Option Investor

Daily Newsletter, Thursday, 7/22/2010

Table of Contents

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

Market Wrap

A 5-ticket Ride

by Keene Little

Click here to email Keene Little
Market Stats

Reversals of reversals of reversals. Either this market is being wickedly unkind to both sides, just hitting stops on both sides of the market and thoroughly frustrating traders (especially if you try to hold overnight) or else we've got one hugely confused market right now. And a confused market is a dangerous market to trade. Need I say more?

Bernanke's talk on Wednesday left market participants feeling glum. For political reasons Bernanke can't say we're headed for a double-dip recession (or worse that we never came out of the first one) so instead he says these times are "unusually uncertain". The market hates uncertainty and it showed its angst with the selloff following the gap up and run up into his speech on Wednesday. Bernanke's "slower growth" points to another global slowdown (recession in normal speak) and while he can't say recession specifically he can at least be on the record as having pointed out that the economy looks like it could slow down again. He's well aware of how history pulls out quotes that showed complete naivety (remember the "this will be contained" quote?) so I'm sure he's doing his best to say what he wants but feels he can't come right out and say it.

For once I would love it if one, just one, of these guys would tell the truth and stop being so wishy-washy with their words. It's the reason I'd never make a good politician. I'd tell people like it is, let them make appropriate plans (how can you plan in this environment?), I'd have us all take our medicine and then get on with life. Ugh, enough preaching to the choir.

So today the market must have decided that Bernanke meant "unusual uncertainty" must mean we're going to see the economy grow in no uncertain terms. Yea, that's the ticket. Let's rally!

Actually we can thank Europe for the start of our rally. Futures were already up about 15 S&P points before the bell and the gap up, following Wednesday's smash down into the close, had both sides scrambling to do some buying at the open (especially the shorts who couldn't get out fast enough). The rally was essentially over by 10:00 AM after it quickly added 9 more S&P points to the board. SPX was up about 25 points by then, consolidated, added a whopping 3 points with a choppy rally into the late afternoon before closing down 1 point from its 10:00 AM high, finishing +24 for the day. If you weren't already in a long position at yesterday's close then you missed the rally. And if you weren't in a short position at prior high closes you probably missed the short play. Both sides can't win for losing right now and both sides are losing at this roulette wheel.

The bank stress tests in Europe will be announced on Friday and they rallied hard today (up more than 3%). Our banks rallied in sympathy (+4%) and I can't help but wonder if they're going to have a sell-the-news reaction to the announcement. Surely they don't actually believe the stress tests are anything other than a feel-good exercise. We did the same thing in 2008 and the market rallied on the "good" news so it's no surprise Europe is having the same reaction. But caveat emptor--the positive reaction for us did not last very long. Later I'll discuss some of the financial shenanigans the banks are involved with that masks the real problems. But in the meantime, perception is reality and as long as traders perceive it to be good news and buy it then the market will go up. Don't fight the feeling (just don't trust it either).

As for positive earnings being a reason for the rally, really? Have you looked at the daily responses to earnings these past two weeks? Good earnings are sold one day and bought the next. Then it switches and bad earnings are bought one day and sold the next. If you can successfully trade this market based on earnings results I seriously would like to know your secret.

In all seriousness, this market's whacky behavior is dangerous. Volatile price action like this is typically not a healthy sign for the market. Bull markets thrive on a steady diet of worry with some good news sprinkled in for good measure, and tend to march higher at a relatively steady pace. When it becomes manic-depressive, as if it's bipolar off its meds, it's usually a sign of a market in a topping process. It could rally a little further, as I'll show in a bit, especially into the end of the month, but in my opinion it becomes more vulnerable the higher it pushes from here.

I mentioned on today's market monitor that I feel like I'm herding a bunch of cats as I try to keep up with the wave pattern for this market. Each day lately it looked like it was picking a direction and then the next day it was the next direction. Oh wait! I mean I want to go this way. Forget ping-pong. This feels like I'm the ball in that arcade game (the name of which escapes me at the moment--see my mind is turning to jelly). We're dealing with an Alzheimer's market--it forgets on a daily basis where it is (but hey, at least it can hide its own Easter eggs).

What's interesting about the price volatility is that it's not really showing up in the VIX itself. Oftentimes price volatility from uncertainty is associated with a higher VIX level as that uncertainty results in a greater willingness to buy options as either a hedge play or a pure directional play. Instead the VIX is showing some complacency. The wall of worry for the bulls is not there and that's actually bearish. The VIX is down testing its 200-dma for the 3rd time since June 21st and MACD is showing bullish divergence. While I see the possibility for the VIX to drop a little lower to its broken downtrend line from January 2009 (if the market is going to rally into the end of the month), currently near 21.60, I think the potential bullish setup here for the VIX is of course a bearish setup for the stock market.

Volatility index, VIX, Daily chart

SPX has rallied back up to its 50-week moving average, which stopped last week's rally, currently near 1097. This is where SPX stopped today so the bulls have some work to do tomorrow. If SPX can close above 1097 on a weekly basis it will be bullish into next week otherwise another weekly close below 1097 could have some bulls pulling the plug.

S&P 500, SPX, Weekly chart

SPX pushed above its 50-dma and downtrend line from April today and that's bullish. Or is it a head fake break? Not that we've seen that many head fakes lately. Speaking of head fakes, I enjoyed Todd Harrison's update (on Minyanville) yesterday when he stated the following:

"It's no shocker trading revenues are down across the board for Wall Street firms; over the last quarter, we've highlighted several 'best in breed' industry veterans who have offered that this has been the toughest tape they've ever seen. We can call it "trading deflation" as the War on Capitalism continues to rage.

"Let's use the S&P for illustrative purposes; strong start this year, a quick 9% haircut, a 16% sprint that slightly violated resistance (S&P 1200), a grind lower, FLASH CRASH!, the knee-jerk rebound, and then -- just to really confuse everyone -- a sideways range, complete with a head-fake higher (above S&P 1100-1115) and a false break lower (below S&P 1040).

"Yet here we are, clowns to the left of us, jokers to the right, and stuck back in the middle of the range."

I thought that was a perfect summary of the market and he wrote that before trading started Wednesday morning. So back to the chart below, will today's break above resistance see follow through or will it be another bull trap? If it pulls back, which is due, and finds support at or near 1080 and then proceeds higher above 1100 then we'll have a good sense that we should see some follow through to the rally next week. If the rally continues I'll be watching for resistance near 1112 (200-dma and a Fib price projection) and if that's cleared then a shot up to the 1150 area looks very doable. If it were to rally above 1160 then I think there's a good chance the market will rally in August and quite possibly to new annual highs (1250-ish). But a drop back below 1056 from here would spell immediate bearish trouble for the market.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1113
- bearish below 1056

Many are pointing to an inverse H&S pattern developing since May (left shoulder in May-June, head into July 1st, right shoulder being this week's low). First, will the inverse H&S pattern be any more reliable than the oft-discussed H&S topping pattern that developed since January? Second, H&S patterns (inverse or otherwise) or more reliable at the end of a long run and not in the middle of a run (it's not reliable in a correction to a trend). A bullish inverse H&S pattern here would be in the middle of a longer-term rally from March 2009 and therefore is not a reliable pattern. As shown with the pink price depiction, we could see a leg up to the 1150 area, "confirming" the inverse H&S pattern, only to find it fail to the downside just as the regular H&S top failed after the break below the 1040 neckline and down to 1011 on July 1st. So be careful about H&S patterns that are discussed by financial media. Once again, if it's obvious to many it's obviously wrong.

In addition to the 50-week moving average discussed with the weekly chart, it's also an important number on a shorter-term basis. Two equal legs up from Tuesday, for a possible a-b-c bounce, is at 1097.33. Today's high was 1097.50. It's possible the sharp zigzag bounce up from Tuesday was enough to whip a lot of bears out of their positions, suck in some longs and now the market could start down in earnest. That's the bearish setup. The bullish setup calls for just a pullback correction, perhaps to about 1080-1081 (50% retracement and back down to its broken downtrend line from April), and then a continuation of the rally into next week.

S&P 500, SPX, 60-min chart

I've got a couple more SPX daily charts that are interesting (at least to me). I haven't updated the MPTS in a while (Moon Phase Trading System) and it shows the possibility for a turn on July 26th (Monday) which is the next full moon. The two previous phases, June 26th (full moon) and July 11th (new moon) were close to market turns so it will be interesting to see what happens around Monday, especially if SPX is able to bounce up to its 200-dma (1113) around the same time.

S&P 500, SPX, Daily chart with MPTS

Next is a daily chart that I squished in order to show back as far as I could (August 2008). The 67-day cycle is something Jeff Cooper discussed in his update and I thought it was rather interesting. Cooper loves numerology and I find it fascinating when he finds all these number relationships. He's the one that turned me onto the Gann Square of Nine chart years ago. At any rate, he identified a 67-day cycle that seems to be doing a good job identifying market turning points. What's interesting about the 67 days is the relationship to the March 2009 low, which rounded off was 667. Pure coincidence? Perhaps. The significance now is that the next turn date by this cycle study is on July 30th (Friday, end of month).

S&P 500, SPX, Daily chart with 67-day cycle

So the two charts above point to next week as being a potentially important turning point. When you throw in another astrological event, something I don't understand but astrologists say is scary, a Cardinal Climax is a particular alignment of 5 planets, something that hasn't happened in 1000 years (some say 10,000 years). Arch Crawford says certain planetary alignments put people under additional stress and of course that's reflected in their mood which is then reflected in the stock market. This particular alignment is supposed to be accompanied by some particularly nasty things (possibly involving a nuclear/radiation event). Crawford is calling for a market crash and he has been too correct in many of his past calls to dismiss him lightly so the fact that the timing of this astrological signal is coinciding now with some other potential turn signals, well, let's just say I'm sitting up straight and watching carefully. We'll get another update on all this next week but be thinking ahead about what your plans are, especially if the turn comes earlier in the week.

The setup on the DOW is the same as SPX. It pushed above its downtrend line from April today and its 50-dma, which is bullish. It seems to be struggling under both its 200-dma, currently near 10392, and its 50% retracement of the 2007-2009 decline. These longer-term retracement levels can remain significant for some time, especially if price action around a retracement level now provides additional price-level support/resistance. For the DOW this was the area of the price consolidation in November/December 2009. If the DOW can get through 10400 it should be able to make a run for it up to 10500 if not higher into the end of next week. In the meantime there is the potential for the bounce to have completed today and now down we go.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 10,500
- bearish below 10,007

The NDX pushed right up to its downtrend line from April, near 1870. It has its 50 and 200-dma's below, in the 1840-1845 area, and its downtrend line near 1870. A close below or above either should tell us the next direction, at least for a couple of days. With the dashed line I show the possibility for a higher rally into August but like the DOW and SPX, we could see only a minor run higher to complete an a-b-c bounce off the July 1st low and then a turn back down.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 1870
- bearish below 1784

With respect to its downtrend line from April, the RUT is the weaker index. It has a very good rally today (+3.7%) but now it's getting ready to run into potentially tough resistance. Its downtrend line and 299-dma are both near 639. Not shown but two equal legs up for the bounce off Tuesday's low is near 638. Slightly higher is its 50-dma at 643. So 638-643 could be a tough wall to break through. The bearish wave count calls for the start of the next leg down from here.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 645
- bearish below 602

While the banking indexes did well today, probably helped by high expectations for a successful stress test of Europe's banks, tomorrow will show how well the banks are doing. Everyone knows the emperor is wearing no clothes but no one will yet admit it to themselves and they're certainly not telling the emperor. Just last week, with the closure of 6 more banks in the U.S., the records show that the banks were overvaluing their holdings on average about 50-75%. This is really extraordinary and the full value of the problem is not coming to light until the banks fail.

The FASB (Financial Accounting Standards Board) rule 157 allows banks to carry their loan inventory at whatever value the bank thinks is fair, which usually means the value long before the credit crisis hit and loans started failing left and right. Most know that many of these loans are not worth the paper they're written on. But allowing the banks to carry them at full value, vs. writing them down now and taking the write-off against reserves (which are woefully inadequate, especially now that banks are digging into their reserve accounts to help this quarter's earnings), we are being led to believe the banks are in good shape. As Todd Harrison has commented several times now, when a FASB ruling has the power to hold up or crush the banking sector (and in turn the entire market) you know we have a major problem.

One of these days the man behind the curtain will be exposed for who he is. It will probably happen when banks start failing en masse and we collectively can no longer deny that banks have a major problem--there's way too much debt that is failing (part of the debt destruction process that we're going through). There are all kinds of machinations going on to thwart the needed correction but we only make it worse. I'd rather not see us get stuck in 3-decade-long process of price discovery (economic malaise) and instead prefer to see us take out medicine, get better, and get back to growth. Alas, it's not what the politicians, who are more worried about their jobs than doing the right thing, will allow to happen.

So as I said, the banking indexes had a great day (+4%) and it will be interesting to see if there will be any follow through after Europe's bank-stress report is released (sell the news?). The BKX index has pushed up to a previous downtrend line from April, which is just under potential resistance at its 20-ema and 200-dma, both near 48 (BKX closed at 47.64). Slightly higher is its 50-dma near 49 and then its downtrend line across the July 13th high which is currently dropping down through 50, a price level that has been support/resistance in the past. The decline from July 13th looks impulsive which suggest the current bounce off yesterday's low will be just a bounce correction to be followed by a stronger decline into August. Follow the money if it turns back down in earnest.

KBW Bank index, BKX, Daily chart

The TRAN is another index that rallied right up to its downtrend line from April and stopped. At the same level, 4324, is a Fib 62% projection for the 2nd leg up in an a-b-c bounce off its July 6th low. If today's rally did not complete the a-b-c bounce then the next upside projection at 4490 should be next week's target.

Transportation Index, TRAN, Daily chart

The Baltic Dry index is another transportation index and is used to measure the shipments by sea. Global transports rely heavily on ships and therefore this index is very good for identifying swings in the global economy. While our stock market will not follow it exactly, you can see in the chart below it does follow it very closely. Since the stock market high in 2007, other than the outsized rally in the BDI into the May 2008 high (which is the red/black line), they've been in synch and this makes sense. But now we have a negative divergence where the BDI made a lower high this year while SPX pushed to a new high in April. The BDI has broken support at its September 2009 low while SPX bounced off that low. Care to guess which way SPX will head next? It might make it a little higher next week but the global slowdown in shipping says stock bulls are whistling past the graveyard right now.

Baltic Dry index, BDI, vs. S&P 500, Daily chart

The dollar's decline into last week's low did a good job in completing the a-b-c decline from the June high. This is either all of the correction to the November-June rally, which means we'll see a kickoff to a major dollar rally, or else the June-July decline is only wave A of what will become a larger A-B-C pullback into October, which is the way I've currently got it labeled. We won't know which it is until a larger bounce gets underway and I can see how impulsive vs. corrective it is. If it drops a little lower first, watch the 50% retracement level of 81.68 for support.

U.S. Dollar contract, DX, Daily chart

Gold found support at its uptrend line from October 2008 and could make it higher still to the 1215 area (Fibs and 50-dma) before turning back down. If you look at the daily chart with the log price scale you'll see that the previous consolidation in early July was on top of the uptrend line from 2008 and the bounce that's shown in dark red would take it back up to its broken uptrend line. So far gold has run into resistance at its new downtrend line from late June and any break to new lows from here could turn quite bearish in a hurry.

Gold continuous contract, GC, Daily chart

The gold miners index looks interesting right here. After breaking its uptrend line from February and finding support at its 200-dma, it has bounced back up to its broken uptrend line and promptly pulled back today from the test. It's a setup for a kiss goodbye at broken support and if it lets go from here it could drop rapidly.

Gold Miners, GDX, Weekly chart

While gold languishes oil rallies. The very choppy price action since the May low says the rally effort will fail and it will fail hard. The only question is from what level. With the renewed push higher I see Fibs and its broken uptrend line coinciding around the 80.00-80.50 area for resistance. If it can push through that area then the next upside target would be 82-ish and then 86-ish (which would also be a test of the May high). A drop back below 76 now would be a sell signal.

Oil continuous contract, CL, Daily chart

This morning's economic reports had no effect on the market. Earnings had no effect either (regardless what the talking heads on TV said). The market was in rally mode long before earnings and economic reports were announced. This morning's economic reports were not good, or certainly not supportive of the rally. It'll matter soon but not today. Friday has no major economic reports.

Economic reports, summary and Key Trading Levels

How to summarize where we are...let me count the ways. Let's see, OK I have a flower in my hand with a few petals to pluck...she's bullish...she's bearish...she's bullish...she's...

As I told a colleague today, if I stand on my head I see a bunny rabbit in the price pattern. I think it's the one from "Alice in Wonderland". Lots of smoke and mirrors.

Seriously though, this market may be jumpy and whippy and it obviously requires great care in managing your trades right now. When it does let go to the downside I'm afraid it's going to be very fast and it will be difficult to get aboard without shorting it in the hole. But that doesn't mean shorting it here and holding on for dear life while the market rallies another 50 S&P points (or more). I may have a strong opinion about the bearish setup for the market but it doesn't mean I'm right. As always, follow the key levels identified on the charts and use those to tell you which way the market is heading next. While I struggle with the wave count sometimes it's just as easy to follow trend lines, moving averages and oscillators to get the clues you want.

The bottom line is that today's rally may have finished a 3-wave bounce to correct the decline from last week. It's a very high bounce and not typical for a correction, which is what has me thinking we'll see higher highs next week before the market turns back down in earnest. The risk for longs is that the market could turn down immediately from here, which of course would simply add to the list of daily reversals.

The bears need an immediate decline that drops below Wednesday's lows. That would be a strong indication that the bounce correction did in fact finish today. A drop below Tuesday's low would of course confirm that.

The bulls need to see a pullback followed by a push back above today's highs. That would confirm we're into at least a higher a-b-c bounce off the July 1st lows, in which case look for the upside targets I've identified on the charts. Any rally higher next week may not last very long and therefore holding positions overnight is simply not worth the risk (imo).

We could see a rally into the end of the month/start of August and I'll certainly be evaluating that next week if it occurs. I'm feeling like there's a really big move coming and I don't think it will be to the upside, for whatever that's worth. Be very very careful out there.

Good luck and I'll be back with you next Thursday.

Key Levels for SPX:
- cautiously bullish above 1113
- bearish below 1056

Key Levels for DOW:
- cautiously bullish above 10,500
- bearish below 10,007

Key Levels for NDX:
- cautiously bullish above 1870
- bearish below 1784

Key Levels for RUT:
- cautiously bullish above 645
- bearish below 602

Keene H. Little, CMT

New Option Plays

Long ETF Play in Basic Materials

by Scott Hawes

Click here to email Scott Hawes


ProShares Ultra Basic Materials - UYM - close 29.58 change +1.86 stop 27.20

Company Description:
ProShares Ultra Basic Materials seeks daily investment results that correspond to twice (200%) the daily performance of the Dow Jones U.S. Basic Materials Index (the Index). The Index measures the performance of the basic materials industry of the United States equity market. Component companies are involved in the production of aluminum, steel, non-ferrous metals, commodity chemicals, specialty chemicals, forest products, paper products, as well as the mining of precious metals and coal. The Fund takes positions in securities and/or financial instruments that, in combination, should have similar daily return characteristics as 200% of the daily return of the Index.

Target(s): 30.35, 31.20
Key Support/Resistance Areas: 31.30, 30.50, 29.00, 28.00, 27.25
Time Frame: 1 weeks

Why We Like It:
Today UYM closed and broke above its primary downtrend line and its 50-day SMA for the first time since April. The ETF surged +6.71% (2x normal returns). Basic material stocks have been beaten down and are gaining momentum. I expect UYM to retrace some of the gains before regaining momentum and testing its 200-day SMA which is near our most aggressive target $31.20. UYM also closed above a key support resistance level of $29.00. I suggest we use $29.10 as a trigger to enter long positions. Our stop will be $27.20 which is below the 50-day SMA and yesterday's lows. NOTE: This is a leveraged instrument so please use proper position size to manage risk. The bid/ask spread is a little wider than I normally like so I suggest using a limit order between the two and you should get filled.

Suggested Position: September $29.00 CALL, current ask $3.00, estimated ask at entry $2.60

Annotated Chart:

Entry on July xx
Earnings Date 8/4/10 (unconfirmed)
Average Daily Volume: 1.0 million
Listed on 7/22/10

In Play Updates and Reviews

Head Fakes

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:
Good Evening. Does this market have your head spinning yet? Mine sure is after the head fakes we have seen over the past several days. In any event, ETN was opened and closed in a matter of minutes this morning and our positions in QQQQ and WYNN were also stopped out at the open. I suggest treading lightly until we know whether this market is truly heading higher or it is setting up for another fall. I like our short play set-up in COST and our new long play set-up in UYM, should we get filled. Small postion size in suggested. Please email me with any questions.

Current Portfolio:

PUT Play Updates

Costco Wholesale - COST - close 54.90 change +1.29 stop 57.25

Target(s): 54.35, 53.80, 53.00, 52.25
Key Support/Resistance Areas: 56.80, 55.60, 54.25, 53.40, 51.50
Time Frame: 1 week

7/22: COST could not even get above yesterday's highs when the market was spring boarding higher. this stock appears is a relative underperformer and I like it short if we get filled at $55.50. If nothing else a quick turn around from this resistance area can turn into a quick profit. I've added $54.35 as an immediate target. If we get triggered and hit this target, options positions should easily gain 20% to 30%. If we get a meaningful pullback COST should be one of the first stocks to let go.

7/21: COST tanked -2.69% today has already hit our first target. It's probably wishful thinking that the stock will rally up to our target of $55.80, but if we are patient we might get one of those rally days so I suggest we see how the rest of the week plays out. I will lower the trigger to $55.50 which is near the 20-day SMA and $55.60 resistance area which is where I expect COST to hit a brick wall.

7/20: COST has broken through key support/resistance areas at $56.80 and $55.60 and is below all of its major moving averages which are declining. The stock is rallying to test these areas from below and I suggest readers using a trigger of $55.80 to enter short positions on any further strength COST exhibits in the coming days. This area is near the most recent downtrend line. We'll use a tight stop at $57.25 which is just above the 50-day and 20-day SMA's, the recent downtrend line, and the congestion area overhead. COST has a large gap to be filled down near the $52 level which is near our most aggressive target and could happen if weakness reappears in the broader market. NOTE: September options were just recently released so the open interest is less than other months.

Suggested Position: September $55.00 PUTS, current ask $1.86, estimated ask at entry $1.50

Entry on July xx
Earnings 10/7/10 (unconfirmed)
Average Daily Volume: 3.76 million
Listed on July 20, 2010


Eaton Corp - ETN - close 74.75 change +1.61 stop 74.90

Target(s): 71.55, 70.80, 69.85
Key Support/Resistance Areas: 74.00, 71.50, 70.00, 68.50
Final Gain/Loss: 0%
Time Frame: 1 to 2 weeks
New Positions: Closed

7/22: ETN gapped up near our stop loss and then ran right through it within the first few minutes of trading. The only trades I can find that went off in the time frame of our stop was hit were at $1.65 so that is price I have used for the entry and exit. I'm not concerned so much about that though. I would rather explain how I would have handled the opening gap and placed a short trade on ETN. First, in this volatile environment it's impossible to tell where a stock will open and find resistance which makes it very difficult to pinpoint entries/exits in an end of day newsletter. One thing is certain and that is we must have relatively tight stops (i.e. not like DE & SBUX) to prevent the market from running away from us. In this case, had you been following the stock this morning prior to shorting it you would have never taken the position until the initial onslaught of momentum faded, which it clearly did at about 10:00 AM. Only then should a short have been initiated with a stop above the highs. If you were able to do that you have a gain of more than +25% as of the close today plus you have better reference points to place protective stops. The bottom line is ETN has gained nearly +13% in three trading sessions and it is an expensive stock. I like the short play even more now. The stock now has two gaps to fill below and if there is any weakness they should get filled relatively quick. If readers have positions I think you will have a chance to take profits soon. I would stick with the trade and trail your stop down as ETN fades. One exit strategy is to place a good til cancelled (GTC) order on the option price, at say $2.10 or $2.20. I would be surprised if you don't get filled in the coming days, maybe even tomorrow.

7/21: ETN reported earnings this morning that beat estimates and the stock closed +5.9% on the day with most of that coming in the form of a gap higher. The company also guided higher but the stock is still expensive trading around a 20 PE ratio. ETN has gained over +10% in just two days and has rallied right into a downtrend line from its April to June highs. I expect there to be a significant retracement and we could see ETN begin to close the gap higher from today. At a minimum we should see ETN turn back towards today's lows and its 50-day SMA. Our stop will be above today's highs at $74.90. NOTE: the September strikes were recently released so the open interest isn't as high as other months.

Suggested Position: September $70.00 PUTS at $1.65, entry was at $1.65

Annotated chart:

Entry on July 22, 2010
Earnings: More than 2 months (unconfirmed)
Average Daily Volume: 1.7 million
Listed on July 21, 2010

PowerShares QQQQ Trust - QQQQ - close 45.77 change -1.13 stop 45.10

Target(s): $45.05 (hit), 44.60 (hit), 44.40 (hit 7/17, 7/20), 44.15, 43.90
Key Support/Resistance Areas: 46.77, 45.25, 44.46, 43.50, 42.50, 41.00
Final Gain/Loss: -41.62%
Time Frame: 1 week
New Positions: Closed

7/22: Well, you certainly have to pick your spots very carefully in this environment and obviously our spot to exit this position was at the close yesterday. QQQQ proceeded to gap open above our stop so we were taken out at the open. We are flat the position for a loss and finding better opportunities. The ETF backed off of its primary downtrend line today while the other major indexes (except RUT) closed above their trend lines. But with the huge reversal it appears this may be taken out. Price will soon tell us and it will be interesting to see how this plays out.

7/21: QQQQ gapped higher and essentially sold off the remainder of the day. The stock hit our first target of $45.05 and drifted higher to the $45.40 area which is where the real selling began. For intraday traders I've provided an intraday chart to illustrate where protective stops could have been placed to protect against a reversal and to get the most of the price action that was happening (see red lines on the chart). The initial stop could have been placed near the $45.50 level which was above the initial swing high (see small oval). QQQQ then proceeded to sell off hard hitting our targets of $44.85 and then finally $44.60 at the end of the day. Once these targets were hit the stops could have been moved down to the $45.10 area which was above prior intraday support areas of the past few days (which should now act as resistance). This is the ideal way to deal with the current volatility upon us. So now we are ready to lower the stop to $45.10 going into tomorrow. $44.10 is still a valid target just above the 20-day SMA that has been previously hit. This is the area where I suggest tightening stops to see if we can get even more out of the position. If things continue to the downside the immediate next targets are $44.15 and $43.90 with the most aggressive target at $43.40. I know managing a trade like this is difficult for traders who do not trade intraday. A possible solution would be to initiate a trailing stop which will protect you from a hard reversal back to the upside. In this case the trailing stop would be about 45 cents. My goal is to exit this positions this week.

Current Position: August $45.00 PUTS at $1.08, entry was at $1.85

Annotated chart:

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

Wynn Resorts - WYNN - close 85.48 change +3.52 stop 85.10 *NEW*

Target(s): 81.55, 80.50, 79.50
Key Support/Resistance Areas: 85.00, 84.00, 76.50, 72.00
Current Gain/Loss: -54.2%
Time Frame: 1 week
New Positions: Closed

7/22: After coming within 2 cents of our target yesterday WYNN reversed with the entire market and stopped us out within the first 45 minutes of trading this morning. There were some opportunities to take profits on this trade earlier in the week but my targets were simply not quite right which in the end caused the loss. For readers who may still have positions I would close positions or tighten stops on weakness. I see intraday support at $84.50, $83.80, $82.50 and the above the above targets. At the end of the WYNN will eventually touch its 200-day SMA but its just not ready yet.

7/21: WYNN came within 2 cents of hitting our revised first target this afternoon so I have raised this 5 cents. The stock prices of WYNN are coiling and it is due for a trip lower. When that happens I suggest readers use the above targets to tighten stops to see how much more we can get out the position. I think WYNN's early strength was more about a prior unfilled gap than true strength. I think we will see $80.50 and probably $79.50 prior to going much higher. I'm going to lower the stop to $85.10 which is above today's high. If WYNN trades up to this level its probably headed towards $88.00 but I like it go lower first.

7/20: Once again WYNN was down -$2 at the open and pulled a complete reversal. Conservative traders may want to consider exiting this position and preserving capital as we have already lost -$1.50 in the option premium. After WYNN broke below key support levels and its 20-day, 50-day and 100-day SMA's the stock has catapulted higher with the broader market. It's time to salvage what we can so I have listed 4 targets above and I suggest readers begin too tighten stops or exit positions at these levels.

NOTE: I view this trade as being aggressive and potentially quick.

Current Position: August $75.00 PUTS at $1.60, entry was at $3.50

Annotated chart:

Entry on July xx
Earnings 7/29/10 (unconfirmed)
Average Daily Volume: 2.92 million
Listed on July 17, 2010