Option Investor

Daily Newsletter, Wednesday, 9/21/2011

Table of Contents

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

Market Wrap

Fed Gives the Market Some But Not All

by Keene Little

Click here to email Keene Little
Market Stats

The market has been consolidating for about six weeks while trying to decide (predict) what the Fed was going to do for the stock market, um, I mean the economy. The rally for the past week has been on expectations the Fed would provide more liquidity for the markets, especially since they announced help for the European banks last week. But fear started to come back into the market the past two days, and even leading into the FOMC announcement, as worry about how much or how little the Fed would offer. The post-FOMC reaction shows the market did not get what it wanted.

The GOP leadership had warned the Fed earlier in the week to refrain from any more easing moves. They told the Fed they believe it's time to let the free market do its work on the economy (what a concept) and to stop trying to use central-bank policy to determine how the economy behaves, especially since what they've done hasn't worked. The fear is that the Fed is simply doing what Japan has done for more than two decades and they've already proven it doesn't work. The definition of insanity is doing the same thing over and over and expecting a different result. One could say the Fed is insane.

As stated in the GOP letter, sent Monday to Bernanke, "We have serious concerns that further intervention by the Fed could exacerbate current problems or further harm the U.S. economy." Whether or not this had a restrictive effect on Bernanke is not known but we do know that Bernanke has been struggling lately to keep his ducks (Fed governors) in line. As it is, the Fed's vote was 7-3.

The FOMC announcement confirmed their plan to swap out short-term securities for longer-dated securities, dubbed Operation Twist 2 (the first Operation Twist was done in 1961 with President Kennedy). They announced their intention to swap $400B out of short-term maturity bonds that it holds and reinvest in bonds maturing in 6 to 30 years. They expect this process to be completed by June 2012. They also announced their intention to swap out their mortgage-backed securities with U.S. Treasuries (getting rid of their toxic debt in the process).

As a side note, moving into more longer-term debt gives the Fed a strong incentive to see inflation rates spike up, no matter what they say publicly. Inflation is very good for debt holders since over time the value of your debt decreases in an inflationary environment. Deflation is a killer for debt holders since the value of the debt increases (it takes more dollars in deflated value). Watch the Fed's actions in the future, not their words. The latest inflation number was 3.8% and yet the Fed came out and said economic growth remains slow and that inflation will settle at or below levels consistent with its dual mandate. Nowhere is it acknowledging the climbing inflation. It will repeatedly tell us that it is "transitory". Governor Perry is correct when he declares the Fed as "almost treacherous, treasonous". I am convinced the Fed will attempt to protect the wealth of the Federal Reserve system banks at the cost of the public, although interestingly, Operation Twist hurts the performance of banks.

Operation Twist was first tried back in 1961 with President Kennedy as a way to get out of the recession the country was in at the time. The purpose of the program is to replace short-term Treasuries with longer-dated Treasuries as a way to lower the longer-term rates (thereby "twisting" the yield curve). This in theory would help the mortgage market and businesses who borrow capital for long-term project investments (buildings and equipment). What they don't get is the fact that we're dealing with a very different situation today than back in 1961. Back then we were in a normal business-cycle recession while Europe was not (and therefore provided a market for our businesses). The current recession/depression is due to a global over-indebtedness and we've reached the saturation point. Spending has stopped. The only way an economy that has grown on expanding credit can continue to grow is to continue expanding credit. When we max out there's only one way to do -- down. We can't take on more debt no matter how cheap it is.

Bernanke has proven that he uses the stock market to help him with his monetary policies, even using rumors and stock market reactions to test ideas. He wants lower Treasury rates as a way to entice investors out of Treasuries and into riskier assets such as corporate bonds and stocks. Never mind that's not where retirees should be; he doesn't care. But it won't stop the Fed from trying, especially Bernanke who has staked his reputation on saving us from a deeper recession (depression). His problem now is that he's using the tools he was taught in school, which were based on normal recessions. He simply doesn't seem to understand how fundamentally different this one is (as is apparently true for most economists who are academics, and is the reason they keep getting their forecasts thrown back in their faces).

Operation Twist 2 will also be damaging for the banks. Bill Gross had a very good article in the Financial Times about this. As he noted, the two-year yields are already so low that they're essentially the same as the overnight lending rates. The difference between these rates is where banks have earned a profit by leveraging their loans. Banks can no longer borrow overnight and lend at the two-year rate. So they've lost their incentive to lend.

Real yields are already so low that they're actually negative, especially with the current inflation rate. The latest inflation rate of 3.8% means the 10-year rate of 1.9% is actually negative. The 5-year TIPS are currently a negative 0.83%. Three-year rates are 0%. The 30-year rate is 3.2% so if inflation continued at 3.8% it means all investors in bonds are losing money. Retirees are getting killed. So how much lower can yields go and will it make a difference to home buyers and businesses? Not very likely. The only ones who will get hurt are banks (boo hoo) and individuals. The Fed does not care about individuals and he cares more about getting out of the short-term securities and lock in low rates with longer-term securities, which will of course lower their longer-term costs if and when longer-term rates start to rise again (with inflation).

Bill Gross further points out that the Fed could lower the cost of borrowing by pushing longer-term rates lower but they will "destroy leverage and credit creation in the process. The further out the Fed moves the zero bound towards a system-wide average maturity of seven to eight years the more credit destruction occurs, to a US financial system that includes thousands of billions of dollars of repo and short-term financed-based lending that has provided the basis for financial institution prosperity."

One point I've made repeatedly over the past several years is that this time it's different, meaning that this recession is different than the ones we've had since WWII. This one is a result of credit/debt destruction. We spent decades building up more and more credit. People, businesses and governments all got themselves into too much debt. The destruction of that debt (paying it down, going bankrupt, negotiating it lower, etc.) is the process we're now going through and it's a deflationary process. We're probably a little more than half way through the process and the latter portion (another 4-5 years?) will probably be the most painful as the Fed and others finally realize their bag of tricks don't work and people lose faith in the government to fix it.

Operation Twist, interestingly enough, and as pointed out by Bill Gross, could accelerate the credit destruction process. The man who has been expected to fix the problem could actually help accelerate the problem. And in the end that could be a good thing since the faster we get through this process the sooner we'll be able to get to the other side and to the next growth phase (secular bull market).

The afternoon selloff in the stock market (more buying in the bond market), has prices close to the lower end of the 6-week consolidation. Any follow through selling tomorrow could inflict some more technical damage. In the meantime there remains the possibility for a reversal back up as participants realize the brilliance (cough) of the Fed's plan (or so we'd be told). When the market sells off hard into the close, finishing near the lows of the day (or vice versa), it's common for a reversal the next day. The move following the FOMC announcement is often reversed the next day. So the setup for tomorrow is for a bounce back up. Failing to do that would be another notch in the bear's gun.

With the consolidation pattern since the August 9th low we're left to wonder when it will end and from what level it will end. It's a bearish continuation pattern, of that I have little doubt, and so it will resolve to the downside (famous last words). On the weekly SPX chart the highest odds wave count looks like we'll get a 5-wave move down from May. That means the current consolidation is a 4th wave and we're due a 5th wave down, which is what I'm showing on the chart below. Assuming we'll get the leg down it then becomes a matter of targeting the low. I can see the possibility for just a retest of the August low near 1101 or a steeper drop down to the 1013-1019 area where I've noted a Fib confluence zone; or anything in between. The downside target should become clearer once the decline is in progress (and it could be already).

S&P 500, SPX, Weekly chart

The ideal EW (Elliott Wave) pattern would be a drop to a new low (target price to be determined) followed by a rally into the end of the year and then a much stronger leg down early next year.

The decline from May can be enclosed in a parallel down-channel as shown on the daily chart below. The most recent bounce poked above the channel but today's selloff leaves it inside the down-channel. But we still have the short-term up-channel from August in play, which is where SPX closed today. A gap down tomorrow morning and more selling would clearly be bearish. But we can't yet rule out another rally attempt within the bear flag pattern. For the 5th wave down I'm showing a potential path down to the 1010 area (the Fib confluence zone shown on the weekly chart above and it's the July 2010 low) in October to then set up the rally into yearend.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- Short-term bullish above 1229
- bearish below 1150 and more bearish below 1100

Instead of a bear flag pattern as shown on the daily chart above, I'm considering the consolidation to be a sideways triangle instead, a common pattern for a 4th wave (triangle patterns often lead to the final move of the bigger move, which in this case is the move down from May). SPX stopped at the uptrend line from August 9th through the first two pullbacks so we could see a bounce back up to the top of the triangle from here (near 1215). Or it could drop a little lower to the next uptrend line through the September 12th low, currently near 1150. So I'd say the bears need to break SPX below 1150 before they can claim victory and start looking for at least 1100 for a downside target. While it remains possible for a bounce up to the 1260 area before completing the consolidation, I think that's the lowest probability path. But it remains a possibility for now.

S&P 500, SPX, 120-min chart

The DOW presents the same picture as SPX -- it's within a down-channel from May and inside an up-channel from August. It too could be forming a sideways triangle pattern that will get one more leg up before heading down to a new low to finish. But I'm showing a more bearish wave count on the DOW that matches up with NDX, starting with a finish to its rally in July with a truncated finish (as opposed to May). This would mean the bounce off the August low is a 2nd wave correction which points to a very strong selloff right around the corner, possibly already started. In fact the short-term count calls today's decline the start of the 3rd of the 3rd wave down, in which case the selling will become intense over the next few weeks. I mention this possibility because it means longs are potentially at great risk so be careful holding onto positions because "you know they'll come back". But the next chart below this one is the weekly perspective and back to looking like we're only due a 5th wave down, which is shown with the dashed red line starting from just below 10500. The picture should become clearer once the decline gets going since a 5th wave will lack market breadth as compared to the previous decline. If it's stronger then the stronger 3rd wave idea will become more likely.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,000
- bearish below 10,900

For a cleaner picture of what could be playing out for the DOW, and one that is not quite as bearish as described for the daily chart, the weekly chart below shows a simple 5-wave move down from May with the 5th wave needed to complete the leg down. For now I'm showing a downside target near 10350 by mid October, which is the 38% retracement of the 2009-2011 rally. The 5-wave move down would complete a larger-degree 1st wave. From there we'd get a sharper bounce back up into the end of the year as a 2nd wave correction and it would get a lot of people feeling very bullish again. At the conclusion of the 2nd wave bounce it will be the best time to exit long positions and get short for a longer-term ride down since a 3rd wave decline in early 2012 will be one of those MOAPs (Mother Of All Puts). This is clearly speculation at this time but it's a pattern that I'll be monitoring for changes.

Dow Industrials, INDU, Weekly chart

NDX made a new high in July and even on July 26th and therefore does not have a parallel down-channel like the blue chips. Its bounce pattern from August looks more like a rising wedge pattern and yesterday it poked above it and then sold off, creating a sell signal. If it can hold above its 50-dma near 2244 the bulls have a chance but a break below 2240 would be a bearish heads up and below 2200 would be a confirmed breakdown.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2352
- bearish below 2200

Yesterday was actually a good shorting opportunity on NDX (QQQ or any of the other ETFs based on NDX). The poke above the top of its rising wedge was also a poke above its broken uptrend line from March 2009 - July 2010, leaving a throw-over finish. That's a classic finish to a rising wedge pattern and the close back inside the wedge was the sell signal. Today it bounced back up to the top of its wedge and broken uptrend line and then sold off, leaving a bearish kiss goodbye after the back test. All good stuff to a technical trader. This looks to be headed lower right from here (not in a straight line of course).

Nasdaq-100, NDX, 120-min chart

A big reason for NDX's outperformance lately is AAPL. That stock has been on a tear since rallying out of its July-September consolidation pattern. The pattern is a sideways triangle pattern, which points to one more leg up out of it before reversing back down. So the current rally is the one that should be viewed as an opportunity to protect profits for those who are holding the stock. When looking at the weekly chart, this last leg up has also tagged the top of its parallel up-channel from March 2009. While you might not want to short AAPL here (although I could be tempted), it's a good opportunity to take profits and say thanks very much for the run up.

Apple Computer, AAPL, Weekly chart

The RUT's consolidation pattern looks like a sideways triangle pattern and today's selloff stopped at the bottom of it. If it is a triangle pattern it needs one more leg up to finish it. Any further selling tomorrow would negate the pattern and call for more immediate selling instead, calling the August 31st high the conclusion to the correction of the July-August decline.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 719 and more bullish above 775
- bearish below 664

The bond market reacted to the Fed's Operation Twist announcement with buying. The overbought bond market is now more overbought and those who have been convinced for the past several months that the bond market is ripe for a selloff, and therefore short bonds, have been getting crushed. The inverse ETF, TBT, is not a pretty picture if you've been long that fund. TNX, the 10-year yield, has dropped to another new low for the leg down from February. In so doing it tagged the bottom of a potential bullish descending wedge pattern for the choppy decline since August. Note the bullish divergences at the new lows. This could surprise with a break to the downside but I think the higher-probability is for at least a bounce to work off the oversold conditions on yields (overbought on bonds) before potentially heading lower again next month.

10-year Yield, TNX, Daily chart

In the "hit them while they're down" category, Moody's came out today and downgraded Bank of America's (BAC) long-term senior debt to Baa1 from A2 and Wells Fargo's (WFC) to A2 from A1. Both stocks sold off and BAC finished down -7.5% at 6.38 (on its way to zero?) Citigroup (C) also got a downgrade on its short-term ratings from Prime-1 to Prime-2 and lost -5.2% to its split-adjusted price and closed at 25.52, half its value at its high back in January.

Like the major indexes, the banking indexes could be hammering out a triangle (descending triangle in this case) since the August low. If BKX finds support at its August 23rd low at 34.57 it could then bounce back up to the top of the triangle heading into the end of the month (to save the end of month/quarter from the savage bears). As a triangle pattern it would suggest one more leg down for the decline from February and would point to 28 for a low (probably in October). From there we could expect a larger bounce into the end of the year. It takes a rally above 40 to suggest a higher bounce to 42. A break below 34.57 directly from here would point to a more serious decline.

KBW Bank index, BKX, Daily chart

The TRAN currently supports the sideways triangle pattern if today's low holds. One more trip back up to the top of the triangle would set up a great shorting opportunity. A break lower tomorrow, especially below 4200 would signal more immediate strong selling is likely.

Transportation Index, TRAN, Daily chart

Following the FOMC announcement the U.S. dollar got a strong upside reaction (it looked like short covering). If the dollar is going to rally strong from here it's going to be a lot of short covering as the dollar carry trade gets unwound. Assuming the dollar is ready to rally, instead of one more leg down as shown with the dashed line, it will likely find resistance at its 200-week MA, pull back into October and then be set up for a stronger rally from there.

U.S. Dollar contract, DX, Weekly chart

Copper is one of the most-watched commodities when it comes to determining the health of the economy. The direction of copper, because of its many industrial uses, especially in housing, is a good indicator for where the economy is headed. And right now we do not have a positive signal coming out of copper. The weekly chart below shows a 4-month diamond top pattern that formed at the highs earlier this year. The retest of the high into its August 1st high left a significant bearish divergence which was then followed by a sharp selloff in the first week of August. Off the August 9th low it bounced back up (sound familiar so far?). It made it up to its 20-week and 50-week MAs (as well as its 50-dma and 200-dma) and has since rolled back over and on Monday it broke support at its May and August lows.

Copper continuous contract, HG, Weekly chart

Is copper telling us something about what to expect from the stock market? Will copper get dragged back up by a continuation of a stock market rally or will the stock market get dragged lower? I know it comes as no surprise to hear me say the stock market will be the loser.

The pullback in gold continues to support the idea that we haven't seen the final high for gold yet. If the market sells off sharply from here, or after one more bounce, we could see a flight to safety in gold, driving it up to a target near $2007 and its trend line along the highs from May 2006. A more impulsive decline and a drop below 1600 would be the first bearish clue suggesting the top is already in. Still waiting for more price action to help answer the question. But long gold is, I think, the riskier side to be.

Gold continuous contract, GC, Weekly chart

The daily chart of silver below shows what I mean about its pullback so far -- it's very choppy with alternating up and down day and looks corrective. It's finding support at its uptrend line from August 2010 so it's do or die time for silver bulls. Another rally could see it up to 46 while a break below 39 could see the selling accelerate. I suspect gold and silver will be in synch for their next move.

Silver continuous contract, SI, Daily chart

I've been pointing to the rising wedge pattern for oil since its August 9th low and have been suggesting it will resolve to the downside just as the previous triangles/wedges have down. Oil broke down on Monday, retested the bottom of the wedge both yesterday and today and sold off each time, leaving a bearish kiss goodbye. Oil should resolve lower from here but there is the possibility for one more stab back up to the $90 area if the stock market gets one more bounce into the end of the month.

Oil continuous contract, CL, Daily chart

Other than the FOMC announcement this afternoon, the only other economic report of consequence this morning was the Existing Home Sales report, which was better than July and better than expectations. Sales were up +7.7% in August, a 5-month high. Prices for homes dropped while rents went up (as a current renter I can attest to that). Inventories of homes dropped to an 8.5-month supply at the current sales rate. It helped lift the futures briefly but the market was clearly focused more on this afternoon's announcement. Unless there's a big surprise out of the Leading Indicators tomorrow morning I don't think we'll see much of a reaction to tomorrow's reports.

Economic reports, summary and Key Trading Levels

One last chart to show what may be in store for us. The chart below comes from Joe Weisenthal who presents his daily Charts of the Day, this one from Citi/Tobias Kevkovitch. The chart compares the P/E ratio of the stock market to what they call the Age Ratio, which is the ratio of 40-49 year olds (people in the prime of their earning years and invest more) to the 60-69 year-old group (people who are retiring and spending vs. investing). It should not be surprising that when the 60-69 year-old group becomes larger (can you say Baby Boomers?) the ratio goes down, as indicated with the red line and projects lower into the 2020's. With the lack of demand for stocks the P/E ratio also drops, which drops the value of the stock market. It all fits and it's not a comforting picture for the bulls. So, have you become comfortable yet shorting the market? Try it, you'll like it. You can even evaluate inverse ETF's with your more comfortable "bullish" perspective when you look at the chart.

P/E Ratio vs. Age Ratio, 1954-2023, chart courtesy Joe Weisenthal and Citi/Tobias Kevkovitch

Today's selloff has the market sitting on the edge of a cliff. The bulls need to step back in immediately or else they may lose their grip on the little raccoon holding onto the rope for dear life. As noted on tonight's charts, we could see another bounce up into next week before the market is ready for a stronger selloff.

There are a couple of reasons I like the possibility for another bounce back up: one, the market closed at its lows today following a strong selloff and that mini-capitulation move could see a lack of follow through tomorrow morning; two, the move following the FOMC announcement is oftentimes reversed the following day; and three, today's afternoon selloff could have been engineered to suck in the shorts to provide a short-covering burst to a new up leg and help the market recover into the end of the month/quarter next week. And for all these reasons, if the market does not bounce tomorrow we could instead see strong selling. There are some cycle studies pointing to the end of September for a turning point so we'll have to see if that's going to be a high or low.

If the market sells off further tomorrow I think we can expect at least a test of the August lows and probably a break of them. In that case it will be important to chase it down with a trailing stop in case it will finish the decline and set up a stronger rally over the next few months. But I suspect we'll have another opportunity next Wednesday to see how things are progressing and set up a nice swing/position trade into October.

Good luck in the next week and I'll be back with you on Wednesday.

Key Levels for SPX:
- Short-term bullish above 1229
- bearish below 1150 and more bearish below 1100

Key Levels for DOW:
- bullish above 12,000
- bearish below 10,900

Key Levels for NDX:
- bullish above 2352
- bearish below 2200

Key Levels for RUT:
- bullish above 719 and more bullish above 775
- bearish below 664

Keene H. Little, CMT

New Option Plays

Old News!

by James Brown

Click here to email James Brown

Editor's Note:

Operation Twist? That's old news! The official announcement of the Federal Reserve's plan to sell their short-term bonds to buy long-term bonds was not greeted with enthusiasm by investors.

The market sold off hard. The S&P 500 index closed down -2.9%. Financials were crushed with the BKX and BIX banking indices down -5.4% and -4.7%, respectively. The small cap Russell 2000 index looks poised to breakdown from its consolidation pattern. Meanwhile the Dow Transportation index is nearing its August lows and a breakdown there would be very bearish indeed.

While stocks look ugly today I don't want to chase a -3% drop by buying puts right now. On the other hand we don't want to buy calls with the market poised for a potential breakdown. Aggressive traders may want to consider using a trigger below support on their favorite index as an entry point to launch bearish positions. We are not adding any new positions tonight.

Chart of the S&P 500 index:

Intraday Chart of the S&P 500 index:

Chart of the Russell 2000 (small cap) ETF (IWM):

- James

In Play Updates and Reviews

RRC Hits Our Final Target

by James Brown

Click here to email James Brown

Editor's Note:

Shares of Range Resources Corp. (RRC) hit new all-time highs on new takeover speculation. The stock hit our final target at $72.50.

Meanwhile the widespread market weakness pushed PX and TIF through our stop loss. We removed WFM from the newsletter (but keep it on your watch list).


Current Portfolio:

CALL Play Updates

Check Point Software - CHKP - close: 56.36 change: -0.35

Stop Loss: 55.70
Target(s): 61.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

09/21 update: CHKP held up pretty well considering the market's widespread sell-off. The NASDAQ gave up -2.0% and the S&P 500 fell -2.9%. Shares of CHKP only lost -0.6%. Traders might want to consider buying a dip near $55.00 with a tight stop. Tonight we're going to stick to our plan and wait for a breakout past $58.00. Our trigger to buy calls is at $58.25.

Trigger @ 58.25

- Suggested Positions -

buy the OCT $60 call (CHKP1122J60)

Entry on September xx at $ xx.xx
Earnings Date 10/20/11 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on September 20, 2011

Dollar Tree, Inc. - DLTR - close: 76.00 change: +0.31

Stop Loss: 73.75
Target(s): 76.00, 79.00
Current Option Gain/Loss: Oct$75: +44.6%
Time Frame: 2 to 4 weeks
New Positions: see below

09/21 update: Wow! I am impressed. DLTR managed to post a gain today. Shares are up +0.4% versus the -2.9% drop in the S&P 500. The high today was $77.76. I am still suggesting that cautious investors take money off the table now. Our final target is currently $79.00. Please note our new stop loss at $73.75. I am not suggesting new positions at current levels.

- Suggested Positions -

Long OCT $75 call (DLTR1122J75) Entry $2.35

09/21 new stop loss @ 73.75
09/19 new stop loss @ 72.25
09/17 new stop loss @ 71.75
09/15 new stop loss @ 71.45
09/15 1st Target hit at $76.00. Oct $75 call bid @ 3.20 (+36.1%)
09/15 planned exit for Sep. $75 call. bid $0.65 (+30%)
09/14 exit the September $75 calls ASAP (tomorrow morning)
09/07 trade is open. DLTR gapped open at $72.97
09/06 trade not open. Adjusted entry point strategy, stop loss, and targets.

Entry on September 7 at $72.97
Earnings Date 11/17/11 (unconfirmed)
Average Daily Volume = 2.2 million
Listed on September 3, 2011

Mead Johnson Nutrition - MJN - close: 74.23 change: -1.20

Stop Loss: 71.75
Target(s): 77.00, 79.50
Current Option Gain/Loss: Oct$70: + 7.6% & Oct$75: -21.5%
Time Frame: 3 to 4 weeks
New Positions: see below

09/21 update: MJN held up reasonably well until the last half hour of trading. Shares closed down -1.59% versus -2.9% for the S&P 500. Cautious traders may want to raise their stop loss toward the $73.50-74.00 zone. I would anticipate potential short-term support near $74.00 or the 10-dma (currently 73.80). However, I am focusing on the $72.50 zone. Prior resistance near $72.50 should be stronger support.

We are not suggesting new positions tonight. Look for a bounce near $72.50.

Earlier Comments:
NOTE: The spreads on the Oct. $75 calls are a lot wider than the spreads on the $70s. Buying the $75s would be a riskier bet.

- Suggested Positions -

Long OCT $70 call (MJN1122J70) Entry $5.20*

- or -

Long OCT $75 call (MJN1122J75) Entry $3.15

09/19 new stop loss @ 71.75
09/17 new stop loss @ 71.45
09/14 new stop loss @ 69.90
*09/14 entry price is an estimate

Entry on September 14 at $73.22
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on September 13, 2011

PUT Play Updates

Stanley Black & Decker - SWK - close: 50.91 change: -3.04

Stop Loss: 56.25
Target(s): 50.25, 46.00
Current Option Gain/Loss: Oct$50: +18.4%, & Oct$55: +30.7%
Time Frame: 3 to 4 weeks
New Positions: see below

09/21 update: The widespread market weakness has pushed SWK to a new 2011 low. Shares lost -5.6% today. Our first target to take profits is at $50.25. Please note our new stop loss at $56.25.

- Suggested Positions -

Long OCT $50 put (SWK1122V50) Entry $1.90

- or -

Long OCT $55 put (SWK1122V55) Entry $3.90

09/21 new stop loss @ 56.25

Entry on September 12 at $54.78
Earnings Date 10/18/11 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on September 10, 2011


Praxair Inc. - PX - close: 97.06 change: -4.45

Stop Loss: 97.75
Target(s): 104.80, 109.00
Current Option Gain/Loss: -33.3%
Time Frame: 3 to 4 weeks
New Positions: see below

09/21 update: Ouch! PX was hit with profit taking today. The stock sold off this morning with drop toward the $99 level. Then the sell-off continued this afternoon as stocks sold off on the FOMC announcement. PX hit our stop loss at $97.75 when it broke down under short-term support at $98.00 in the last 30 minutes of trading. Our option when from +38% to -33%.

- Suggested Positions -

OCT $105 call (PX1122J105) Entry $1.05, exit $0.70 (-33.3%)

09/21 stopped out @ 97.75
09/20 trade opened.
09/19 new stop loss @ 97.75


Entry on September 20 at $100.32
Earnings Date 10/26/11 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on September 17, 2011

Range Resources Corp. - RRC - close: 64.89 change: -0.94

Stop Loss: 59.90
Target(s): 69.75, 72.50
Current Option Gain/Loss: Oct$65: +142.8% & Oct$70: +262.0%
Time Frame: 4 to 6 weeks
New Positions: see below

09/21 update: Wow! Shares of RRC completely ignored the market's focus on the FOMC. Instead shares of RRC were soaring to new all-time highs on takeover rumors. Shares were up +19% intraday when they hit $77.24. The takeover fever cooled after word spread that RRC was not in talks with Shell.

Our second and final target was hit at $72.50 around the 11:00 o'clock hour. The bid on the October $65 call was near $8.50 (+142.8%), the option hit a high (ask) of $12.70. The bid on the October $70 call was near $5.25 (+262.0%), the high today was $10.20.

- Suggested Positions -

OCT $65 call (RRC1122J65) Entry $3.50, exit $8.50 (+142.8%)

- or -

OCT $70 call (RRC1122J70) Entry $1.45, exit $5.25 (+262.0%)

09/21 2nd target hit at $72.50
09/19 1st target hit @ 69.75
bid on Oct. $65 call @ $6.30 (+80%)
bid on Oct. $70 call @ $4.45 (+206%)
09/13 trade opened. RRC @ 63.12


Entry on September 13 at $63.12
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on September 8, 2011

Tiffany & Co - TIF - close: 72.19 change: -2.85

Stop Loss: 72.75
Target(s): 79.90, 83.50
Current Option Gain/Loss: - 47.2%
Time Frame: 3 to 4 weeks
New Positions: see below

09/21 update: The last half hour killed our TIF play too. The stock was hovering in the $73.50-74.50 zone for most of the day and then fell under $73.00 as the market accelerated lower late in the day. TIF closed the session down -3.7%. Our play was stopped out at $72.75. I would keep TIF on your watch list for a dip or a bounce near $70.00 or potential support at the 200-dma near $67.50.

The plan was to use small positions to limit our risk.

(Small Positions) - Suggested Positions -

OCT $80 call (TIF1122J80) Entry $2.22, exit $1.17 (-47.2%)
09/21 stopped out at $72.75 (on market wide drop)


Entry on September 20 at $76.54
Earnings Date 11/29/11 (unconfirmed)
Average Daily Volume = 2.7 million
Listed on September 19, 2011

Whole Foods Market - WFM - close: 70.05 change: -1.95

Stop Loss: 65.25
Target(s): 74.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: see below

09/21 update: The stock market's reaction to the FOMC announcement was pretty ugly. While I would be tempted to buy calls on WFM on this dip to $70.00 I'd rather wait and see if there is any follow through lower in the broad market indices.

Our bullish trade on WFM was never opened. I a removing it from the play list but I would definitely keep this stock on your watch list for a bounce from what should be support near $68.00.

Our Trade never opened.


Entry on September xx at $ xx.xx
Earnings Date 11/02/11 (unconfirmed)
Average Daily Volume = 2.1 million
Listed on September 17, 2011