Option Investor

Daily Newsletter, Saturday, 7/10/2010

Table of Contents

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

Market Wrap

Oversold to Overextended in Four Days

by Jim Brown

Click here to email Jim Brown

The markets have seen a marked change in sentiment over the last week as we head into the start of the Q2 earnings cycle.

Market Statistics

After languishing around the flat line most of the day we saw another short covering rally in the last 30-minutes of trading push all the indexes into the green. This capped a stellar rebound week where half of the +511 Dow points were gained in the last 30 minutes of the trading day. The sell the close trend has changed into a buy the close trend. This is probably caused by funds that were hoping for a dip to buy each day but when the dips don't appear they have to buy the close or risk being left behind.

The economic news was sparse with only the WLI and the Wholesale Trade report for May. The trade headline number rose +0.5% compared to +0.2% in April. This was a slightly bullish report except that the sales component fell -0.3% after a +0.9% gain in April. That was the first decline in sales in 15 months. While the decline in sales was disconcerting this report still suggests the U.S. is growing at a +3.0% GDP rate.

The report that continues to be troubling is the Weekly Leading Index. The headline number declined to 121.5 from 122.2 and the smoothed annualized growth rate fell to -8.3% from -7.6%. This was the eighth decline in nine weeks for the headline number and it is closing in on the lows for 2009. The annualized growth rate bottomed at -30.2% in December 2008. The decline in the WLI is a leading indicator to U.S. economic health and it is definitely heading lower.

Weekly Leading Index Chart

The economic calendar next week has quite a few more entries and plenty of data points for investors to stress over. The most market reactive will be the release of the FOMC minutes on Wednesday. This is the minutes for the June 22/23rd meeting and analysts will be pouring over the phrasing to see if the Fed is really thinking the economy is going to sink again or maintain its forward motion.

Economic Calendar

The real focus of investors next week will be the beginning of the Q2 earnings cycle. Alcoa officially kicks off the cycle when they report on Monday but investors will be watching INTC, GOOG, JPM, BAC, C and GE for the real news. Intel and GE will be the biggest tells on the state of the economy. JPM, C and BAC will tell us about the health of the banking sector. Traders are evidently expecting big things from the banking sector. There were 287,000 calls traded on the XLF on Friday. That was three times the four-week average and twice the number of puts traded.

There are a few high profile companies on the schedule next week but the following week there are hundreds more announcements. This week is just the pre-show.

Earnings Calendar

Earnings for S&P companies are expected to have risen +34% in Q2 compared to 52% in Q1. The estimates for Q3 are for a +25% gain and the slowest quarter in 2010. That is mostly do to the harder comparisons with 2009-Q3. Tech earnings are expected to have risen +57% in Q2. This will be the third quarter of consecutive earnings growth after nine quarters of decline. With the pace of earnings growth expected to decline in the current quarter this makes the earnings guidance much more critical. Do analysts have it right or are they too optimistic or too pessimistic? The next two weeks will answer that question.

In stock news Visa (V) was added to the "conviction buy" list at Goldman and the stock gained +3.1%. Visa does not report earnings until July 28th.

Research in Motion (RIMM) gained +8% after the company said it was going to extend Internet services and application stores in China. The company launched Blackberry service there in May.

Google said its Internet license in China was renewed after they made concessions to the government on forwarding search traffic to their uncensored Hong Kong website. Google stock had lost nearly 25% of its value in Q2 over the China censor issue as well as earnings guidance for Q2. Google rallied +2.39% on the news and Baidu (BIDU) lost -1.7%.

NTP Corp is a company whose sole reason for being is to come up with obscure patents they hope applies to somebody's current technology and then sue those who might be inadvertently violating that patent. NTP Corp filed suit against Apple, Google, Microsoft, Motorola, HTC Corp and LG Electronics on Friday. NTP claims the smart phones sold by those companies violate their "email over wireless" patent. NTP was founded in 1992 on patents held by a Chicago inventor named Tom Campana. He had developed wireless email technology in the 1980s that was never commercialized. I struggle to understand how wireless email would have been transmitted in the 1980s without wireless devices but I guess the concept is the key.

They sued Research in Motion over this same patent several years ago in reference to the Blackberry. RIMM eventually settled for $612.65 million after NTP won an injunction to shutdown the Blackberry network. Apparently NTP's bank account is running low so they decided to attack those six other companies. However, when you take on six giants at once that are sitting on more than $200 billion in cash the odds are not as good as they were against RIMM as a much smaller company at the time. Microsoft, Apple and Google can afford the best lawyers and NTP will be the equivalent of a pesky mosquito for years to come. Eventually they will get their day in court but I doubt they will get a major judgment. Courts have recently taken dim views of these kinds of generic technology suits.

NTP has previously sued Verizon, Sprint and T-Mobile over the same issue. Since the RIMM settlement there have been other cases and one against Ebay that went to the Supreme Court changed the legal process and getting a shutdown injunction today would be next to impossible. That takes away much of the NTP leverage. However, the phones at risk the most are the Android versions. The license fee awarded in the RIMM case was 8.5% and that would be a big hit to the cost of the low cost Android phones.

Anadarko Petroleum (APC) told BP to take a hike when BP presented them with a $272 million bill for the first installment of the oil cleanup expenses. APC is a 25% "non-operating" owner of the leaking Macondo well. Anadarko's CEO has gone on record in recent weeks saying that BP engaged in reckless and potentially criminally negligent actions that caused the Horizon explosion. He believes the reckless and irresponsible actions leading up to the explosion violated the agreements between BP and APC and APC is not going to pay the BP bill. BP also sent Mitsui, a 10% non-operating owner a $112 million bill. There is no word yet on Mitsui's intent but I think we all know how they are going to react.

Chart of Anadarko

Goldman Sachs has raised their estimates of the cleanup costs to as much as $163 billion if the spill was halted today. Cleanup costs are just a part of the problem. The government has already started a criminal investigation that will almost undoubtedly find cause for negligence. That will earn BP another round of fines and penalties over an above the cleanup costs.

BP said it would begin the process of changing out the LMRP containment cap as soon as Saturday in order to take advantage of an expected week of mild weather. The current cap is a loose fit contraption that allows BP to capture about 25,000 bpd of oil but allows as much as 30,000 bpd to continue escaping into the gulf. The new cap is reportedly a tight fitting custom built cap that will be bolted onto the flange where the bent pipes were cut off several weeks ago. In theory the new cap will allow up to four containment vessels to be connected at once and will prevent any further oil from leaking into the gulf. Unfortunately it will take 5-9 days to make the switch and during that time the well will be flowing at full force into the gulf. The robotic vehicles worked all day Saturday to remove the bolts and the old flange with the broken pipe.

Chart of BP

Crude prices rallied to close over $76 on Friday on improving global sentiment and solid demand for gasoline in the U.S. over the last two weeks. The decline in initial jobless claims on Thursday and the hike in global economic estimates by the IMF on Thursday helped to improve sentiment.

Also helping push prices higher was the beginning of the new quarter. Every quarter end there is a new flow of long only money hitting the commodity funds. This translates into rises in the price of crude and other commodities. This flow of cash into funds normally ends by the 10th of the month and commodities will be left to trade on real fundamentals for the rest of the quarter.

Helping fuel positive sentiment on crude was a five million barrel decline in crude inventories in Thursday's EIA report. That was the second consecutive weekly decline. However, the declines were related more to output cuts in the gulf and tanker rerouting for hurricane Alex than a sudden surge of consumption. The July 4th weekend helped raise gasoline demand by +2% for the prior two weeks. Analysts were somewhat disappointed in that increase since the July 4th weekend is normally a high consumption period.

The results of the stress tests on European banks are expected on July 23rd. Recent comments from analysts in Europe suggest most banks will pass with flying colors. This has improved sentiment about a banking crisis in Europe. The banks are being tested on three scenarios. One scenario will assume economic growth hits targets from the European Commission. The second scenario is for a -3% drop in GDP and the third scenario is a so-called "shock" event in the bond markets. Ninety-one banks are being tested and the results are due out on July 23rd.

In the U.S. the FDIC closed two more banks on Friday bringing the total to 90 for the year. New York based USA Bank and Oklahoma based Home National Bank were closed for a cost to the FDIC of $140.4 million. FDIC head Shelia Bair said the pace of closures should decline after Q3.

There were several positive data points last week. The IMF upgraded its estimate of global growth and this buoyed markets around the world. German exports rose by 9.2% in May and imports rose by +14%. Australia and Canada both reported a strong increase in employment. Canada said there were 90,000 new jobs created in June compared to estimates for 20,000.

In the U.S. tax receipts from corporations rose by +37% in May indicating corporate profits are rising. Costco said same store sales were up +4%. Capital spending in the U.S. was up +20% year-over-year in May.

On the downside the IMF said there was a strong possibility of a double dip in housing caused by a large backlog of foreclosures, negative equity and elevated unemployment. However, several indicators in the U.S. suggested the foreclosure backlog was shrinking and we could be seeing a smaller numbers of homes on the market in the coming months. The weekly mortgage applications survey spiked +6.7% from the prior week to 721 on the index. Purchase applications plummeted to a 12 month low thanks to the expiration of the tax credit but refinance applications rose to a 12 month high with a +9.2% gain thanks to record low interest rates. The 30-year fixed mortgage rate was 4.68%. This is a positive indicator for consumer sentiment.

Overall I am shocked at the change in economic sentiment in just the last two weeks. Just a couple weeks ago the analyst chatter was almost entirely consumed with the potential for a double dip recession. In the space of two weeks it has turned 180 degrees and they are talking about a 3.2% to 3.5% GDP rate for Q2. I find that exceedingly hard to imagine given the rate of decline in May and June but I am not an economist.

The market has also turned on a dime and despite negative technical indicators it is in strong rally mode. I told you I expected a rally this week but I did not expect it to be a 5% gain. This proves how a good short squeeze and sentiment change can catch everyone off guard.

Three prominent authors have not changed their estimates. Robert Prechter is predicting Dow 1000 over the next six years. He believes we are going to see a major bear market as a result of the economic problems. Richard Russell author of the Dow Theory letters for the last 30 years is also predicting a major bear market but has not targeted a specific Dow level. Robert Kiyosaki said in his online blog that he expects a return to Dow 5000. Obviously opinions are like noses, everybody has one. Research has proven that those analysts with the most radical forecasts are accepted as likely right in their predictions over those who are less radical with say a Dow 9000 target. Apparently those with radical forecasts are assumed to have done extensive research before they risk their credibility with such a radical claim.

I reported last week on Abby Joseph Cohen's continued S&P target at year-end 2010 of 1,250-1,300. David Bianco at BACML also has a 1275 target. A Morgan Stanley analyst was targeting 1375 as of Friday. These analysts were not getting as much airtime as the major bears until this week. Now that sentiment has turned they are getting plenty of face time on stock TV. Amazing how quickly the news feed changes.

The S&P rallied to close at 1077 and just under decent support at 1080 for better than a 5% gain for the week. The majority of the gains came in the last 30 minutes of the trading day every day last week. We have gone from a sell the close mentality the prior week to a buy the close mentality. As I mentioned earlier the end of quarter cash flows are predominantly into long only funds and this end of day buying is that money being put to work. The funds would buy a dip if one appeared but in a rising market like this they can't afford to be left out so if no dip by 3:30 they buy the close. This helps juice the shorts to cover as well because they are hoping for another end of day sell on close and when it does not happen they are forced to cover.

Last weekend I said I was looking for a rally into earnings and that has come to pass. I expect it to continue for another week or so but I doubt it will continue at the same vertical rate. The S&P has decent resistance at 1080 and it is over extended from the +5.5 gain. The market as a whole is still long-term oversold but in the very short-term it is over extended. We still need a 20-point decline on the S&P to equalize pressures before we can move higher in confidence.

I can't tell you how many times in the last 14 years I have written "it should pull back after last week's gains." Sometimes rallies don't cooperate with logical concepts and they move up in defiance of what logic would dictate. This forces traders to chase stocks higher just so they don't get left out. I believe that is a possibility for next week. We should rest for a day but I think any dips will be bought until 1111 or so and the bears will make an initial stand there. The 200-day is interim resistance at 1111 along with the 50-day at 1100. A break over 1120-1125 would be very bullish. The 50/200-day "death cross" is in full bloom and will remain an active technical indication for the weeks ahead.

S&P-500 Chart

On the Dow the initial resistance is 10250 (red line) followed by the 200-day at 10365. The brick wall will be 10500. The Dow has several components reporting earnings next week with INTC, JPM, BAC, AA and GE. Their guidance will be the critical support for any continued gains. The Dow is over extended with a +511 point rebound for the week. This is the most visible indicator of the market and a decline here could poison sentiment for the other indexes. If you look at the chart you will see an identical 500-point rally that started on June tenth and ran for five days to end at 10400. A 500-point short covering rally is not an indication of a bullish market but simply an oversold bounce.

Dow Chart

The Nasdaq rallied the least of the major indexes despite some strong gains by the big caps. Tech stocks are not normally favored in the summer months despite expected earnings growth of 57% for Q2. The Nasdaq performed a perfect test of the 50% retracement level as support but even with a +5% rebound it is just now moving back into the congestion range from May/June. When individual tech stocks report in July they normally sell off almost immediately as investors move on to other plays. There is no conviction for techs in the summer months. They are kicked to the curb and picked up again in October.

The next resistance point is 2235 with an interim gap fill at 2220. The Nasdaq as an index is not showing me any trading signals this week. You need to key on the individual stocks for tech plays. Support on profit taking should be 2150.

Nasdaq Chart

I would like to say the Russell made a technically perfect test of support at 590 but as I reported on Tuesday the decline was really just a carry over from the rebalance and not fundamentally significant. However, support is support and I am sure it played a part in the process. The Russell, like the Nasdaq is entering its congestion range again and other than continued short covering I suspect 650 will be resistance. Critical resistance is 670 but I would be very surprised if the Russell made it that far.

Russell Chart

In summary the rally I predicted last week appeared on schedule although the short covering was stronger than I expected. The sudden improvement in global economic indicators overshadowed the weak jobs report from the prior Friday. The earnings calendar will be the main focus for the next two weeks. I expect the markets to continue to trend higher until the last week of July and then weaken again. We need to see the economics in the U.S. begin to improve before the rally will gain any real strength.

Jim Brown

New Plays

Two Long Candidates

by Scott Hawes

Click here to email Scott Hawes

Editor's Note: Good evening. The results of my scanning this weekend provided very little opportunities for long trades. I looked at several hundered charts and was unenthused with prospects to the long side. However, I did find a few in the pharmacuetical space and have chosen to release MRK below. I'll also share some additional trade set-ups with you that I think have some potential.

Long C - I like C as a speculative long play. The government has been selling its stake and when the selling begins to wane C could be in for a sustained run higher. If C breaks above $4.07 it could see see $4.50 to $5.00 fairly quick.

Long DF - The stock looks like it is ready to break out of resistance near $11.10. If it does there is a lot of clear air overhead with little resistance. There has been a big institutional seller of this stock over the past year which has beat it down. It is cheap now and looks ready to bounce higher, possibly up to $12.50 and then $14.00.


Suntech Power Holdings - STP - close 11.79 change +0.43 stop 9.73

Company Description:
Suntech Power Holdings Co., Ltd. (Suntech) is a solar energy company, which is engaged in the design, development, manufacturing and marketing of photovoltaic (PV) products, including a range of building-integrated photovoltaic (BIPV) products and also provides engineering, procurement and construction services to building solar power systems using its own solar modules for certain related party and third party customers. Suntech's products provide electric power for residential, commercial, industrial and public utility applications in various markets worldwide. It also provides PV system integration services to customers in China and the United States, and is expanding into the development of utility scale solar power systems. Suntech sells its products in various solar energy markets worldwide, including Germany, Italy, the United States, China, South Korea, Spain, the Middle East, Australia and Japan.

Target(s): 11.35, 11.90, 12.15
Key Support/Resistance Areas: 10.50, 9.90
Time Frame: Several weeks

Why We Like It:
STP broke out of a key resistance area at $10.50 on Thursday and continued higher on Friday. STP has now closed above its 50-day SMA for the first time since late April. The stock made a higher low and a higher high. STP is in a longer term downtrend but has some room to run before reaching the primary downtrend lines and overhead resistance. I am looking for STP to retrace some of last week's gains and suggest readers initiate long positions in the stock if it trades to $10.65. This is just above Friday's low and the $10.50 prior resistance area that should now act as support. If we get filled the stock has some room to move higher. Our first target is near Friday's high and would represent a +6.5% gain if the position play out as expected. NOTE: STP is a volatile stock and I view this as a speculative play. Please use proper position size to limit risk.

Suggested Position: Long STP stock if it trades to $10.65

Suggested Position: Buy August $10.00 CALLS, current ask $1.68, estimated ask at entry $1.20

Annotated Chart:

Entry on July xx
Earnings Date 8/19/10 (unconfirmed)
Average Daily Volume: 3.5 million
Listed on 7/10/10

Merck & Co - MRK - close 36.30 change +0.44 stop 59.38

Company Description:
Merck & Co., Inc. (Merck) is a global health care company that delivers health solutions through its medicines, vaccines, biologic therapies, and consumer and animal products, which it markets directly and through its joint ventures. The Company's operations are principally managed on a products basis. The Pharmaceutical segment includes human health pharmaceutical and vaccine products marketed either directly by the Company or through joint ventures. Human health pharmaceutical products consist of therapeutic and preventive agents, sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers, such as health maintenance organizations, pharmacy benefit managers and other institutions.

Target(s): 37.95, 38.60, 39.35
Key Support/Resistance Areas: 39.50, 38.75, 38.00, 36.35, 35.80,
Time Frame: 1 to 2 weeks

Why We Like It:
MRK is building an ascending triangle on its daily chart with resistance near a key pivot level for the stock at $36.35. The stock formed a bullish inverse head and shoulders pattern that began with the left head in April (see large ovals on chart). If MRK trades above Friday's highs there is little resistance until about $38.00. Earnings are at the end of July and I expect this stock to make a run. I suggest we use any weakness to initiate long positions or a break above Friday's highs, whichever occurs first. The stock has closed above its 100-day, 200-day, and 20-day SMA's which are all converging so I don't expect too much pullback from here. Let's use a trigger of $36.50 and $35.85 to initiate long positions. Our stop will be $24.79 which is below all of the aforementioned SMA's and the lows from 6/21 and 6/23.

Suggested Position: Long MRK stock if it trades to $36.50 or $35.85, whichever occurs first.

Options Traders: Buy August $36.00 CALLS, current ask $1.40

Annotated Chart:

Entry on July xx
Earnings Date 7/30/10 (unconfirmed)
Average Daily Volume: 18 million
Listed on 7/10/10

In Play Updates and Reviews

Adjustments Made to Most Positions

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:

BULLISH Play Updates

PowerShares DB Agriculture Fund - DBA - close 24.54 change -0.08 stop 24.28 *NEW*

Target(s): 24.60 (hit), 24.95
Key Support/Resistance Areas: 25.00, 24.70, 24.40, 23.55, 23.40
Current Gain/Loss: +2.68%
Time Frame: Several weeks
New Positions: No

7/10: We are hanging in here with DBA. I adjusted the stop down a few cents to $24.28 which is below Thursday's low and the 100-day SMA. This stop guarantees us of a winning position if DBA reverses lower. Our first target of $24.60 was hit on Thursday and our current gain is +2.68%. It appears DBA is consolidating prior to moving higher. We are looking for $24.95.

7/7: We are long DBA as of the open today. The stock printed a bullish engulfing candlestick on its daily chart and closed above its 100-day SMA. The ETF maintained its upward trend line and also made a higher high. DBA is gaining momentum and I am expecting our targets to be hit, possibly this week. In addition, the stock has now closed above and broken two downtrend lines. My only suggestion is to protect profits if DBA continues higher. I'm going to tighten the stop to $23.80 which is below yesterday's low.

7/6: DBA has broken a downtrend line that began on 1/6/10. The ETF has struggled with a secondary downtrend line but I think its only a matter of time before DBA makes another push higher and breaks through it. DBA also appears to be forming a higher low on its daily chart. Today the ETF sold off to its 20-day SMA from above. I am expecting this support hold and for DBA to make a run up towards its 200-day SMA which is currently just over $25.00. Our most aggressive target is $24.95 while our first target is $24.60. We will use a tight stop at $23.25 which below May's lows.

Current Position: Long DBA stock, entry was $23.90

Options Traders:
Suggested Position: August $23.00 CALLS

Annotated 30-minute Chart:

Entry on July 7, 2010
Earnings Date N/A (unconfirmed)
Average Daily Volume: 792,000
Listed on 7/6/10

BEARISH Play Updates

Informatica Corporation - INFA - close 25.47 change +0.08 stop 26.10

Target(s): 24.80, 23.82, 23.00, 22.75, 22.15
Key Support/Resistance Areas: 25.35, 24.60, 23.80, 23.25, 22.60, 22.00
Current Gain/Loss: -3.75%
Time Frame: 1 to 2 weeks
New Positions: Yes

7/10: INFA has retraced about 50% of its recent decline and finds itself right at its 20-day and 50-day SMA's. I didn't think the stock would get much higher than $25.00 on any bounce but have been proven wrong. There is some congestion overhead to provide resistance and this is a logical place for the stock make a lower high and reverse, but the broader market direction will most likely determine our fate on this position. I have added a target of $24.80 for readers looking for a quick exit and to limit losses on this position. This is just above the 200-day SMA and the high from 7/6. This may provide some support on a pullback and is a good area to tighten stops.

7/7: INFA shot up to $25.00 this morning and stalled while the broader market continued to march higher. The stock still has to contend with its 20-day and 50-day SMA's if the bounce continues. My feeling is we may see an intraday bounce but I also feel it will be sold into so I suggest we be patient and see how things play out this week.

7/6: INFA traded up to its 200-day SMA today and then backed off. It remains below all of its major SMA's which should keep any bounces in check. I'm going to list another target of $23.82 which is near Friday's closing price. If INFA trades down here prior to bouncing I suggest we take profits on this trade, or at least tighten stops to protect against a reversal. Current Position: Short INFA stock, entry was at $24.55

Option Traders: August $25.00 PUT

Annotated 30-minute Chart:

Entry on July 6, 2010
Earnings 7/22/2010 (unconfirmed)
Average Daily Volume: 1.72 million
Listed on July 1, 2010

Lululemon Athletica Inc. - LULU - close 38.89 change +0.17 stop 41.30 *NEW*

Target(s): 35.80, 34.55, 33.50
Key Support/Resistance Areas: 42.25, 39.75, 37.00, 35.16, 32.75
Time Frame: 1 week

7/10: LULU is getting ever so close to our entry. The stock traded to within 8 cents on Friday and backed off. The bounce over the past few days has been on extremely light volume showing a lack of participation. This is one of the most bloated retail stocks out there trading at a P/E of 38. It is a novelty retailer and sometimes the P/E doesn't matter so I will keep a tight leash on this and use a stop of $41.30 which is just above the 20-day and 50-day SMA's. LULU has not tested them from below since breaking through them in June. I like the short set-up and want to lower the entry trigger to $39.15. I have also adjusted the targets. I'm looking for LULU to make quick trip back down to test its lows and possibly break them.

7/7: LULU rallied +4.24% higher today and is getting closer to our short entry trigger at $39.25. If the stock trades to this level I feel comfortable suggesting a short position as it will be the first time the stock approaches its 50-day SMA since breaking it on 6/25. The 20-day SMA is also overhead, along with a downtrend line which will provide even more resistance. I think patience will pay off for us on this trade.

7/6: LULU came within 15 cents of hitting our trigger to enter short positions today, and then reversed down. The stock has faced a barrage of selling recently and is coming into a prior support/resistance area near our first target of $35.25. If the stock keeps testing this area the support should eventually break. I only wish LULU and the market were not so oversold. I am expecting this stock to bounce, maybe even up to its 50-day SMA which is near $40.00. Considering the conditions I would like to raise our entry back to $39.25 (below the 50-day SMA). If we are patient and get a good short entry it should pay off.

Suggested Position: Short LULU stock if it trades up to $39.25

Option Traders: Buy August $35.00 PUTS if LULU trades to $39.25, current ask $2.05, estimated ask at entry $1.55

Annotated 30-minute Chart:

Entry on July xx
Earnings 9/9/2010 (unconfirmed)
Average Daily Volume: 1.89 million
Listed on July 1, 2010

PowerShares QQQQ Trust - QQQQ - close 44.62 change +0.42 stop 46.90

Target(s): 43.60, 42.55, 41.80, 41.05
Key Support/Resistance Areas: 46.77, 45.25, 44.46, 43.50, 42.50, 41.00
Current gain/loss: -0.72%
Time Frame: 1 to 2 weeks
New Positions: Yes

7/10: QQQQ is bouncing but I expect the selling to resume soon. In light of the choppy trading that I foresee I am going offer a near term target of $43.60 which is $1 lower than current levels. For readers in PUT positions they should be worth about $2.15 (entry was at $1.85) which would be a +16% gain. This target is near the June 8 low and may form an inverse head and shoulders pattern. I suggest being quick to tighten stops at this level to protect profits. QQQQ may bounce up to its 20-day or 50-day SMA just overhead before reversing so I suggest being patient. There was a lot of volume in the August PUT strikes on Friday and large blocks bought on the offer. This is a good sign for a move lower but earnings is the wild card.

7/7: QQQQ had a monster truck rally today but I believe this will be short lived. The ETF is nearing an important resistance level at $44.46 and has all of its SMA's and plenty of congestion overhead to act as resistance. The rectangle on the chart represents a gap that I suppose could get filled so conservative traders may consider waiting to enter at $45.00. I'm just not confidant the gap will get filled. Today was a relief rally and we may get a little more but I think the selling will resume again and QQQQ should easily retest its lows and possibly break them. Let's use a trigger of $44.30 to initiate short positions. Our stop is $46.90 and I do not see QQQQ trading up to this level prior to breaking down again.

Current Position: Short QQQQ stock, entry was at $44.30

Options Traders: August $45.00 PUTS

Annotated chart:

Entry on July xx
Earnings N/A (unconfirmed)
Average Daily Volume: 100 million
Listed on July 7, 2010

Sherwin-Williams - SHW - close 72.23 change -0.39 stop 76.70

Target(s): 69.25, 68.35, 67.05
Key Support/Resistance Areas: 75.90, 73.50, 71.10, 69.00, 68.00, 66.50
Current Gain/Loss: +0.71%
Time Frame: 1 to 2 weeks
New Positions: Yes

7/10: We opened short positions in SHW at the open on Friday. The stock proceed to drift lower the entire day. I am expecting the stock to reverse lower from here as it has rallied into resistance and its 20-day SMA from below. Our first target is $69.25.

7/8: SHW broke below a key support level of $73.40 and has now rallied almost back up to that level. This should provide resistance along with the declining 20-day SMA. I expect the stock to at least retest its recent lows which are $3 to $4 lower than current prices, and possibly even the 200-day SMA. The 50-day SMA is also overhead and we will place our stop just above it at $76.70. The stop will be adjusted once we are in the position. I like shorting the stock at current levels but readers could wait to see if SHW rallies up to its 20-day SMA which is 50 to 75 cents higher.

Current Position: Short SHW stock., entry was at $72.75

Options Traders: August $70.00 PUTS

Annotated chart:

Entry on July xx
Earnings 7/22/10 (unconfirmed)
Average Daily Volume: 1.48 million
Listed on July 8, 2010

Starbucks Corp. - SBUX - close 25.30 change +0.48 stop 26.75 *NEW*

Target(s): 24.25, 23.70, 22.55, 21.30
Key Support/Resistance Areas: 26.50, 26.00, 25.25, 24.80, 24.00, 23.60, 22.50
Current Gain/Loss: -2.22%
Time Frame: 1 to 2 weeks
New Positions: Yes, with a tight stop

7/10: SBUX has retraced some of its recent decline as the market has bounced. The stock is testing its 100-day SMA from below and the backside of its broken upward trend line for the first time since breaking in late June. The 100-day SMA has been an important reference point for the stock in 2010. We are also near an important support/resistance level of $25.25 so this is a logical place for SBUX to reverse back down. However, the broader market direction will most determine our fate on this position. A tighter stop could be placed at $25.80 but the bounce may go a little further so patience is suggested. I am looking for SBUX to make a lower high and reverse back down to at least retest its lows. I like new positions at these levels.

7/6: SBUX came with 6 cents of our trigger to enter short positions and then proceeded close down -3.04%. I'm expecting SBUX to bounce with the broader market so I suggest being patient and ready to short the stock if it trades to our trigger of $24.75.

7/3: Last week SBUX broke below a trend line that began in October 2009 and collapsed below it 20-day, 50-day, and 100-day SMA's. These SMA's (in particular the 100-day SMA) have been key areas where the stock has bounced during its rally over the past year. And now that the stock is below them it has probably seen its best days, at least for awhile. I would like to use a trigger of $24.75 to enter short positions which is below the stock's 100-day SMA, the underside of the broken trend line, and the recent steep downtrend line, all of which are converging (see oval on chart). The $25.00 area could also be considered an entry point but I chosen $24.75 because it is near Friday's highs which could possibly form a double top on the intraday charts. Our primary target is $22.55 but I have also listed $23.70 as area to consider tightening stops. It is above the 200-day SMA which SBUX has not touched in over a year.

Current Position: Short SBUX stock, entry was at $24.25

Options Traders: August $25.00 PUTS

Annotated 30-minute Chart:

Entry on July xx
Earnings 7/21/2010 (unconfirmed)
Average Daily Volume: 10 million
Listed on July 3, 2010