Option Investor

Daily Newsletter, Tuesday, 10/5/2010

Table of Contents

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

Market Wrap

See Your QE2 and Raise You an ETF

by Jim Brown

Click here to email Jim Brown
Japan matched the U.S. quantitive easing on bonds and went two steps further to add ETFs and REITs.

Market Statistics

The Bank of Japan surprised everyone with a monster quantitive easing program to increase liquidity in the financial system as part of a comprehensive monetary easing policy. They also cut the interest rate to between zero and 0.1%. After an initial drop in the yen the currency rebounded to close higher to close near the 15-year high that it hit last month.

The surprising factor in this QE program was not that they would buy more bonds but they are going to expand the program into buying ETFs and REITs. Basically they are hoping to boost the equity market and the real estate market with this major program.

This move by Japan boosted expectations the U.S. Fed will expand its QE program by up to $1 trillion in November and possibly branch out into other asset classes following Japan's lead. The prospect of the Fed buying equities caused a major market spike at the open and another round of short covering was born. The Fed may be forced to buy equities or some other asset class because they are going to run out of available treasuries.

If you analyze the speeches from the various Fed governors there is a lot of disagreement on how future stimulus should be handled or even if there should be another round of stimulus. A QE2 program from the Fed is not a done deal but after today's rally it is baked into the market cake.

Friday's payroll report could give us a critical clue into the Fed's next move. This report will give us the first look at the annual benchmark revisions for the past year. Many analysts believe the revisions will significantly reduce the reported employment numbers and show that conditions were worse during the recession than we thought at the time. The revisions will cover the 12 months ending in March 2010. The final revision will be published with the January 2011 jobs report.

The Bureau of Labor Statistics produces estimates each month and then once a year they revise those estimates based on data received after those estimates were made. This revision could show that significantly more people lost their jobs than previously thought. The impact of a large downward revision would be a lengthening of the time analysts expect it will take for a recovery. For every million additional jobs lost it will take roughly another year to recover completely, if in fact we ever will recover completely.

Currently analysts are looking out to 2014-2015 for the economy to fully recover. Since the U.S. recessionary cycle runs about every 4-6 years that suggests we could see another recession in the 2012-2014 period and that would delay the recovery from the current recession even farther into the future, if ever. There are quite a few analysts that believe we will never recover because of the baby boomer wave set to retire in this decade. They believe the current rebound will end in 2012 and then begin a long decline into 2020 and beyond.

The boomer generation controls over 80% of personal financial assets and more than 50% of discretionary spending power. They are responsible for more than 50% of all consumer spending, buy 77% of all prescription drugs, 61% of all OTC medications and more than 80% of all leisure travel. More than 76 million people were born between 1046-1964 and they began retiring in 2009 with the peak expected over the next 5-7 years. That is 76 million people who will go from wage earners and spenders to social security incomes and hoarding savings for their old age. It will be a once in a hundred years economic shift as retirees downsize their lifestyles and spending.

The dollar collapsed again losing nearly -1% and reaching lows not seen since January. The dollar has declined -8% in the last three months. The dollar is dropping because of the expectations for a new round of Fed easing. Gold soared to a new intraday high at $1,342, a gain of +$24.70 or nearly +2%. There appears to be no end in sight for the gold rally.

Gold Chart

Dollar Index Chart

The only material economic report today was the ISM Non-Manufacturing for September. The headline number came in at 53.2 and a decent increase from the 51.5 in August. It did not completely erase the August decline of nearly three points but it was a move in the right direction.

Specifically interesting was the export component, which soared to 58.0 from 46.5 in August. This is a factor of the cheaper dollar that makes our goods and services more attractive in other countries. This was the largest monthly gain since records were started in 1997. New orders rose by 2.5 points to 54.9 but back orders declined by 2.5 points to 48.0 and into retraction territory.

This report and the ISM Manufacturing were not strong enough to prevent the Fed from easing. In fact these reports probably gave the Fed added incentive to provide extra stimulus. These reports are consistent to a Q3 GDP under 2%.

The chart below is showing some continued respect for the declining trend from March 2006. The next move higher needs to break this resistance and the Fed will want to reinforce that move.

ISM Chart

The biggest report left for this week is the Nonfarm Payrolls on Friday. With the benchmark revision causing additional concern about how the market perceives the data there is risk ahead of the report.

Economic Calendar

In earnings news Yum Brands reported earnings that beat the street and gave guidance that matched analyst expectations. Earnings were 73-cents compared to estimates of 72-cents on revenue of $2.87 billion. Sales were powered by gains in China. After sinking in Monday's afterhours trading the stock rallied slightly on Tuesday to an all time high at $47.50.

Wolverine Worldwide (WWW) posted earnings that beat the street and raised guidance. Earnings were 70-cents compared to estimates for 67-cents. Revenue rose +11% and profits +6%. Wolverine is a shoe manufacturer for brands including Timberland, Caterpillar, Harley Davidson and Hush Puppies. Wolverine raised guidance to $2.04-$2.08 from $1.98-$2.04. Wolverine shares rallied 3.5% on the news.

Diamond Foods (DMND) posted earnings that beat the street and raised guidance slightly. The company produces Pop Secret popcorn, Emerald snack nuts, Diamond nuts and Kettle Chips. Earnings were 30-cents compared to estimates for 28-cents. Their shares rallied +4% on the news.

Earnings due out on Wednesday include STZ, MAR, MON, RPM and RT.

Harley Davidson (HOG) shares spiked +9% to $32 after RBC Capital Markets raised his price target saying sales were improving significantly following the recession slump. Based on checks with dealers and their reports of improving business he raised his target to $36 from $33. He said this was the first indications of improving sales since April. Meanwhile there does not appear to be any expectations in the market for a business recovery. In July Harley said it would ship 5-10% fewer motorcycles this year in an effort to support prices. Nothing creates price support better than limited supply. If consumers are buying Harleys again then the recession is definitely over.

Harley Davidson Chart

Trader Jerome Kerviel was convicted on all counts, sentenced to three years in prison and ordered to pay $6.7 billion in restitution. Yes, Billion with a B. Kerviel was the rogue trader that nearly bankrupted France's second largest bank, Societe Generale. The court rejected arguments that he was a scapegoat for a failed banking system. This is the biggest fine on record for a trading violation. That is the amount of money SocGen lost unwinding his trades. Unfortunately for SocGen he has no money so the fine is not going to replenish their coffers. Odds are good Kerviel will not be working in the financial sector when he gets out of prison.

The term "bond bubble" is getting more airtime as each day passes. However, with competing governments racing to devalue their currency more than everyone else by purchasing their own bonds the bubble may persist for some time.

Mexico became the first government to issue a century bond when it offered $1 billion in 100-year bonds expected to yield 6%. The bond will become a benchmark rate for Mexico as it tries to sell additional debt before year-end. Mexico's debt was recently downgraded but remains investment grade and that gives them the low rate. Demand for the century bond was so strong they are considering doubling the offer. In a filing with the SEC they said they could issue up to $80 billion. Ironically their 10-year bond yields were only 6.14% so there was little difference between the two other than duration. Institutions like the 100-year bonds because they can lock in their yields for a very long time. Brazil is rumored to be considering a century bond offering. RBC Capital said they had clients lined up to buy century bonds and waiting for the next offering.

Goldman told investors today to avoid bonds and buy stocks because bonds were overpriced and stocks were cheap. One analyst believes the S&P will post record earnings in 2011 but stocks are still priced for a recession. This sentiment appears to be spreading.

Meanwhile a Bank of America analyst, Mary Ann Bartels, said she is expecting a 10% to 12% pullback in October. If she is right it would take the S&P below the September low and be the tenth major move of the year. She is expecting a decline to the 1000-1040 range on the S&P.

Eliot Spitzer launched a new career as a TV journalist this week on the Parker Spitzer show on CNN. The reviews were so bad that he will probably be looking for another new career within weeks. The disgraced ex-New York governor was forced to resign in 2008 after being caught paying for high prices call girls. The NY Post called the show "Freak show unbearable to watch" and the Baltimore Sun said it was "a load of obnoxious, self-important noise."

I wish I had better things to say about today's rally. Unfortunately I have no confidence it will last. The opening spike was pure short covering. After last week's lack of a gain and solid halt under 1150 the Monday decline was an open invitation for shorts to back up the truck in expectations for an October decline.

Internals were negative 3:1 on Monday and the number of declining issues was the highest since September 7th at 4,716. Everyone was definitely setting up for a bearish week. That setup was trashed at the open today and the strength of the spike was a testament to how broadly the market was shorted on Monday.

The opening spike took the S&P to 1150 in the first 30 minutes where is stalled for a very short time before the move higher continued. Once over 1150 it triggered an entirely new set of stop losses and buy stops. Once these dominoes began to fall the rest of the day was clear. I suspect there are quite a few traders still in disbelief and still short overnight with futures already moving higher.

Even though I don't believe in this rally we have to respect the move. Going counter trend to the market bias can continue for days if not weeks as we saw in September. This is really going to confuse fund managers. Do they follow through on plans to sell their losers or wait on the outside chance they turn back into winners if they wait long enough?

Don't forget option expiration comes early this month only eight days from today. That means an increased sense of urgency for managers that have options as part of their insurance and income strategy. They have to close positions before the 15th or face a loss of those positions.

For the rest of the week S&P 1130 remains support but that is 30 points below where we closed. That means we could see some serious volatility without endangering the September trend. Meaningful overhead resistance is now 1175.

S&P Chart

The Dow managed to hold over resistance at 10,920 at the close but only barely. Only one Dow stock was negative and that was American Express. The first Dow stock to report earnings will be Alcoa on Thursday.

I don't believe the Dow closed far enough over 10,920 to be free from its influence. If we dip down below that level tomorrow it would reinforce its value as resistance. Conversely if it continues to move higher the 10,975-11,000 range will become a resistance magnet and setup a test of the market strength.

Dow Chart

It was an amazing day for the Nasdaq with a 2.3% gain. That gain was powered by AMZN +5%, AAPL +4%, GOOG +3%, PCLN +4% and FFIV +5% to name just a few. Every stock was heavily shorted and every short paid the price.

The Nasdaq Composite slammed into 2400 at the close and screeched to a sudden stop. This is psychological resistance rather than a technical level but sometimes those levels have an even bigger influence on traders. Next resistance at 2415-2420 is minimal and I believe a move over 2400 will have legs.

Nasdaq Chart

The chart with the most positive impact for me is the Russell 2000. The Russell is clearly in breakout mode and it appears at least some fund managers are buying in self-defense. The breakout over 670 last week lagged the big caps but when that same 670 level acted as support on Monday's dip it was a solid buy the dip signal.

I still believe the Tuesday rally was almost completely short covering but many times a long-term rally begins with a heavy dose of shorts getting creamed. Just looking at the Russell chart I would say the rally has legs but this is only one part of the market. Use continued strength in the Russell as a confirming indicator.

Russell 2000 Chart

In summary the global governments are racing each other to the bottom to see who can have the cheapest currency. Cheap currency values mean your exports are more desirable around the world. It is an offensive tactic and a defensive move at the same time. When the dollar is getting cheaper you need to own stocks and that could eliminate a normal October decline.

Most analysts would claim any future QE move by the Fed was now baked into the market cake. However, we are probably faced with no move until November and that allows plenty of time for economics to improve and take the Fed move off the table. We could be setting up for a big disappointment in the weeks ahead. The jobs report on Friday could be a downer if the benchmark revisions are ugly. However, an ugly jobs number could provide even more reasons for the Fed to act.

This is going to be an event driven market until after the elections so keep your seatbelts fastened and your stop losses in place.

Jim Brown

New Option Plays

Long Candidate

by Scott Hawes

Click here to email Scott Hawes


Dresser-Rand Group - DRC - close 37.46 change +0.78 stop 36.15

Target(s): 39.00, 39.95, 41.40
Key Support/Resistance Areas: 42.00, 40.00, 39.15, 37.50, 36.30
Time Frame: 2 to 3 weeks

Company Description:
Dresser-Rand Group Inc. is the global supplier of custom-engineered rotating equipment solutions for the applications in the oil, gas, petrochemical and industrial process industries. The Company's products and service are used in applications, such as gas gathering, gas recompression and export, gas lift and high pressure re-injection; carbon dioxide (CO2) re-injection, enhanced oil recovery, main refrigeration compression and other duties for liquefied natural gas (LNG) plants; gas transmission and storage, as well as gas processing; a variety of refinery services; ammonia and methanol synthesis gas, and ethylene and other petrochemical services and chemical plant services. The Company provides a range of products and services to its worldwide client base in over 140 countries from its global locations.

Why We Like it:
DRC has been in a bullish uptrend since its lows in the fall of 2008. The stock is now finding support at its 50-day SMA and looks poised to test its highs from 2007. We have a good reference point to place a stop below yesterday's lows at $36.15. Currently, the primary target is $39.95 which should produce a profit of +90% on options positions.

Suggested Position: Buy November $40.00 CALL, current ask $0.75

Annotated chart:

Entry on October XX
Earnings 10/28/2010 (unconfirmed)
Average Daily Volume: 570,000
Listed on October 5, 2010

In Play Updates and Reviews

Bearish Positions Suffer

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:

CALL Play Updates

Petroleo Brasileiro - PBR - close 36.71 change +0.12 stop 33.70

Target(s): 37.40, 38.65
Key Support/Resistance Areas: 39.00, 37.50, 36.60, 34.00
Current Gain/Loss: +16%
Time Frame: 1 to 2 weeks
New Positions: Yes

10/5: PBR experienced a wave of selling early today but recovered nicely. The stock continues drifting higher and I am expecting first target to be reached, perhaps tomorrow or Thursday. I suggest taking profits or tightening stops to protect them at $37.40.

10/4: All things considered, PBR held up well today as the market sold off. The stock is hanging on to an intraday upward trend line that began last Monday, however, if a broader market correction gains momentum PBR will most likely head lower. I would view dips as buying opportunities. The comments below remain valid.

10/02: PBR is holding up relatively well. While everyone was impressed with the size of the company's recent secondary offering many analysts were worried it would depress the stock going forward. So far those worries seem to be unfounded. I agree with Scott that the broader market is overdue for a correction and PBR will likely trade lower if the market does pull back. More conservative traders may want to consider a tighter stop loss (maybe closer to $35.00). PBR looks poised to move higher but given my expectation for a market dip I would keep bullish positions very small. The Nov. $37 call closed with a bid at $1.37 on Friday.

Suggested Position: Long November $37.00 CALL, entry was at $1.25

Entry on September 25, 2010
Earnings 11/11/2010 (unconfirmed)
Average Daily Volume: 13 million
Listed on September 23, 2010

Visa, Inc. - V - close 74.99 change +1.75 stop 67.40

Target(s): 74.90, 76.90, 79.40
Key Support/Resistance Areas: 79.80, 77.50, 75.00, 70.50, 68.00
Time Frame: 3 to 5 weeks

10/5: Nimble traders may want to consider entering long positions on a breakout over today's highs. I would prefer to enter long positions on a pullback to at least V's 100-day SMA (currently $73.04). Let's raise our trigger to enter long positions to $73.25 which will also fill today's gap higher.

10/4: V was taken out to the woodshed after FinReg and a Department of Justice anti-trust suit. The company, along with MasterCard, announced a non-monetary settlement has been made with the DOJ today which puts this issue behind them. There has been many analysts/brokerages defend the stock in recent weeks and I think V is on the verge of running higher into the company's earnings report on 10/27. Technically, the stock has made a higher high and closed above its 50-day and rising 20-day SMA. I would like to see V pullback a little more with the broader market and use $71.80 as our trigger to enter long positions. If triggered, our first two targets are estimated to produce +80% and +130% gains. This is a good addition to our model portfolio and will also provide more balance as we are currently firmly biased to the short side.

Suggested Position: Buy November $75.00 CALL, current ask $2.85, estimated ask at entry $1.90

Entry on October XX
Earnings 10/27/2010 (unconfirmed)
Average Daily Volume: 6.8 million
Listed on October 4, 2010

Volatility Index - VIX - close 21.76 change -1.77 stop 20.85 Target(s): 26.00, 27.25, 29.50
Key Support/Resistance Areas: 21.00, 24.00, 28.00, 30.00
Current Gain/Loss: -41%
Time Frame: 2 to 3 weeks
New positions: Yes

10/5: A surprise shift in monetary policy suggesting significant quantitative easing by the Bank of Japan caused volatility to collapse today. This provides more liquidity in the market and traders are feeling more and more comfortable buying stocks. If there is follow through tomorrow there is a good chance we will be stopped out of the position.

10/4: We are long October $25.00 call options in VIX as of the open this morning. My primary targets are $26.00 and $27.25 (added today). The comments below remain valid.

10/2 I really like Scott's play on the VXX. The market is very overbought with the huge rally off its August lows. Now upward momentum has stalled and we're about to move into earnings season after a very weak third quarter. Volatility is almost guaranteed. I think options on the VIX might offer an even better trade than the VXX. I'm suggesting bullish positions now. We'll plan on taking profits at $26.00 and at $29.50. I do consider this somewhat aggressive so consider keeping your positions small. Traders will also want to keep in mind that VIX options don't expire on the same schedule as normal equity options but it shouldn't matter since our time frame is only two to three weeks.

Current Position: Long October $25.00 CALL, entry was at $1.80

Entry on October 4, 2010
Earnings N/A (unconfirmed)
Average Daily Volume: N/A
Listed on October 2, 2010

iPath S&P 500 VIX ST Futures - VXX - close 16.43 change -0.93 stop 16.23

Target(s): 17.55, 18.45, 19.25
Key Support/Resistance Areas: 17.50, 19.75, 20.60
Current Gain/Loss: -16%
Time Frame: 1 to 2 weeks
New positions: Yes

NOTE: I view this as an aggressive trade so small position size is recommended. Long VXX is a bearish play on equities, however, it is listed as long play because we are long the underlying instrument.

10/5: A surprise shift in monetary policy suggesting significant quantitative easing by the Bank of Japan caused volatility to collapse today. This provides more liquidity in the market and traders are feeling more and more comfortable buying stocks. If there is follow through tomorrow we will likely be stopped out of the position.

10/4: VXX is moving in our direction as the market sold off today. I suggest picking your exit and sticking with it. My primary targets are $18.45 and $19.25. If a market correction gains momentum VXX may surge higher than these targets, but tightening stops and protecting profits at these levels is suggested. Our comments below remain valid.

10/02: After September's huge gains in the stock market and a week of moving sideways, odds are pretty good the market will see a correction soon. That means the VXX has a lot of potential here. It is an aggressive trade but personally I would adjust the targets higher and plan to take profits near $18.75 and $19.90. FYI: The Nov. $18 call closed with a bid of $1.15.

Current Position: Long November $18.00 CALL, entry was at $1.25

Entry on September 22, 2010
Earnings N/A (unconfirmed)
Average Daily Volume: 21 million
Listed on September 21, 2010

PUT Play Updates

Alliant Techsystems - ATK - close 74.45 change -2.26 stop 76.25

Target(s): 72.25, 71.25, 70.50
Key Support/Resistance Areas: 76.00, 74.00, 72.00, 71.25, 70.00
Current Gain/Loss: -17%
Time Frame: 1 to 2 weeks
New Positions: Yes, with tight stops

10/5: ATK reversed yesterday's losses and then some as the stock surged +3.13%. Yesterday's gain is now a loss and readers should use caution.

10/4: ATK's slide continued today as the stock broke through its 20-day SMA. There is support near $71.00 so I have added $71.25 as a target. Protecting profits is key here as we already have a nice profit in the trade.

10/2: The rally in this defense stock just failed at significant resistance near $76.00 and its simple 200-dma. Combine that with an overbought market that has seen its upward momentum stall and it looks like a good spot to speculate on some puts. Now the intermediate trend for ATK is still higher so we're only looking for a correction toward support. I'm suggesting bearish positions now. More cautious traders may want to wait for a little confirmation of Friday's bearish reversal pattern before initiating positions. I am targeting the 50-dma (currently $70.31).

Current Position: Long November $70.00 PUT, entry was at $1.45

Entry on October 4, 2010
Earnings: 11/11/2010 (unconfirmed)
Average Daily Volume: 310,000
Listed on October 2, 2010

Carbo Ceramics - CRR - close 79.44 change +1.46 stop 80.25

Target(s): 75.75, 74.25, 72.25
Key Support/Resistance Areas: 84.00, 82.00, 80.00, 78.00, 76.00, 74.00
Current Gain/Loss: -24%
Time Frame: 1 to 2 weeks
New Positions: Yes, with tight stops

10/5: CRR has resistance just overhead but if the broader market follows through higher in the coming days our stop will likely get hit. Readers should use caution.

10/4: CRR hit our trigger to buy puts at the open this morning. The stock is approaching support with an upward trend line and its 100-day SMA converging. As such, I want to add a target of $75.75. Taking profits or tightening stops to protect them is suggested at the first target.

10/02: Oil service stocks have been surging on the strength in crude oil (oil has been moving on weakness in the dollar). Shares of CRR appeared to breakout from a consolidation pattern on September 28th but the rally reversed. Now shares are testing short-term support at $78.00 and the bottom of its previous trading range. The current failure also looks like a bearish double top pattern.

Current Position: Long November $75.00 PUT, entry was at $3.10

Entry on October 4, 2010
Earnings: 10/28/2010 (unconfirmed)
Average Daily Volume: 226,000
Listed on October 2, 2010

SPDR DJIA ETF - DIA - close 109.40 change +1.83 stop 110.55

Target(s): 107.25, 106.55, 105.40
Key Support/Resistance Areas: 112.00, 110.00, 107.30, 106.40, 105.00
Current Gain/Loss: -16%

Time Frame: 1 to 3 weeks
New Positions: Yes, with tight stops

10/5: DIA has resistance at $110.00. Our stop is $110.55. I still like the short set-up with a tight stop. However, the massive amount of quantitative easing being announced in recent weeks from various countries (US, China, UK, and now Japan to name a few) will/is providing liquidity to the market and investors are beginning to feel more comfortable buying equities. DIA will correct but I am concerned of another push higher first, perhaps up to its YTD highs. I suggest using caution and honoring stops if we are taken out.

10/4: DIA took out last weeks lows and looks like it is headed lower. My primary target is $105.40 but taking profits or tightening stops on any further weakness should also be considered. The 20-day SMA is just below which may provide a bounce.

10/02: Upward momentum in the market has clearly stalled. Stocks have been trading sideways for a week. Thursday's action looks like a bearish reversal but Friday did not confirm the signal. Instead Friday produced an inside day. While I remain bearish here more cautious traders may want to look for a move under Thursday's low (107.47) before initiating positions. Personally, I would target a correction toward $105.25 but keep an eye on the rising 50-dma, which could be support (currently $104.81). FYI: The November $105 put closed with a bid of $1.85.

Current Position: Long November $105.00 PUT, entry was at $1.75

Entry on September 30, 2010
Earnings: N/A (unconfirmed)
Average Daily Volume: 6.5 million
Listed on September 25, 2010

PNC Financial - PNC - close 53.48 change +1.38 stop 54.92 *NEW*

Target(s): 51.05, 49.50, 48.75
Key Support/Resistance Areas: 54.50, 53.50, 50.50, 49.50, 48.75, 47.00
Current Gain/Loss: -35%
Time Frame: 1 to 2 weeks
New Positions: Yes, with tight stops

10/5: PNC has been consolidating below its 20-day SMA for the past 2 weeks but the stock closed above it today. There is resistance at current levels up to $54.00. I want to raise the stop to $54.92 to account for the declining 50-day SMA and a trend line. 10/4: PNC reversed off of its declining 20-day SMA today and looks to be headed lower if the broader market correction continues. The comments from the weekend remain valid.

10/02: Financial stocks have been a drag on the market of late and the path of least resistance seems to be down. Yet Friday's action in PNC was uncomfortably bullish. Shares posted a +1.79% gain and closed above the simple 10-dma. I'm not saying we should panic yet but the relative strength is a warning sign. Look for short-term overhead resistance near $54.00. I would prefer to see a failed rally under $54.00 or a new close under $51.50 before launching new positions.

Current Position: Long November $48.00 PUT, entry was at $1.26

Entry on September 30, 2010
Earnings: 10/20/2010 (unconfirmed)
Average Daily Volume: 5 million
Listed on September 29, 2010


Charles Schwab - SCHW - close 14.36 change +0.34 stop 14.42

Target(s): 13.45, 13.10, 12.85
Key Support/Resistance Areas: 14.10, 13.35, 13.05, 12.65
Final Gain/Loss: -60%
Time Frame: 1 to 3 weeks
New Positions: Closed

10/5: SCHW hit our stop so we are flat the position for a loss. The closed above its 50-day SMA and printed a new high. The next resistance level is near $14.75.

10/4: We need SCHW to get below $13.80 to get things moving in our direction. This should happen if the broader market correction continues. Our stop is in place if SCHW breaks higher.

10/02: I am somewhat surprised by the strength in shares of SCHW the last few days. I use the term strength somewhat loosely but you can see a trend of higher lows. Thus far the stock has been unable to breakout past technical resistance at its 50-dma. The third quarter has seen terribly low trading volumes and investors have been pulling money out of stock funds for weeks. It should not be a good quarter for the likes of SCHW so odds favor this oversold bounce in the stock rolling over. Personally, I would consider giving SCHW a little bit more room and placing the stop loss above $14.50 (maybe $14.51 or $14.55). I would prefer to see a drop or a close under $13.80 before launching new positions.

Closed Position: Long November $13.00 PUT at $0.20, entry was at $0.50

Annotated Chart:

Entry on September 23, 2010
Earnings: 10/14/2010 (unconfirmed)
Average Daily Volume: 11 million
Listed on September 22, 2010