Option Investor

Daily Newsletter, Thursday, 10/7/2010

Table of Contents

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

Market Wrap

Market On Hold In Front of Employment Data

by Keene Little

Click here to email Keene Little
Market Stats

As has been the case with so many mornings in the past 5 weeks or so, equity futures were up in the overnight and pre-market session and the cash market gapped up at the open and ran higher in an effort to join futures. The unemployment numbers, out at 8:30 AM, showed some improvement (minus the usual higher revision for the prior week) with new claims dropping 11K to "only" 445K, which is lowest level since early July, and that sparked a ramp up in the futures. It turned out to be quite the pump and dump exercise that caught a few bulls in a bull trap while shoving a few more shorts out of the market.

It's very common for big money to do these little exercises. It's easy for them to create some buying pressure, especially in the futures market, as a way to create a lot of liquidity at the open. As buyers (including short covering) scramble into their positions (and shorts are getting out of their positions) the big-money players are selling into it. It's a way for them to unload inventory without driving prices down. I suspect we'll see more of that behavior as inventory is turned over to the masses who believe the rally will continue. The cry for dip buyers will continue so that big money can hand off more inventory.

Yesterday's rally was credited to the hope (that's that 4-letter word) that the central banks will be able to save the stock markets. Japan has promised to support the markets through the purchase of equities (through ETFs) and real estate (through REITs -- Real Estate Investment Trusts). What used to be hush-hush and shrouded in secrecy and something only conspiracy theorists talked about (the government's involvement in the capital markets) is now out in the open and traders cheer this development! Oh, the web we weave...

So the hope now is that the Greenspan put has morphed into the Bernanke bailout and that Bernanke, and other central banks, will do everything they can to support the financial markets. The money that is growing on trees behind the Fed's building will be used to support the markets in an effort to keep the sheeple happy. They believe buying in the stock market will reduce risk (but in fact just the opposite is happening as complacency about risk has returned to the market).

The problem with this theory is that the Fed can't single handedly support the markets. As we've seen with all government support programs, when the support is taken away there's nothing behind it to continue the buying. And institutional investors are fully into the market at this point. The cash levels as a percent of total assets in mutual funds are now lower than where they were at the tops in 2000 and 2007, currently around 3.4% (it may be lower after September's rally). They are more than fully invested.

In the meantime we're hearing reports about people, especially the baby boomers, pulling their money out of the stock market. Any increase in redemption requests to mutual funds will have to be met by liquidating stocks. Multiply that selling across the board, along with an absence of shorts to help support the market, and it doesn't take a wild imagination to see that the market is very vulnerable to the downside, no matter how much the Fed tries to support it. The market is simply too big for them and mass psychology is what will drive the market, not the Fed. Hope can turn to fear in a New York second.

With bullish sentiment hitting extremes not seen since the 2000 and 2007 highs, we're ripe, from a contrarian perspective, for a reversal. With the markets stretched to the upside and losing momentum, we're ripe for a reversal. What we have no idea about is what the catalyst will be to start the selling. And May's flash crash could be but a blip on the chart if we get hit with a Black Swan event, which is not an unlikely event considering the psychological makeup of the market along with the technical chart patterns. We still have multiple Hindenburg Omen signals that are good through the end of the year.

There seems to be a somewhat unanimous opinion that no matter what tomorrow's jobs report says it will be bullish for the stock market. If it's a good number that will mean the economy is improving and we don't need no stinkin' Fed. If it's a bad number then we'll need that stinkin' Fed who will jam more money into the market and that will be bullish for stocks. So with everyone thinking the reaction from the market will be positive no matter what the report says, might we be set up for just the opposite reaction? In other words, with the high expectations for the market to rally no matter what, we seem to be set up for a sell-the-news reaction.

But these are all cautionary notes in the midst of a strong rally. The only thing I've been advising traders to do is to be very cautious at this point. While shorts have been getting hammered the past month, I think it's wise to look for reversal patterns rather than continuation patterns. Could it continue higher? Absolutely. I'd rather miss a trade for an upside run from here than enter a long trade with the potential of seeing a strong gap down against me. If you're in a long position pull stops up tight underneath this rally. If you want to play the short side then have a plan for how you would like to participate. The price pattern is set up for a steep decline as the next major move so it could be a real money maker for those who grab a chunk out of it on the way back down.

Moving on to the charts, SPX has now rallied right up to its downtrend line from October 2007 through the April 2010 high. There's upside potential to the 200-week moving average near 1197 but it's got some serious resistance near 1174 before it can get there. In the meantime a turn back down from here would look bearish.

S&P 500, SPX, Weekly chart

In addition to the downtrend line from October 2007 you can see on the chart below how SPX is pushing up against the top of its bear flag pattern (parallel up-channel for the a-b-c bounce off the July low). It has also achieved two equal legs up from July at 1158. Today's candle is a hanging man at this resistance level so a red candle on Friday would be a confirmed sell signal. If it instead gaps up and jumps over resistance near 1160 we should see it head for 1174. A drop below 1132 would confirm we've seen the high. The negative divergence shown on RSI is telling us the momentum to the upside is drying up. It's been a challenge to find the top of this rally but once the a-b-c bounce off the July low is complete the next big move will be a drop well below the July low. This is what makes the next short trade a real money-making opportunity.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1164
- bearish below 1132

An uptrend line from the August 31st low through the September 23rd low was broken last week, retested Friday and then retested again on Tuesday. Holding as resistance should be a bearish sign but so far the market continues to hold up. This morning's high hit the top of a parallel up-channel for price action since September 21st and if it's tested again on Friday we could see 1166. But after this morning's decline and a 62% retracement into this afternoon, any drop back down below 1151 would be bearish.

S&P 500, SPX, 60-min chart

With Tuesday's big rally it popped the DOW above the trend line running across the highs since June, which is the top of a rising wedge pattern. Today's decline brought it back down to that trend line and if it holds like it did today we could see a bullish continuation higher. If the DOW instead drops back below the top of its rising wedge pattern it would be a sell signal. A drop below 10711 would confirm we've seen the high. So we're close to a sell signal but the uptrend from August is also still holding (near 10860). Notice that the DOW is struggling with the level, near 10970, that acted as a shelf of support back in April. When it let go we got the big drop into the May crash. This is the first time that support-turned-resistance is being tested (and the odds favor resistance holding at least on the first attempt to break it).

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 11,000
- bearish below 10,711

The DOW has found its 200-week moving average to be both support and resistance for the past several years, using it as support in 2004 and again in early 2008. Once it broke in June 2008 it was resistance in August 2008, which led to the crash of '08, and again in April 2010. It was again tested this morning at 10977 (this morning's high was 10998.53 so it almost rang the bell at 11K). A second failure this year would scare more than a few bulls away.

Dow Industrials, INDU, Weekly chart

The techs were on fire to the upside in September but NDX came to a screeching halt at the downtrend line from October 2007 through the April 2010 high. At the same level is a 161.8% extension off the previous swing down, which is the August decline. This Fib extension is often associated with the head of a H&S topping pattern so that's what I've depicted on its chart.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 2030
- bearish below 1963

The RUT has formed a small rising wedge pattern for price action since the September 21st high. Negative divergence on RSI supports the bearish interpretation of the pattern but we still don't know where it will end. While yesterday's high may have finished its rally, it takes a break below 666 to confirm that. In the meantime we could see the RUT push marginally higher within the rising wedge. A 127% extension off the July-August decline crosses the top of the wedge on Friday so maybe a quick blast higher following the jobs reports and then a reversal back down. It's not a time to chase this any higher.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 695
- bearish below 666

The banks have been coiling for a while now while the rest of the market has raced on ahead without them. That should be enough warning to the hapless bulls frolicking in the fields, oblivious to the danger lurking at the edge of the field. Many will look at the ascending triangle (flat top, rising bottoms) that I've drawn on the chart as bullish and typically it is. But it has to be considered in context and the pattern following a move down into it usually leads to a continuation in the same direction--down. The pattern could catch a few traders leaning the wrong way if they're expecting a bullish breakout (watch out for a head-fake break and then reversal) and it breaks down instead.

KBW Bank index, BKX, Daily chart

I haven't reviewed the home builders index in a while so I thought I'd look at it tonight but step out a bit and look at the weekly chart since price has been consolidating in a small range since July. Once again, the little flag pattern following the drop April calls for a resumption of the selling once the consolidation finishes. The next leg down should be relatively strong and will likely take out the November 2008 low. And if the home builders are not doing well, nor is the housing market and that in turn means bad things for the economy and stock market.

U.S. Home Construction Index, DJUSHB, Weekly chart

The transports could push a little higher to a confluence of trend lines and a price projection in the 4650 area. With waning upside momentum I would not want to bet on price getting through that area of resistance.

Transportation Index, TRAN, Daily chart

The US dollar is one of the most hated currencies at the moment. The Daily Sentiment Index (DSI from trade-futures.com) is currently at only 4% bulls, lower than it was at the November 2009 and August 2010 lows. From a contrarian perspective the dollar is ripe for a rally. Today's candle left a bullish candle at Fib support. The 78.6% (and 88.6%) Fib retracement levels are often associated with double top/bottom patterns so in effect the current low is a test of the November 2009 low. The pullback from June is an a-b-c correction to the November 2008 - June 2010 rally and once it completes we should see a strong rally well above the June high. Today's candle may have marked the bottom of the pullback in which case the next rally leg is about to begin. That could have all other asset classes reverse course at the same time.

U.S. Dollar contract, DX, Daily chart

Gold may have spiked up to its final high. It's very common for the metals (and commodities in general) to see v-tops while it's more common for stocks to form rolling tops and v-bottoms. So when the metals started going parabolic, as they often do into their final highs, I've been watching carefully for a sign the rally is over. We might have received that signal today. After gapping up this morning and running up to a new high, gold then sold off sharply and created a bearish engulfing candle, which is a potential key reversal day.

Gold continuous contract, GC, Daily chart

Gold dropped down to its steepest uptrend line from September 28th and also to the top of a parallel up-channel for price action since July. So the rally can't be called complete yet, even though that's the warning here. The warning would likely be confirmed with a close below 1330 and then stay below the two trend lines. Confirmation that gold's rally is finished would be a drop below the September 28th low near 1276.

The weekly chart below shows gold came close to achieving an important price projection at this morning's high. The 5-wave move up from October 2008 would have the 5th wave achieving equality with the 1st wave, a very common relationship, at 1371.20. This morning's high was 1366.00. As depicted on the chart below, I see the possibility for a little more rally into the end of the year but a break of its uptrend line from October 2008 and the high in June 2010, both near 1266, would eliminate that possibility.

Gold continuous contract, GC, Weekly chart

Silver's daily chart shows an even more pronounced bearish engulfing pattern with a drop of more than 2% today. Silver's weekly chart below also shows a very good setup for a reversal. The rally from August has been practically straight up--a classic blow-off finish for silver. The last time it did this was back in March 2008. When it cracked it dropped over $4 in a week (-20%). I'm expecting to see the same kind of thing this time around. There are two Fibs I've been eyeing for silver: the first is the 113% extension of the previous decline (the March-October 2008 decline), which is often associated with a momentum reversal and that's at 23.13; the second is where the a-b-c move up from January achieved two equal legs at 22.93. This area is also the top of a parallel up-channel for price action since October 2008. This week's rally popped above this level but the week's close will be important. If the $23 level holds as resistance there's an excellent chance that silver's rally has completed.

Silver continuous contract, SI, Weekly chart

Oil also had a key reversal day with its bearish engulfing candle. There were two Fibs that I was watching, practically on top of each other. As I mentioned for the dollar, the 78.6% and 88.6% retracements are often associated with the double top-bottom pattern and the 88.6% retracement for oil is at 84.54. For the final a-b-c move up from August the c-wave achieved 162% of the a-wave at 84.53. Today's high for oil was 84.43 so it missed the mark by about 10 cents. It then proceeded to give up $3. The combination of the Fibs and the key reversal day has me thinking we've seen the end of the rally for oil. And if oil, gold and silver (and other commodities) reverse back down, along with a rally in the dollar, I believe the stock market will also be heading back down.

Oil continuous contract, CL, Daily chart

Other than the unemployment claims this morning the only other economic report was consumer credit that was reported this afternoon. It shows the consumer continuing to shrink from his/her responsibilities. Doesn't everyone know that it's their civic duty to continue to rack up debt and spend spend spend? Come on people!

August consumer credit declined by -$3.3B vs. an expected decline of -$3.0B but not as much as the previous month's -$4.1B (which was revised lower from -$3.6B). What I'd like to know is how come economic figures are always revised to be worse than originally reported? Just wondering. Revolving credit shrank by -$5.0B, making it the 23rd consecutive month of declines. The consumer appears to be in permanent retrenchment mode. Interestingly, the chart below shows a pop in consumer credit in the fall, which I guess can be attributed to back-to-school shopping (and tuition bills). Following those periods we've seen credit fall off sharply, most especially in 2001 and 2007. The current pop up could lead to the next round of reduced spending.

Consumer Credit Year/Year%, 1995-2010

Friday's economic reports include the Wholesale Inventories but obviously the market really only cares about the payrolls numbers.

Economic reports, summary and Key Trading Levels

I had mentioned the loss of upside momentum in the rally from August and the chart below shows the NYSE making new highs in September but it wasn't accompanied by new highs in the advance-decline line. Especially with the new price highs at the end of September and into October you can see the negative divergence. This pattern has been the same at all previous market highs and I strongly suspect we're seeing another one.

NYSE vs. Advance-Decline line, Daily chart

For the month of September there haven't been many technical indicators working very well, not even the MPTS. The market has been under some other kind of influence (called the Fed and our money) other than the moon phases but here we are at another one (new moon tonight). Will it work this time to mark a turn in the market? With all of the other factors shown on tonight's charts I must say the chances look good this time.

SPX MPTS, Daily chart

Lastly, I came across the chart below that shows an analog of price action between now and 1937. It compares the period of May 1936-February 1938 to July 2009-present. Analogs work until they don't so you can't take this to the bank but again, with all of the other technical indicators, Fibs, trend lines, time and even the MPTS, it does cause one to ponder the possibilities. This chart says look out below so caveat emptor if you're still interested in the long side of the market.

Analog of DOW's pattern, 1937 vs. 2010, chart courtesy Donald L. Luskin

Good luck as we head into opex next week and be careful of increased volatility after tomorrow's report. I'll be back with you next Thursday.

Key Levels for SPX:
- cautiously bullish above 1164
- bearish below 1132

Key Levels for DOW:
- cautiously bullish above 11,000
- bearish below 10,711

Key Levels for NDX:
- cautiously bullish above 2030
- bearish below 1963

Key Levels for RUT:
- cautiously bullish above 695
- bearish below 666

Keene H. Little, CMT

New Option Plays


by Scott Hawes

Click here to email Scott Hawes
Editor's Note:
Good evening. The market remains at elevated levels and has kept us guessing once again as we head into tomorrow's employment report. The safest thing to do here is be patient and see how the market reacts to the numbers. As such, I am not releasing new plays tonight but have provided a long breakout plat below for those interested.

Personally, I think a bad employment report may be just what the market wants to hear because it will just about guarantee more quantitative easing from the Fed. On the other hand, a good number could cause a sell the news event on the prospect that the Fed won't take as much action. Watch the US Dollar and its inverse correlation with the broader market for clues on direction. It should lead tomorrow.

Regardless of tomorrow's outcome, or lack thereof, it seems apparent that dips will get bought. If there is a sell-off I would use the opportunity to tighten stops or take profits on bearish positions. And if we breakout higher I would be keeping a tight leash on bearish and bullish positions. Either way I believe we could see some volatile trading as the tug of war continues. The overhead resistance remains and I doubt it will be broken without a meaningful correction first. Staying nimble here and hitting singles is the name of the game.

Long Idea:
Schnitzer Steel (SCHN): There is big ascending triangle that has been building since July. Look for a breakout above $50.00 and target a +$3 to +$5 move higher.

In Play Updates and Reviews

Oil Pay Closed

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:

CALL Play Updates

Dresser-Rand Group - DRC - close 37.34 change -0.12 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
Current Gain/Loss: -21%
Time Frame: 2 to 3 weeks
New Positions: Yes

10/7: Not too much has changed with DRC. The stock is stuck in a range and tomorrow's employment report could be the catalyst for a breakout. If we go lower we have a tight stop to keep losses under control.

10/6: DRC surged higher at the open today but the bounce was sold into. The stock remains above its rising 50-day SMA, however, if the market corrects we have a tight stop to keep losses under control. My comments below remain valid.

10/5: 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.

Current Position: Long November $40.00 CALL, entry was at $0.70

Entry on October 6, 2010
Earnings 10/28/2010 (unconfirmed)
Average Daily Volume: 570,000
Listed on October 5, 2010

Visa, Inc. - V - close 73.61 change -0.62 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

10/7: V is approaching our trigger to enter long positions, however, tomorrow's employment report could end our hopes of a lower entry if the reaction is favorable. On the other hand, if the reaction is unfavorable the stock could sell-off and blow right through our entry. So picking an entry when the market without knowing the outcome becomes a tricky proposition. Conservative traders may want to wait for a breakout over the $75.00 level, whereas more aggressive and nimble traders may want to time a pullback. I do not see V trading much lower than its rising 20-day SMA which is currently $71.25 and increasing about 30 cents per day. This puts the 20-day SMA near in the $72.50 to $73.00 area by mid to late next week. I suggest we stick with the $73.25 trigger and reassess over the weekend if we are not filled tomorrow. However, if the stock gaps lower near our trigger I suggest readers use the opening range as a guide to enter positions. If the opening range is broken to the downside use $72.60 as an entrance point. If the opening range is broken to the upside use the price above the opening range as the entrance point.

10/6 & 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 $2.11, 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 21.56 change +0.07 stop 20.70 *NEW*

Target(s): 23.00, 24.00, 26.00
Key Support/Resistance Areas: 21.00, 24.00, 28.00, 30.00
Current Gain/Loss: -60%
Time Frame: 2 to 3 weeks
New positions: Only with later dated options

10/7: We are getting crushed in this VIX play and readers should use caution. Continue to use spikes to exit positions or tighten stops as time is not on our side. If the market breaks higher tomorrow we will likely be stopped out of the position. If we break lower our targets will likely be reached. $23.00 is another added target to consider exiting or tightening stops.

10/6: Our new position in VIX has not worked so we need to adjust as time decay is really affecting premiums. I've added a lower target which should get our position closer to break-even and have also lowered the stop 15 cents to 20.70 which is just below the swing low on 9/14. I suggest readers use any surges in VIX to tighten stops or close positions.

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.

10/2 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

PUT Play Updates

Alliant Techsystems - ATK - close 74.36 change +0.11 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: -20%
Time Frame: 1 to 2 weeks
New Positions: Yes, with tight stops

10/7: ATK has formed a perfect bearish head and shoulders pattern on its hourly chart and remains below its 200-day SMA. If the market breaks lower tomorrow I would consider new short positions.

10/6: I see no change from the comments below. ATK traded in tight range today. We are looking for a move down towards the stock's 50-day SMA.

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

Isilon Systems, Inc - ISLN - close 25.14 change +1.26 stop NONE

Target(s): 21.50, 20.50, 19.25
Key Support/Resistance Areas: 26.35, 25.00, 21.40, 20.40, 19.00
Current Gain/Loss: -28%
Time Frame: 1 to 2 weeks
New Positions: Neutral

10/7: ISLN retraced much more of Wednesday's loss than I expected. The stock is sitting right at the 61.8% retracement which is a normal turning point for a move back down. I think trying a short position at this level makes sense, especially if the market turns lower from here. We should know a the short term direction tomorrow.

10/6: ISLN, along with many other data networking stocks, has surged over the past 3 months on takeover speculation. Stocks in this sector are trading at ridiculously high multiples and are massively over inflated. Earnings are starting to be released and as investors begin to realize they bought on hope, they are running for the exits. The trade started to unwind today and I do not believe this is a one day event. Let's use a bounce to $24.10 or a breakdown to $22.95 to enter short positions. I have chosen a further out of the money option than normal to limit losses if we are wrong. Let's enter the position with no stop initially to account for volatility. If I were to place a stop $25.25 is a logical area. If the market finally has a meaningful correction ISLN could get hit hard.

Current Position: Long November $20.00 PUT, entry was at $0.70

Entry on October 6, 2010
Earnings: 10/21/2010 (unconfirmed)
Average Daily Volume: 1.2 million
Listed on October 6, 2010

SPDR DJIA ETF - DIA - close 109.60 change -0.17 stop 110.55

Target(s): 107.50, 106.55, 105.40
Key Support/Resistance Areas: 112.00, 110.00, 107.30, 106.40, 105.00
Current Gain/Loss: -25%

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

10/7: DIA had an outside day (traded lower and higher than Wednesday's range) and looked vulnerable but buyers stepped in again. Tomorrow's reaction to the employment report will likely determine our fate on this position. We have tight stop overhead if there is a major breakout.

10/6 & 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 53.10 change -0.68 stop 54.92

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: -30%
Time Frame: 1 to 2 weeks
New Positions: Yes, with tight stops

10/7: PNC turned lower and printed a bearish engulfing candlestick. The stock continues to look bearish, however, a breakout in the broader market will likely prevent further declines for the time being. If the opposite happens we should be on our way to nice gains.

10/6: Nothing has changed in my comments below. PNC is at resistance and this is a logical spot for the stock to turn lower. New positions with tight stops at this level makes a lot of sense to me.

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


Petroleo Brasileiro - PBR - close 33.89 change -1.20 stop 33.70

Target(s): 37.40, 38.65
Key Support/Resistance Areas: 39.00, 37.50, 36.60, 34.00
Final Gain/Loss: -60%
Time Frame: 1 to 2 weeks
New Positions: Closed

10/7: PBR has fallen apart the previous two days and our stop was hit today so we are flat the position for a loss. The stock head faked us by breaking its primary downtrend line last week but the downgrade yesterday from Barclays sealed our fate. At the close on Monday we had an unrealized gain so this is a disappointing result.

10/6: PBR was the recipient of a downgrade this morning from Barclays to Equal Weight from Overweight. This sent PBR down -4.4% today and we have gone from a winning position to a losing position. Readers may want to consider exiting positions to preserve capital, especially considering the overbought conditions in the broader market as a pullback will likely put even more pressure on the stock. PBR has solid support at $34.00 but that is -$1 lower than current levels. Our stop is below this level at $33.70.

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

Closed Position: Long November $37.00 CALL at $0.50, entry was at $1.25

Annotated Chart:

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