Option Investor

Daily Newsletter, Wednesday, 9/15/2010

Table of Contents

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

Market Wrap

The Bulls Keep Battling the Bears Back

by Keene Little

Click here to email Keene Little
Market Stats

James will be with you tomorrow night as he and I switched nights this week as I prepare for my return to my "winter" office.

The day started out with another gap down, like Tuesday but then, like Tuesday, the dip buyers rushed in (or at least someone did) and pushed the market back up into the green. We've seen this movie before and it usually occurs at market tops. A lot of energy goes into getting the market back up into positive territory and essentially all that buying power is merely holding the market from dropping. It ends up frustrating the bears who can't seem to make a short play stick. The bulls start to get uneasy and start to sell a little more quickly. Consequently we get these choppy tops. It's also what makes the market vulnerable to sudden whoosh to the downside as there's very little to support the market and the bears end up chasing it down and the bulls start dumping stock en masse.

This kind of price action created the choppy top in August and once the topping process completed there was a big drop on August 11th. If you go back in time you'll see very similar market action at tops. It looks like a bullish consolidation at the time and bulls start getting into position for the next leg up. Failed patterns tend to fail hard and that's why we typically see a strong down day when it finally breaks. I'm anticipating seeing the same thing again if the market is able to hold up for another few days but not make any serious headway to the upside.

The pre-market futures were already slightly in the red before we got our morning economic reports which only added to some selling pressure out of the gate. The NY Fed Empire Manufacturing Survey dropped to 4.1 from 7.1 in August. The slowing in manufacturing supports those who say our economy is slowing and may be headed for a double dip recession. Those who believe this have been drowned out lately by those saying there's no chance of that happening. We'll see about that.

Industrial production and capacity utilization numbers came in close to expectations so there wasn't much of a market reaction to those. Even though the July number for industrial production was revised lower to 0.6% from 1.0%, that was just more bad news for the bulls to sweep away. It was a "less bad" number. The market did like the fact that capacity utilization rose slightly from 74.6% to 74.7%, which is the highest it's been since September 2008. But anything under 80% shows we've still got a slack economy. Depending on how you look at the numbers you'll see a weak economic or a less weak economy.

So the S&P dropped about 6 points out of the gate, made its low in the first 10 minutes of trading and promptly roared back to life and drove right back up to close the gap and climb another point. It then took the rest of the day to tack on another 4 points to finish up about 4. It was just enough to keep the bears away. So let's jump right into tonight's charts to see what's setting up--I think we're nearing, from a price and time perspective, a very important turning point for the market.

Until I see evidence to the contrary I've changed the primary wave count for the move since the April high. I could still get away with calling it an impulsive move down and a series of 1st and 2nd waves to the downside (as long as the August high isn't exceeded, which it came very close to doing on Tuesday) but I'm going with what it looks like for now. And that's an a-wave down to the May low and a triangle b-wave since then. It shows more clearly on the daily chart but essentially it calls for another leg down equal to or greater than the first leg down (I'm depicting a greater leg down for several reasons).

S&P 500, SPX, Weekly chart

If the 2nd leg down from here achieves 162% of the 1st leg down we get a downside target near 840. I'll get into the H&S topping pattern later but it projects down to about 860 and the July 2009 low was near 869. So I think the 860 area makes for a good downside target once the selling begins again.

If the bulls can keep the rally going for a little longer there is an upside target near 1158. This is where the bounce off the July low would achieve two equal legs up (for an a-b-c bounce) and it would also hit the downtrend line from October 2007 at the same level. I consider the market to be set up nicely for a short play here but if stopped out with a move above 1135 I'd look to try it again near 1158.

The daily chart below shows the sideways triangle idea more clearly. Triangles typically have a 5-wave move inside them but each leg is corrective and that's one of the things that has me leaning towards this triangle idea--we haven't had any good clean impulsive moves for months. The rally from late August is the 5th wave inside the triangle pattern (wave-e of an a-b-c-d-e move) and therefore we should be looking for the end of the triangle pattern now. Tuesday's high tagged the top of the triangle just about to the penny. It's common to see a small throw-over and therefore we might not have seen THE high for this leg up yet. But I would not chase any move higher at this point. While it could go to 1158 it could also go to 1135 and turn on a dime and come sharply back down.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1130 to 1158
- bearish below 1091

This morning SPX dropped out the bottom of a small parallel up-channel for price action since September 7th. This channel should identify the last leg up for the rally from August. After dropping out the bottom it spent the rest of the day scurrying to get back inside but was unable to do any better than nuzzle the underside of it into the early afternoon. And end-of-day push (jam) had SPX right up against the broken trend line for the 4th touch of the day. It also came within a point of the top of its triangle. On the 60-min chart below I also show a larger parallel up-channel from the August low and it should signal an end to the rally once it breaks below it, currently near 1121.50.

S&P 500, SPX, 60-min chart

Before looking at the other indexes I want to talk a little more about H&S patterns because there has been a lot of discussion about them this year. We had (still have) a bearish H&S topping pattern from January and we have an inverse H&S bottoming pattern from the end of May.

Let's start with the bullish inverse H&S pattern that is now being widely discussed. In my opinion there are three strikes against this pattern (and therefore out):

1. When a technical pattern is widely discussed, meaning it's obvious to many, it's obviously wrong. That's not a given but it's been the way of this market lately that all technical patterns discussed by the media fail. When everyone sees and takes a position to trade it there is a high likelihood for failure and failed patterns tend to fail hard. The false break of the H&S neckline near 1040 into the July 1st low near 1010 (so a 30-point drop) led to a strong rally, starting with a huge up day on July 7th, into August. Might we see a 30-point rally above the current inverse H&S neckline (that would be to the same 1158 level mentioned above) that then fails and drops sharply lower, trapping the bulls? It's certainly possible.
2. The volume is very important when evaluating H&S patterns and the volume pattern since May does not support the inverse H&S pattern. Volume should be kicking up in the rally from August and instead it's dying. If SPX were to make it over 1128 (the neckline) it would need volume confirming the break but more importantly it would need to hold on a retest. But right now we're getting no volume support for this pattern. The chart below shows SPY because I can get volume with it and it shows the declining volume following the right shoulder:

S&P SPDR, SPY, Daily chart

3. H&S patterns are unreliable in the middle of a move. This bullish inverse H&S pattern is in the middle of a larger move up from March 2009 and is following only a pullback (a pullback in the eyes of longer-term bulls). That makes it an unreliable pattern to use. H&S patterns should be at the end of a longer run in order to be effective.

Based on the above I do not believe we'll see an upside projection based on an inverse H&S pattern, which projects up to SPX 1250. I don't believe it for a second. While we could get a higher rally, such as to the 1158 target, do not trust it to go far and certainly not to 1250. This market has been full of head-fake breaks and a break of the 1128 neckline would very likely fail and trap a lot of bulls.

Now we'll look at the H&S topping pattern, with the left shoulder in January, head in April and the right shoulder is between the August and September highs. The neckline can be drawn across the lows that do not include the July 1st low (near SPY 104, SPX 1040) or it can be drawn through the July 1st low. The lower neckline would of course have a much lower price projection but using the 104 neckline we get a downside projection near 86 (SPX 860). As noted on the chart, bears will want to see increasing volume on the decline from the right shoulder and an explosion of volume on the break of the neckline. The head-fake break and bear trap can clearly be seen with the July low.

S&P SPDR, SPY, Daily chart, 2009-2010

Moving on to the other indexes, the DOW continues to struggle with its downtrend line from April, which SPX and NDX have broken (the RUT has not reached its downtrend line yet), but today managed to marginally close above it. It will be important for the bulls to make the break stick and not let it close back below it, now near 10523, otherwise we'll be left with a throw-over finish of its triangle pattern. If the bulls can push the market up a little further the DOW could tag its Fib projection near 10620 (where the 2nd leg of the bounce off its July low would equal 62% of the 1st leg up). I don't see it happening but two equal legs up from July would be up to 11042. I think the more likely move will be down (even if it starts a few days from now) and once below 10332 it would confirm the end of the months-long consolidation pattern.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 10620
- bearish below 10332

The techs have been relatively strong this past week. NDX climbed above its August high on Monday and its June high today. I've got a slightly different EW (Elliott Wave) count on the NDX because of the new high above June's. It counts best as wave A down to the July 1st low and then an a-b-c bounce up to the current position. Two equal legs up from July is at 1966 and the top of a parallel up-channel from July (bear flag pattern) is currently near 1950, only 8 points higher than today's high. But notice where it stopped yesterday and today--right at the broken uptrend line from March 2009 through the May 25th low. You can see how that line was used as support in early August before it gapped down below it on August 11th. Coincidence? Perhaps. We'll know soon enough. The next move out of this pattern is exactly the same as the sideways triangle shown for SPX--a strong decline in wave C. If it were to drop the same amount as the April-July decline we get a downside projection to about 1580. I think it will go deeper than that.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish to 1966
- bearish below 1851

The semiconductors have been acting somewhat out of synch with the broader tech indexes but the rally on Monday and Tuesday certainly helped. The move up from the August 31st low is now an a-b-c bounce and it would have two equal legs up at 337.42. The 50% retracement of the July-August decline is at 338.41 and the 50-dma is at 339.40. If the SOX makes it up to the 337-339 area, stalls and turns back down it would be an outstanding shorting opportunity (use SMH). Whether it makes it up to that level over the next few days is the question. It made a high of 335.12 yesterday.

Semiconductor index, SOX, Daily chart

As mentioned earlier, the RUT has been relatively weak as related to its sideways triangle pattern but it wouldn't take very much for it to get up to the top of it near 664 (Tuesday's high was 654.32). It takes a break below 628 to tell us the high is already in place.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 665
- bearish below 628

The volatility index is right back down into the danger zone and has dropped to the bottom of a descending wedge pattern, with positive divergence supporting the bullish interpretation of the pattern. It can still drop lower though and it takes a push above 25 to suggest a bottom for VIX has been made (and a top for the stock market). We're still in the sell window that I mentioned last week with the VIX first closing below the bottom Bollinger Band and then closing up inside it. The previous times gives us a window for a market high through September 22nd, which turns out to be a turn date by various cycle studies.

Volatility index, VIX, Daily chart

If bond prices drop a little further it's going to look like they might have topped out. Looking at the weekly chart of TLT, the 20+ year Treasury ETF, the Fed might be losing the battle to hold down interest rates. There are rumors that the Fed is getting ready to announce yet another program to pump a trillion dollars into the economy by buying up mortgage-backed securities in an effort to hold mortgage rates down, which are largely driven by the 10-year yield. I've said it before and I'll say it again, the market drives rates, not the Fed. It will be another failed program from the Fed if this chart is correct (as bond prices decline, yields will rise).

20+ Year Treasury ETF, TLT, Weekly chart

But it's possible the up-channel for TLT will hold and that this week's minor break will not result in a breakdown. What looks bearish about the chart is that the 3-wave bounce off the June 2009 low had the 2nd leg up (April-August rally) achieving 162% of the 1st leg up and the whole bounce looks like a correction that achieved a 62% retracement. It does not look like an impulsive move to the upside. This supports the idea that another leg down is coming (and could tie in with the idea that all markets--stocks, commodities (including gold and silver) and bonds--will sell off together in the next bear market leg down.

But I don't think it's a slam dunk that bonds will sell off from here. While the shorter-term chart supports that view I continue to watch the longer-term chart of the 10-year yield and wondering if we're going to see a rate closer to 1% before we get a bottom in yields. It would mean the economy continues to slow, the Fed continues to pump and loans go begging for borrowers. Lack of demand for loans could continue to drive yields lower (and bond prices higher) into next year. It takes a rally in the 10-year yield above 4% before we'll know for sure.

10-year Yield, TNX, Monthly chart

The KBW bank index could make it a little higher to tag its 200-dma at 48.45 before it's ready to tuck tail and run back down the hill. A break below 46 would be a bearish heads up and below 45 would confirm the top is in. Follow the money over the next week as it should lead the way.

KBW Bank index, BKX, Daily chart

For the TRAN, two equal legs up from July is up near 4663 so that remains upside potential for now. But if the price pattern is a sideways triangle similar to SPX (not drawn on the chart but it is labeled in dark red) then we should be getting a high very close to the current level. All those topping tails on the daily candles over the past week is a sign of exhaustion by the buyers and sellers starting to get stronger.

Transportation Index, TRAN, Daily chart

The US dollar has pulled back a little more than 62% of the bounce off the August low. If it drops below 80.90 (78.6%) I'd say we'll see lower lows for the dollar over the next few weeks. It broke its 200-dma yesterday and bounced back up to it today. Notice it did the same thing in early August and then blasted higher. The wave count calls for the same result again.

U.S. Dollar contract, DX, Daily chart

Last week I showed the commodity related equity index (CRX) and pointed out the upside target near 793, which is a Fib projection as well as the top of a rising wedge pattern. Like the sideways triangle shown for SPX and the RUT, this one has an upward slope but they're basically the same pattern and both bearish in the larger price pattern. Yesterday's high of 790.22 came close to the upside projection but as with the others we could get a little throw-over above the top of the wedge. If that happens and it then drops back down inside the wedge pattern it would create a sell signal. The risk from here is for a quick move back down (rising wedges are completely retraced in less time than it took to build them, typically much less time). I fully expect commodity stocks to follow, if not lead, the broader stock market in its next decline so those who are interested on commodity stocks may want to wait a while if I'm correct on this pattern.

Commodity Related Equity index, CRX, Daily chart

Keeping the longer-term pattern in view on gold, it has nearly made it up to the top of its rising wedge pattern that has been playing out since December 2009, currently near 1285 (yesterday's high was 1276.50). If gold blows out the top of this wedge, meaning it's not the correct pattern, then the next upside target is nearly $100 higher. The bearish divergence does not support that kind of move but I'm also aware of the propensity for the metals to make a blow-off top so be careful if looking for a short entry. By the same token I think it's too late to be looking for a long entry on gold, considering the downside risk potential (and when it breaks down it will likely go fast and overnight).

Gold continuous contract, GC, Weekly chart

Oil's bounce off the August low looks complete as it struggled to get through its 200-dma this week but failed. If the bulls can make another stab at pushing it higher I see upside potential to about $80 before the bounce fails. The next leg down is expected to see strong selling.

Oil continuous contract, CL, Daily chart

Tomorrow morning we'll get the unemployment numbers and it has the potential to upset the bulls. Last week's number had estimates for nine states (due to the holiday) and if those estimates were low we could see a revision higher. If the number of newly unemployed also climbs it could be a double whammy. But if the number comes in lower than expected it could be what the market needs to pop over resistance and that could have us off to the races for another 30-point run in SPX. Or it could be good for 5-10 points and an immediate failure. Just be careful chasing any news-related rally higher at this point as it's a typical way for a rally to finish.

Reader Steve T. hit the nail on the head describing what could happen from here:

"If you cannot breech OHR [overhead resistance] normally, as we all know that markets have a hard time fighting obvious OHR where we have real supply waiting (called over head resistance), these markets take another route as if you're a market manipulator getting huge Fed-handouts of free and easy money (you guessed it they are called primary dealers, who run huge prop-desk and program trading desks) they have the juice. It's called the ability to orchestrate up-grades and manipulate the futures and options, especially the new weekly options players...they create the gap-run scenario. They ignore the data, the technicals and indicators, as in a thin market environment they are in complete control! They just gap over OHR, trap the bear-cub shorts and keep running the markets higher and then force other funds to chase (especially at the end of the secession) as GREED is a huge inducement. And if you're a fund manager that failed to buy the September lows you're underperforming again, and the end of the quarter is only 11+/- trading days away. We ended today just 6+/- points away from the 1,131-1,132 level of OHR. If the numbers are decent tomorrow for initial claims the futures ramp-o-rama players will induce a GAP-over support and then the Short squeeze will be on!"

Tomorrow morning we'll also be getting the PPI numbers before the bell and the market is expecting to see minor inflation (indicating in their minds that the Fed is winning the battle against deflation). There will be trouble when those numbers start coming in negative because the market is building this rally on the hopes (there's that bad word again) that the Fed will be able to create some inflation and fight the dreaded deflation. At 10:00 AM we'll get the Philly Fed index, which came in at a dismal -7.7 for July. For August the market expects to see a big goose egg, as in 0.0. Maybe "less bad" will spark a rally.

Economic reports, summary and Key Trading Levels

In summary, and using SPX as our market proxy, the consolidation just underneath resistance (the trend line along the highs from June-August, which many are viewing as an inverse H&S neckline) can be viewed as bullish. If it does resolve bullishly I would be very careful about the long side from there since I believe an upside break (even if it runs 30 points) will be a head fake. The break back down from whatever high gets put in should be fast and sharp.

I completely agree with reader Steve's take on this but I think it's time for buyer beware. We should be close to a reversal back down and a gap up n go scenario could be quickly followed by a quick reversal--stop a bunch of shorts out, trap some bulls and then stop them out with a break back below the OHR line (SPX 1128). Played right (and the big boyz do) and you could make a ton of money with that kind of move.

There are a few cycles, including the Bradley Turn Model, which point to September 22nd, +/-, as a turn date. Therefore if the market holds up into that date I would be looking for a shorting opportunity. Past patterns (fractals) point to the unique vulnerability of the market right now. A market crash is still very possible if not likely. The long sideways consolidation since May (or the a-b-c bounce off the July low) is setting us up for the next leg down and it should be a stronger decline than the April-May decline. It's entirely possible we'll be at SPX 870 before October opex. If we get a crash leg down it could be worse.

There is of course no guarantee that the market will crash. It is after all a rare event. But with the liquidity of the market drying up, the shorts being driven out of the market, bullish sentiment hitting extremes (ISEE hit 150 again today and the Daily Sentiment Index from trade-futures.com is up to 83% bulls, the highest reading since the April high), HFT (high frequency trading) and quote stuffing becoming more apparent (and the SEC not knowing what to do about it), with the trading machines taking over most of the trading and the flash crash in May being a precursor of things to come, I think the risk is as high as I've seen it for quite some time (since August 2008).

It's simply a time for caution by both sides. Bears are getting fried and bulls are feeling complacent. It's all part of the market cycles and they'll soon reverse positions. Good luck with the rest of opex week and early next week. I'll be back with you next Thursday.

Key Levels for SPX:
- cautiously bullish above 1130 to 1158
- bearish below 1091

Key Levels for DOW:
- cautiously bullish above 10620
- bearish below 10332

Key Levels for NDX:
- cautiously bullish to 1966
- bearish below 1851

Key Levels for RUT:
- cautiously bullish above 665
- bearish below 628

Keene H. Little, CMT

New Option Plays

Treading Lightly Heading Into OPEX

by Scott Hawes

Click here to email Scott Hawes
Editor's Note:
Good evening. I suggest we tread lightly and be patient heading into the end of OPEX week. Volume has continued to be light and the market is struggling at resistance. The market will break one way or the other and we will take advantage of it when it does. Currently, I favor a quick, possibly sharp 2% to 4% correction that will most likely find buyers. Please see my comments in the play updates for more details. I have listed two long trade ideas below for those interested.

HD - Look for a pullback into the $29.00 to $29.25 area. A breakout could be considered but it a riskier trade for more nimble traders.

FWLT - The stock poked its head above prior resistance on Tuesday but closed below it today. Look for a pullback to the $23.00 to $23.50 area.

In Play Updates and Reviews

No Big Changes

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:
Good evening. There were no significant changes to most of our positions on Wednesday so I have not provided specific updates, unless noted below. The model portfolio snapshot below is current and I have reprinted Tuesday's updates.

This week has been painfully slow with the indexes trading in a fairly tight sideways channel. Tomorrow's Jobless Claims report and Producer Price Index released in the pre-market will likely set the tone for the remainder of the week. After the pre-market reports we have the Philly Fed Survey and on Friday the CPI Index and Consumer Sentiment report. If these reports are bullish stocks are likely to break out higher so readers should use caution on short positions. On the contrary, if these reports are bearish we will likely experience a sharp sell-off. Throw in OPEX week and it becomes difficult to determine which way the broader market heads from here. There is one thing I do know for sure and that is the market can not continually gap higher and go up in a straight line. So I also caution readers of a breakout higher only to see it fail.

If we do head lower I suspect pullbacks will most likely be bought unless the data is extremely bad or more unfavorable news surfaces, which must be considered. In any event, we have long and short positions with a bias to the long side and any moves tomorrow or Friday may present opportunities to open new positions at better prices than we currently have. Please feel free to email me with any questions.

Current Portfolio:

Our long positions are performing well and all of them currently have gains, with the exception of RIG which is slightly negative. Our short positions are all slightly in the red and they are in play to take advantage of a much needed pullback in the broader market. I anticipate a pullback to be sharp and quick so planning your exits on short positions is the right strategy. However, if we do break out higher first I would also be looking to take profits on long positions because I do not believe a breakout higher is sustainable without a meaningful correction. My only comments that differ from Tuesday's updates are below:

SWC - The stock surged +4.43% higher today on no news that I could find. A tighter stop could considered in the $15.25 area.

MCD - MCD is forming a bull flag in its hourly chart. I believe our stop is in the right place but caution is advised.

NOTE: The below updates are a reprint from Tuesday. The closing prices are not current. Please refer to the snapshot above for current prices.

CALL Play Updates

ConocoPhillips - COP - close 55.37 change -0.01 stop 52.30

Target(s): 55.85, 56.90, 57.75
Key Support/Resistance Areas: 58.50, 57.00, 54.00, 53.00 to 53.50
Current Gain/Loss: +10%
Time Frame: 1 to 3 weeks
New Positions: Yes, only on pullbacks

9/14: COP traded to within 12 cents of reaching our first target today before closing about 40 cents lower. Our current gain is +10% but it appears the broader market is going to pullback here so readers may want to consider exiting positions now if they do not want to endure a pullback. However, I do believe the pullback will be quick, plus our options expire in November so I am not concerned about time decay yet. If we do happen to go higher first I suggest readers be quick to take profits or tighten stops to protect them. The stock has solid all the way down to $54.00

9/13: COP is nearing our first target. Considering the overbought conditions in the broader market readers should considering taking profits or tightening stops to protect them at this level.

Current Position: Buy November $57.50 CALL, entry was at $1.05

Entry on September 7, 2010
Earnings 10/28/2010 (unconfirmed)
Average Daily Volume: 8.9 million
Listed on September 4, 2010

iShares Russell 2000 - IWM - close 64.99 change -0.28 stop 59.80

Target(s): 66.50, 67.75
Key Support/Resistance Areas: 68.00, 67.00, 64.50, 62.00
Time Frame: 2 to 4 weeks

9/14: We are going to get a pullback and our trigger to enter is just above IWM's 50-day SMA, which should act as a launching point for a move back towards recent highs. I suggest readers be prepared to buy the dip which could easily happen in the next day or two.

9/13: IWM has left the train station without us and is now well above our trigger to enter long positions. I still like the play on a pullback but the question is how far will it come. This could get tricky considering its OPEX week but I do believe a pullback to the 50-day SMA will hold. Let's raise the trigger to $63.15. The 50-day is currently just under $63.00.

9/9 & 9/11: IWM is backing off from its 200-day SMA near $64.50. Our trigger to enter long positions at $62.50 is below the 50-day and above the 20-day moving averages. I like the long set-up, now we need to get triggered. More nimble traders may want to try to time an entry near $62.00 which is closer to the 20-day SMA which is starting to turn up.

Suggested Position: Buy November $65.00 CALL, current ask $3.09, estimated ask at entry $2.20

Entry on September xx
Earnings N/A (unconfirmed)
Average Daily Volume: 60 million
Listed on September 7, 2010

NVIDIA Corp. - NVDA - close 10.54 change -0.10 stop 9.55

Target(s): 10.75 (hit), 11.10, 11.80
Key Support/Resistance Areas: 11.85, 11.45, 11.00, 10.25, 10.00 9.45
Current Gain/Loss: +20%
Time Frame: 1 to 2 weeks
New Positions: Yes, on a pullback

9/14: I like the potential of this trade but we may need to exhibit some patience with NVDA on a pullback. If we head higher prior to pulling back be ready to take profits or tighten stops. Our $10.75 target was reached yesterday and still remains a valid target.

9/13: NVDA surged +5.66% today and looks poised to test its 100-day SMA which is declining. We have a +33% gain so protecting profits is advised. I've raised the stop to $9.55 and lowered the 2nd target $11.10. If we head higher prior to pulling back be ready to take profits or tighten stops.

9/9 & 9/11: NVDA remains above $10.00 and its 20-day and 50-day SMA's. Any pullback to these areas would be good long set-ups for new entries.

Current Position: Long October $10.00 CALL, entry was at $0.72

Entry on September 8, 2010
Earnings 11/4/2010 (unconfirmed)
Average Daily Volume: 23.5 million
Listed on August 28, 2010

Stillwater Mining - SWC - close 15.11 change +0.48 stop 13.78

Target(s): 15.45 (hit), 15.90, 16.30, 16.95
Key Support/Resistance Areas: 14.40 to 14.70
Current Gain/Loss: -16%
Time Frame: 1 to 3 weeks
New Positions: Yes, only on pullbacks

9/14: SWC traded all the way up to our first target today before backing off. The stock continues to look bullish but I am concerned about a broader market pullback and the double top the stock made with the 9/7 high. However, SWC gained +3.28% today and mining stocks can do well if stocks fall. Further, with precious/industrial metal commodity prices rising miners are benefiting. Caution is advised.

9/11: I've lowered the stop 12 cents to 13.78 which is just underneath the 20-day moving average. The 14.40 level is the logical place for SWC to bounce but we are going to need the broader market strength to continue. My comments from below remain the same.

9/9: SWC is at a critical support level and if it breaks I am concerned SWC could head towards $13.00. As such, I suggest we tighten the stop to $13.90 and step aside if it gets hit. I've lowered the targets to take advantage of higher highs should SWC turn back higher from here.

9/8: SWC is consolidating recent gains and is maintaining an upward trend line that began on 8/25. The stock has strong support all the way down to the $14.00 level. We're looking for SWC to find support soon and make another higher high.

Current Position: Long October $15.00 CALL, entry was at $1.20

Entry on September 3, 2010
Earnings 11/4/2010 (unconfirmed)
Average Daily Volume: 1.62 million
Listed on September 2, 2010

Transocean Ltd - RIG - close 58.35 change -0.49 stop 53.40

Target(s): 62.95, 64.50, 66.50
Key Support/Resistance Areas: 55.50, 58.35, 63.90, 64.90
Current Gain/Loss: -20%
Time Frame: 2 to 4 weeks
New Positions: Yes

9/14: We may need to exhibit some patience here as RIG is consolidating gains. The volume pattern look great as the pullbacks are on lighter volume than the breakout. Broader market weakness will most likely pull RIG down but I believe the dips will be bought. Our options expire in November so I'm not worried about time decay yet. I like new positions on any further weakness.

9/13: We are long RIG calls as of this morning. The stock retraced some of Friday's gains and is holding above a prior resistance level of $58.35. RIG is also forming a bull flag on its hourly chart. My comments from below remain the same.

9/11: RIG exploded on Friday after BP's new CEO said that BP does not intend to seek compensation from RIG for the oil spill disaster unless the DOJ finds gross negligence on their part. Reports from FBR and BofA/Merrill state that they don't believe the DOJ will be able prove gross negligence. RIG is also a cheap stock trading at a PE below 7. Technically, the stock broke out of a downward trend line on heavy volume that started on May 27th. The stock has made a series higher lows and higher highs which I think will continue. I suggest we open positions at current levels. More nimble traders may want to time an entry on a retracement of some of Friday's gains or a breakout above Friday's highs. Our initial stop will be $53.40.

Current Position: Long November $65.00 CALL, entry was at $2.25

Entry on September 13, 2010
Earnings 11/3/10 (unconfirmed)
Average Daily Volume: 8 million
Listed on September 11, 2010

Vale SA - VALE - close 28.17 change -0.19 stop 25.80

Target(s): 28.38 (hit), 28.65, 28.90, 29.30
Key Support/Resistance Areas: 29.30, 28.45, 28.00, 27.25
Current Gain/Loss: +44%
Time Frame: 1 to 3 weeks
New Positions: Yes

9/14: VALE came within 4 cents of our primary second target before backing off and closing near its lows of the day. Options could have been closed for about 85 to 90 cents on the surge higher this morning which would have been a +70% to +80% gain. Nonetheless, our current gain is +44%. It looks like VALE is due for more pullback so readers should consider protecting profits. I do believe the dips will get bought and VALE should head back higher once the selling subsides. I've adjusted the targets and suggest we close positions as targets approach again.

9/13: Vale surged +3.39% higher today and our first target has been hit. I'm looking for $28.75 and suggest we close positions or tighten stops at this level.

9/11: VALE traded right down $27.25 and bounced so we are now long October 29.00 calls at 50 cents. I've added a lower target right underneath the 200-day SMA. My primary targets on this trade are the first two. If the first target is reached our 50 cent options should be worth about 80 cents which is a +60% gain. As these targets approach I suggest we keep a tight leash on the trade get out with a winner.

9/9: We are waiting to be triggered at $27.25 which is just above the 50-day SMA and Tuesday's lows. I'm looking for this area as a bounce point in VALE back up towards its August highs. NOTE: I incorrectly listed the wrong monthly option as November in the play release last night. It should be October and has been corrected. I apologize for the error.

NOTE: I have chosen a further out of the money call than normal to reduce risk on the trade should the stock break lower.

Current Position: Long October $29.00 CALL at, entry was at $0.50

Entry on September 10, 2010
Earnings 10/28/10 (unconfirmed)
Average Daily Volume: 17 million
Listed on September 8, 2010

PUT Play Updates

Freeport-McMoRan - FCX - close 81.44 change -0.33 stop 84.55

Company Description:
Freeport-McMoRan Copper & Gold Inc. (FCX), through its wholly owned subsidiary, Phelps Dodge Corporation (Phelps Dodge) is a copper, gold and molybdenum mining company. Its portfolio of assets includes the Grasberg minerals district in Indonesia, which contains the single recoverable copper reserve and the single gold reserve; mining operations in North and South America, and the Tenke Fungurume minerals district in the Democratic Republic of Congo (DRC). FCX also operates Atlantic Copper, its wholly owned copper smelting and refining unit in Spain.

Target(s): 78.00, 76.80, 75.75
Key Support/Resistance Areas: 84.25, 76.50, 75.00
Time Frame: 1 week

Why We Like It:
FCX has gained nearly +20% since its low on 8/25 less than 3 weeks ago. The stock has surged higher, virtually in a straight line with little to no pause. FCX has rallied right into its primary downtrend line from its January highs and also closed at a prior resistance level from mid-March. This type of move is not sustainable and I suggest readers open short positions at current levels and play for a retracement of the stock's recent gains. Our primary target is $76.80 which is about -5.5% lower than current levels, and also just above a 38.2% retracement from the 8/25 lows to today's highs. For options traders, if this target is reached it should produce a gain of approximately +60% to +65%. This could be a quick trade and a good strategy would be to immediately place a "good til cancelled" or "one cancels the other" order immediately after the position is entered and be ready to take profits or get out should our stop get hit.

Current Position: Long October $75.00 PUT, entry was at $1.75

Entry on September 15, 2010
Earnings: 10/20/2010 (unconfirmed)
Average Daily Volume: 10 million
Listed on September 14, 2010

McDonald's Corp. - MCD - close 73.94 change -0.63 stop 75.75

Target(s): 73.25, 72.05, 70.90
Key Support/Resistance Areas: 75.35, 73.60, 71.50, 70.50
Current Gain/Loss: +14%
Time Frame: 1 week
New Positions: Yes

9/14: MCD is headed lower and I suggest readers begin to look for exits on any further weakness. My comments from below have not changed.

9/13: MCD lost -0.59% while the broader market surged higher today. The stock traded right up to $74.30 and sold off hard before bouncing late in the day. I'm looking for MCD break through its 20-day and head towards its 50-day SMA but we are most likely going to need to see a broader market pullback. I've added a target of $73.25 which will fill a gap higher on 9/1. This should give us nearly a +50% gain and is a good place to consider taking profits or tightening stops to protect them.

9/11: I expected MCD to fill some of the its gap lower on Thursday but was a little surprised the stock traded to $75.00. On the hourly chart MCD closed right on its 20 and 50 period moving averages which it is testing from below. This is a logical spot for the stock to turn lower but we will most likely need broader market weakness. If MCD heads higher first a nice short set-up would be in the $75.30 area. This would create a bearish head and shoulders pattern on the hourly chart.

Current Position: Long October $72.50 PUT, entry was at $0.84

Entry on September 10, 2010
Earnings: 10/21/10 (unconfirmed)
Average Daily Volume: 6 million
Listed on September 9, 2010

SPDR S&P 500 ETF - SPY - close 112.65 change -0.07 stop 116.25

Target(s): 110.62, 109.60
Key Support/Resistance Areas: 115.00, 113.00, 110.60, 50-day, 20-day
Current Gain/Loss: -1.92%
Time Frame: 1 week
New Positions: Yes

9/14: SPY closed the day just about where it began. My comments from the play release remain the same. We are looking for the S&P 500 to turn lower here, fill a few open gaps higher, and test its rising 20-day and 50-day SMA's from above.

9/13: The market is overbought and needs a healthy pullback to regain its energy. SPY has rallied right into resistance from its June and August highs. I'm looking for the S&P 500 to turn lower here, fill a few open gaps, and test its rising 20-day and 50-day SMA's from above. I suggest readers open short positions at current levels and look for a $2 to $3 pullback in the coming days (equivalent to 20 to 30 S&P 500 points). Our profit targets should produce +40% and +60% gains.

Current Position: Long October $109.00 PUT, entry was at $1.56

Entry on September 14, 2010
Earnings: N/A (unconfirmed)
Average Daily Volume: 198 million
Listed on September 13, 2010