Option Investor

Daily Newsletter, Wednesday, 11/17/2010

Table of Contents

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

Market Wrap

Consolidation Day

by Keene Little

Click here to email Keene Little
Market Stats

The numbers in the table above tell the story for today's price (in)action. After yesterday's big down day it was not surprising to see the day consolidate the move. Bears have been conditioned to not trust the downside and therefore did not press their bets today. Bulls have been chomping at the bit to buy the dip but this dip turned a little more bearish than they had been looking for. Consequently many have backed off and have decided to wait and see if support is really going to hold or not. That left both sides in a standoff wondering who was going to blink first (neither side did).

The market is trying to figure out what the economy is doing, what the Fed is doing and what the other countries (especially China and Europe) are doing. To say this is a period of uncertainty would be an understatement. Considering all this I find it amazing that the stock market has held up as well as it has. While we all anxiously wait for good, or at least better, news about the economy and the employment picture, and hope that the Fed really does know what they're doing, there's a lot of uncertainty about whether or not we're going to see some improvement.

In college one of my least favorite courses was Economics. Actually I hated it. So when it comes to reading the work of economists I must admit to going glassy-eyed very quickly. Gagging myself with a spoon is probably more pleasurable. But now and then I find one who seems to really understand what's going on and explains it well. In John Mauldin's November 5th newsletter (frontlinethoughts.com) he presented two articles written by Dr. Lacy Hunt, Hoisington Investment Mgt. Co., and John Hussman, Ph.D (hussmanfunds.com), both of whom I've read before and whose work I find valuable and easy to understand.

In his latest report Dr. Hunt wrote about the employment numbers and how distorted they are. John Hussman wrote about some of the things affecting our economy and what the Fed is trying to accomplish. In light of the historic nature of the QE program that the Fed has embarked on, and the very positive reaction from the stock market in anticipation of the Fed's actions (but not so much since they've started QE2), I'd like to know more about what to expect in the next several months. Does the stock market rally since August mean it has it correct or was it just another hope-filled rally?

Dr. Hunt first made it quite clear that the number of jobs reported on Friday, November 5th (+159K) was seriously in error when several factors are included. As he mentioned, "The broader household employment fell 330k. The only reason that the unemployment rate held steady is that 254k dropped out of the labor force. The civilian labor force participation rate fell to a new low of 64.5%, indicating that people do not believe that jobs are available, but this serves to hold the unemployment rate down. In addition, the employment-to-population ratio fell to 58.3%, the lowest level in nearly 30 years."

Of the 159K new jobs the Labor Department reported, their business birth/death model, which continually gets revised the following months, assumed 61K new jobs were produced. But as Dr. Hunt pointed out, "...the US economy lost another 124K full-time jobs, thus bringing the five-month loss to 1.1 million in this most critical of all employment categories." As Dr. Hunt observed, at this point in the cycle the level of full-time employment is now the same as it was back in December 1999. The replacement of full-time employment with part-time employment (part of the under-employed group that's now estimated to be about 17%) will cause additional spending reductions by consumers. Personal income, less transfer payments (from the government), has remained stagnant since May. Once the "99-ers", those who have been on extended unemployment benefits for 99 weeks, start falling off the books (millions will lose their benefits at the end of November and December), personal income will drop further.

The stock market has been excited about the benefits of "not fighting the Fed" and has ignored signs of continuing deterioration in the economy (although the past week's price action may be indicating the fear is returning). Even Bernanke has declared that the Fed alone cannot address the problems of a weak economy. Up until the past week the stock market has turned a deaf ear to that warning as most believe QE is here to save us. But as John Hussman pointed out, QE has unintended negative consequences for real household income, saying "Due to higher prices of energy and food commodities, QE may result in less funds for discretionary spending for consumers whose incomes are stagnant."

This week's inflation reports showed a large increase in energy costs and this fits Dr. Hussman's contention it will decrease discretionary spending, which is the kind of spending we need so that factories can start producing "stuff" again, which will get people back to work, which will increase consumer spending, etc. That's the flip side of the economic model that brings about economic growth. We're still stuck in an economic contraction.

People on fixed incomes dependent on rates of return on bank CDs and other short-term investment vehicles have been hurt over the past several years by the Fed's ZIRP (Zero Interest Rate Policy). So as the Fed touts the benefits of QE in higher stock prices (creating a wealth effect, at least for bankers), the effects of reduced consumer spending will be much stronger than any stock market's increase to consumer's feeling of wealth. The Fed is in fact penalizing those people who are doing the right things--saving instead of going deeper into debt. The Fed does not care about our individual balance sheets; they want people and businesses taking on more debt and spending more. As we all know, that's what got us here in the first place.

John Hussman then got into the meat of his discussion about the Fed's monetary policy, money supply and money velocity (how quickly the money supply is expanding or contracting, which is a measure of inflation or deflation). He gets into the Keynesian theory and how it's pointing to a real problem for the Fed. So even though proponents of Keynesian economics, such as Paul Krugman, demand the government keep spending, there's a lot of information indicating this is a failing policy.

I want to include a couple of paragraphs from Hussman's article because I think it is one of the clearest pieces I've read in a while that speaks to what the Fed is trying to do (and the resulting positive reaction of the stock market from the August low) and why the Fed, and stock market, are probably wrong. He does mention what the Fed's role should be in our monetary system. As he says, "Simply put, monetary policy is far less effective in affecting real (or even nominal) economic activity than investors seem to believe. The main effect of a change in the monetary base is to change monetary velocity and short-term interest rates. Once short-term interest rates drop to zero, further expansions in base money simply induce a proportional collapse in velocity." [Emphasis mine]

He goes on to say "I should emphasize that the Federal Reserve does have an essential role in providing liquidity during periods of crisis, such as bank runs, when people are rapidly converting bank deposits into currency. Undoubtedly, we would have preferred the Fed to have provided that liquidity in recent years through open-market operations using Treasury securities, rather than outright purchases of the debt securities of insolvent financial institutions, which the public is now on the hook to make whole. The Fed should not be in the insolvency bailout game. Outside of open-market operations using Treasuries, Fed loans during a crisis should be exactly that, loans - and preferably following Bagehot's Rule ("lend freely but at a high rate of interest"). Moreover, those loans must be senior to any obligation to bank bondholders - the public's claim should precede private claims. In any event, when liquidity constraints are truly binding, the Fed has an essential function in the economy." Can I hear an Amen to this? Let's hope Ron Paul will start to make some of these changes if he begins chairing the House Subcommittee for Domestic Monetary Policy and Technology -- Bernanke's Worst Nightmare.

Another point that Hussman made had to do with the Fed's hope of improving the economy through their monetary policy decisions. But as he said, "At present, however, the governors of the Fed are creating massive distortions in the financial markets with little hope of improving real economic growth or employment. There is no question that the Fed has the ability to affect the supply of base money, and can affect the level of long-term interest rates, given a sufficient volume of intervention. The real issue is that neither of these factors is currently imposing a binding constraint on economic growth, so there is no benefit in relaxing them further. The Fed is pushing on a string." [Emphasis mine]

I've been saying since Greenspan's days that the Fed is pushing on a string and that you can lead a horse to water but you can't make him drink. You can make money cheaper to borrow but you can't make people borrow. And therein lies the Fed's biggest problem - how to affect social mood, which is much bigger than the Fed. The Fed has admitted that their real hope for the QE program is to get stock prices higher so that people feel the "wealth effect" and get out there and spend more. For this reason many are calling the QE program the Fed's Hail Mary pass.

At any rate, sorry if you found the above boring but I think it's very germane to the current state of the stock market. During a bear market we will see many hope-filled rallies, which tend to be strong, followed by more disappointment, fear and anger. Those emotions show up in more selling as more and more recognize that we're dealing with some very fundamental issues, not the least of which is conflict between countries. The arguments over monetary policy, trade agreements, immigration, etc. will likely increase and that will only make more people anxious about the future. And the anxious mood, surrounded by uncertainty, is what causes the stock market to sell off and that could be what we're facing next.

So with that let's jump into tonight's charts. I'll start off with the DOW tonight because the weekly chart shows the DOW pulling back to its 200-week MA, near 10950, which could at least act as support for a bounce. Lower support should be found at an uptrend line from March 2009, near 10800. As shown on the chart, we could see another move higher (dashed line) into the end of the year if support holds above 10800. A drop below 10720, the August high, would negate the potential for a new high but I think any drop below 10800 would effectively eliminate the bullish potential shown with the dashed line.

Dow Industrials, INDU, Weekly chart

The daily DOW chart below shows the decline to the 50-dma that has acted as support yesterday and today, currently near 10979. From a wave count perspective it would look best if we get at least one more drop down to the 10900 area before potentially setting up a larger bounce to correct the leg down from the November high. A rally back up from here could instead be part of a larger pullback pattern that then leads to another new high into the end of the year (shown with the dashed line).

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 11,350
- bearish below 10,980

The DOW's 60-min chart below shows a projection down to the 10910 area, which could be price-level support from previous highs and lows in September/October. Not shown on any of the charts are the Fibonacci retracement levels and the 38% retracement of the rally from August is near 10873 so that's a potential downside target/support level as well. The bounce/consolidation off yesterday's low had price finding resistance at the bottom of the parallel down-channel based on the initial declining pattern from the November high. Whenever you see price drop out of a channel like this you will often see it act as resistance. Therefore if we get a new low as depicted and then a bounce back above the bottom of the channel that would be a good clue the higher bounce has started. Otherwise we could see the market stair-step a little lower first, with 10720 being a good downside target before we get a larger bounce.

Dow Industrials, INDU, 60-min chart

SPX has a very similar setup as the DOW. If it rallies from here back above 1186 we could see the bounce continue back up to the 1220 area before turning back down again in a larger pullback pattern (dashed line) in preparation for another rally leg in December. If it drops lower there should be good support around 1165 and certainly near 1150 to launch a bigger bounce to at least correct the leg down from the November high. The bearish pattern, dark red, calls for a continuation lower after the bounce.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1220
- more bearish below 1150

Looking at the Nasdaq tonight instead of NDX shows it's finding support at its broken downtrend line from October 2007 through the April high. This may or may not be an important trend line since it's not a confirmed trend line (it only has the two points). If it drops a little further it should find support at its 50-dma near 2430. A bounce and then continuation lower into December is expected but if it gets a bigger rally from here it might instead be in a larger pullback pattern before heading higher in December.

Nasdaq, COMPQ, Daily chart

Key Levels for COMPQ:
- cautiously bullish above 2535
- more bearish below 2400

For the RUT I'm showing a different possibility for a consolidation pattern before pressing higher in the latter part of December (Christmas rally?) and into the new year. A sideways triangle would fit for a 4th wave correction to the rally from July, which would be followed by the 5th wave to complete the c-wave a large A-B-C bounce off the March 2009 low. Price action hasn't been clear enough to rule this possibility out which is why I'll carry it on the charts until it's been negated (with a drop below the July/August highs). But I consider this to be a lower probability than a stronger decline (hence it's shown with the light red dashed line) and in the meantime I'm looking for a new low followed by a bounce and then a continuation lower, as depicted by the bold red line.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 730
- more bearish below 690

Continuing a watchful eye on the 10-year yield, Monday saw a large gap up and TNX closed just above resistance near 2.89%. Since then it's been consolidating just below that line of resistance. A reversal back below 2.72% would change my expectation for a run up to the 3.1% area but until then I don't see anything to change the bullish outlook for yields (bearish for bond prices).

10-year Yield, TNX, Daily chart

I've mentioned in the past that municipal bonds are probably one of the riskier areas to invest in. We all know the financial trouble that states and counties are in. One way many municipalities have maneuvered around the requirement to balance their budgets has been to sell bonds to finance budget shortfalls. But as we're seeing with Europe, the bill eventually comes due. The National Municipal Bond fund is a good example of what can happen:

iShares National Municipal Bond fund, MUB, Daily chart

This fund is not a junk bond fund and its average yield for the past year is only 3.61%. The bulk of its holdings are rated A+ or better with practically nothing rated less than A. It is most heavily invested in transportation and utility bonds with another large portion in "Various Purpose" bonds (which I alluded to above). Its top holdings can be seen in this chart:

National Municipal Bond fund top holdings

If I had reviewed this fund as an investment candidate I would not have been particularly alarmed about anything. Perhaps the only thing that would have scared me away is the fact that they're holding CA and IL bonds, two of the weakest states in the nation and probably the closest to bankruptcy. But the bottom line is you need to check your holdings in your investment accounts and get out of muni bonds. Your bond funds should include only Treasury-only funds and even those we're going to have to start watching carefully for exit signs.

The banks have been particularly weak the past week and a half, this following an explosive move up November 3rd, 4th and 5th. After tagging the top of its parallel up-channel from August (bear flag pattern), it reversed course and has practically retraced the whole move up. The bottom of the flag, near 45.25, could provide support for a bounce but I expect it to break down from the flag pattern after the bounce.

KBW Bank index, BKX, Daily chart

The housing starts number that came out this morning was not good--down -11.7% in October, for an annualized rate of 519K, which is the lowest number since April 2009 (right after the March 2009 low in the stock market) and well below the 600K expected by economists. Making it worse was the fact that the number of housing starts for September was revised lower from 600K to 588K. On top of that, mortgage applications dropped -14.4% which is rather significant. Mitigating this dismal picture somewhat was the fact that housing permits increased by +0.5% to 550K and the number was revised slightly higher for September from 539K to 547K. Admittedly the +0.5% increase in permits doesn't offset the -11.7% in new construction and the home builders index took another hit today.

The home builders index broke its uptrend line from August, which is the bottom of an ascending triangle pattern in which price has been consolidating since the late-May low. When viewed on a weekly chart you can see that this triangle pattern is a bearish continuation pattern rather than a bullish pattern. Therefore the breakdown from the triangle, after a small throw-over finish above the top of the pattern on November 9th, confirms the next leg down has begun. I'm looking for another new low followed by a bounce into early December and then a stronger decline from there.

DJ US Home Construction index, DJUSHB, Daily chart

The TRAN looks just like the DOW. Both broke above their April highs but neither has been able to hold those highs (usually a bearish sign). The price pattern of the pullback from the November highs is not clear enough to rule out another run to a new high, in which case the upside projection for TRAN would be near 5065, so a rally back above 4800 would be a bullish heads up. In the meantime the bears control the ball so I am looking for new lows rather than new highs. Watch for potential support around its 50-dma near 4649, if it reaches that level, in the next day or two.

Transportation Index, TRAN, Daily chart

For the U.S. dollar I've been expecting a pullback from its downtrend line from June, which is the top of its parallel down-channel. So far it looks more like a bullish consolidation rather than a pullback. A break higher above 80 would clearly be bullish and I suspect there are many short traders with their stops close by. The dollar could flash to the upside and tag its 200-dma just shy of 82 in a hurry if that happens. But typically, with the dollar being short-term overbought, we should see a pullback to relieve the overbought indicators and then charge higher, which is what I'm showing. The other, less probable, possibility is for the dollar to head back down for a new low before setting up a stronger rally next year. A drop below 76.30 would be bearish otherwise any pullback would be a good buying opportunity in the dollar.

U.S. Dollar contract, DX, Daily chart

Gold is finding support at its 50-dma the past two days but it looks more like it's consolidating above support rather than something more bullish. I show a bounce from here back up to its broken uptrend line from July, but that bounce might start from a lower low such as the October low near 1315. In any case, a bounce would be a good opportunity for a short play which is what I'll be watching for.

Gold continuous contract, GC, Daily chart

Oil has been getting hammered since its high last Thursday. I had mentioned in last Thursday's wrap that the wave pattern had been satisfied with that day's high and to be on the lookout for a break of its uptrend line. I guess I should have been a little more emphatic about that possibility. It closed below its 50-dma today and the next support level, which I think will hold, is its uptrend line from February 2009 the August low, currently near 79.40 (log scale). The 200-dma at 78.66 should also be support for a bounce into next week. That bounce should then be followed by a continuation lower as depicted.

Oil continuous contract, CL, Daily chart

The other economic reports today were the CPI numbers. While most of us will appreciate a little deflation, or certainly no inflation (to keep prices down since wages have already been kept down by the lousy economy), the Fed is bound and determined to get the inflation rate back up (it helps those who are in debt since you pay with cheaper and cheaper dollars in future years). Can we think of anyone who might benefit from inflation? Hmm, the government is in a bit of debt right now. Still think the Fed is on your side? So the CPI numbers show only a slight bit of inflation and the core rate was 0%. This is what the Fed is trying to fight with their QE program, among other things. Crude inventories continued to drop, although you wouldn't have known that by price action.

Economic reports, summary and Key Trading Levels

Tomorrow's economic reports include the unemployment claims, which really no one trusts anyway, and then at 10:00 AM we'll get the potentially market moving Leading Indicators and Philly Fed index. A surprise to the upside for these could ignite a market bounce sooner rather than later. Conversely a negative surprise could drop the market to firmer support before the bigger bounce starts.

Summarizing where we are, the price action today makes it look like a bearish consolidation pattern following a strong down day on Tuesday. The little dojis near the lows indicate indecision/consolidation. The expectation based on this is for another leg down on Thursday. What's not real clear, since different indexes have slightly different consolidation patterns, is whether we'll first see a small bounce and then tip back over or if instead we'll get a new low right away, such as SPX 1165/DOW 10900, and then a bigger bounce. Short-term traders will need to be careful of some whipsaw price action over the next day or two.

Opex may start the pinning process so it's also possible we'll see prices become trapped near their current levels. SPX may settle around 1175. Continue to keep an eye on the dollar since a deeper pullback there could help the stock and commodity markets. So far the dollar continues to hold its uptrend line from its November 3rd low but a break below 79 could usher in a stronger pullback. If the dollar breaks higher it could spark some short covering in the dollar and tank the stock and commodity markets. So take a look at where the dollar is tomorrow morning for some clues as to what the other markets might do.

A little longer-term, into the end of this month and December, it's not clear yet whether we're into a larger pullback/consolidation pattern that will lead to another rally leg into the end of the year, or if instead we've started a more serious decline where we'll get only a bounce and then a hard selloff into the end of the year. The majority of traders are expecting a rally into the end of the year and for an opportunity to buy this pullback (it fits the seasonal and historical patterns). But will the majority be disappointed, again? I would not place any big bets either way yet; look for shorter-term swing trades and make some base hits and take your money before the market takes it back. We'll have more time in the near future to figure out the longer-term pattern.

Good luck and I'll be back with you on Monday as Todd and I exchange weeknights next week (he'll be with you on Wednesday for a sendoff to tryptophan land on Thursday).

Key Levels for SPX:
- cautiously bullish above 1220
- more bearish below 1150

Key Levels for DOW:
- cautiously bullish above 11,350
- more bearish below 10,980

Key Levels for COMPQ:
- cautiously bullish above 2535
- more bearish below 2400

Key Levels for RUT:
- cautiously bullish above 730
- more bearish below 690

Keene H. Little, CMT

New Option Plays

Management Services

by James Brown

Click here to email James Brown

Editor's Note:
It could be time to buy the dip in this PBM.

- James


Express Scripts - ESRX - close: 51.41 change: +0.69

Stop Loss: 49.65
Target(s): 53.95
Current Option Gain/Loss: + 0.0%
Time Frame: 5 to 6 weeks
New Positions: Yes

Company Description:
Express Scripts, Inc., one of the largest pharmacy benefit management companies in North America, is leading the way toward creating better health and value for patients through Consumerology®, the advanced application of the behavioral sciences to healthcare. This approach is helping millions of members realize greater healthcare outcomes and lowering cost by assisting in influencing their behavior. Headquartered in St. Louis, Express Scripts provides integrated PBM services including network-pharmacy claims processing, home delivery services, specialty benefit management, benefit-design consultation, drug-utilization review, formulary management, and medical and drug data analysis services. The company also distributes a full range of biopharmaceutical products and provides extensive cost-management and patient-care services. (source: company press release or website)

Why We Like It:
We want to buy the dip in ESRX. The correction has been on light volume and shares still look bullish following the early November breakout over resistance. The $50.00 level should be support. I am suggesting we buy half of our position now at current levels. Then if we see another dip near $50.50 we can buy our second half. We'll use a stop loss at $49.65. Our first target is $53.95. FYI: The Point & Figure chart is pretty bullish with a $74 target.

Suggested Position: Buy the 2010 December $52.50 calls (ESRX1122A52.5) current ask $1.94

Annotated Chart:

Entry on November 18th at $ xx.xx
Earnings Date 02/24/11
Average Daily Volume = 4.3 million
Listed on November 17th, 2010

In Play Updates and Reviews

Narrow Range

by James Brown

Click here to email James Brown

Editor's Note:

The stock market traded in a narrow range for most of the session. We didn't see a lot of movement in our candidates except for COST, which is surging to new highs, and FFIV, which is seeing some volatility and hit our bearish trigger.


Current Portfolio:

CALL Play Updates

Ansys, Inc. - ANSS - close: 47.69 change: +0.13

Stop Loss: 44.90
Target(s): 49.50,
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

11/17: It was a quiet session for ANSS with the stock trading sideways in a 60-cent range. The $48.00 level above looks like short-term resistance. There is no change from my prior comments. Currently our plan is to buy calls on a dip at $46.75 but readers may want to wait and watch for a bounce from the $46.00 level before initiating positions instead.

Buy-the-dip trigger @ 46.75

Suggested Position: Buy the 2011 January $50.00 calls (ANSS1018L50)

Entry on November xxth at $ xx.xx
Earnings Date 02/24/11 (unconfirmed)
Average Daily Volume = 651 thousand
Listed on November 13th, 2010

Caterpillar - CAT - close: 81.17 change: +0.80

Stop Loss: 79.40
Target(s): 84.85, 89.50
Current Option Gain/Loss: -18.5% & - 2.5%
Time Frame: 3 to 4 weeks
New Positions: Yes

11/17: CAT managed a little bounce with traders buying the dip near support at $80.00. Volume was a lot lighter compared to the last couple of days. I'm still optimistic here but if the market continues to breakdown then CAT will most likely hit our stop under $80.00. For now the pull back toward $80 looks like a new bullish entry point.

Earlier Comments
Our first target is $84.85. We want to exit the majority of our position here. We'll set a secondary target at $89.50 but again I warn you the $85 level should be tough resistance.

Current Position: Long the December $85 calls (symbol: CAT1018L85)
Entry @ $1.40

Double Down
New Position: Buy the December $85 calls (CAT1018L85), current ask $1.17

Entry on November 9th at $ 81.75
Earnings Date 01/27/11
Average Daily Volume = 7.7 million
Listed on November 6th, 2010

Cliffs Natural Resources - CLF - close: 66.41 change: +0.52

Stop Loss: 64.75
Target(s): 71.50, 74.75
Current Option Gain/Loss: -19.4%
Time Frame: 4 to 6 weeks
New Positions: Yes

11/17: For the second day in a row traders bought the dip near $65.00. Readers can use this intraday bounce as a new bullish entry point to buy calls. Obviously we're at the whims of the market here and any further breakdown in the major indices or commodity sector will probably see us stopped out.

Current Position: Long the 2010 December $70.00 CALL, Entry @ $2.42

Entry on November 12th @ 67.00
Earnings Date 02/17/11
Average Daily Volume = 4.3 million
Listed on November 1, 2010

Costco Wholesale - COST - close: 67.02 change: +1.28

Stop Loss: 62.90
Target(s): 69.00
Current Option Gain/Loss: +100.0%
Time Frame: 3 to 4 weeks
New Positions: No

11/17: Traders reacted positively to Target's (TGT) earnings report today and the RLX retail index gained +0.7%. Yet shares of COST outperformed its peers with a +1.9% gain and a new two-year high. I am raising our stop loss to $63.90. Readers will want to strongly consider taking some profits in their call positions since our December $65 calls have doubled to $3.00 (+100%). Officially our target to exit is $69.00.

Earlier Comments
We want to keep our position size small to limit our risk.

Current Position: December $65.00 calls (symbol: COST1018L65)
Option Entry @ $1.50

Entry on November 8th at $64.50
Earnings Date 12/09/10
Average Daily Volume = 3.4 million
Listed on November 6th, 2010

Humana Inc. - HUM - close: 58.05 change: +0.49

Stop Loss: 51.75
Target(s): 59.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

11/17: HUM saw a little oversold bounce today (+0.8%) but shares still looks due for a bigger correction. There is no change from my prior comments. We are still waiting for a pullback toward $55.00. If HUM hits our bullish trigger at $55.25 we'll use a stop loss at $51.75.

Suggested Position:

Trigger to buy calls at $55.25

BUY the 2011 January $55 calls.

Entry on November xxth at $ xx.xx
Earnings Date 11/01/10 (confirmed)
Average Daily Volume = 2.1 million
Listed on October 16th, 2010

iShares DJ Financial ETF - IYF - close 53.10 change -0.23

Stop Loss: 52.90
Target(s): 57.50, 59.75
Current Option Gain/Loss: -65.0%
Time Frame: 6 to 8 weeks
New Positions: No

11/17: Warning! The situation in the financials is not improving. Banks were some of the worst performers today. The IYF lost another -0.4% and closed under its simple 50-dma now. The intraday low was $52.98 and our stop loss is at $52.90. Readers may want to wait for a close back above $54.00 before considering new bullish positions. Right now odds are growing that we'll get stopped out soon.

Current Position: Long the December $55.00 CALLS, entry @ $2.00

Entry on November 9th @ 55.00
Earnings Date N/A (unconfirmed)
Average Daily Volume: 1.0 million
Listed on November 4, 2010

Nike Inc. - NKE - close: 81.39 change: +0.88

Stop Loss: 79.90
Target(s): 86.75, 89.50
Current Option Gain/Loss: -53.0%
Time Frame: 4 to 6 weeks
New Positions: Yes

11/17: NKE is seeing a little oversold bounce after slipping toward support near $80.00 and its rising 50-dma yesterday. I don't see any changes from my previous comments. Aggressive traders could buy this dip.

Current Position: Long the December $85.00 CALLS (symbol:NKE1018L85) Entry @ $1.15

Entry on November 11th at $83.00
Earnings Date 12/21/10
Average Daily Volume = 2.3 million
Listed on November 6th, 2010

VimpelCom Ltd - VIP - close 15.53 change +0.10

Stop Loss: 14.80
Target(s): 16.75, 17.75
Current Option Gain/Loss: -38.0%
Time Frame: 6 to 8 weeks
New Positions: Yes, on dips

11/17: VIP spent the session churning sideways. There is a battle going on as the bullish trend of higher lows is fighting the short-term bearish trend of lower highs. I'm expecting a breakout higher as long as the market cooperates. If the trend of lower highs holds up the next dip should only fall toward $15.20-15.30. FYI: VIP is due to report earnings around Nov. 24th.

Current Position: December $15.00 CALLS, Entry @ $1.05

Entry on November 8, 2010 @ 15.60
Earnings Date 11/24/2010 (unconfirmed)
Average Daily Volume: 3.5 million
Listed on November 3, 2010

PUT Play Updates

F5 Networks - FFIV - close: 115.01 change: -0.94

Stop Loss: 121.10
Target(s): 105.25
Current Option Gain/Loss: -10.5%
Time Frame: 2 to 3 weeks
New Positions: Yes

11/17: FFIV initially rallied this morning with a gap open higher at $116.52 and almost hit $119 but shares slowly drifted back toward support near $115.00. Then the late afternoon market weakness helped pull FFIV under support and shares dipped to $112.10. Our trigger to buy puts was hit at $114.50. The play is open and I would still consider new positions but keep your positions small. This is an aggressive, higher-risk trade. Our target is $105.25.

Current Position: Long the 2010 December $105 puts (FFIV1018X105) Entry @ $2.85


Entry on November 17th at $114.50
Earnings Date 01/19/11
Average Daily Volume = 2.9 million
Listed on November 16th, 2010

Lubrizol Corp. - LZ - close: 103.85 change: -0.16

Stop Loss: 110.25
Target(s): 100.50
Current Option Gain/Loss: +29.2%
Time Frame: 3 to 4 weeks
New Positions: No

11/17: The morning bounce in LZ has rolled over and shares look poised for more weakness. I don't see any changes from my prior comments. You may want to keep your position size small to limit your risk.

Current Position: Long the December $105 puts (symbol:LZ1018X105)
Entry @ $2.90

Entry on November 10th at $107.68
Earnings Date 02/03/11 (unconfirmed)
Average Daily Volume = 525 thousand
Listed on November 9th, 2010

Oceaneering Intl. Inc. - OII - close: 68.80 change: +0.77

Stop Loss: 71.05 *new*
Target(s): 64.50, 62.25
Current Option Gain/Loss: - 3.4%
Time Frame: 3 to 4 weeks
New Positions: No

11/17: Oil service stocks were strong performers today with the OSX index up +1.3%. OII saw a +1.1% gain. I warned readers yesterday that OII's lack of weakness on Tuesday could spell trouble. I'm surprised the oil stocks were this strong given the big declines in oil today. Readers may want to lower their stops toward the $70.00 level. I'm not suggesting new bearish positions at this time.

Current Position: Long the December $65.00 puts (OII1018x65) Entry @ $1.45

Entry on November 15th at $69.21
Earnings Date 02/17/11
Average Daily Volume = 1.0 million
Listed on November 13th, 2010

Research In Motion - RIMM - close: 55.92 change: -0.37

Stop Loss: 60.25
Target(s): 55.05, 53.00
Current Option Gain/Loss: +11.8%
Time Frame: 1 to 2 weeks
New Positions: No

11/17: RIMM was hugging support near $56.00 most of the session but the market's late day decline pushed the stock deeper into negative territory. I don't see any changes from my prior comments. If RIMM does see a little bounce look for resistance near $58.00.

Current Position: Long the December $55 puts (RIMM1018X55) Entry @ $2.53

Entry on November 16th at $57.28
Earnings Date 12/16/10
Average Daily Volume = 17.6 million
Listed on November 15th, 2010