Option Investor

Daily Newsletter, Tuesday, 7/13/2010

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Streak Swap

by Jim Brown

Click here to email Jim Brown

After seven days of declines the markets have reversed that losing streak with six days of gains totaling about 8% on the Dow.

Market Stats Table

The markets rallied on better than expected earnings news, a lack of negative guidance and some positive economic news both in the U.S. and abroad. The rally came on light volume as investors waited for Intel's numbers after the close.

In economic news the Job Openings Labor Turnover Survey (JOLTS) showed that the number of people hired in May was larger than the number of people who left jobs for any reason. This is a lagging report but tends to me more accurate than the other employment reports. The survey showed that 4.5 million workers were hired while 4.09 million left their jobs. Unfortunately there was a significant impact from the census worker hiring in May. Private sector hiring was only 3.8 million. The survey was viewed as positive but it was a lagging report and ignored by investors.


The Trade Deficit for May widened unexpectedly by $2 billion to $42.3 billion. The real goods deficit grew to $46 billion from $44.2 billion. The sudden increase in the deficit suggests there will be a larger drag on the second quarter GDP when it is announced at the end of July. Net exports could subtract as much as 1% from the GDP. Over the last quarter exports rose by 16.3% on an annualized basis but imports rose by 20.3%.

The Treasury budget deficit for June was $68 billion. Through the first nine months of fiscal 2010 the deficit is actually 8% smaller than the same point last year. However, the spending for June was $319.5 billion and roughly $40 billion over May levels. On the bright side the receipts spiked sharply to $251 billion from $146.8 billion in May.

Consumer credit numbers released today showed that overall consumer balances declined by -4% with mortgage balances down -3.7%, bankcards -9.6%, auto loans -5.6% and consumer finance lines -14.3%. The high unemployment and the changes in terms and credit offers by banks is crushing the availability of credit. Consumers are also paying down balances at a rapid rate because of worries over the future.

The big reports for the week are still ahead with the FOMC minutes and the Philly Fed survey the two most important.

Economic Calendar

The rally today came on better than expected earnings from several companies and more importantly they did not trash second half guidance. News from overseas also helped with Greece successfully selling bonds for the first time since the EU-IMF bailout. Greece was trying to sell €1.25 billion and the offering was vastly over subscribed with bids for €3.6 billion. This was a serious change in sentiment and the first step in the austerity workout process. The yield on the auction was 4.65% and actually lower than the IMF loans.

Portugal's debt rating was downgraded two notches by Moody's but the market ignored that action because it had been expected for months.

The news of the successful Greek auction crushed the dollar with the dollar index falling to a new two month low. The decline in the dollar is positive for stocks because it reduces the currency translation issues for the 60% of the S&P that are strongly multinational.

Dollar Index Chart

The big news moving the market was of course the earnings news. Alcoa was the first Dow component to report earnings and they beat the street and posted higher than expected revenue. More importantly they did not guide lower for the second half. Alcoa predicted that aluminum demand would rise by 12% this year compared to prior estimates of 10%.

CSX also reported earnings that beat the street and said pricing and volume remains strong. They said Q3 volumes and revenues were positive across all segments. If railroads are still showing strong volumes and not having to discount traffic to get loads then the economy should be doing well.

Novellus (NVLS) was a big winner with a 6% gain after reporting earnings of 66-cents when analysts had expected 60-cents. Novellus said they were benefiting from a strong upturn in semiconductor demand fueled by strong growth in a broad spectrum of electronics products. Novellus said the upgrade of the worldwide communications infrastructure and growth in China would support a multi-year recovery in chips.

Novellus Chart

After the bell the 800-pound gorilla reported earnings that should boost the tech sector. Intel posted the largest quarterly profits in a decade. Net income was 2.89 billion or 51-cents per share. Analysts were expecting 43-cents. Intel also boosted revenue guidance for Q3 to $11.2 to $12.0 billion. Analysts were expecting $10.9 billion. Gross margin estimates were raised to 64-68% from 62-66%.

CEO Paul Otellini said large corporations were buying more computers that use Intel's most expensive chips and that was an encouraging sign for the economy. He said corporations were also upgrading workers personal computers and replacing 4-5 year old systems to take advantage of the newer technology. This suggests corporations are confident enough in the economic recovery to begin spending money again.

Intel Chart

This should bode well for Microsoft and IBM when they report earnings next week. IBM would benefit from a new corporate trend to upgrade their higher cost servers and mainframes. Microsoft is benefiting from the sales of Windows 7 and the new versions of Office and Windows Server. Both companies should post better than expected results.

One company not feeling the love was Yum Brands (YUM). The parent of Taco Bell, KFC and Pizza Hut chains gave a disappointing full-year earnings outlook and said it expects labor costs to rise in its key China market. YUM receives 35% of its profits from China. They expect food costs and labor costs to rise as a result of economic growth raising the standard of living. KFC China workers won a pay raise in June amid mounting unrest that is pushing up labor costs nationwide. YUM has 3,500 stores in China.

YUM raised its earnings forecast for the full year to $2.43 from $2.39 and analysts were expecting $2.48. That prompted traders to dump the stock in after hours trading despite YUM beating the street's Q2 estimates of 55-cents with earnings of 58-cents. U.S. same store sales were flat. Pizza Hut saw sales rise +8% and Taco Bell +1% but KFC suffered a -7% decline. While pizza may not be a health food it is certainly better than fried chicken and consumers are starting to make healthier choices.

YUM Chart

Wednesday is not a big earnings day but Thursday and Friday have some big names. Google would be a coin toss for direction but the banks should do well. However, they are expected to post the lowest earnings growth of the top ten sectors at +17% but do it on a -7% decline in revenue. Earnings expectations for financials have fallen from 21% to 17% in just the last week so there is plenty of room for an upside surprise.

GE could be the wild card for Friday. Normally GE's earnings are about as exciting as a week old newspaper but this week could be different. In an interview on CNBC on Tuesday CEO Jeffrey Immelt said "When you look at all the early indicators that we look at, like media buy, rail loading, passenger miles - all key early indicators - are trending better, they're all trending to the upside. I'm limited in what I can say because of Friday earnings, but we definitely see the economy getting better." Those comments could be a prelude to some strong guidance from GE on Friday.

Earnings Calendar

Apple did not report earnings today but the stock was down -$13 intraday. Traders bought the dip to end up with only a -$5.50 loss but the problem has not gone away. The cause for the dip remains the reception problems on the iPhone 4. You may remember Apple tried to explain it away that it was a software problem reporting the bars incorrectly. Since then they have had to admit that it really is a hardware problem when the phone is held a certain way. Their solution, "don't hold it that way" has not been going over well with users.

This morning Consumer Reports said they couldn't recommend the phone until Apple comes up with a "free" fix for the antenna problem. Recommending that users buy a $30 cover for the phone was not an acceptable response for Consumer Reports. Cheaper solutions such as recommendations to apply duct tape has been met with even worse reception. According to Consumer Reports when your products are supposedly the coolest and most demanded products on the planet you really need to keep up that image with a fast response to a critical problem.

Apple Chart

BP concluded updating the "stack" on top of the failed blow out preventer and is supposedly testing the integrity of the well today. The new stack is a combination of valves and instruments that are roughly 40 feet high and weigh 40 tons. The stack includes connections for up to four recovery vessels so oil collection can continue if the well proves to be damaged to the point where it cannot be sealed.

The new stack does provide the capability of sealing the well and preventing any further oil from flowing into the gulf. However, if the pressure tests with the well closed show that there may be other integrity issues within the well then BP will be forced to continue collecting oil and piping it to the surface rather than opting for a shutdown of the leak at the stack level.

The first relief well is only 10 feet from the leaking well casing and 150 feet from the bottom of the Macondo well. The relief well must go very slow at this level and proceed at the rate of 10-15 feet per day in order to zero in perfectly on the broken well. BP has now upped the potential final plugging date with the relief well to late July from mid August. They appear to be very confident the relief well will be on target and ahead of schedule. This will be the 41st successful relief well for the crew in charge of the drilling.

BP gained only slightly today after an 8% rally on Monday. Crude oil prices roared higher on better news from China, Latin America and the positive earnings guidance from CSX and Alcoa. Crude prices rose +2.20 to close at $77.15 to give Dennis Gartman a headache. He was on TV yesterday suggesting a heavy short in crude and energy stocks.

Crude Oil Chart

The markets stretched their gains for July to six days. This has been the best six days for the S&P-500 since 2003 with a 7% gain. The Dow has gained +749 points since the July 2nd lows. To say the markets are over extended would be an understatement. However, I believe the gains can continue for a few more days.

There are still a lot of shorts in strong denial. The market was heavily shorted going into July with many stocks having short interest that was out of sight compared to normal levels. First Solar for instance had a 24% short interest.

Obviously the broader market is nowhere near a 24% short interest but there are plenty of bears that believed the July bounce was just another bear market bounce. They were content to hold their highly profitable shorts and wait for the next decline. Now those profits are dwindling and in many cases have shrunk to losses and the bears are getting worried.

After Intel's blowout earnings tonight and strong guidance they should be very worried. S&P futures are up +8 points overnight.

It is not clear sailing ahead despite the improving sentiment. The S&P has strong resistance at 1100, 1111 (200-day) and 1120-1125. For the S&P to clear those levels without a bout of profit taking would be unimaginable. It would be possible but not probable. If the futures hold until Wednesday's open we could blow over 1100 but then the serious resistance comes back into play.

It is not that I believe the earnings the rest of this week will be so outstanding but I do believe the earnings next week with Microsoft, IBM and others, will be outstanding in terms of guidance. This should keep the bulls engaged and new money flowing back into mutual funds.

Long term, it is still summer and the doldrums are just ahead. Eventually the excitement will fade and the "what have you done for me lately" feeling will come back to haunt the market. In plenty of years there were strong Q2 earnings only to see the market lows set in Q3. It is simply a market cycle thing and we still need the economics to confirm there is not going to be a double dip. It is one thing for the indexes to rally for seven days and another for the economic reports to improve. Right now all the economic reports are still trending lower.

I know the market anticipates events by six months but the current rally is technical not fundamental. The market was oversold going into the end of quarter and the earnings cycle. Shorts have been forced to cover on a daily basis. This will eventually end but probably not this week. There is still too much good news to be reported but investors are fickle. Eventually they will glaze over on the earnings news. Enjoy the rally while it lasts.

The Dow touched 10400 today and will run into strong resistance at 10450-10500. With Intel's after hours spike that could be on Wednesday. If it does decide to take profits the first real support is in the 10100-10150 range but after an opening spike on Wednesday that would be several hundred points away. That suggests there will be some point in the middle where buyers will decide to make a stand.

Dow Chart

The S&P-500 rallied to 1095 and the 50-day average. The next resistance is 1100 followed by the 200-day at 1111 and the June resistance ranges at 1120-1125. This is a veritable minefield of problems and it will take some additional strong earnings news to lift the S&P over these problems. Support on the S&P is 1075. I am starting to fear that the S&P is going to lose traction as the week comes to a close despite some large companies still left to report.

Wednesday does not have any major companies reporting other than Marriott and they are not a market mover. The S&P will need to depend on Intel sentiment to remain positive on Wednesday. Google has not been kind to traders in recent quarters and that could hurt sentiment on Thursday. The potential for profit taking definitely exists but I think the S&P will move higher next week.

S&P-500 Chart

The Nasdaq is laboring under the weight of Apple and continued declines in this stock could be a drag on the index. Offsetting the Apple drag will be the Intel news on Wednesday. However, Google is the next pothole on Thursday. The Nasdaq is back into its congestion range and the next serious resistance is around 2320. I believe it will move over the 50/200 at 2255 on Wednesday thinks to Intel but getting over 2320 will be a challenge.

Nasdaq Chart

In summary I believe the markets will move higher next week. We could see some profit taking this week simply because we are so over extended. The longer we move higher without any pause to reload the harder the drop will be when it occurs. I still believe the markets will begin to fade before the end of July unless the economic indicators suddenly improve. However, we are seeing a rotation out of bonds and into stocks and that is implied confidence that there will not be a second dip.

Jim Brown

New Option Plays

Market Direction

by Scott Hawes

Click here to email Scott Hawes
Editor's Note: Good evening. I wanted take a few minutes to review market action today and where I think we may be headed from here. Obviously, the market has bounced much higher than I anticipated as the S&P 500 has gained over 75 points in 5 trading sessions since its lows last week. Honestly, I'm surprised it held up as well as it did today considering the sell-off in AA and CSX after earnings and the -2% decline in Apple. Something else interesting was the VIX and VXX not falling harder. Both of these indicators should have declined much more with today's gains (to the tune of -3%) but they were not. In fact, the VIX closed higher on the day. It feels to me that this market is being held up by an institution and it may have something to do with OPEX. This is the concern for long positions because when the rug is pulled this rally could fail very hard and fast. I've provided a 4-hour chart of the SPX that I am using to keep things in perspective. Now is logical reversal point but we need to see it happen.

After the bell today Intel reported their second straight "best ever quarter" and has popped significantly higher while YUM Brands is getting punished after earnings. Intel has a history of post earnings sell-offs and last quarter the markets went along for the ride in a big way. Will history repeat itself? We probably won't tank tomorrow but the fact is the major indexes are right at critical resistance areas, primary downtrend lines, and important SMA's. The momentum has obviously shifted but I will be surprised to see these levels broken on the first try. As I have stated recently I can not get behind this rally until a close and follow through above the 1,105 area on the S&P 500. And even then we may only rally another 25 points until the next resistance area near 1,130 has to be dealt with.

The same concerns about the economy that existed last week are still here but for now the fundamentals have been thrown out with the bath water. Whenever this bounce stops I do believe we retest lows or at least regress back to the 1,050 to 1,060 area. However, if we bust through this resistance then we'll follow the market and get more bullish. But until there is more clarity I am hesitant to release additional long plays. On the contrary, shorting now with tighter stops seems to be the better play. We've got plenty of open short positions to take advantage of a sell-off. Tomorrow looks like it will be a continuation of the rally up to the 1,105 area so we'll have to see how things close and how OPEX week ends.

I'm considering releasing a short trade on SPY, possibly tomorrow, but I need to see more price action first. I've provided a couple of long and short trade set-ups for those that are interested. These may or may not make into the model portfolio but I wanted to give readers a heads up.

Long ILMN: The stock looks like it wants to break out of resistance and to new 52-week highs. I would keep a tight leash on the breakout in case the broader market fails.

Long EWZ: The ETF has broken and closed above its primary downtrend line that started on 4/21. Profit target is about +5% higher.

Short Candidates include: LEG (rallying into resistance), EBAY (rallying into resistance), EBIX

In Play Updates and Reviews

Damage Control

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:
Damage control has set in as this rally has obviously exceeded my expectations. I have made adjustments to targets on most positions. We've had a tough week after a very profitable last half of June. I'm confident we will get good exits on our current positions and get things back on track once we have more clarity of the next move in the market. I'll have June results posted this weekend. Please email me with any questions.

Current Portfolio:

CALL Play Updates

Merck & Co - MRK - close 36.45 change +0.36 stop 34.79

Target(s): 37.20, 37.75, 38.60, 39.35
Key Support/Resistance Areas: 39.50, 38.75, 38.00, 36.35, 35.80
Current Gain/Loss: +18%
Time Frame: 1 to 2 weeks
New Positions: Yes

7/13: MRK closed above resistance of $36.35 and looks like it is headed towards our targets. If the broader market continues bouncing we should have no issues hitting our target(s) and MRK could also act as a defensive play if there is a pullback.

7/12: MRK traded down to $35.84 in early trading which triggered our long entry. The stock then drifted higher throughout the day. MRK appears to be forming a bull flag on its daily chart. A break above Thursday's high of $36.40 should get things moving higher relatively quick. Since we were able to get the lower entry trigger today I am going to offer a lowered 1st target of $37.20 which is a good place to consider at least consider tightening stops. I've also adjusted our primary target of $37.95 down 20 cents to $37.75.

Current Position: August $36.00 CALLS, entry was at $1.21

Entry on July 12, 2010
Earnings Date 7/30/10 (unconfirmed)
Average Daily Volume: 18 million
Listed on 7/10/10

PUT Play Updates

Deere & Co. - DE - close 59.37 change +1.89 stop 61.63 *NEW*

Target(s): 57.55, 57.05, 56.30, 55.20
Key Support/Resistance Areas: 60.00, 57.50, 56.50, 56.00, 54.00, 52.70, 51.50
Current Gain/Loss: -57%
Time Frame: 1 to 2 weeks
New Positions: Yes, with a tight stop

7/13: Simply put this trade has turned out to be a disaster and I am looking for an exit. All of the resistance levels mentioned in yesterday's update (see below) have not held. The broader market is at a critical reference point (SPX 1,105 likely tomorrow) and considering it has catapulted to this level with absolutely zero pullback we should get a down day or two soon. I'm not concerned about time decay with August options yet so I am suggesting we be patient here and wait for the exit prices I have listed above. I added $57.55 as the near term target followed by $57.05 and $56.30. $57.55 will close the gap higher from this morning. I believe the stock will print these levels either this week or next week. As DE begins to retrace these recent gains I will be looking to trail the stop down so that the loss on this trade is minimized. So now we have to deal with the stop loss. I am going to go out on a limb and raise the stop to $61.63 which is above the June 21 high and the primary downtrend line from April to June highs. This should provide us enough room to withstand any spikes in the market which appears may happen at the open tomorrow.

7/12: DE backed off and closed below its 20-day and 50-day SMA's today. The stock is also below the broken upward trend line that began in July 2009. We have two immediate targets below that could be hit intraday if there is any continued weakness in the stock. These targets are near intraday support levels and are good places to consider closing positions or to tighten stops to see if we can get a better exit. $59.30 is still a good level to place a tighter stop.

Current Position: August $55.00 PUTS, entry was at $3.00

Entry on July 6, 2010
Earnings 8/18/2010 (unconfirmed)
Average Daily Volume: 5.4 million
Listed on July 3, 2010

Ingersoll-Rand - IR - close 35.08 change +1.18 stop 36.60

Target(s): 34.15, 33.25, 32.05, 31.25
Key Support/Resistance Areas: 37.00, 36.50, 35.70, 34.50, 33.11, 31.50, 30.12
Current Gain/Loss: -25%
Time Frame: 1 to 2 weeks
New Positions: Yes

7/13: IR printed a big green bodied candle and appear to be headed for its 200-day SMA from below. This is only about 25 cents higher and will be the first re-test of it IR broke through it on 6/30. When we get a pullback in the broader market I expect IR to retrace today's gains and possibly retest its lows near $33.25. I've listed $34.15 as a target to consider exiting positions to preserve capital. We should see this level quickly on any on any meaningful pullback in the market.

7/12: IR spiked higher this morning but was met with selling which sent the stock lower, and it never really recovered. If there is any weakness in the broader market I expect IR to break lower and easily trade down to our first target of $33.25. Our primary target is $32.05.

7/10: I am comfortable with the fill we got in IR on Thursday. The stock is forming a bear flag and I expect it break down when the oversold bounce in the market loses momentum. I've adjusted our targets and added one just below for readers looking for a quicker exit. If the first target is hit the gain should be 10% to 15%. This is good place to at least tighten stops to see if we get more out of the position.

Current Position: August $35.00 PUTS, entry was at $2.25

Entry on July 8, 2010
Earnings 7/19/2010 (unconfirmed)
Average Daily Volume: 5.4 million
Listed on July 7, 2010

Lululemon Athletica Inc. - LULU - close 39.13 change +0.26 stop 41.30 *NEW*

Target(s): 37.95, 37.20, 35.80
Key Support/Resistance Areas: 42.25, 39.75, 37.00, 35.16, 32.75
Current Gain/Loss: -7.6%
Time Frame: 1 week
New Positions: Yes

7/13: LULU managed to eek out a 26 cent gain today as the market catapulted higher. This is under performance and confirms my bearish outlook for the stock. We could get a little more bounce in this position but when the market pulls back LULU should go lower relatively quick. However, in the spirit of following the market we need to be careful and not get too greedy by expecting LULU to simply rollover and give us a big gain. As such, I've added $37.95 as the first target which just above yesterday's low. This level is -3% lower from our entry price and if you bought options they should return about +15% at $37.95. Tightening stops at this level is suggested to see if we cn get more out off the position.

7/12: Finally, LULU hit our trigger of $39.15 to enter short positions. The stock immediately lost $1.25 and then recovered. One thing is clear on the intraday charts and that is the volume when the stock was declining this morning was much greater compared to its recovery. I like the volume pattern and think LULU retests its lows before breaking higher. Should it break higher the 50-day SMA sits at $39.87 which should keep things under control. I've also listed a target of $37.20 which is just above a key support/resistance area of $37.00. Some might view this level as forming an inverse head and shoulders pattern on the hourly chart so it would be prudent to consider tightening stops at this level. This level will also produce a decent gain in the position.

7/10: LULU is getting ever so close to our entry. The stock traded to within 8 cents on Friday and backed off. The bounce over the past few days has been on extremely light volume showing a lack of participation. This is one of the most bloated retail stocks out there trading at a P/E of 38. It is a novelty retailer and sometimes the P/E doesn't matter so I will keep a tight leash on this and use a stop of $41.30 which is just above the 20-day and 50-day SMA's. LULU has not tested them from below since breaking through them in June. I like the short set-up and want to lower the entry trigger to $39.15. I have also adjusted the targets. I'm looking for LULU to make quick trip back down to test its lows and possibly break them.

Current Position: Buy August $35.00, entry was at $1.30

Entry on July 12, 2010
Earnings 8/19/2010 (unconfirmed)
Average Daily Volume: 700,000
Listed on July 1, 2010

Polo Ralph Lauren - RL - close 77.68 change +1.56 stop 82.50

Target(s): 75.50, 73.50, 72.10
Key Support/Resistance Areas: 82.00, 80.00, 78.00, 75.00
Current Gain/Loss: -10%
Time Frame: 1 week
New Positions: No

7/13: I've adjusted the first target on RL up 25 cents so that it si just below yesterday's low. I expect RL to hit this target within the next week. The stock bounced today but the volume was light when compared to the selling recently. I expect that to continue as the market pulls back.

7/12: RL sold off at the open and never really recovered. I'm expecting RL to hit our first target relatively quick, possibly tomorrow. This would fill its gap higher on 7/8. My comments below haven't changed.

7/10: We initiated AUG $75 PUTS at the open for $3.00. The opening print was all RL could muster for the day as the stock drifted lower throughout the day. There is a lot of resistance to keep RL in check. I am looking to book a quick gain on this position and expect the stock to hit our first target of $75.25 relatively quick. This should give us a +20% gain on the position and is good place to tighten stops to protect profits. My primary target is $73.50 but that may take a bit longer depending on earnings, news, and how the market is reacting to it.

Current Position: August $75.00 PUTS, entry was at $3.00

Entry on July 9, 2010
Earnings 8/5/2010 (unconfirmed)
Average Daily Volume: 1.8 million
Listed on July 8, 2010

PowerShares QQQQ Trust - QQQQ - close 45.33 change +0.58 stop 46.90

Target(s): 43.75, 42.55, 41.80, 41.05
Key Support/Resistance Areas: 46.77, 45.25, 44.46, 43.50, 42.50, 41.00
Current gain/loss: -28%
Time Frame: 1 to 2 weeks
New Positions: Yes

7/13: It appears the Q's are going to spike higher in the morning as a result of earnings from Intel. The NASDAQ 100 futures are currently up over 1% as of this writing. This equates to a price in the Q's of approximately $45.85. The recent patterns after Intel reports show significant market sell offs in the ensuing days after the initial spike. If you believe this time is different and we continue to go higher I suggest exiting early tomorrow or place a new stop above the highs of tomorrow. $46.15 gives you some room and is above the 200-day SMA (near QQQQ's close today) and the 50-day SMA's. But this level could also get picked off as a stop on a spike higher, only to see QQQQ reverse lower. I believe we will see our first target of $43.75 before our official stop of $46.90 so I am sticking with the original plan.

7/12: QQQQ backed off right at its 20-day SMA this morning which also corresponds to the ETF's February highs. This level is a logical reversal point for QQQQ, however, Intel reports earnings tomorrow after the bell so that is the wild card for the short term price direction. I've adjusted our near term target to $43.75 which is just above the lows on 7/8.

7/10: QQQQ is bouncing but I expect the selling to resume soon. In light of the choppy trading that I foresee I am going offer a near term target of $43.60 which is $1 lower than current levels. For readers in PUT positions they should be worth about $2.15 (entry was at $1.85) which would be a +16% gain. This target is near the June 8 low and may form an inverse head and shoulders pattern. I suggest being quick to tighten stops at this level to protect profits. QQQQ may bounce up to its 20-day or 50-day SMA just overhead before reversing so I suggest being patient. There was a lot of volume in the August PUT strikes on Friday and large blocks bought on the offer. This is a good sign for a move lower but earnings is the wild card.

Current Position: August $45.00 PUTS, entry was at $1.85

Entry on July 8, 2010
Earnings N/A (unconfirmed)
Average Daily Volume: 100 million
Listed on July 7, 2010

Starbucks Corp. - SBUX - close 25.94 change +0.67 stop 26.75

Target(s): 25.25, 24.85, 24.25, 23.70
Key Support/Resistance Areas: 26.50, 26.00, 25.25, 24.80, 24.00, 23.60, 22.50
Current Gain/Loss: -40%
Time Frame: 1 to 2 weeks
New Positions: Yes, with a tight stop

7/13: SBUX is just not giving us the pullback I anticipated. The stock has rallied +10% from its lows last week in five trading days. It bounced straight up from its 200-day SMA right into its 50-day and 20-day SMA's. I keep anticipating a reverse lower and if it doesn't happen soon I suppose the concerns of strapped consumers buying $5 latte's are a thing of the past. There is a gap to be filled up to $26.39 and that might be where this is headed before a turn back down. I've tightened the above targets and suggest we begin to exit positions on weakness. These levels are good places to at least tighten stops.

7/12: SBUX sold off this morning but drifted higher the remainder of the day. SBUX has resistance at current levels and I am looking for the stock to make a lower high and reverse to retest its lows.

7/10: SBUX has retraced some of its recent decline as the market has bounced. The stock is testing its 100-day SMA from below and the backside of its broken upward trend line for the first time since breaking in late June. The 100-day SMA has been an important reference point for the stock in 2010. We are also near an important support/resistance level of $25.25 so this is a logical place for SBUX to reverse back down. However, the broader market direction will most determine our fate on this position. A tighter stop could be placed at $25.80 but the bounce may go a little further so patience is suggested. I am looking for SBUX to make a lower high and reverse back down to at least retest its lows. I like new positions at these levels.

Current Position: August $25.00 PUTS, entry was at $1.40

Entry on July 8, 2010
Earnings 7/21/2010 (unconfirmed)
Average Daily Volume: 10 million
Listed on July 3, 2010