Option Investor

Daily Newsletter, Sunday, 8/22/2010

Table of Contents

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

Market Wrap

Big Swings, Minor Loss

by Jim Brown

Click here to email Jim Brown

Option expiration week produced a 333-point range in the Dow but only an 89-point loss for the week. However, Friday was the lowest close for the week.

Market Statistics

It was not a good week for economics and that set the tone for the market. Friday was a neutral day with a couple minor reports but market sentiment was already negative. The Mass Layoff report on Friday came in about where it did in the prior month with 1,609 layoff events impacting 143,703 workers. That was not earth shaking but just a continued weakness in employment.

The Weekly Leading Index took a dive to 120.8 from 122.4 and the first decline in three weeks. It is now only .4 points from a new 52-week low at 120.4 and I fully expect the current decline to continue. I have talked about this weekly report several times in recent months and it clearly shows the economy in decline.

Weekly Leading Index Chart (Moody's)

While there were not any reports stirring up the market on Friday the two out on Thursday will probably haunt us for several more days. The new Jobless Claims at 500,000 was the highest level since November and the third consecutive weekly gain. The rise in new claims during the survey period for the August non-farm payrolls suggests we are going to see even more job losses on the payroll report due out on September 3rd. There are no reliable estimates making news because of the unknowns about the lingering census worker terminations. About the only guarantee is there will be job losses.

The biggest hit to market sentiment came from the Philly Fed survey on Thursday. The index dropped -12.8 points to a -7.7 from a positive 5.1 in July. 58 out of 58 economists surveyed by Bloomberg were expecting a positive number on the Philly Fed. This decline back into contraction territory put the index at a level not seen since July 2009.

This is a serious problem because the manufacturing sector had been leading the rebound. Also, the Philly Fed Survey is the most followed of the manufacturing surveys. The dramatic decline in the headline number and in the individual components is not indicating a slowing of growth to some peaceful level that will eventually pull us out of the slump. It is indicating a contraction back into levels that will trigger more layoffs and put businesses back into recession mode. This was a serious hit to market sentiment that could have a long-term impact.

Philly Fed Components

Philly Fed Chart

Economic reports next week will be dominated by housing and the GDP revision. The GDP estimates have taken a shocking drop with some analysts now talking about numbers under 1.0% for Q2 growth. This is down from some estimates of more than 3.0% just a month ago. Like the Philly Fed this is a dramatic decline and does not bode well for the equity markets.

The housing reports are also expected to be ugly. This is the first month that has no hangover from the tax credit and some analysts are expecting sales declines of 5% to 7% for the July period. These are lagging reports so any negative number will be extrapolated forward to cover August and the rest of the year. Every month for the rest of the year sales are expected to decline so the July numbers next week will just be a jumping off point for future estimate revisions.

There are several more regional manufacturing reports but they will be overshadowed by the Philly numbers. The Kansas and Chicago reports are influenced by the auto sector and as such are not true reads on the general manufacturing activity in their regions.

Ben Bernanke will speak on Friday at the Fed's Jackson Hole conference and analysts are speculating he will use the speech to try and guide expectations on what new quantitative easing the Fed is planning. However, the Fed does not use the Jackson Hole speech as a policy discussion so there may be limited references to future plans. I expect him to say the Fed is ready to act just as a confirmation to the recent FOMC announcement.

Economic Calendar

Another problem weighing on the market was the return of Greece to the spotlight as tensions in Greece rise because of the forced austerity measures. Even though Greece qualified this week to receive the next $11.5 billion in bailout loans the country is crumbling internally.

The austerity measures have caused stores to close, tax revenues are falling as a result and unemployment has hit an unbelievable 70% in some areas according to Spiegel Online. Austerity measures have cut government spending by more than 10% in less than a year. Bankruptcies are soaring, consumption is plunging and purchasing power is evaporating. The National Confederation of Hellenic Commerce said 17% of all shops in Athens have had to file for bankruptcy. GDP was a -1.5% in Q2 and it is expected to finish the year at -4%.

Despite all the existing problems, conditions are expected to worsen. Citizens are warned on TV to expect a large wave of additional layoffs in September. The social unrest is growing and one expert predicts "extreme social consequences" later this year. Riots and strikes are a daily occurrence and increasing. Worries are growing that Greece is going to fail despite the billions in bailout loans. The country is in a death spiral and it is starting to appear in the daily papers once again. The problem we thought had gone away is growing progressively worse. If you follow the timeline of the country's demise we might not be that far ahead of similar problems in Spain, Portugal and possibly even Italy.

The markets did not need a resurgence of the EU debt crisis because we have enough problems here in the U.S. but we don't always get to choose what crisis is going to disrupt our markets.

At home the banking sector lost another eight banks on Friday bringing the total for the year to 118 closed. The Chicago based ShoreBank with $2.16 billion in assets was closed at a cost of $367 million to the FDIC. That was the largest of the banks closed. Others included:

Imperial Savings - Virginia
Community National Bank - Florida
Independent National Bank - Florida
Los Padres Bank - California
Pacific State Bank - California
Butte Community Bank - California
Sonoma Valley Bank - California

The banks are still suffering from the crash in the real estate sector and the high number of loan delinquencies. Over 12 million homeowners are behind in their house payments. The various bailout or modification programs are not working. In July the Treasury Dept reported 630,000 applicants for loan modifications were disqualified for not fitting the required criteria. Only 24,577 who successfully made it into a trial modification program were approved for a permanent loan. This was down from 51,205 in the prior month. If unemployment is rising the number of people in trouble on their house payments is rising as well.

According to RealtyTrac we are likely to see slightly more than one million homes foreclosed this year. That is up from 900,000 in 2009. Moody's Mark Zandi said the projection for 2011 is 1.5 million foreclosures. As of June 30th only $490 million has been spent of the $75 billion set aside to help homeowners avoid foreclosure by lowering payments. The program rules are too strict and people without jobs are tough to finance.

The government is finding it hard to pay its bills as well. Forty-six states plus Washington DC are facing serious budget shortfalls. For 2010 the collective gap is over $140 billion and it is already projected to be over $121 billion in 2011.

The talking heads on TV have been asking the question for weeks, "are we going to have a double dip recession?" If you look around we see that parts of the economy are already in a second recession like retail, housing and manufacturing. It is not a very big jump from here to a full-blown double dip. I told you a couple weeks ago I did not think we were going to dip again but simply see a slower growth process. After seeing the Philly Fed numbers I am no longer confident of that statement.

I believe the Fed is sending the wrong message to the economy. Corporations see the "unusual uncertainty" at the Fed and then decide they should be uncertain as well. They are storing up cash for the next rainy day. The division of opinions at the Fed is also a concern. One half of the board believes in slower growth and the other is warning about deflation. If you are a business owner how do you plan for that? You hoard cash and cancel expansion plans.

Most analysts believe we could see some additional stimulus programs announced at the Fed any day now. How bad is the economy if the Fed is in reaction mode again after buying up $2 trillion in debt to stabilize economic conditions? It does not make business owners sleep well at night.

The market and the economy are killing investors and that is not just the small investor like you and me. Two major hedge fund managers called it quits this week because of very tough conditions. Paolo Pellegrini, the Paulson researcher that recommended shorting sub-prime mortgages before the bubble burst, called it quits. He personally made over $150 million in the call for Paulson and then started his own hedge fund. The fund made 40% in 2008 and 61.6% in 2009 but is down -11% YTD in 2010. Paolo sent a letter to investors this week saying he was shutting down the billion-dollar fund and returning the money to investors. Paolo has turned very bearish on the U.S. and U.S. equities. He turned so bearish that he moved out of the U.S. and returns only to transact business.

An even bigger player, Stan Druckenmiller, sent a letter to investors saying the pain of losing money in this market was forcing him to close up shop. Stan is a billionaire investor who started his fund in 1981 and grew it to $12 billion today. He has managed several high profile trades over the last 25 years that made over a billion dollars. His firm, Duquesne Capital, is down about 10% YTD.

These traders are not alone in shutting their funds because of losses in 2010. There have been numerous funds closed. The volatility has been huge and we are underwater for the year after suffering under a 1600-point range on the Dow. When billionaire hedge fund traders with tons of hired talent quit because of a tough market it is really a tough market. I heard one commentator saying today that these two traders calling it quits was a sure sign of capitulation. Unfortunately I don't buy that argument today.

In stock news the big winner and a major reason the Nasdaq finished in positive territory was SalesForce.com. After the bell on Thursday CRM reported earnings that beat the street by 2-cents on better than expected revenue. They also raised their guidance on future revenue because of a +30% increase in customers. CRM is a heavily shorted stock and the good news prompted a +17% spike in the stock to $113. CRM has a great looking chart that attracts shorts like flies to picnics. I am sure the shorts were ecstatic when it failed at $100 earlier in the week and they increased their shorts only to get crushed on Friday.

CRM Chart

Google announced it bought Like.com in an effort to beef up its product search in time for the holidays. There was no mention of the price tag but it was rumored to be in the range of $100 million. Google has been on a shopping trip of its own of late and appears to be changing to a buyer rather than a developer. Google is rumored to have invested $100 million in social gaming company Zynga and rumored to be buying Slide, a photo sharing service, for $182 million. Google also said it was discontinuing development of Google Wave because user adoption was not as good as they would have liked. Google has also pulled the plug on Dodgeball, Jaiku, Notebook and its video service. Also gone was Google Answers and Hello, a photo sharing service. The news did not help Google shares with a close at a five week low at $462.

Google Chart

Intel closed flat a day after announcing it was buying McAfee (MFE) for a monster premium of 60%. That equates to $48 a share and McAfee has not seen that price since the dot.com boom. Nobody in the analyst community understands the Intel-McAfee deal. The analyst community is united in their dislike and suggest the stupidity behind it means it is time for a new Intel CEO. Some are suggesting corporations don’t buy McAfee software until the real reason for the acquisition becomes apparent. Intel said it was to make their chips more secure but nobody is buying that argument. Intel is paying cash for MFE because Intel shares have no buying power at a 52-week low.

Intel Chart

Intuit, the maker of Quickbooks, rallied +15% after releasing earnings that beat the street and raising guidance. Intuit actually lost 5-cents for the quarter on revenue that rose +18%. Analysts were expecting a 10-cents loss. Intuit said its Mint.com personal finance website had grown to more than three million members. Intuit shares hit $44 after a flurry of upgrades.

You can tell is was a slow news day when Intuit earnings are a highlight of the day. It was also option expiration, which normally spikes volume significantly. However, Friday's volume was only 6.8 billion shares. Volume was really anemic as it should have been on an August Friday. One statistic caught my eye. The new 52-week lows spiked up to levels not seen since the crash at the end of June. When large numbers of stocks are not just declining but making new 52-week lows it confirms the bearish market sentiment.

Any trades that get made over the next couple weeks will probably be called in from the beach. The last two weeks of summer are normally very weak in the volume department with the next trading cycle kicking off after Labor Day.

Over the last week the S&P rallied to resistance at 1100 twice and then closed at a new four week low. It was a textbook failure at clearly defined resistance that even a novice day trader could have captured. As John Gray said in the Market Monitor on Tuesday when the first failure began, "Is it really going to be this easy?" Rarely do we have strong short squeezes exactly to resistance (1100.14) and then an immediate plunge. Normally there is a head fake or a couple point breakthrough and then the selling begins. Clearly the market has a negative bias.

Friday I was surprised at the strength of the short covering in the afternoon. With all the economics for the week displaying the skull and cross bones symbol you would have thought the close would have been more negative. Of course it was expiration Friday so some end of day short covering was a given as traders closed positions rather than face an exercise on Monday. There was also a rumor that the Fed was readying a new stimulus announcement. OK, a summer Friday, very low volume, option expiration and the Fed is going to announce some new stimulus? Are traders really that stupid to fall for the rumor and rush in to buy stocks? Apparently some traders were.

For next week initial support will be 1060-1065 on the S&P with resistance still 1100. Volume will be light and economics will be bad. How much of that is already priced into the market is anybody's guess. We are really close to a bearish cross of the 100 and 200-day averages. The 50-day crossed back in July and a cross by the 100 will be even stronger confirmation.

S&P-500 Chart

The Dow traded in a 333-point range for the week that topped at 10475 but closed at just over 10200. It was a classic failure at the resistance of the 200-day average I don't hold out much hope that it is going to miraculously rebound again next week. We now have a solid lower high pattern followed by a lower close. The best guess would be a test of support at 10100 on very low volume. Dow components HPQ, INTC, MMM, UTX, GE and MSFT are leading the Dow lower. The weak economy is very detrimental to earnings from the industrial components. On a technical basis the Dow is weak and on a fundamental basis it is weak. Bulls may try to "wish it higher" but that has never worked for me as a trading strategy.

Dow Chart

The Nasdaq chart is a clone of the others with a lower high but not quite a lower low. There is support at 2160 and it has held three times in the last two weeks. A break there targets 2063 and the 50% retracement level of the March 2009 low. The rally on Friday to positive territory was due to the gains in CRM, INTU, PCLN, AKAM and FFIV. All the big caps like GOOG, AAPL, MSFT, INTC and RIMM were negative.

There is no spark in the tech sector. Chips are holding on the 6-months lows and the PC sector has shorted out. Hewlett's less than exciting earnings report last week was the final straw on the tech camel. I am expecting further weakness and I believe that 2160 support level will break.

Nasdaq Chart

In another confusing set of events the Russell actually gained slightly for the week and avoided a close at the low of the week on Friday. I can only attribute it to option expiration because small caps do not do well when the economy is falling apart.

The clear target on the Russell is 590 and we can only hope that it will find lasting support there and not just a one-night stand. That level has held on tests twice this year. I would be a buyer for a trade only on a test of the 590 level. Resistance is 630.

Russell 2000 Chart

In summary nothing has changed in my market outlook. I am still in the "why buy" camp until after Labor Day. The next two weeks are going to see very light volume and continued negative economics. Eventually the market will have enough of the gloom and doom and start preparing for a Q4 rally. Of course that assumes we have a normal Q4 rally and not a confirmed double dip recession. If the economics continue to get worse I believe traders will run to the sidelines and cash out in order to avoid a repeat of the 2008 lows. In reality double dips rarely reach the same market lows as the first dip but that does not mean investors won't be expecting it anyway. I think the next couple weeks should be used as trading practice in buying support and selling resistance while we wait for post Labor Day volume to return.

Jim Brown

Index Wrap

S&P falls a bit, Nasdaq not: at Support or just a Pause?

by Leigh Stevens

Click here to email Leigh Stevens
As is usually the case with stocks or indexes declining within broad downtrend channels, stocks continued mostly lower this past week, especially within the Dow and S&P indexes. Holders of puts are in the driver's seat. For example, in the Dow, which had been leading the last rally, there's now only one(of 30) stock (MCD) bucking the current downtrend.

Without a larger volume more sustained rally ahead the current decline looks to continue almost by virtue of too little buying interest. The current decline of course beginning from the late-July/early-August high, and which was a retreat from technical resistance implied by the top end of downtrend price channels highlighted on all the major index charts seen below.

Some support/buying interest developed in the area of prior (down) swing lows in the Nasdaq Composite at least and the other major indexes aren’t far away from a possible retest of their pullback lows of 7/16-7/21. However, it looks like the strongest potential support is in the area of the early-July bottom, with next major support at the LOW end of the various uptrend channels.



The reason I described the S&P 500 (SPX) last week as having formed a 'possible' double top is that confirmation of such tops are considered made if/when a stock or index pierces the low made AFTER the first top; i.e., at 1011. With this past week's low in the 1064 area, SPX has a ways to go for that. Still, the chart is bearish currently as prices fall within the index's broad downtrend channel. SPX is getting nearer to what's considered an oversold 30 or below on the Relative Strength Index (RSI) shown. However, in terms of the long-term weekly chart (not shown), prices would have to fall much further to say that this index was 'oversold'.

Key near resistance is at 1100, then at the upper trendline comprising the top end of the downtrend channel, currently intersecting in the 1116 area. A decisive upside penetration of this resistance is needed to turn the chart picture from bearish to one having some bullish potential again although such a rebound would still face further resistance implied by the prior two tops made in the 1130 area.

Pivotal near support can be assumed in the area of the prior downswing low made in the 1057 area. As I noted in my initial (bottom line) comments, I don't view this low as potential major support. Rather, I would grant that potential to the previous bottom in the 1011 area, which also represented support implied by a 38% fibonacci retracement of the March '09 to April 2010 advance. The 1000 level tends to be a technically significant level as support or resistance, just as 100 is in stocks and stock indexes. Major support, below 1000, can be implied by the low end of SPX's downtrend channel, which intersects currently around 960.


Not surprisingly, bullish sentiment is tapering off and the 5-day average of my CPRATIO line is approaching the lows seen in this indicator just prior to the early-July bottom. Generally, I expect bearish sentiment to reach an oversold extreme when 1-day dips are seen that touch or dip under the lower line seen above. If such sentiment lows occur ahead of or simultaneously with bullish chart action, short-covering is advisable as well as trading again on the long side of this market.


What I've written in general for the S&P 500 above, is true as well for the big cap S&P 100 (OEX) index as to a bearish chart and importance of prior lows as possible support points; in the case of OEX we're looking at 480 and then, most importantly, in the 460 area. Major technical support below 459-460 would then come in at the lower trend channel boundary, currently intersecting around 437.

First key technical resistance is at 500 (and one of the technically important '100' multiples I talked about in my SPX comments above) and then at the upper trendline, currently intersecting at 507. Of course then the prior recent intraday high at 512 is another important benchmark level; the 200-day moving average also falls in this area. You'll note that twice now this key average has 'acted as' resistance at important prior tops.


I mentioned also in my initial comments on the indexes, that of the 30 stocks in the Dow 30 Average (INDU), only one is bucking the current downtrend (MCD). The other 29 technically don't look like patterns that will have upside reversals anytime soon. Intraday highs seen over Tuesday-Wednesday of this past week reversed in the area of INDU's 200-day moving average. It's not so much that this average always acts as resistance, but failure to get above this key average in stocks tends to see buyers withdraw their bids.

The 10000 area is key near support, but the 9600 area represents fairly major support as suggested by the last important bottom.

I've noted resistance around the 200-day moving average at 10453 currently, with next key technical resistance at the down trendline comprising the upper end of INDU's bearish downtrend channel, currently intersecting at 10650.

It would be surprising, given the current look of the underlying stocks, to see the Dow NOT test support around 10000 and then perhaps break under that level at some point. If INDU gets to 10000 and then rebounds (and it would likely be oversold at that point) it doesn't mean that that such a rally will be the start of a sustained up leg.


The Nasdaq Composite (COMP) Index is bearish its pattern as the index continues to trend lower after the last rally. COMP is racking lower within the broad downtrend channel seen on its chart. The pattern looks most like 'completion' would be a retest of the prior lows in the 2060 area. If a new low for the move is seen, major technical support is then assumed at around 1940, the low end of COMP's downtrend channel.

Key near-term resistance comes in around 2230, with important upside 'break-out' resistance at 2257 currently. Of course above 2257-2260, next resistance would then come soon overhead in the area of the prior double top that occurred between 2309 and 2341; the most recent high being 2309 and 2341 the peak price of the top made in June.

2150-2160 is still near support, than in the 2060 area, marking the prior low in this current bear swing.


Not surprisingly, bullish sentiment is tapering off and the 5-day average of my CPRATIO line is approaching the lows seen in this indicator just prior to the early-July bottom. Generally, I expect bearish sentiment to reach an oversold extreme when 1-day dips are seen that touch or dip under the lower line seen above. If such sentiment lows occur ahead of or simultaneously with bullish chart action, short-covering is advisable as well as trading again on the long side of this market.


I begin to sound like a broken record to myself, as I state the obviousness of the Nasdaq 100 (NDX) chart looking bearish like the other major indexes. It doesn't look like NDX can mount any substantial rally from near the 1800 level as it was trying to do feebly this past week. 1800-1785 will likely be under assault by the sharks in the water in coming days. 1750 seems more probably as a next low for example; somewhere between my (green arrow) support point at 1785, equaling the last low and 1700 which is assumed as an even more pivotal technical support at this juncture.

The near support/buying interest area looks like 1785-1808, at least until that zone is penetrated and by the looks of the chart, the index working lower ahead to under 1785 looks more likely than not. Fairly major support should be found at the 1700 prior low. If evaluated by the current intersection of the lower channel line, another major support is suggested around 1623, down from 1635 last week.

Key near resistance is in the 1860 area, with fairly major resistance beginning at 1900, extending to the 1920 area. The 1900 level is the 'breakout' point, assuming a sustained rally is mounted after the index crosses above that level.


The Nasdaq 100 (QQQQ) tracking stock is of course showing the same bearish patterns as NDX with only the differing levels to look here at in terms of support and resistance.

The trend is down and until/unless there's an upside breakout, we should be positioned with the trend. Nothing 'telling' in volume/On Balance Volume (OBV) this past week. Volume has been relatively low but that's across the board such as at the CBOE. No one knows for sure which way this economy is going to go but there are some disquieting signs.

Near support: 44.0 - 43.8

Major support: 42-41.7

Next major technical support: 40.0

Near resistance: 45.75

Next resistance: 46.3

Major resistance: beginning 47.2 extending to 47.7


The Russell 2000 (RUT) continued to slip lower along with the rest of the market but hasn't yet tested or broken through nearby support at 600. 587 is a prior low that seems likely to get re-tested. Support has shown up in the past in the low-600 area and it may be supported there again. The small to mid-cap stocks segment has been a favored investment theme and is still a potent idea out there for how to best make money in coming years.

I was writing last week about a rebound from the low-600 area, especially thinking of the prior 603 low; Friday's low: 601.7. We did see a bounce from there with what looked like pre-weekend short-covering. Just based on the chart pattern, a next probable move for RUT looks like at a minimum the index tests its prior 587 low and possibly makes a new low after that; e.g., to the the 550 area. Stay tuned.

Key near resistance is 632, with a more pivotal technical resistance at 650, the current intersection of the upper end of RUT's broad downtrend channel.




1. Technical support or areas of likely buying interest and highlighted with green up arrows.

2. Resistance or areas of likely selling interest and notated by the use of red down arrows.


3. Index price areas where I have a bullish bias or interest in buying index calls, selling puts or other bullish strategies.

4. Price levels where I suggest buying index puts or adopting other bearish option strategies.

5. Bullish or Bearish trader sentiment and display the graph of a CBOE daily call to put volume ratio for equities only (CPRATIO) with the S&P 100 (OEX) chart. However, this indicator pertains to the market as a whole, not just OEX. I divide calls BY puts rather than the reverse (i.e., the put/call ratio). In my indicator a LOW reading is bullish and a HIGH reading bearish, consistent with other overbought/oversold indicators.

Trading suggestions are based on Index levels, not a specific option (month and strike price) and entry price for that option. My outlook often focuses on the intermediate-term trend (next few weeks) rather than the next several days of the short-term trend.

Having at least 3-4 weeks to expiration tends to be my guideline for trade entry choice. I attempt to pick only what I consider to be 'high-potential' trades; e.g., a defined risk point would equal in points only 1/3 or less of the index price target.

I tend to favor At The Money (ATM), In The Money (ITM) or only slightly Out of The Money (OTM) strike prices so that premium levels are not as cheap as would otherwise be the case, which helps in not overtrading an account. Exit or stop points, as well as projected profitable index price targets, are based on my technical analysis of the underlying indexes.

New Option Plays

Restaurants & Technology

by James Brown

Click here to email James Brown


Panera Bread Co. - PNRA - close: 79.49 change: +0.84 stop: 76.45

Target(s): 84.90
Key Support/Resistance Areas: 72.50, 76.00, 80.00, 85.00, 88.50
Current Gain/Loss: %
Time Frame: two or three weeks
New Positions: Yes, see trigger

Company Description:
Panera Bread Company owns and franchises 1,399 bakery-cafes as of June 29, 2010 under the Panera Bread®, Saint Louis Bread Co.®, and Paradise Bakery & Café® names. With our identity rooted in handcrafted, fresh-baked, artisan bread, we are committed to providing great tasting, quality food that people can trust. Nearly all of our bakery-cafes have a menu highlighted by antibiotic free chicken, whole grain bread, select organic and all-natural ingredients, with zero grams of artificial trans fat per serving, which provide flavorful, wholesome offerings. (source: company press release or website)

Why We Like It:
This is a relative strength play. PNRA has been out performing the market the past few days. Now the stock is testing resistance near $80.00. The high on Aug. 18th was $80.56. I am suggesting we buy calls at $80.75 and target a move toward resistance at $85.00 (exit target $84.90). This should be a relatively short-term play if we are triggered.

Trigger @ 80.75
Suggested Position: if triggered by the Sept. $80 calls (current ask $2.35)

Annotated Chart:

Entry on April xxth at $ xx.xx
Earnings Date 10/27/10
Average Daily Volume = 562 thousand
Listed on April 21st, 2010


Intl. Bus. Machine - IBM - close: 127.50 change: -1.40 stop: 130.51

Target(s): 123.00
Key Support/Resistance Areas: 130.00, 127.00, 123.00, 121.00
Current Gain/Loss: %
Time Frame: Two weeks
New Positions: Yes

Company Description:
International Business Machines (IBM) is a titan in the information technology space. The company has several divisions with major operations in hardware, software, and IT services.

Why We Like It:
IBM has been bouncing around the $132-120 zone for months. On a short-term basis the stock is rolling over and shares look ready to breakdown from a the current $130-127 trading range. I'm suggesting we buy puts now, ride the stock down toward $123.00. Then we can re-evaluate since it might be a good spot to consider switching directions and buying calls.

Buy puts now at current prices.

Suggested Position: Buy the September $125 put (current ask $1.81)

Annotated Chart:

Entry on April 23rd at $ xx.xx
Earnings Date 10/18/10
Average Daily Volume = 5.4 million
Listed on April 21st, 2010

In Play Updates and Reviews

Not Much Has Changed

by James Brown

Click here to email James Brown

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

Current Portfolio:

CALL Play Updates

Cameron International - CAM - close 36.84 change -0.70 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: -50.0%
Time Frame: Several weeks
New Positions: maybe

8/21 I don't see any changes from my Thursday comments. The stock is down three days in a row and down there weeks in a row. Short-term the trend is down. Wait and watch for a bounce from support near $36.00 before considering new bullish positions. If crude oil continues to fall then CAM will struggle.

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

Annotated Chart:

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 61.63 change -0.66 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: -22.7%
Time Frame: Several weeks
New Positions: No

8/21: It is starting to look like FTI is forming a bearish double top under the $65-66 level. More conservative traders may want to raise their stops toward $59.00 or $59.50. Personally I would keep my stop under the 200-dma near $59.23 but if the S&P 500 continues to sink then FTI will probably hit our stop!

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.

8/14: 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

Annotated Chart:

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 27.20 change +0.61 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
Option Current Gain/Loss: +21%
Time Frame: Several weeks
New Positions: Yes

8/21: HGSI outperformed on Friday with a +2.2% gain thanks to a rumor that GlaxoSmithKline (GSK) might buy HGSI. With all the merger news last week we were bound to see some rumors resurface. The trend off the July lows is still up but HGSI is facing tough resistance near $28 and its 200-dma. If you're looking for a new entry point I would wait for another bounce from $25.00 or a close over $28.00.

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

Annotated Chart:

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 57.73 change +0.56 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: -12.1%
Time Frame: 1 to 3 weeks
New Positions: Maybe, see details below

8/21: As of Thursday it looked like MON was in trouble but shares managed a +0.9% rally and outperformed the rest of the market on Friday thanks to some news out of Brazil. I remain cautious on this name, especially given the weakness in the broader market. Here is an excerpt from MON's press release on Friday morning:

Monsanto Company confirmed that at yesterday's National Technical Biosafety Committee (CTNBio) meeting in Brazil, the committee approved Monsanto's Bt Roundup Ready 2 Yield® soybean product for planting in Brazil. This is an important step toward the Brazilian commercialization of the first biotechnology trait Monsanto has developed specifically for a non-U.S. market.

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

Annotated Chart:

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 119.97 change -0.42 stop 115.95

Target(s): 121.25, 123.00, 125.00
Key Support/Resistance Areas: 123.00, 119.10, 118.00, 116.00
Option Current Gain/Loss: +17.7%
Time Frame: Several weeks
New Positions: No

8/21: Gold ran into some profit taking on Friday. That's not too surprising since the GLD looks a bit overbought with the rally from late July. Longer-term we're still bullish on this ETF but short-term I would wait for a pull back before considering new positions. The GLD should find short-term support near $118 and $116.

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

Annotated Chart:

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 31.61 change -0.18 stop 29.89

Target(s): 33.40, 34.25, 35.00
Key Support/Resistance Areas: 35.00, 34.40, 33.50, 31.50
Option Current Gain/Loss: -37.6%
Time Frame: 1 to 2 weeks
New Positions: Maybe

8/21: Shares of UNH bounced twice near $31.40 this week. While it might be tempting to consider bullish positions here I suspect we'll see a better entry point near $30.00. Be patient and wait for the correction to continue. Nimble traders can keep an eye on the 50-dma near $31.00 as possible support.

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

Annotated Chart:

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 249.64 change -0.24 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

8/21: I don't see any changes from my Thursday comments. However, we will add a second entry point at $244.00. Now we have two entry points to buy puts - at a bounce near $257.00 or at a breakdown at $244.00. If AAPL hits $244.00 we'll adjust the stop loss down to $256.00.

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. 8/14: 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, current ask $5.65, estimated ask at entry $4.15

Annotated Chart:

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

FASTENAL Co. - FAST - close: 48.01 change: +0.19 stop: 50.40

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:
8/21: FAST dipped toward support near $47.00 and bounced. That's why we have the trigger to buy puts at $46.50. More conservative traders could use a trigger at $46.00 instead. More aggressive traders could try and time an entry point on a failed rally near $50.00. There are no changes from my Thursday comments.

8/19: 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 $0.65)

- or -

Buy the November $45 puts (current ask $2.10)

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: 38.37 change: -0.17 stop: 40.55

Target(s): 35.25, 31.90
Key Support/Resistance Areas: 43.00, 40.30, 37.00, 35.00
Option Current Gain/Loss: -11.4%
Time Frame: 4 to 6 weeks

Why We Like It:
8/21: NUE gapped open lower at $38.29 (our entry point) and bounced from the $38.00 level intraday. I would still consider new positions at current levels or you can wait for another bounce toward $40 and its 50-dma. ,P> 8/19: 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.

Current Position: Long October $35.00 PUT, entry was at $0.96
symbol: NUE1016V35

Annotated Chart:

Entry on August 20th at $ 38.29
Earnings Date 10/21/10
Average Daily Volume = 2.9 million
Listed on August 19, 2010

Occidental Petrol. - OXY - close: 75.06 change: -0.33 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

8/21: There is no change from Thursday's update. Oil and the oil sector continue to look weak. Odds are growing that OXY will breakdown. We have two entry points. One possible entry is at $77.50. Another is at $73.50. If triggered at $73.50 we'll change the stop loss to $78.51. Plus we'll change the targets to $70.25 and $66 if triggered on the breakdown.

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, current ask $3.05.

Annotated Chart:

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: 59.98 change: -0.21 stop: 63.26

Target(s): 59.50 (hit), 58.05, 55.25
Key Support/Resistance Areas: 59.00, 61.00
Current Gain/Loss: -1%
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

8/21: PG continues to bounce around the $59-61 trading range. There is no change from my Thursday comments. Readers can choose to buy puts near $61 or wait for a breakdown and confirmation of the trend with a drop under $59.00.

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

Annotated Chart:

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