Option Investor

Daily Newsletter, Saturday, 6/11/2011

Table of Contents

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

Market Wrap

Six Week Streak

by Jim Brown

Click here to email Jim Brown

The Dow lost -199 points for the week to stretch the current decline to six consecutive weeks. That is the longest losing streak since October 2002 when the Dow lost -15%.

Market Statistics

It was not an economic report that knocked the market for a loss on Friday but a resurgence of worry over the second bailout for Greece and new worries about a decline in exports from China. China reported that imports accelerated in May suggesting the economy might not be slowing as much as regulators had hoped. Worse for the global economy their exports weakened and suggested slower global demand. Imports rose +28.4% over the same period in 2010 and up from the 21.8% rate in April. Export growth slowed to +19.4% from +29.9% in April. However, 19% growth is still growth.

The combination of China's numbers is like a good news, bad news joke. The increase in imports suggests China is not headed for a hard landing from its four rate hikes and seven reserve hikes over the last year. That was the good news. The bad news is a slowing pace of global consumption of Chinese exports. China's economy grew at a +9.7% rate in Q1. Their CPI for May is due out on Tuesday and it is expected to rise to 5.4% according to the consensus estimates. The PPI is expected to decline slightly to +6.5%. The recently released Purchasing Managers Index declined from 66.2 to 60.3 and a significant decline by Chinese standards. If the CPI rises China is expected to raise interest rates again in June or July. That would be the fifth hike since October.

The worries over slowing exports from China coupled with another round of worries over the second bailout for Greece combined to push our markets lower or at least that was the theory being put forth in the press. The Euro collapsed and the dollar rallied sharply for the third consecutive day. A spiking dollar means lower commodities and equities.

The economic reports in the U.S. were mostly ignored with Import and Export prices for May basically flat at +0.2% compared to +2.2% in April. The ECRI Weekly Leading Index declined slightly from 128.3 to 127.7. Unfortunately the implied economic growth rate fell to +4.1% and has been declining steadily since mid April's 7.7%.

Next week is a busy week for economic reports with the PPI, CPI and Philly Fed Survey headlining the list. The price indexes are not expected to show any material gains since energy prices have declined for more than a month. Grain prices have been rising due to the floods and fewer acres planted. These reports should give the Fed some comfort if they decide to continue some form of stimulus in July.

Economic Calendar

The euro collapsed after Germany's Finance Minister defied Trichet, the president of the ECB, when he said a restructuring of privately held Greek debt would be a requirement for a bailout. Trichet said the ECB would unequivocally deny the possibility of an ECB sanctioned debt restructuring for Greece. Many analysts believe Greece will never be able to pay off its debt and they will eventually have to either default or restructure. Most believe a restructuring where the principal is lowered or term is lengthened is just another form of default. Credit default swaps for Greek debt rose to a new record high. Trichet said the ECB would not accept Greek bonds as collateral for future loans.

The continued on again, off again agreement over the Greek problem has been roiling the currency markets for over a year now. Getting a dozen finance ministers from different countries with vastly different economies and balance sheets to agree on anything is next to impossible. The countries with a strong economy and finance system see loans to Greece as a handout and a reward for running their economy into the ground. Those debtor nations who depend on outside funding can't afford to donate billions to the Greek problem when they know Portugal, Italy, Ireland and Spain are lining up behind Greece. The U.S. may have some serious financial problems but at least we are not dependent on a dozen misfit countries controlling our fate. Expect this problem to continue to cause volatility for months to come.

Leigh Stevens was in Spain last week and he said a hedge fund manager in his party had called on several large banks to question them about their portfolios. Apparently the Spanish banks have not written off their portfolio of bad real estate loans left over from the 2008 crisis. They are using the "pretend and extend" policy where they pretend the borrower/collateral is better than it is and extend the loans hoping the economy recovers along with real estate prices. If they had to write down the value of their loans to a market value basis many of the banks would be underwater. The manager said Spain has accepted a big austerity package but unemployment is so high the youth are in revolt. Leigh said he saw large abandoned housing projects in the south where construction funds dried up. Spain is the largest of the "PIGS" and will be far worse for the EU than Greece if they can't get their act together soon.

Euro Chart

Dollar Index Chart

The nearly 2% spike in the dollar over the last three days finally crushed the commodity markets on Friday. Gold was down $21 off the Thursday high and silver -$1.30. The biggest decline came in light sweet crude which fell -$3 on Friday due to the dollar spike and news that Saudi Arabia would increase production by July to 10.0 million barrels per day. At least that is the theory why oil prices fell but I think it was bogus.

The tightly controlled Saudi newspaper Al-Hayat reported Saudi officials were going to raise production unilaterally from 9.3 mbpd to 10.0 mbpd in July. That additional oil would go to China and Asia. The price of WTI crude declined -$3 to close at $98.92.

If you believe that drop was a reaction to the Saudi news then I have a bridge in New York I want to sell you. Saudi already said on Wednesday they, along with Kuwait and the UAE were going to raise production by 1.5 mbpd despite the quotas. Why didn't WTI decline then? The Friday announcement was only half the quantity of the Wednesday announcement and basically just a repeat of that announcement.

Secondly, why did WTI (light sweet crude) in the U.S crash? The crude Saudi is going to produce is heavy sour crude that is not interchangeable with light sweet. Thirdly they said all the oil was going to China and Asia and not to the USA. If any contract should have crashed it would have been the Brent contract, still a light sweet crude, but it is the contract the European and Asian heavy crudes are indexed to. Brent only fell 90-cents.

Saying the WTI light sweet contract crashed because Saudi is going to sell an extra 700-Kbd of heavy sour to China is like blaming falling milk prices on orange trees freezing in Florida. There is no direct correlation.

I believe WTI crude collapsed because speculators in all investments were running for cover. Our equity markets were in the tank with the Dow down -187 points at midday. The dollar was spiking and commodities in general were declining. Plus this is a quadruple option expiration month. Everything expires next Friday. If a fund had some big option bets on oil ahead of the OPEC meeting then Friday would have been the time to close them. Funds normally close positions the week before expiration. Traders got the big OPEC spike in crude on Wed/Thr and it was time to take profits. Nobody would want to carry profits on an expiring contract over the weekend in this environment.

Lastly the USO ETF rolled over their July WTI futures into Aug futures. The posted forward roll dates for June were the 7th-10th. Friday was the 10th. The USO sells 4,000 to 6,000 contracts of the current expiring month and rolls the proceeds into the next month. That is $400 to $600 million in contract value. With oil so volatile after the OPEC meeting they probably waited until Friday to sell the majority of those contracts and that helped push the current WTI price lower. According to the USO website they had pending sells for 3,333 July contracts on Friday morning and they were going to buy 3,590 of the August contracts.

I think the news crews simply report on whatever headline happens to scroll by and then ignore everything else.

WTI Light Crude Chart

Brent Chart

Late Friday an Ohio judge issued a ruling calling for Ford to pay $2 billion in damages to thousands of dealerships in a 2002 class action lawsuit. The court found Ford had over charged dealers under their agreements and awarded $781 million in damages and $1.2 billion in interest. Apparently Ford billed all the dealers based on unrealistically high published wholesale prices but used a series of unpublished "secretive" discounts to shift revenue from the dealerships to Ford. Under the dealership agreements Ford was required to sell the trucks to the dealers at prices and discounts published in accordance with all dealer Terms of Sale Bulletins. Ford gave favored dealers unpublished discounts while making others pay the published price. Ford has maintained a liability warning on this case in its financial statements for years but at a microscopically lower level. There are 3,000 dealerships in the suit covering purchases of 474,000 trucks. Ford said it would appeal the verdict.

Auto production for 2011 could decline by 2.8 million vehicles as a result of the Japanese earthquake. So far Japanese manufacturers have lost production of 2.3 million vehicles though June 3rd and all manufacturers are not yet up to full production. The 2.8 million loss also accounts for declines at automakers outside of Japan that saw production slow due to a lack of parts.

Ford Chart

The market attempted to rebound in the middle of the day after CNBC reported the biggest banks, considered too big to fail, would have to put up less capital than previously thought. The Basel accords have raised the basic capital requirements of banks to a minimum of 7% but the big banks are going to have to put up additional capital in order to avoid any future bailouts for systemically important banks.

The Systemically Important Financial Institutions or SIFIs will be charged another 3%. At least it was thought to be 3% up until Friday afternoon. After a secret meeting of regulators the capital surcharge is now expected to be 2.0% to 2.5%. That may not seem like a large amount but a bank as big as Bank America with $2.3 trillion in assets and $165 billion in tier one capital, one percentage point is a huge amount of money. Having to put 9% aside under the new Basel rules is going to be very painful. This is why the banking sector has been in the tank for the last three months.

When the news was announced the entire banking sector rocketed higher. It went from the worst performing sector for the day to the best performing in about an hour. The market would have finished significantly lower without the bounce in the banks.

KBW Banking Index

Bank America Chart

Travelers was hit by a tornado. Actually several tornados. The company said it was cutting back on a stock buyback program and would probably post a loss for Q2 as a result of more than $1 billion in insured losses from the tornados in Joplin and Tuscaloosa. The said normal insured losses are less than half that amount. According to risk modeler AIR Worldwide the insured losses for all carriers will be in the range of $4 to $7 billion for the May storms and $3.7 to $5.5 billion for April storms. There have been 1,439 tornados so far in 2011 compared to 1,282 in all of 2010.

Travelers Chart

The major indexes (Dow, S&P) are down -7% since the first of May. It has been a long slow grinding decline with three material rebounds but all posting lower highs. The Dow closed under 12,000 at 11,952. Since the May high that equates to an $855 billion decline in household net worth.

The top ten percent of households with the highest incomes account for more than 20% of all spending. Those are also the households that invest the most. Seeing nearly a trillion dollar decline in their investment accounts is going to produce a big hit to consumer sentiment and consumer spending.

According to fund tracker EPFR Global the bond funds saw $6 billion in inflows for the week and the fastest rate in nearly a year and equity funds saw outflows of $7.7 billion. Investors are seeing the signs of economic stress and running back to the safe haven of bonds even though the ten-year yield is under 3%.

The American Association of Individual Investors (AAII) weekly survey of members on their outlook for the next six months found 48% bearish, 24% bullish and 28% neutral. The bearish group rose +14.2% and the bullish group declined -5.8% from the prior week. The neutral fence sitters declined by -8.5%. The long-term normal ranges are bullish 39%, neutral 31% and bearish 30%.

Other red flags include a sharp sell off in the junk bond market plus an increased amount of options activity. The put call ratio hit an 18-month high last week. Did anyone notice how easily major support levels were broken? The indexes barely slowed as they passed through levels thought to be strong support like 1295 on the S&P or 12,200 on the Dow. That suggests further selling ahead when the buyers are not even making a halfhearted attempt to buy the dips.

Over the last few weeks IPOs were making headlines and people were talking about a new bubble forming after stocks like Linkedin opened with big numbers. On Friday another IPO made big news. Ally Financial announced it was delaying its $6 billion IPO because of bad market conditions. The target date was to IPO before July 4th. Now they are talking late August depending on the market.

The Dow and S&P have now been down for six consecutive weeks. That is the worst performance since 2002 when the Dow lost -15%. The Nasdaq has lost -191 points (-7%) in just the last 10 days and is now negative for the year along with the Russell 2000, Dow Transports, Semiconductors, Banks, Brokers and Housing. The S&P-500 is only 12 points away from a low for the year.

The slow decline we saw for the entire month of May turned into a steep dive in June. It would appear we are going to target a true -10% correction and it could come next week. For the S&P that would be 1225 but I am betting we find some bargain hunters in the 1250 range assuming the economics don't suddenly turn worse.

We have been seeing quite a few more earnings warnings BUT we are still on track for the S&P to earn between $95 and $100 for the year and that would be record earnings. Using those numbers we are currently undervalued and oversold. The problem is not that investors don't want to buy something. The problem is the economic uncertainty. The drop from "decent but slow" growth to "barely growing if at all" occurred so quickly it caught everyone off guard.

Personally I believe it was $4 gasoline that shocked consumers into a buying halt. They remember the pain from 2008 and immediately changed their spending habits. Fool me once shame on you, fool me twice shame on me. Now we will have to rest awhile and let prices decline so consumers will feel comfortable opening their wallets again. Look at the decline in same store sales for the lowest common denominator retailers like Wal-Mart for the proof. Those are the retailers who were hurt the worst by the sharp spike in gasoline prices. Moody's claims gasoline prices will have to decline by 90-cents from the highs to rebuild that confidence. That would put it back to a national average of roughly $3.05. Don't hold your breath.

I am not going to repeat it all here but global oil demand is rising and production is not despite the minor increase by Saudi Arabia. Prices will decline slightly but nowhere near $3.05 without another recession. That means the slow growth economy is going to continue growing slow if at all. There are still more than 16 million people unemployed and more than two million homes still in the foreclosure process. This is not an economy that inspires investors to buy the dip.

While I expect the S&P to find some buyers at 1250 I think it is going to require some better economics to keep them in the game. The reports this week are more inflation oriented (CPI, PPI) but the Philly Fed could be a turning point. Estimates are for a rebound from the seven month low of 3.9 in May. The cycle high was 43.4 in March. That is how fast things turned to crap. March was when oil prices first rallied to $110. Economic activity crashed almost immediately.

If the S&P fails to hold 1250 or even the 10% correction level at 1225 the next target would be 1175 and the lows from November. However, a break below 1250 would have analysts racing to lower their year-end forecasts and that would further sour investor sentiment. We need to pray that 1250 level holds. Better yet we need to pray all the manufacturing reports post rebounds this month that prove the damage to the supply chain from Japan is over.

S&P-500 Chart

The Dow is in free fall mode with the close under 12,000 and the last level of material support before the March lows at 11,600. The 200-day at 11,687 may not hold since 11,600 is such a clear target. Like the S&P if the Dow breaks below the March lows it could be a very quick trip to stronger support at 11,000.

Dow Chart

I wish I could skip the Nasdaq this week. This is the definition of an ugly chart. The possibility of a miraculous rebound at the March low at 2610 is practically zero. The damage to the Nasdaq in June has been dramatic. All the big caps are imploding. Google closed at a new eight month low on Friday at $509. Cramer's $675 or is it $750 price target is not going to happen this summer. Apple hit a six-month closing low at $325. Unless some seriously dramatic tech news breaks next week the Nasdaq appears destined to fall below 2600. That would be a critical breakdown in sentiment that could cause an even further decline.

Granted tech stocks are supposed to decline in the summer but this is a little worse than normal. I keep hearing brokers pounding the table to buy tech stocks but I don't see it. I would want to see a decent bounce off 2600 that lasts more than 48 hours before taking a chance at a long position.

Nasdaq Chart

The Russell, like the Nasdaq, has gone negative for the year. It is on the verge of a potentially horrendous breakdown should support at 775 fail. This is going to be a critical test of fund manager sentiment and it would have to be a Jekyll and Hyde transformation to make me a believer of any rebound.

Russell Chart

Next week is the proverbial "pivotal" week. The indexes should all reach critical support levels and how they react to those levels will be the key. If they break it will be like the groundhog seeing his shadow and doom us to six more weeks of pain. If they hold on support long enough for a couple of positive economic reports to arrive them we have a chance this correction will fall just short of a -10% drop.

That is a couple of very big "IFs." More than likely the economics will improve slightly as the impact of Japan fades but I would be surprised if slightly will be enough. The next big turning point for the market is more than likely the second week of July when the Q2 earnings begin to appear. If earnings are decent they may overpower the weak economics.

This is a quadruple witching expiration week but most of the associated volatility likely played itself out on Friday with the big drop. Moves like that are either caused by expiration or they eliminate expiration pressures by blowing through the stop losses. Regardless of the reason on Friday the move was enough to spike volume by 1.3 billion shares to 7.4 billion. That was 1.4 billion more than I was expecting. Summer Fridays are normally very quiet so that is even more confirmation for me it was option liquidation rather than just a market dump on mediocre news. Declining volume was 5:1 over advancing. Before the banking rebound it was much worse. However, it was not bad enough to be a capitulation day. I would love to see one on Monday with volume 10:1 negative and taking us right to those critical support levels. I would be very surprised if it happened. I have never found wishing to a particularly effective trading strategy.

There is one significant caveat. With six consecutive weeks of losses we are very oversold. However, the minor short squeeze on Thursday was sold hard so any new short squeeze would require some follow on confirmation before I would jump on board.

I would continue to be very cautious. Enter passively, exit aggressively.

Jim Brown

Send Jim an email

"Good people do not need laws to tell them to act responsibly, while bad people will find a way around the laws."

Index Wrap

The Bear Walks THROUGH the Door

by Leigh Stevens

Click here to email Leigh Stevens

The week before last saw the intermediate trend turn down which was 'confirmed' by heavy further selling this past week. Given accelerating downside momentum, a retest of prior S&P lows at 1250 and at 2600 in the Nasdaq (Composite) seems likely.

The first big technical bear signal was when the S&P and Nasdaq markets broke below up trendlines, per last week's column. Once that happened and retracements of the last big up leg went beyond 66%, the next likely scenario is for important mid-March lows to be retested and make this correction a 100% retracement. A return to the area of prior lows that would make for a potential double bottom if prices rebounded; OR, if there's a decisive downside penetration of the aforementioned prior lows, this could preface a new down leg; unlikely in my view, given an 'oversold' RSI as well as my sentiment indicator.

There may be a bevy of professional traders willing to buy the S&P 500 (SPX) 1250 area and 2600 in the Nas Composite (COMP). For this reason and (finally) a huge shift toward bearish sentiment, a tradable rebound isn't likely to be so far off.

To trade this market profitably, once up trendlines were pieced (week before last), was to be short/bearish. What's the longer-term bigger picture?

Judging by the weekly S&P 500 chart, SPX has yet to fall out of its broad uptrend channel. Below 1230, the weekly chart starts to look more bearish for the long-term. Conversely, as long as support/buying interest surfaces in the 1250-1230 area, SPX stays within its current longer-term uptrend.



The S&P 500 (SPX) continues bearish in its pattern, as the index has accelerated past the 2/3rds retracement level that I put a lot of stock in; once past a 66% retracement, I assume there's good potential for a round-trip 100% retracement of SPX's prior up leg. The mid-March intraday low in the 1250 area becomes my next objective or maybe SPX won't get that low, especially given an oversold RSI as well as the oversold extreme seen with my CPRATIO model.

1250 to around 1230 is likely to be many others' trade objective as well and SPX might not get that low or for long. The index could have a brief final dip to the 1200 area, but that is my lowermost target currently. A move to 1250 would make the second down leg in this correction 1.6 times greater than the initial move from 1370 to 1312. It's common for a second decline to be more prolonged; especially for the second decline to be a fibonacci 1.3, 1.5 or 1.6 times greater than the first down leg.

I anticipate resistance to first be found in the 1300 area, which was seen as prior support. 1340 is a pivotal next resistance.


The 13-day Relative Strength Index (RSI) has finally gotten 'fully' oversold as seen above. In the long-term bull market we've been in since early-2009, an oversold RSI extreme like this has occurred near or at the END of corrections and a turnaround in 5 prior instances. IF the Market was in transition to a bear market, an oversold RSI like our current situation might not lead to much of a recovery rally; otherwise, in the context of the bull market dating from early-2009, an oversold RSI has been a buying bet since March 2009. Initial oversold readings can be early which makes it important to also look at chart/price action closely for 'confirming' type reversal action.

This recent bear move got traders spooked enough to buy enough puts to pull my CBOE daily equities call to put ratio (see my CPRATIO indicator above) low enough to suggest the market is at or near another type of 'oversold' extreme, which adds potential for a rebound.


The S&P 100 (OEX) went bearish as it the index fell below its prior 577 intraday low, then dropped another 12 points beyond that before prices stabilized a bit on Friday on some short-covering buying. The obvious, maybe 'too' obvious, next downside objective is for a retest of prior lows in the 560 area. 540 is a next support if 560 is pierced.

As with the S&P 500, the decline to date has gone beyond a 2/3rds or 66% retracement of the mid-March to early-May advance and thereby suggests 100 per cent retracement potential or back to prior lows in the 559-560 area. (If SPX rebounded from here a second time, that's how double bottoms 'set up'.) The OEX is also at an oversold extreme in terms of its 13-day Relative Strength Index or RSI.

I've noted resistance in the 585 area, coinciding with the current 21-day moving average level; next resistance is expected around 596.


The Dow 30 (INDU) is in the second stage of a bearish correction, within what has been a 2+year bull market. If this second stage decline runs true to the 'norm', it will be longer than the initial decline from 12876 to 12309 or a down 'leg' of 567 Dow points. With the most recent INDU decline this second stage of the downside correction has achieved a 'measured move' objective where each decline has fallen AS MUCH as the other.

Commonly however, the second downswing in a down-up-down or a-b-c bearish correction will end up being 1.3, 1.5 or 1.6 times the price loss of the first decline. This kind of thinking on the question of how low do we go here, would suggest further downside objectives to 11837; beyond that, to 11724 and lastly to a target of 11667.

I've calculated support in another way that suggests a key next support at 11800; a slide below this area yields potential for INDU to get to 11600-11605, with further potential to retest the prior intraday low print of 11555.

All in all a bearish looking chart and we've stopped seeing the pattern of ever higher reaction lows. On a rebound attempt, and this market is quite oversold, I anticipate resistance/selling pressures initially in the 12200 area. Next technical resistance is projected at 12300, representing a rebound back to the previously broken up trendline.


The current bearish-looking Nasdaq Composite (COMP) chart pattern started with the prior week's close below COMP's closing low of mid-April. Then, after the second failure of the Composite to hold above its up trendline, the technical picture got immediately bearish. Trendline breaks, of the up trendline in this case in terms of (basis) the daily chart, most often suggests an intermediate downside reversal.

This past week's weakness saw a slight acceleration of downside momentum. The long-term weekly chart (not shown) suggests that COMP will pierce its long-term up trendline below 2540 and I anticipate that 2540-2500 would be strongly held by those bullish on tech.

A point with the 66% downside retracement level is that pullbacks that exceed this amount often then go on to complete a decline back to the prior low, in this case to the 2600 area. With many looking perhaps to cover shorts and do some speculative buying at 2600, it might not happen. I've sometimes missed a tradable bottom by figuring only the most 'obvious' and watched downside objective. There has to be willing sellers in the 2600 area to satisfy all the potential buying that might come in; would you continue to be a seller at 2600, looking for 2550 or lower? Fairly major support should be found at 2550-2540.


The 13-day Relative Strength Index (RSI) has finally gotten 'fully' oversold as seen above. In the long-term bull market we've been in since early-2009, an oversold RSI extreme like this has occurred near or at the END of corrections and a turnaround in 5 prior instances. IF the Market was in transition to a bear market, an oversold RSI like our current situation might not lead to much of a recovery rally. In the context of the bull market dating from early-2009, an oversold RSI has been a good buying bet. Initial oversold readings can be early however, which makes it important to also look at chart/price action closely for 'confirming' type reversal action.

This recent bear move got traders spooked enough to buy enough puts to pull my CBOE daily equities call to put ratio (CPRATIO line above) low enough to suggest the market is at or near another type of 'oversold' extreme, which adds to the potential for a rebound.


The Nasdaq 100 (NDX) chart has been bearish since forming an 'island top' that I've previously highlighted. The decline maintained strong downside momentum this past week, which by week's end I partly attribute to Apple (AAPL) falling below a key technical support at 326. I've thought for some time that AAPL might be tracing out a large rectangle top. Based on the current chart, NDX rallies look like they may be short-lived; the bearish chart suggests this group of stocks is headed lower still, not withstanding a short-term bounce.

A next technical support is assumed to lie in the area of the prior 2189 intraday low. A decline to mid-March lows in the 2190-2200 area, followed by a rebound, would suggest the possibility of a double bottom. If NDX however falls below 2189-2190, next lower NDX support looks like 2150.

Immediate overhead resistance is in the 2265 area, then around 2300. I anticipate fairly major resistance at 2337 to 2350.


The Nasdaq 100 tracking stock (QQQ) has gone from 'mixed' to increasingly bearish in the past two weeks.

I anticipate a retest of prior lows in the 54-53.7 area. If there is a move to this area, followed by a rebound, this pattern 'fits' with that of a potential double bottom, in the initial stages at least.

Conversely, if the stock pieces 53.7, it suggests potential to extend the decline to the 52.3-52.0 area; if there was an opportunity to buy QQQ in this lower zone, I'd favor it for a trade on a risk to reward basis. Needless to say, I'd also favor covering bearish options trades in the 52 area.


The Russell 2000 (RUT) is now very close to testing its potential to rebound in the zone bounded by prior key lows at 776 and 772. If the index doesn't pause or stop at 776-772, next technical support is in the 740 area.

Betting on RUT hitting 740 looks like a bit of a long shot and that 772-776 may instead end up being the low end of a broad summer trading range. If instead, there's a couple of closes under 772, such a move projects further downside potential of 30 points to around 740. There's further downside potential to 700 if the 740 area is pierced.

Near technical resistance is in the 800-808 area. Above this area, next resistance looks like 832, extending to 840.


New Option Plays

Healthcare & Oil Services

by James Brown

Click here to email James Brown


Becton, Dickinson and Company - BDX - close: 84.92 change: -1.38

Stop Loss: 87.15
Target(s): 80.50
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
BDX is in the healthcare sector but the stock's very impressive rally from March through May has broken. Now shares are falling through multiple layers of support. I do want to keep our position size small because the market's decline is now six weeks old and stocks could see an oversold bounce even though the trend is down.

BDX just closed under the $85.00 mark and its 50-dma on Friday. I am suggesting small bearish put positions now. We'll use a stop loss at $87.15. Our target is $80.50. We'll try and keep our target just above the 200-dma.

NOTE: Just because the July $80 puts are inexpensive don't go overboard. Keep your position size small.

- Suggested (SMALL) Positions -

buy the July $80 put (BDX1116S80) current ask $0.55

Annotated Chart:

Entry on June 13th at $ xx.xx
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on June 11th, 2011

Transocean Ltd. - RIG - close: 62.85 change: -2.44

Stop Loss: 66.15
Target(s): 58.00, 55.25
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
RIG has already exceeded the bearish target from the head-and-shoulders pattern formed over the first quarter of this year. Now after spending a few weeks consolidating under resistance at $70 and the 200-dma shares are accelerating lower. You could argue that RIG is a little bit oversold here so we want to keep our position size small to limit our risk.

On a short-term basis the oversold bounce on Thursday failed at resistance near $66.00 (old support). I'm suggesting we buy puts now with a stop loss at $66.15. More conservative traders may want to take profits early near $60.00 since the $60 level might be support but I'm setting our targets at $58.00 and $55.25.

- Suggested (SMALL) Positions -

buy the July $60 puts (RIG1116S60) current ask $1.46

Annotated Chart:

Entry on June 13th at $ xx.xx
Earnings Date 08/04/11 (unconfirmed)
Average Daily Volume = 4.3 million
Listed on June 11th, 2011

In Play Updates and Reviews

New Entry Points

by James Brown

Click here to email James Brown

Editor's Note:

The market's Friday sell-off has created a few new entry points in our bearish candidates. Meanwhile I'm suggesting an early exit for our BHI call play. Plus, we want to exit our June calls in the FRX trade.


Current Portfolio:

CALL Play Updates

Apple Inc. - AAPL - close: 325.90 change: -5.59

Stop Loss: 317.45
Target(s): 337.50, 347.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

06/11 update: The stock market extended its declines to six weeks in a row. Friday's big drop pushed AAPL under support near $330. Shares look headed for the simple 200-dma currently near $323.83. I am adjusting our buy-the-dip trigger from $325.00 to $324.00, which should put it right on the 200-dma this Monday. More conservative traders will seriously want to consider waiting for a bounce in AAPL instead of trying to buy a dip given the market's recent weakness.

In summary, this is a very aggressive, higher-risk trade. We want to buy calls at $324.00 with a stop loss at $317.45. If the 200-dma fails then AAPL is headed for the next level of support at $320.00. Let's keep our position size small to limit our risk. We have two targets at $337.50 and $347.50.

Trigger @ $324.00 (SMALL POSITIONS)

- Suggested Positions -

buy the July $340 call (AAPL1116G340)


Entry on June xxth at $ xx.xx
Earnings Date 07/19/11 (unconfirmed)
Average Daily Volume = 12.9 million
Listed on June 8th, 2011

Fossil Inc. - FOSL - close: 105.48 change: -0.28

Stop Loss: 99.39
Target(s): 109.75, 114.00
Current Option Gain/Loss: - 74.6% & -23.3%
Time Frame: 3 to 6 weeks
New Positions: see below

06/11 update: FOSL held up reasonably well on Friday only suffering a 0.2% loss. FOSL actually hit a new high on Friday morning before reversing. We want to exit our June calls immediately! If FOSL pulls back we'll be looking for another dip near support in the $100 area. I am not suggesting new positions at this time.

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

- Suggested (SMALL) Positions -

June $110 call (FOSL1118F110) Entry @ $1.38, exit 0.35 (-74.6%)

- or -

Long July $110 call (FOSL1116G110) Entry @ $3.00

06/11 Exit June calls ASAP. Option @ 0.35 (-74.6%)


Entry on May 27th at $104.96
Earnings Date 08/09/11 (unconfirmed)
Average Daily Volume = 842 thousand
Listed on May 26th, 2011

Forest Labs Inc. - FRX - close: 37.95 change: +0.09

Stop Loss: 34.45
Target(s): 39.00, 42.50
Current Option Gain/Loss: +69.2% & +64.2%
Time Frame: 4 to 6 weeks
New Positions: see below

06/11 update: FRX just refuses to cave into profit taking. The stock posted another gain and hit another two-year high on Friday. FRX is up about 11 out of the last 12 weeks. Eventually FRX will see some profit taking. It was our plan to exit our June calls on Friday at the closing bell. We still have the August calls. Please note our new stop loss at $34.90. I am not suggesting new positions at this time.

Our targets are the $39.00 level and the $42.50 mark but I'm starting to worry that FRX just doesn't move fast enough.

- Suggested Positions -

June $37 call (FRX1118F37) Entry @ $0.65, exit $1.10 (+69.2%)

- or -

Long the August $37 call (FRX1120H37) Entry @ $1.40

06/11 New stop loss @ 34.90
06/10 Planned exit of June $37 call. exit $1.10 (+69.2%)
06/09 Prepare to exit the June calls on June 10th at the close
06/04 new stop loss @ 34.45
05/28 New stop loss @ 33.75


Entry on May 20th at $35.29
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 3.2 million
Listed on May 19th, 2011

Goldman Sachs - GS - close: 135.92 change: +2.39

Stop Loss: 128.45
Target(s): 134.00, 137.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

06/11 update: Some of the major banking stocks rallied today on news that the regulators may only require a 2.0-to-2.5% surcharge on capital requirements instead of 3%. GS surged to its 20-dma before trimming its gains. The stock closed up +1.7%. Overall the move has no change on our strategy. The trend is still down although the close over the 10-dma might be consider a very short-term bullish development. I don't see any changes from my earlier comments.

Earlier Comments:
The 2010 lows are near $130. I am suggesting we launch very small bullish positions on a dip at $130.25. This is a very aggressive, higher-risk trade.

Trigger @ 130.25 (very small positions)

- Suggested Positions -

buy the July $135 call (GS1116G135)


Entry on May xxth at $ xx.xx
Earnings Date 07/19/11 (unconfirmed)
Average Daily Volume = 6.5 million
Listed on May 21st, 2011

Union Pacific - UNP - close: 99.60 change: -1.69

Stop Loss: n/a
Target(s): 109.00, 114.00
Current Option Gain/Loss: -94.4%
Time Frame: 4 to 8 weeks
New Positions: see below

06/11 update: If there was any value left in our call options I would suggest everyone exit now. As it stands, the June $105 call has a bid of 9 cents. We might as well risk holding on for the next five days to see what happens. Odds are this option is going to expire worthless. Since we're in this situation I am removing the stop loss.

- Suggested Positions -

Long the June $105 call (UNP1118F105) Entry @ $1.62

06/11 option has deteriorated. Removing the stop loss.


Entry on May 9th at $102.19
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on May 7th, 2011

PUT Play Updates

Amazon.com Inc. - AMZN - close: 186.53 change: -3.15

Stop Loss: 192.55
Target(s): 180.25, 175.00
Current Option Gain/Loss: -23.1% & - 5.6%
Time Frame: 3 to 6 weeks
New Positions: see below

06/11 update: AMZN failed again at resistance near $190-191 and its 50-dma. Friday's move looks like a new entry point for bearish put positions. I am lowering our stop loss down to $192.55.

Earlier Comments:
The plan was to keep our position size small. Our first target is $180.25. Our second target is $175.00 (or the simple 200-dma, whichever one AMZN hits first).

- small bearish positions -

Long June $185 PUT (AMZN1118R185) Entry @ $2.89

- or -

Long July $180 PUT (AMZN1116S180) Entry @ $4.40

06/11 New stop loss @ 192.55
06/07 New stop loss @ 195.15.


Entry on June 6th at $188.01
Earnings Date 07/26/11 (unconfirmed)
Average Daily Volume = 4.5 million
Listed on June 4th, 2011

Diamond Offshore Drilling, Inc. - DO - close: 68.22 change: -0.96

Stop Loss: 72.65
Target(s): 64.50, 62.50
Current Option Gain/Loss: - 3.3%
Time Frame: 4 to 6 weeks
New Positions: see below

06/11 update: The OSX oil service index fell -2.7%. I'm surprised that DO did not show more weakness on Friday. The stock was only down -1.3%. I would prefer to launch new positions on a bounce or failed rally near resistance at $70 and the 200-dma.

Earlier Comments:
Our targets are $64.50 and $62.50. FYI: Traders should note that the most recent data listed short interest at more than 14% of the float. That does raise the risk of a short squeeze should the stock suddenly find strength.

- Suggested Positions -

Long July $67.50 PUT (DO1116S67.5) entry @ $2.09


Entry on June 8th at $68.91
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on June 7th, 2011

General Dynamics Corp - GD - close: 69.37 change: -1.12

Stop Loss: 72.25
Target(s): 65.50
Current Option Gain/Loss: - 4.0%
Time Frame: 3 to 4 weeks
New Positions: see below

06/11 update: Our new put play on GD has been opened. The stock broke down through support near $70.00 and the 200-dma. Shares hit our trigger to buy puts at $69.75. The intraday bounce stalled at $70. I would still consider new positions now at current levels.

-Suggested Positions-

Long July $67.50 PUT (GD1116S67.5) Entry @ $1.25


Entry on June 10th at $69.75
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on June 9th, 2011

Nike Inc. - NKE - close: 79.66 change: -1.01

Stop Loss: 84.05
Target(s): 75.50
Current Option Gain/Loss: +44.0%
Time Frame: 2 to 3 weeks
New Positions: see below

06/11 update: NKE produced another failed rally move on Friday morning and then sank toward is lows for the week. I would still consider new positions now. Please note our new stop loss at $83.05.

Our target is $75.50 but we'll adjust the target as the trade progresses. NKE is due to report earnings on June 27th and we do not want to hold over the announcement.

- Suggested Positions -

Long July $80 PUT (NKE1116G80) Entry @ $2.00

06/11 New stop loss @ 83.05


Entry on June 7th at $81.75
Earnings Date 06/27/11 (confirmed)
Average Daily Volume = 2.3 million
Listed on June 6th, 2011

SanDisk Corp. - SNDK - close: 42.53 change: -0.00

Stop Loss: 46.25
Target(s): 40.50, 36.00
Current Option Gain/Loss: +36.3% & +15.9%
Time Frame: 3 to 6 weeks
New Positions: see below

06/11 update: The declines in SNDK have been slowing and shares produced a sharp rebound off its intraday lows on Friday. This is suggesting SNDK is trying to form a short-term bottom but is struggling under the market's decline. At this point I would prefer to wait for a bounce or failed rally near $44.00 or the 200-dma closer to $45.00 before initiating new positions.

Our targets are $40.50 and $36.00, given enough time. FYI: The P&F chart for SNDK is bearish with a $30 target.

- Suggested Positions -

Long July $42.00 PUT (SNDK1116S42) Entry @ $1.10

- or -

Long July $40.00 PUT (SNDK1116S40) Entry @ $0.69

06/08 New stop loss @ 46.25


Entry on June 6th at $44.31
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 5.8 million
Listed on June 4th, 2011

Stericycle Inc. - SRCL - close: 84.90 change: -1.18

Stop Loss: 90.05
Target(s): 84.00, 80.50
Current Option Gain/Loss: +50.0%
Time Frame: 3 to 4 weeks
New Positions: see below

06/11 update: After a week of holding support at $85.00 SRCL broke this level on Friday and closed at new two-month lows. I would consider new positions at this time (although if you launch positions now don't exit at $84.00). I am lowering our stop loss to $88.05. More conservative traders may want their stop even lower. Our first target is $84.00. Our second target is $80.50.

- Suggested Positions - Long July $85 PUT (SRCL1116S85) Entry @ $1.50

06/11 new stop loss @ 88.05
06/08 Exit June $85 puts. Bid @ $1.00 (+100%)
06/04 new stop loss @ 90.05


Entry on May 31st at $88.78
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 502 thousand
Listed on May 28th, 2011

Whole Foods Market - WFM - close: 54.23 change: -0.91

Stop Loss: 58.15
Target(s): 55.10, 52.00
Current Option Gain/Loss: +156.8% & +133.3%
Time Frame: 4 to 6 weeks
New Positions: see below

06/11 update: The oversold bounce has already rolled over and WFM closed at a new three-month low. I am lowering our stop loss down to $58.15. More conservative traders will want to seriously consider exiting our June puts immediately. Any bounce will have a very negative effect on these options. I'll be looking to exit these June puts in the next day or two. For our July puts we'll stick to the $52 target. I am not suggesting new positions at this time.

- Suggested Positions -

Long June $60 PUT (WFM1118R60) Entry @ $2.20

- or -

Long July $55 PUT (WFM1116S55) Entry @ $1.05

06/11 New stop loss @ 58.15.
06/11 Consider exiting our June puts early.
06/08 1st target hit @ 55.10. June $60 put @ 4.30 (+95.4%), July $55 put @ 1.92 (+82.8%)
06/06 new stop loss @ 60.15
06/04 new stop loss @ 60.65


Entry on June 2 at $58.70
Earnings Date 08/11/11 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on June 1st, 2011


Baker Hughes Inc. - BHI - close: 72.09 change: -2.61

Stop Loss: 69.90
Target(s): 79.00
Current Option Gain/Loss: -77.6%
Time Frame: 3 to 4 weeks
New Positions: see below

06/11 update: I am giving up on our BHI trade. Maybe if we had July calls instead of Junes I might consider holding on. BHI has not yet broken support at $72.00 and it should have additional support at $70.00 and its 100-dma. Unfortunately oil and oil service stocks were some of the worst performers on Friday. We want to exit early from this trade immediately.

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

-Small Positions - Suggested Positions -

June $75 call (BHI1118F75) Entry @ $1.61, exit 0.36 (-77.6%)

06/11 Exit early. BHI @ 72.09. Option @ 0.36 (-77.6%)
06/04 new stop loss @ 69.90


Entry on May 26th at $73.34
Earnings Date 08/03/11 (unconfirmed)
Average Daily Volume = 2.2 million
Listed on May 25th, 2011