Option Investor

Daily Newsletter, Thursday, 8/19/2010

Table of Contents

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

Market Wrap

Bulls Losing Their Grip as Economy Slips

by Keene Little

Click here to email Keene Little
Market Stats

It's been a typical opex week with an effort to hold the market up; most opex weeks tend to be bullish as most participants seem to prefer selling puts rather than calls and there's then an effort to keep the market above the sold put levels. Coming into opex there were a lot of SPY puts and calls around the 110 level (SPX 1100) and this will often tell you where the market will settle. On Tuesday and Wednesday it was certainly apparent that 1100 was resistance.

Both Tuesday and Wednesday saw selling into the close after failing to get through 1100. After Wednesday's regular-hours close the futures suddenly sold off even more. This combination looked like bearish price action and even an overnight rally that got ES (S&P 500 emini futures) up almost 8 points was not able to hold back the sellers following the morning economic reports. The selling from Wednesday's high and into Thursday morning looked pretty much straight down and didn't find a low until near midday.

The unemployment numbers this morning spiked the futures down (about ES 11 points) which is not typical behavior. The market usually ignores this report. That immediately told us how nervous the market is. Initial claims came in at 500K vs. the expected 478K, which was bad but not to cause a spike down of 11 points on ES. The number however was the worst we've seen in nine months. The bottom line is that no matter how many jobs the Obama administration says they've saved, it's not showing up in the unemployment lines. The economy is slowing again, after the government stimulus is wearing off, and the stock market is losing its footing.

Most of us do not need a reminder about how tough it is out there for jobs. I think most of us know of several people who have lost their job and how difficult it has been for them to get reemployed. I've seen this graphic before but not updated through May. Until the employment picture improves we're not going to see a growing economy. In front of the elections it's going to be "it's the jobs stupid". Unemployment rates by county

The other two reports this morning were the Leading Economic Indicators and Philly Fed. The Leading Indicator was up +0.1% so there was some growth there but obviously not very much. The expectation was for +0.2%. As you can see in the chart below, the sharp turn down this year is looking reminiscent of the turn down in 2004. The sharp rise in 2009 was mostly government stimulus and removing it shows there's not much else besides the government's spending (which has only grossly increased our debt which now needs to be paid with dwindling government income).

Leading and Coincident Economic Indicators, chart courtesy briefing.com

Of the ten indicators there were five that rose (which are not necessarily a good sign): interest rate spread, average weekly manufacturing hours, the index of supplier deliveries, average weekly initial unemployment claims and manufacturers' new orders for non-defense capital goods.

The remaining five indicators that were down were: the index of consumer expectations, building permits, real money supply (a sign of deflation and the Fed's inability to expand the monetary supply) and stock prices. Manufacturers' new orders for consumer goods and materials held steady.

All in all it was not an encouraging report but that did not stop the Conference Board's economist, Ken Goldstein, from saying "The indicators point to a slow expansion through the end of the year." And somehow he believes the data "do not point to a recession." I'm not sure about you but I feel much better now.

The next economic report, the Philadelphia Fed index, was also a disappointment. Both reports came out at 10:00 AM and the market dropped sharply following the news. The Philly Fed index was a big miss and disappointment, coming in at -7.7 vs. the +8.0 expected. Even with the large government stimulus program over the past year was not able to lift the Philly Fed index above its previous high in 2004. So as part of the recognition phase that we're entering (for the next leg down in the stock market) these reports are starting to open up the eyes of the market which has been running on hopium for a long time. The dealer (the government) is being throttled by the people (who are screaming "no mas") and the economic numbers are starting to reflect the fact that there's not much following the government's efforts.

Philadelphia Fed Index, chart courtesy briefing.com

The stock market continues to run around at full speed in a small room. It's not wearing any protection equipment and the walls are looking rather bloodied now, blood from traders who are trading this wild trapped animal. There are a lot of very smart experienced traders, individuals and money managers alike, who are getting beat up daily trying to trade the swings. Almost to a person there seems to be agreement that the market is simply no fun to trade anymore. Something has fundamentally changed and those of us who trade the market are up against the machines, and the machines don't like anyone else playing with them.

Consequently we're seeing small and big players alike simply leaving, taking their marbles with them. Liquidity is drying up and that makes for an even wilder animal in a smaller confine. Tight trading ranges see sudden explosions to one side or the other only to be reversed hard the following day. Carrying positions overnight carries a larger risk than normal. We are in a truly difficult time for the market (and economy) so you're living through a time that you'll be able to tell your kids and grandkids about. Understand that you're not alone if you're feeling whipped by this market. Also understand you can still make money but you have to do it differently; you have to learn to trade differently.

While the powers that be in this market (larger government-supported hedge funds like Goldman Sachs as well as the government itself, along with the Federal Reserve system) will not give up their power willingly, the market will take it from them. It's a battle between the titans and our job is to nibble on the crumbs from their food fight. Grab a crumb and quickly run back into your hole to nibble on it. Wait for another, run out and grab it and run away before you get stepped on. While I'm not a day trader at heart I've realized over the past year in particular that I have to manage my trades more carefully. Position trades are going to have to turn into swing trades and swing trades may only last a day if I'm lucky. I need to grab my crumb and scurry out of the way.

I'm finding many technical analysis tools are not working as well as they used to. I like EW (Elliott Wave) but I find the patterns get distorted a lot in this manipulated market, making it harder to trust. Trend, support and resistance lines regularly get broken only to be recovered the next day. I am finding Fibonacci retracement levels and projections working as well as they always have (not always but well). But they're the only tools we have (would you rather trade on fundamentals or news?) and we do the best we can with them. We get our setups, we take our trades and then we carefully, and more tightly, manage them, taking profits where we can and minimizing losses. Look for your 3:1 ratio (profit:loss) and minimize your losses and you will make money. Discipline is required now more than ever.

So don't despair, you're not alone in fighting this monster and I think together we'll have the best chance of beating it and making some money for ourselves. A lot of people are leaving the market out of frustration but I hope all of you reading this can hang in there with us and trade much smaller positions and less frequently if you have to. If you had set a goal previously to make $X per month then change that to $X/3 or something like that. Lower your expectations and trade to stay in the game. Only in that way will you keep your abilities sharp and more importantly you'll be able to read the market better as it changes. Then when we get a good trading period you'll be there to take advantage of it. Stay nimble, stay disciplined and be careful.

And with that let's see what this monster of a market has thrown at us this week. Since May price has been oscillating around a long-term uptrend line from 1990 through the 2002 low. You can see how it's been using it as support since September 2009 and if it lets go this time I think it will the last time it will see it for a very long time. The H&S topping pattern since January's left shoulder continues to be a possible pattern. The first failure near the neckline at 1040 resulted in a head-fake break. The neckline is now sloping downward and is near 1000. If that level breaks I doubt very much it will be a head fake. But as shown with the dashed line, there will remain the possibility for a choppier decline into next year. I consider this to be a much lower probability than the dark red price depiction but after it gets down to the 950 area I'll worry about trying to figure that out.

S&P 500, SPX, Weekly chart

Coming into Monday's trading I was showing on the Market Monitor an expectation for a low Monday morning and then a bounce into mid week to correct last week’s decline. Following the bounce correction I’m looking for a stronger decline into the end of the month. And this expectation has been playing out so far and interestingly it's following fairly closely an analog pattern (similar fractal pattern) with the lead up to the 1987 crash.

The analog is between price action since April of this year and price action following the August 1987 high. Referencing the daily chart below, after the initial decline from April to May 25th we got a 3-wave correction that finished at last week's high. From there we dropped down to a low Monday morning and then bounced to a high on Tuesday which was tested on Wednesday (remember the days of the week to compare to 1987) before it starts back down into what should be a stronger decline.

S&P 500, SPX, Daily chart

As I look at the depiction for the decline, and considering the possibility about the analog with 1987, I'm wondering if I'm being too conservative in my downside depiction. I've often said I do not like to predict a market crash--that's a fool's game. Having said that, when I look at the analog between 1987 and today it does cause me to wonder a bit. The April-August 2010 pattern looks very similar to the August-October 1987 pattern:

S&P 500, 1987, Daily chart

The October 2, 1987 high is equivalent to the August 9, 2010 high. The first drop off October 2, 1987 completed on Monday, October 12th (the start of opex week). It then bounced into mid week, topped out on Tuesday and then tested on Wednesday. Thursday closed lower. Is it starting to sound familiar by now? There was then a stronger decline into Friday followed by a gap down on the following Monday (the crash). So if this analog continues to play out similarly with a strong decline on Friday it will have my attention and my money will be in short trades. Regardless of whether or not we get a crash into next week, do you want to be long with this kind of risk facing you?

Key Levels for SPX:
- cautiously bullish above 1107
- bearish below 1100

There is some disagreement between the indexes with Wednesday's highs (the RUT and NDX made higher highs above Tuesday's whereas the DOW and SPX did not). This changes how I interpret the decline from Tuesday/Wednesday and keeps alive the possibility we'll see another rally leg on Friday and possibly into Monday (dashed on the 60-min chart below). One other possibility is for a new low Friday morning (target is 1065), a bounce back up to retrace a portion of the decline from Tuesday and then let go on Monday. I wish it were a little clearer as we head into Friday but at this point I'd suggest being ready for anything (or nothing), especially since it could be a boring opex Friday.

S&P 500, SPX, 60-min chart

The wedges that I've drawn on the DOW's daily chart below should give a good sense of why trading has been difficult, especially since the high in April. Wedges are usually filled with very choppy and whippy price action as both sides battle it out for control with one side gaining slowly (the bears in the move down into May and bulls in the move up into August). The next move though should be a strong decline where the bears virtually take over the market. As with SPX, there is a chance for another leg back up to complete a slightly larger (in time if not price) correction to the decline from last week but it needs to start up quickly tomorrow. Any new low below today's would strongly suggest we will not get a high bounce.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish to 10520
- bearish below 10209

NDX found resistance this week at its 20-ema and 200-dma. Today's close was also back below the 50-dma. I show the same possibility as the others for another leg up for a larger bounce, possibly up to the 1880 area but the greater risk is for a hard decline from here.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 1880
- bearish below 1801

This week's bounce for the RUT took it up to resistance at it 20-ema. It came close to its broken uptrend line from July 6th but couldn't quite make it up to its broken 50 and 200-dma's so it was weak relative to these resistance levels. If the market manages another leg up for its bounce it should be able to test the 640 area otherwise look out below.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 640
- bearish below 639

The 10-year yield as at a potentially important level that could start a reversal. The weekly chart below shows a possible a-b-c pullback from June 2009 where the 2nd leg down has achieved 162% of the 1st leg down at 2.54% (it remains a little shy of the projection at 2.55%). If the leg down from April 5th is completing the pullback then we'll see yields start to head higher. A push back above 4.0% would be bullish. A drop below 2.5% would suggest the bearish pattern that should eventually take TNX to a downside target of 1.2%-1.3% (the price depiction is just a guess at this time as it could head more quickly down to the bottom of its down-channel, currently near 1.4%.

10-year Yield, TNX, Weekly chart

The banks look like they might have put in a bottom for now and ready for a bounce to correct the decline from August 2nd, perhaps back up to the 50-dma near 14.45 before letting go to the downside. The other more bearish interpretation suggests the bottom could fall out right here right now. In fact the price pattern for the broker index (XBD) looks particularly bearish right here. So follow the money if the banks break down from here but watch for a possible bounce into early next week (in which case the broader market should hold up as well).

Financial sector ETF, XLF, Daily chart

The Trannies look like the broker index and ready for a breakdown from here. If it drops back below the broken downtrend line from April 30th, currently near 4150, the price pattern suggests we could see a sharp and strong decline, one that will take out the July 6th low near 3872 in a hurry.

Transportation Index, TRAN, Daily chart

Just as the stock market could be ready for a stronger decline, the US dollar looks ready for a stronger rally. But also similar to the stock market, but inversely, I see the possibility for a little more pullback in the dollar before it will be ready to rally. Back above its recent high at 83.35 would be the signal that the next leg up was underway.

U.S. Dollar contract, DX, Daily chart

I don't have a chart for it this evening but the commodity-related equity index (CRX) has a pattern that suggests we'll see an immediate and sharp decline from here. Since this index has been in synch with the broader market it has me leaning to the downside sooner rather than later.

Gold ran higher today and I'm wondering if people are jumping into the shiny metal as a hedge against a possible attack by Israel against Iran's nuclear reactor that's about to go online. There are a lot of news stories about the possibility and the fact that the attack will have to happen within the week, before the startup of the reactor, otherwise it becomes a radiation hazard).

What surprises me is that oil is not streaking higher. It instead sold off today. If Iran is attacked and they shut down the Straits of Hormuz, through which some 40% of the world's oil is shipped, the price of oil could easily spike above $100. So we've got a mixed signal between what we're seeing in gold and oil. The run into gold might be more out of a fear about what's going to happen with fiat currencies as the global economy continues to soften and the world's central banks continue to mass produce more money. The trouble for gold bulls is that the money supply is actually shrinking (as indicated in today's LEI report, which is the true definition of deflation). The shrinking money supply takes away the inflationist's support for that reason to hold gold as a hedge.

The bounce off gold's low in July looks like it's heading for the $1250 target where the bounce would have two equal legs up. That would complete an a-b-c bounce correction of the decline from June and should be followed by a continuation of the decline to well below $1000. The risk for gold bulls is that the decline could start at any time now (notice the run up to potential resistance at its broken uptrend line from November 2008).

Gold continuous contract, GC, Daily chart

The gold miners index (GDX) has a very similar pattern to gold and could push a little higher to a price projection at 52.89 for two equal legs up from July. But it's currently struggling with its broken uptrend line from February and could start back down at any time.

Gold Miners, GDX, Weekly chart

As already mentioned, I'm surprised there isn't a premium on oil's price right now if the rumors about Israel/Iran had any merit. Maybe that's telling us all we need to know about the rumors. The decline in oil could be ready for a bounce now or after a little lower, perhaps for a test of the July 6th low near 71.

Oil continuous contract, CL, Daily chart

There are no major economic reports on Friday so the market will be free to fend for itself.

Economic reports, summary and Key Trading Levels

In case you haven't heard, we've got a Hindenburg Omen (HO) in effect since August 12th. The following criteria must be met in order for this signal to be achieved:

1. The daily number of NYSE new 52-week highs and lows must both be greater than 2.2 percent of total NYSE issues traded that day.
2. While not a rule, the smaller of the 52-week highs and lows must be greater than or equal to 69 (to meet the requirement that the number be at least 2.2% of the total issues).
3. The NYSE 10-week moving average is rising.
4. The McClellan Oscillator is negative on that same day.
5. That new 52-week highs cannot be more than twice the new 52-week lows (however it is fine for new 52 Week Lows to be more than double new 52-week highs). This condition is absolutely mandatory.

If the (HO) is reconfirmed within 36 days, so by mid September, the signal becomes even stronger. In that case the HO would be signaling a 77% chance of a market decline of 5% or more. Now 5% is not a market crash and the signal is only good for a 25% chance of a true crash and the signal lasts for 120 days. That's not very helpful from a timing aspect (since it takes us out into mid December). While we've had this signal in the past, and no crash has occurred without it, it's only a warning.

One of the problems with this HO signal right now is that everyone seems to be talking about it. What's obvious to most is mostly not worth knowing. When too many expect something it's often when the market comes up with a different surprise (even if it means the PPT will step in and try to prevent a crash). Having said that, considering where I see the price pattern, this signal needs to be taken seriously. If ever there was a time the market is set up for a severe disconnect to the downside, this is it. It doesn't mean a crash is coming but it means the risk is there and it's a higher risk than I've seen for a very long time, even more than the crash setup I saw in May 2008. Caveat emptor (and of course sellers always need to beware).

For a quick summary of tonight's charts, the primary indexes have me unsure as to whether to expect at least a bounce on Friday and perhaps into early next week before it starts heading down more quickly. But many of the other indexes I watch, including the brokers, transports and commodity-related equity index, have me thinking we're perched on the edge right here. If the market starts to sell off on Friday I think it will be serious. It could open up the crash gate and Monday might not be pretty. Therefore any selling on Friday that holds into the afternoon would have me getting into more short positions to take home over the weekend.

A short position over the weekend could even be considered a JIC trade (Just In Case). If the rumors about Israel taking out the Iranian nuclear reactor come true they'll have to take care of it within days before the reactor is loaded with the fuel rods and activated. Otherwise it becomes too much of a radiation hazard. If things remain quiet over the weekend and the market starts a rally you can simply cover and watch to see if another shorting opportunity sets up. I'd rather be watching for a shorting opportunity than a buying opportunity. With the conditions ripe for a strong selloff (if not a crash) I would be very reluctant to hold any long positions overnight.

Friday could be a quiet opex Friday, especially with low summertime volume, or it could be explosive (either direction). The lighter volume is inducing some strong volatility as the program traders run the tape strongly in one direction. If it's to be a quiet day I'd suggest no trading until the end of the day and then be looking for a short entry.

Good luck and I'll be back with you next Monday or Wednesday (switching next week as I'll be traveling on Thursday).

Key Levels for SPX:
- cautiously bullish above 1107
- bearish below 1100

Key Levels for DOW:
- cautiously bullish to 10520
- bearish below 10209

Key Levels for NDX:
- cautiously bullish above 1880
- bearish below 1801

Key Levels for RUT:
- cautiously bullish above 640
- bearish below 639

Keene H. Little, CMT

New Option Plays

Construction Materials and Metals

by James Brown

Click here to email James Brown


FASTENAL Co. - FAST - close: 47.82 change: -1.82 stop: 50.40

Company Description:
Fastenal sells different types of industrial and construction supplies in the following product categories: threaded fasteners and miscellaneous supplies; tools; metal cutting tool blades and abrasives; fluid transfer components and accessories for hydraulic and pneumatic power; material handling; storage and packaging products; janitorial, chemical and paint products; electrical supplies; welding supplies; safety supplies; and metals, alloys and materials. (source: company press release or website)

Target(s): 41.00,
Key Support/Resistance Areas: 50.00, 48-47, 200-dma, 40.00
Time Frame: 3 to 4 weeks

Why We Like It:
Investors are growing more and more worried that the U.S. economy is slowing down too fast. A weaker economy or a double-dip would be bad news for a company that sells construction supplies. Even though FAST blew away the earnings estimates back in July the stock has continued to build on a pattern of lower highs. Shares are now testing support near $48-47 and will soon test the simple 200-dma near $46.75.

More aggressive traders may want to consider new bearish positions now. I am suggesting we use a trigger at $46.50. We'll start the play with a stop loss at $50.40. Our target is $41.00.

Suggested Position: Buy the September $45 puts (current ask $0.75)

- or -

Buy the November $45 puts (current ask $2.15)

Annotated Chart:

Entry on August xxth at $ xx.xx
Earnings Date 10/12/10
Average Daily Volume = 839 thousand
Listed on August 19, 2010

NUCOR Corp. - NUE - close: 38.54 change: -0.80 stop: 40.55

Company Description:
Nucor and affiliates are manufacturers of steel products, with operating facilities primarily in the U.S. and Canada. Products produced include: carbon and alloy steel -- in bars, beams, sheet and plate; steel joists and joist girders; steel deck; fabricated concrete reinforcing steel; cold finished steel; steel fasteners; metal building systems; light gauge steel framing; steel grating and expanded metal; and wire and wire mesh. Nucor, through The David J. Joseph Company, also brokers ferrous and nonferrous metals, pig iron and HBI/DRI; supplies ferro-alloys; and processes ferrous and nonferrous scrap. Nucor is North America's largest recycler (source: company press release or website)

Target(s): 35.25, 31.90
Key Support/Resistance Areas: 43.00, 40.30, 37.00, 35.00
Time Frame: 4 to 6 weeks

Why We Like It:
After nearly a year of trading sideways in the $39-50 zone NUE has finally broken down. The oversold bounce has stalled near the $40 level and its descending 50-dma. The action today looks like another failed rally under resistance. I am suggesting we take advantage of this weakness with new put positions.

We'll start with a stop loss at $40.55. More aggressive traders may want to use a stop just over $41.00. Our first target is $35.25. Our longer-term target is $31.00 but honestly we may not be in the play that long. FYI: The Point & Figure chart is bearish and is forecasting a $26 target.

Suggested Position: Open positions now at current levels.

Buy the October $35.00 puts (NUE1016V35) current ask $0.90

Annotated Chart:

Entry on August 20th at $ xx.xx
Earnings Date 10/21/10
Average Daily Volume = 2.9 million
Listed on August 19, 2010

In Play Updates and Reviews

Stocks Slip on Jobs and Manufacturing Data

by James Brown

Click here to email James Brown

Editor's Note:
NOTE: I am filling in for Scott today and this weekend. - James

Current Portfolio:

CALL Play Updates

Cameron International - CAM - close 37.54 change -0.65 stop 35.45

Target(s): 40.50, 42.00, 43.95
Key Support/Resistance Areas: 45.00, 42.50, 41.00, 38.75, 36.00
Option Current Gain/Loss: -31.5%
Time Frame: Several weeks
New Positions: maybe

8/19 Worries about the economy slowing down too fast (which means less demand for oil) pushed oil prices lower. A bounce in the dollar didn't help. Meanwhile big names like BP and RIG were slipping lower as the Congress held a meeting with scientists over the clean up for the oil spill in the Gulf of Mexico. The OIX oil index slipped to a new relative low while the OSX oil services index fell toward Monday's low. Shares of CAM held up pretty well and are still out performing much of the sector. Unfortunately the rally is in jeopardy if the market continues to slip. Readers may want to wait for another bounce from support near $36.00 befoer considering new positions.

8/14: CAM was caught in the middle of the drama of the Gulf of Mexico oil spill. The stock has been beaten down because they built the blow out preventer (BOP) on the Horizon well. However, the BOP was heavily modified by RIG/BP so they don't really have any exposure to the damages. CAM is world's largest seller and manufacturer of BOP's so any new rules from the government means a lot of new business for Cameron. And the company recently reported over a $1 billion in new orders. I suggest we capitalize on the gaining momentum and initiate long positions now. Our stop $35.45 which is below Thursday's low, and the 50-day SMA. At a minimum I'm looking for CAM to retest its recent swing high and possibly charge up to its 52-week highs if the broader market cooperates.

Current Position: Long September $40.00 CALL, entry was $0.95

Entry on August 16, 2010
Earnings Date 11/3/2010 (unconfirmed)
Average Daily Volume: 4.6 million
Listed on August 14, 2010

FMC Technologies, Inc - FTI - close 62.29 change -1.44 stop 58.25

Target(s): 65.25 (hit), 67.00, 68.75
Key Support/Resistance Areas: 69.00, 65.50, 62.40, 59.00
Option Current Gain/Loss: -10%
Time Frame: Several weeks
New Positions: Yes, on weakness

8/19: During the session FTI followed the market lower and posted a -2.2% decline and closed under its simple 30-dma. Overall nothing to exciting. I am somewhat concerned with the failed rally on Tuesday near resistance in the $65 area. However, FTI should still have support near $60 and its 200-dma. After the closing bell tonight FTI announced it had received a $36 million deal with Total Exploration & Production Angola.

8/18: FTI gave back a good portion of yesterday's gains as traders took profits. There is intraday support at current levels and the stock remains above all of its daily moving averages and its upward trend line that began on 6/8. I'm not concerned about today's pullback as the stock is forming an ascending triangle and if it breaks above $66.00 our more aggressive targets should be reached. $65.25 was hit yesterday and still remains a valid target. We've got an October option in this position and suggest FTI give it some time and room to work.

8/14: This is another play on the Gulf oil spill as FTI stands to benefit from new regulations in underwater robotics. The company reported solid earnings results in July and this past week's dip is a buying opportunity. The stock is maintaining an upward trend line while the broader market has not, which is a sign of overall relative strength. I believe FTI should easily retest its recent swing high which is just above our first target of $65.25. Our more aggressive target is $67.00 but if the broader market is strong FTI could even make a run at its YTD highs. Our stop is $58.25 which is below the upward trend line and the 200-day and 50-day SMA's. I see some potential in this trade and am going to push the suggested option out to October, but that doesn't mean we can't take quick profits should FTI break higher soon.

Current Position: Long October $70.00 CALL, entry was at $1.10

Entry on August 16, 2010
Earnings 10/27/2010 (unconfirmed)
Average Daily Volume: 1.5 million
Listed on August 14, 2010

Human Genome Sciences - HGSI - close 26.59 change +0.18 stop 24.65

Target(s): 27.20 (hit), 27.70, 28.20, 29.20
Key Support/Resistance Areas: 29.80, 28.24, 27.80, 26.80, 25.00
Current Gain/Loss: +1.0%
Time Frame: Several weeks
New Positions: Yes

8/19: HGSI displayed some relative strength with a minor gain. The stock actually gapped open higher this morning but gave back most of the rally as the wider market declined. The moved was fueled by positive news on one of its Lupus drug treatments. Here is an excerpt from their press release today:

Human Genome Sciences, Inc. and GlaxoSmithKline PLC (GSK) today announced that the U.S. Food and Drug Administration (FDA) has granted a priority review designation to BENLYSTA® (belimumab) as a potential treatment for systemic lupus erythematosus (SLE). A priority review designation is granted to drugs that, if approved, offer major advances in treatment or provide a treatment where no adequate therapy exists.

I am a little bit concerned that the rally stalled under resistance near $28.00 and its 200-dma but then again the market wasn't very cooperative either. If you're looking for a new position consider waiting for another bounce from the $25 area.

8/18: HGSI was up big early in the day but gave back most of the gains late in the day. The candlestick printed today does not look pretty but the bullish case for HGSI remains in tact. Today's high was just about the same as on 7/26 which created a head and shoulders pattern of sorts. But I think the selling will be short lived and expect HGSI to move back up towards its recent highs, and possibly print new ones. I've added $27.70 as a target, which is just below the 200-day SMA, and suggest readers either take profits at this level or tighten stops to protect them. A move to this level should produce a +50% gain.

Current Position: Long September $28.00 CALL, entry was at $0.90

Entry on August 13, 2010
Earnings Date N/A (unconfirmed)
Average Daily Volume: 2.9 million
Listed on August 12, 2010

Monsanto Co. - MON - close 57.17 change -1.80 stop 55.75

Target(s): 63.75, 65.90,
Key Support/Resistance Areas: 66.00, 62.30, 58.50, 56.00
Option Current Gain/Loss: -17.5%
Time Frame: 1 to 3 weeks
New Positions: Maybe, see details below

8/19: Fertilizer names have been popular this week with the potential BHP/POT merger brewing. Unfortunately, traders were in the mood to take profits today. shares of MON gave up 3% and closed near its 30 and 100-dma. I am cautious on this name today. Some of the short-term indicators make me nervous. If you are looking for a new bullish positions I would suggest waiting for a bounce from the $56.00 level first.

8/18: The agriculture sector is heating up and gaining momentum. Farmers want and need to grow more food to keep up with demand, especially from emerging markets. Many potash companies have seen significant gains in recent weeks because potash levels need to be replenished in farmland soil. MON is a downstream play in this space as they provide the seeds and herbicides to actually grow the crops. I also believe this stock and sector can do well in a down market. Technically, MON has been beaten down but is now showing signs of life. The stock is forming a bull pennant above its 20-day and 100-day SMA's and a key pivot level for the stock dating all the back to early 2007. I suggest readers take advantage of the gaining momentum and initiate long positions now. I'm looking for MON to make a run up towards its 200-day SMA and prior support area near $66.00, both of which are above our immediate targets (which are +6% and +10% higher). Our initial stop will be $55.75.

Current Position: Long October $62.50 CALL, entry was at $1.65

Entry on August 19, 2010
Earnings Date 10/6/2010 (unconfirmed)
Average Daily Volume: 7.2 million
Listed on August 18, 2010

SPDR Gold Trust - GLD - close 120.39 change +0.17 stop 115.95

Target(s): 121.25, 123.00, 125.00
Key Support/Resistance Areas: 123.00, 119.10, 116.50, 113.50
Current Gain/Loss: +28.8%
Time Frame: Several weeks
New Positions: No

8/19: The worse than expected weekly jobless claims and the shockingly bad Philly Fed manufacturing number today continues to raise worries over the pace of the economic rebound. Investors are still seeking "safety" in bonds and gold although there are plenty of analysts who would not call gold a "safe haven" play. The shiny metal continues to see bullish momentum and the GLD eked out another gain. This ETF is arguably short-term overbought. I'm not suggesting new bullish positions at this time. Any correction should find some short-term support near $118.

8/18: GLD gapped lower this morning but was quickly bought the remainder of the day. GLD hasn't seen a close this high since June. I am looking for gold prices to move about $10 to $15 higher (about +1%) which should be enough in GLD to hit our first target of $121.25 (lowered 35 cents). This should give us a +50% gain and is an area where I suggest closing positions or tightening stops. This move could happen quick so I suggest planning your exit and sticking with it. I'm ready to get out of here with a nice gain.

Current Position: Long September $120.00 CALL, entry was at $1.80

Entry on August 12, 2010
Earnings Date N/A (unconfirmed)
Average Daily Volume: 12.4 million
Listed on August 10, 2010

UnitedHealth Group Inc - UNH - close 31.79 change -0.75 stop 29.89 *new*

Target(s): 33.40, 34.25, 35.00
Key Support/Resistance Areas: 35.00, 34.40, 33.50, 31.50
Current Gain/Loss: -23.2%
Time Frame: 1 to 2 weeks
New Positions: Maybe

8/19: UNH underperformed the market today with a -2.3% decline but it fared better than the HMO index, which fell -2.6%. I am cautious when it comes to new entries. Wait for another bounce near its rising 200-dma near $31.20 or wait for a bounce near $30.00 before initiating new positions. Please note the new stop loss at $29.89 under the late July low.

8/16: UNH is a relative strength play in a defensive sector that should do well in the current market environment. Technically, UNH recently broke out of a key pivot level near $31.50 and has retraced some the gains by turning back to re-test the pivot from above (see dashed line on chart), which is where the stock bounced today. UNH is above all of its major moving averages and is maintaining an upward trend line from the 7/1 lows. I think UNH is poised to retest its recent swing highs and possibly move up towards the $35.00 area. I suggest we initiate long positions now. Our stop is below all of the major moving averages which should provide support on any weakness, and we have realistic targets to book a nice winning trade should UNH bounce from here.

Current Position: Long September $32.00 CALL, entry was at $1.25

Entry on August 17, 2010
Earnings Date 10/19/2010 (unconfirmed)
Average Daily Volume: 8.5 million
Listed on August 16, 2010

PUT Play Updates

Apple, Inc - AAPL - close 249.88 change -3.19 stop 267.50

Target(s): 240.00, 233.00, 226.00
Key Support/Resistance Areas: 266, 258, 256, 246, 240, 231, 235
Time Frame: Several weeks

8/19: I (James) am very tempted to open bearish put positions in AAPL right now. Long-term I'm bullish on the stock but shares have been building a topping/consolidation pattern for four months now. It's possible investors are worried that Google will be strong competition when it launches a tablet-PC to challenge the iPad later this year. Plus there is concern that the huge success with Google's Android phone means Verizon may not want Apple's iPhone as badly as it use to. Odds are good that AAPL's leverage in negotiating with Verizon may not be as strong since the Droid phones are outpacing iPhone sales. Aggressive traders will want to consider new bearish positions now although I'd consider a tighter stop loss (maybe just over $260). For the moment we'll keep the newsletter strategy unchanged with Scott's suggested entry point to buy puts at $257.00.

8/18: AAPL double topped with yesterday's highs and is coming ever so close to our target to enter short positions. I like this short set-up but the more I think about it the more I think AAPL will make a run at closing the gap lower from 8/10 to 8/11. The stock's 50-day and 20-day SMA's are right there as well, along with its downtrend line. As such, I am going to adjust our entry in this position and push the recommended option out to October. Lets raise our trigger to enter short positions to $257.00. I expect to get filled on this sometime before the end of Monday's or Tuesday's session. Patience should pay off for us as I am looking for AAPL to make a run down towards its 200-day SMA.

8/14: AAPL has been in a fuzzy cloud recently and I believe it looks vulnerable at these levels. Recent reports on smart phone market share point to the Android capturing 18% market share compared to Apple's 14%. Technically, AAPL had a daily and weekly close below its long term upward trend from its March 2009 lows for the first time this past week. I believe AAPL should test its 200-day SMA which is below our two most conservative targets. I also think this is a good hedge against some of our long positions in the model portfolio. I suggest we initiate short positions in AAPL on strength if it trades to $255 or on weakness at $245.95. This is a position that I suggest being quick to tighten stops and/or take profits.

UPDATED: An alternative strategy readers may consider on a short AAPL position is to buy a PUT spread. For example, buy the October $240 PUTS (current ask $5.05) and sell the October $210 PUTS (current ask $2.10) to finance the cost. This is a well defined risk strategy where your max loss is $293 (the amount you paid for the spread) and your max gain is $1,707 if AAPL closes at $210 at expiration.

Suggested Position: Buy October $230.00 PUT if AAPL trades to $257.00

Entry on August xx
Earnings: 10/21/10 (unconfirmed)
Average Daily Volume: 23 million
Listed on August 14, 2010

Occidental Petrol. - OXY - close: 75.39 change: -0.23 stop: 81.05

Target(s): 74.00, 71.50, 67.50
Key Support/Resistance Areas: 75-74.00, 70.00, 65.00
Current Gain/Loss: N/A
Time Frame: Several Weeks
New Positions: Yes, trigger at $77.50

8/19: I am adjusting the strategy on this play. Instead of waiting for a bounce toward $77.50 (which still works as an entry point) I am adding a breakdown trigger to buy puts at $73.50. The recent low was $73.90 and so far traders have continued to buy OXY near support at $74.00. If we are triggered at $73.50 we'll move the stop loss down to $78.51. I'm adjusting our targets to $70.25 and $66.00 if triggered at $73.50.

We can keep the bounce trigger to buy puts at $77.50, if hit we'll use a stop loss at $81.05.

P.S. I've changed the suggested puts to November.

8/14: Hope is not a good strategy when you are in a position, but I suppose it's OK if you're not in yet. I sure hope OXY bounces to $77.50 so our trigger to enter short positions is reached. All we want is a bounce in the stock so we can exploit it. There is so much overhead congestion, moving averages, trend lines, etc. to keep this stock in check. I want to remove the lower trigger to enter for now. If OXY breaks down prior to bouncing the stock could reverse on us so I don't want to get trapped. I like the short set up on strength and suggest looking for a quick move down to the adjusted targets above. I will also add that OXY could bounce higher than $77.50. It really just depends on the strength in the oil sector and how far the broader market can bounce. A bounce much over $79.00 doesn't seem likely.

Suggested Position: Buy November $70.00 PUT

Entry on August XX
Earnings Date 10/21/10 (unconfirmed)
Average Daily Volume 4.4 million
Listed on August 7th, 2010

Procter & Gamble - PG - close: 60.19 change: -0.56 stop: 63.26

Target(s): 59.50 (hit), 58.05, 55.25
Key Support/Resistance Areas: 59.00, 61.00
Current Gain/Loss: -0%
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

8/19: Shares of PG have been forming a top for over eight months now. If the stock breaks down under support near $59.00 it would forecast a drop toward $54.00. Readers can choose to open positions near $61-62 but I would prefer to see a breakdown under $59.00. Please note I have adjusted our exit targets to $58.05 and $55.25. FYI: If you launch new positions I would buy the Novembers.

8/14: Rallies in PG keep getting sold into. We have a nice gain in this position and it could turn into a big winner if PG breaks below $59.00 which is below our 2nd target. I'm inclined to hang on to this position to see if the selling begins, however, that probably means enduring a bounce this week. PG is also a defensive play so the decline in the stock may take a while. If we get down to $59.05 I suggest tightening stops too see if we can get more out of the trade. If we do get to this level we should have close to a +100% gain. That's hard to beat.

Current Position: Long September $57.50 PUT, entry was at $0.36

Entry on August 10, 2010
Earnings Date 10/28/10 (unconfirmed)
Average Daily Volume 2.5 million
Listed on August 7th, 2010