Option Investor

Daily Newsletter, Thursday, 10/28/2010

Table of Contents

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

Market Wrap

Depending On Perspective, The Market Is In a Holding Pattern Or An Ending Pattern

by Keene Little

Click here to email Keene Little
Market Stats

This morning started off as most morning's have lately--with a gap up. The good news about unemployment claims (they dropped 21K to 434K) helped the equity futures market tag a few more points onto what was already going to be a gap-up morning. The dollar pulled back overnight and that gave equity futures and the metals a little bounce.

But the bounce didn't last very long and the gaps were closed within the first hour of trading, followed by a foray into the red before turning back up from a midday low and finishing essentially flat for the day (again). The DOW and RUT were the laggards, finishing in the red, while SPX and NDX finished marginally in the green.

The good news on the unemployment front is that the number of newly unemployed dropped for the 3rd week and is at its lowest level since July. Regardless of what happens to the economy and stock market I'd sure like to see this number stabilize and then start heading down. Finding a new job might not be improving much but if we can at least stop adding so many newly unemployed maybe we can see some deserving people get re-employed. Most economists believe the number of new claims needs to drop below 400K before we can expect an upswing in hiring. The less volatile 4-week average is currently running at about 453K and declined by 5.5K from the previous week.

The DOW got hit a little harder than the other indexes today (except for the RUT but that one's always a little more volatile than the rest) thanks to 3M (MMM) which was down the whole day. It had lost as much as 6.55 (-7.2%) but recovered some and closed at 85.07 (-5.30, -5.9%). MMM reported good numbers for earnings but lowered their guidance for future earnings. So once again we see it's not so much what have you done for me lately but instead what are you going to do for me in the future. If it's not more and higher earnings you'll get taken out to the wood shed for a beating.

The daily chart of MMM below shows the significance of the decline today and it looks like a strong break of the rally from August (and could be a canary in the coal mine for the rest of the market). Notice too that the rally from August stopped at the 127% extension of the previous move (the August decline). This is a very good Fib extension to watch because reversals occur at this Fib enough times to make it a good trade setup (especially with that little shooting star at the Fib level on Monday). The next big move for MMM should be below the June low at 72.72.

3M Company, MMM, Daily chart

Visa (V) also reported earnings in line and issued guidance for 2011 in line with expectations. Uh-oh, not good enough--40 lashes with a wet noodle for you. V lost -3.47 (-4.3%), closing at 76.45, but was up more a dollar from the day's low.

Is Eastman Kodak (EK) a tech company or a consumer products company? Their move into digital cameras could classify them as a tech company. At any rate, they did well today after reporting a loss of only -2 cents vs. an expected -31 cents. Their stock finished +15.4%, which seems like a huge move and relatively speaking it is. But it amounted to +$0.61, closing at 4.58.

Motorola (MOT) also gapped up this morning and was up +$0.62 at 8.71 (+7.7%) after reporting earnings slightly better than expectations and mentioning they were profitable for the first time in 3 years in their mobile phone sales (thanks especially to the Droid phones). Unfortunately the sellers immediately hit the stock and sent it back down to the flat line, closing up only 4 cents. If there's no follow through to today's effort to rally the stock it's going to look like a double top against the September high.

Halliburton (HAL) did not fare well today after an investigative panel determined HAL was partially responsible for the Gulf oil spill out of the Macondo well. It was determined that HAL was responsible for the unstable cement job. Their stock took a hit on the news and finished the day at 31.68, with a loss of -2.74 (-8%). That was after a recovery off a mid-afternoon low at 28.86 (-16%). Its daily chart looks like a high on October 15th ended its rally and now it's starting back down. Could some of these stocks breaking down be part of the topping pattern in the broader indexes? Yes, I think so.

Microsoft (MSFT) had a decent day (+23 cents, +0.9%) but looks like it might have a better day tomorrow if the after-hours rally holds. It reported after the bell and said they earned 62 cents (vs. expectations for 55) on $16.2B in revenue (vs. expectations for $15.8B). As of this evening, the stock is up another 90 cents at 27.18 (+4.3% from yesterday's close). It looks like it's going to play around its 200-dma tomorrow at 26.96. Two equal legs up from July is at 27.00. If I were a bearish person (wink), I'd be looking for a sell-the-news reaction tomorrow on a gap up. In other words I'd be looking to short the gap up. But hey, that's just me.

As for the rest of the market, the day went like so many days recently--a quick move in the morning followed by a boring consolidation the rest of the day. The bulls are content to hold what we've got and the bears are too afraid to go in and try to take Mr. Happy away from the bulls. The continued back and forth while the market inches its way higher has created bearish formations in front of next week's elections and FOMC QE announcement. It's looking like a strong setup for a sell-the-news reaction to both.

The weekly candle for SPX, so far, is a doji and it's at strong resistance at its 200-week MA, currently at 1194.22. The week's high, on Monday, was 1196.14. This is potentially a bearish reversal pattern in the making but needs a red candle next week, which would make this an evening star reversal. In the meantime the bulls will view this as merely consolidation below resistance, which is also a perfectly legitimate interpretation. If the market were not so overbought and bullish sentiment so high I could buy into that interpretation. So we'll have to wait to see how next week finishes in order to get an answer to that question.

S&P 500, SPX, Weekly chart

SPX is barely holding onto its broken uptrend line from August. The first uptrend line through the October 4th low is now well above current price action. The latest one, through the October 19th low, was broken yesterday, recovered (just barely) and today's long-legged doji closed right on the trend line. This week has been filled with doji days, demonstrating there's a lot of work going on right now to simply hold the market near the flat line each day (it looks like distribution and an attempt to hold the market up while big money is handing off their inventory). I show a final move up to the top of its rising wedge pattern, slightly above 1200, into November 2nd and then a selloff. But the market is vulnerable to a breakdown at any time. It needs to break below 1171 to confirm we've seen the top so wait for the break and then pile on the short side.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1185
- bearish below 1171

I'm showing a slightly different rising wedge pattern on the 60-min chart below to help zero in on a possible conclusion to the rally. The wave count is difficult to figure out because of all the choppy 3-wave price action. In a rising market, especially at the end of a strong move up, this choppy price action is a strong indication of an ending pattern. Therefore looking for a conclusion to the rally rather than an opportunity to buy pullbacks seems the more prudent thing to do right now. Once these rising wedges break (they're showing up on a lot of indexes and stocks) they'll probably break hard and fast, making it difficult to get on board if you want to play the short side. The first big move should be a relatively fast retracement of the rally from October 4th, so back to 1130-1140 in perhaps a week's time, maybe faster.

S&P 500, SPX, 60-min chart

The DOW is also just barely clinging to its uptrend line from August, closing on it today. The market needs to rally right away tomorrow otherwise a break of today's low, and most especially Wednesday's low, would signal the decline has started. Otherwise, if the bulls can hold the market up we should see it make it marginally higher into early next week in order to finish the rising wedge patterns.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 11150
- bearish below 11020

NDX is in a steeper rising wedge but still a rising wedge. If it can push a little higher, the top of the wedge is near the 127% extension of the April-July decline, near 2157. As mentioned above with the MMM chart, this Fib extension is often associated with reversals so that's the setup for NDX. Of the different indexes it's doing the best job at staying inside its rising wedge pattern (above its uptrend line from August). Therefore any break of its uptrend line, currently near 2113 (a little higher than today's low), would be a warning signal. A break below 2094 would confirm the top is very likely in place. So we've got the index pinched--look for a possible reversal if 2157 is tagged and holds and look for confirmation of a breakdown below 2094.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 2106
- bearish below 2094

It would appear the mutual fund managers want to be able to show how brilliant they are by having the sexy tech stocks in their portfolios. And what could be sexier than the semiconductor stocks. The SOX got a big boost on Wednesday and in so doing it stretched what should be the final 5th wave of the move up from August. Today's gravestone doji (a more bearish version of the hanging man) is a reversal pattern in the making but it needs a red candle on Friday to confirm it. It takes a break below 358 to confirm the top is in place but be aware the setup is for a top here and now.

Semiconductor index, SOX, Daily chart

The RUT has been relatively weak and it broke its uptrend line from August but has not been able to recover above it. It keeps testing it from below but failing. That's bearish but we've seen many times where price just keeps pushing up underneath a broken uptrend line until it final breaks down. That could happen to the RUT at any time now. A push up to about 717 is possible but a break down below 690 would confirm the top is in. If you're tired, and broke, from trying to pick a top in this market, simply wait for confirmation that it's breaking down.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish to 717
- bearish below 690

There's been much speculation in the past few months about what is going to happen to bonds and their yields. We've been in a long-term bull market for bonds and many are calling for the end of its run. Bill Gross from PIMCO is the most recent one to declare we're at the end of the bull market and that the Fed's QE program (which he refers to as one of the greatest Ponzi schemes going) will cause too much inflation and kill the bond's bull market (higher yields are required in an inflationary environment which depresses the prices of the bonds). You can read his full November 2010 newsletter here: Run Turkey, Run

When it comes to the bond market I have to bow to the man who knows a lot more than I do about this. I certainly can't argue with his logic about too much money flooding the market causing an inflationary problem. After all, that's what the Fed is now trying to achieve. But as with everything I will argue that inflation is not and will not be the problem for at least the next year. We are in a deflationary spiral and that's what's scaring the daylights out of the Fed. They've been trying everything they can think of to stop it and yet this train keeps rolling down the tracks.

I've argued for a few years now that we're going to have to get through a period of credit deflation following the huge credit bubble that was built over the past two decades. That's deflationary (it removes money from the system which is exactly what's been happening in spite of the Fed's efforts) and it's a necessary cleansing of the monetary system. I believe there is more credit destruction ahead of us (by paying off loans and/or defaulting on them) and if so then we still will have deflation ahead of us. And if we've got more deflation then it might be a little premature to declare an end to the bond's bull market. I think Bill Gross is correct but maybe a little early.

As always, we have the charts to help guide us in determining what might be happening with the bond market. I like to use the 10-year yield chart because I find it more consistent than bond prices for analysis and I have the most data on it. A longer-term chart from 1962 shows how high yields got back in 1981 when the 10-year yield reached 15.8%. A parallel down-channel from the late 1980s has contained the move in TNX and it is currently in the lower half of the channel. The downtrend line from 1981 through the high in 2007 is where TNX stopped just short of in April 2010.

10-year Yield, TNX, Monthly chart, 1962-2010

On my QCharts I only have data back to 1994, which picks up the move inside the parallel down-channel. I added the downtrend line to the QCharts monthly chart and zoomed in a bit on the move within the parallel down-channel since 2000. You can see how TNX stopped just shy of the downtrend line from 1981, currently near the April high at 4%. A rally above that level is needed to confirm the bottom is in for yields and the top for bond prices (which would confirm Bill Gross' assertion that the 30-year bond bull market has completed). In the meantime, considering the potential for deflation to continue, the stock market to decline and bonds continuing to be a safe haven, I'm showing a continuation of lower yields (perhaps after a bounce into the new year) to near 1% before bond yields finally bottom sometime late next year.

10-year Yield, TNX, Monthly chart, 2000-2010

The piggy banks have been the pig that gets poked. They've significantly underperformed the broader market this month after breaking down from highs near mid month. The sideways coil that has developed since the low on October 15th is a bearish continuation pattern and as depicted, I expect to see the banks break down from this pattern. Follow the money if they do. They'll be one of the first indexes to break below the August lows.

KBW Bank index, BKX, Daily chart

Since tagging the April high near 4800 the TRAN has been struggling but has held above its uptrend line from August (it was tested yesterday and today). If the broader market rallies into next Tuesday I expect the TRAN to do the same, with a marginal new high above 4800 and complete its rising wedge pattern. A break of yesterday's low near 4679 would say we instead have already seen the high.

Transportation Index, TRAN, Daily chart

If you want to know what commodities, including the metals, and stocks are doing, just look at the dollar. With a bearish sentiment exceeding that which we saw at the November 2009 low, the short-dollar-long-everything-else carry trade is very overcrowded. When those trades unwind there's going to be a serious shortage of doorways to get through. Expect some carnage as the stampede to get out overwhelms traders. The big question as I look at its chart is whether or not we're going to see one more minor new low into next week, as shown with the dashed line on the chart below. It would fit the expectation for another leg up in the stock market. But if yesterday's high at 78.51 is exceeded I would expect to see a strong leg up to follow. Otherwise a drop down to the 75 area looks very possible.

U.S. Dollar contract, DX, Daily chart

The decline to 1315.60 last Friday completed a 5-wave move. That set up the bounce to correct the move which is what we've seen this week. The 5-wave decline tells us the trend has changed to the downside. It could mean just one more leg down following this week's bounce but the high probability is for at least another leg down. If the October high finished a longer-term 5-wave move to the upside, as it is labeled, then we're entering a longer-term correction of it, one that will take gold back down below the July low near 1155. It won't be in a straight line of course and as I've depicted on the chart, which is simply a guess at this point, we could get a strong decline in November, a bounce into December and then a stronger decline into the new year. That won't become clearer until the first leg down completes so one leg at a time and for now, look to short gold (or hedge your long positions) at the completion of the current bounce, which has an upside target near 1353. A drop below 1318 would tell us the next leg down is already in progress.

Gold continuous contract, GC, Daily chart

Oil has been in a choppy mess since early October. Nearly every day is a reversal of the previous day's move. I could argue equally strongly for another leg up to the 85 area before turning back down or for the decline to kick off right from here. It takes a break below 79.39 to tell us the decline is underway otherwise look for a minor new high first.

Oil continuous contract, CL, Daily chart

Tomorrow's economic reports include the advance GDP report, which is expected to show a slowdown in activity. Depending on how much of a slowdown we could see some volatility around the number. If it's bad then it will be good (the Fed will Have to do more QE) whereas if it's good then that'll be good since the economy is holding up. One of these days, and soon I think, good and bad news will be treated as bad news by the market. That will be another way we can tell the market has changed. The PMI (Purchasing Managers Index) and Michigan Sentiment reports come out after the bell so be careful in the first 30 minutes of trading.

Economic reports, summary and Key Trading Levels

Summarizing the charts, sentiment and market breadth, it appears to me that all of these things are coming together that point to a market top in front of two important events early next week. The market has rallied strong since August in anticipation that our savior is going to flood the market with more money which will make its way into the stock market. The market has also anticipated a split House after the elections, which will lock up government and prevent them from hurting us, or spending more money, any more. The best case scenario I can foresee is that the market gets what it's been expecting. Then what?

If even the best-case scenario leads to a sell-the-news reaction and a worst case scenario (Democrats maintain control of both Houses and Bernanke says never mind to QE) leads to panic selling, it seems way too risky to hold long positions into early next week. If the market flares up to a new high it would likely be a blow-off top. You might miss a little upside but only if you're quick to exit.

But if the market does not rally then I think it will sell hard. If you're in mutual funds that only execute trades at the end of the day you could get hurt badly after a down-hard kind of day. Considering the plethora of signals that the market is topping, imho, I simply think it's prudent to protect what you have vs. going for more. If it were a new trade would you enter it here? If not then why are you holding out for more? Pigs get fat, hogs get slaughtered. Know when to fold 'em. And be happy with your winnings rather than angry if you could have gotten more.

As for you bears, we don't have sell signals yet and therefore hold your fire. Many of us have tried to pick a top and we have the scorched fingers (and accounts) to prove it. While I like the setup for highs into next Tuesday, as depicted on my charts, that's just a guess based on a lot of good indicators. I think it's a good guess but the bottom line is we simply don't know where the top will be. It might be difficult to get into a bearish position some morning after a big gap down, especially if there are only little bounces along the southern route, but it may be less risky shorting it on the way down rather than picking a top. My suggestion would be to nibble at a new high Monday/Tuesday if we get them, and then add to your positions once we start getting downside confirmation.

I'll finish with one last chart that shows the waning momentum and loss of market breadth as the market has pressed higher. This is not a market timing tool but is waving a big red flag in front of the bullish masses. Big money wants you charging after the new highs so that they can sell to you, which is what I believe has been happening this week. These charts tell you not to trust those new highs--there's a bear behind that red flag who is ready to take a big bit.

NYSE vs. market breadth, Daily charts chart

The latest survey from the American Association of Individual Investors (AAII) was released today and it showed a continuing drop in the number of investors who believe the market will drop in the next six months. The current percentage of bears is the lowest reading since February 2007. Taken alone this number should not be taken as a green light for the bears to start piling into short positions. The market correlation to a low AAII bearish reading is simply not there. But when combined with a low VIX reading, very high DSI (Daily Sentiment Index from trade-futures.com) bullish reading (93%), waning momentum and loss of market breadth, as shown above and to name just a few indicators, it's a time for extreme caution by the bulls. It's not a green light for the bears but it is a large yellow light for the bulls.

Good luck and I'll be back with you next Tuesday (filling in for Jim).

Key Levels for SPX:
- cautiously bullish above 1185
- bearish below 1171

Key Levels for DOW:
- cautiously bullish above 11150
- bearish below 11020

Key Levels for NDX:
- cautiously bullish above 2106
- bearish below 2094

Key Levels for RUT:
- cautiously bullish to 717
- bearish below 690

Keene H. Little, CMT

New Plays

Sittin On Hands

by Scott Hawes

Click here to email Scott Hawes
Editor's Note:
Good evening. We do not have new plays to release tonight ahead of the weekend. We closed two winners today in MYL and PHM for +5.97% and +3.68% gains respectively, while all of our remaining open positions currently have gains. I like new positions in most of our current open positions, as well as the three plays waiting to be triggered. All of our positions currently have gains. Please see the updates for details and email me with any questions.

James is filling in for me this weekend so he will be releasing new candidates on Saturday.

In Play Updates and Reviews

Two Winners Closed

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:

BULLISH Play Updates

Boyd Gaming - BYD - close 8.46 change +0.20 stop 7.65 *NEW*

Target(s): 8.65, 8.95, 9.20
Key Support/Resistance Areas: 9.60, 9.25, 8.75, 8.00, 7.40
Current Gain/Loss: +0.73%
Time Frame: 1 to 2 weeks
New Positions: Yes, on pullbacks

10/28: BYD and other casino related names did well today on the heels of a string earnings report from Las Vegas Sands. BYD gained +2.4% on the day. However, I suggest we do not get too married to this position considering the overbought broader market conditions. Let's raise the stop to $7.65, which is below the 20-day SMA and primary upward trend line. $8.65 and $8.95 are the primary targets and I suggest readers take profits or tighten stops to protect them as these levels approach.

10/27: BYD was up more than +4% in early trading but the sellers stepped in pushing the stock lower to close virtually unchanged. Our first target was missed by 4 cents. $8.00 and the rising 20-day SMA (just below $8) should offer solid support and any dips. $8.65 and $8.95 are the primary targets.

10/26: BYD traded within yesterday's range and is consolidating near its 100-day SMA. I am looking for a continued move higher and view dips as buying opportunities. There is solid support near $8.00.

Current Position: Long BYD stock, entry was at $8.20

Entry on October 14, 2010
Earnings 10/27/10 (unconfirmed)
Average Daily Volume: 1.8 million
Listed on October 9, 2010

Citigroup Inc - C - close 4.17 change -0.00 stop 3.78

Target(s): 4.60, 4.75, 4.90
Key Support/Resistance Areas: 4.30, 4.00
Current Gain/Loss: +0.24%
Time Frame: 3 to 4 weeks
New Positions: Yes

10/28: C traded in a tight range today and closed flat on the day. My comments below have not changed.

10/27: We are long C as of today's open at $4.16. The stock should find support at its rising 20-day SMA which is currently at $4.12, or at $4.00 if that is breached. I view dips as buying opportunities.

10/26: I suggest we open positions in C at current levels tomorrow. Conservative traders may want to wait for a close above $4.30 before launching positions. However, I am comfortable getting the nearly 3% discount at current levels. We'll raise the stop to $3.78. Use small position size to manage risk.

10/25: C is trading very well in comparison to its peers (BAC, JPM) and has been a relative out performer. I think the stock is poised to break over $4.30 and there is limited resistance overhead. I suggest readers initiate long positions on a dip or a breakout. We'll use a trigger of $4.11 on a dip and $4.34 on a breakout. Our initial stop will be $3.60 and it will be adjusted once the position is opened.

Suggested Position: Long C stock
Options Traders: Buy December $4.00 CALL, current ask $0.30

Entry on October xx
Earnings Date More than two months (unconfirmed)
Average Daily Volume: 523 million
Listed on October 25, 2010

Companhia Brasileira de Distribuicao - CBD - cls: 37.52 chg: +0.80 stop: 34.75

Target(s): 38.80
Key Support/Resistance Areas: 35.25, 36.50, 38.00, 39.00
Current Gain/Loss: +2.10%
Time Frame: 4 to 6 weeks
New Positions: Yes

10/28: CBD broke out higher from the intraday bear pennant that was being formed and looks headed back towards its highs. The stock gained +2.18% on the day. I see resistance at $38.00 so this could be an area for a pullback. I've adjusted the target down 20 cents to $38.80 which a few cents below the 52-week high closing price.

10/27: CBD is finding support at $36.50 and its rising 20-day SMA. I am concerned the stock could break lower with a broader market correction. The next level of support is near $35.25 and its 50-day SMA. I would view dips as buying opportunities.

10/25 & 10/26: CBD has found support at its 20-day SMA and regained all of Friday's losses. However, the stock may be in a bear flag and if the broader market corrects CBD may trade down $35.25 which I view as buying opportunity. Tighter stops could be considered at $35.90 which is below Friday's low.

Current Position: Long CBD stock, entry was at $36.75

Entry on October 19, 2010
Earnings Date 11/10/10 (unconfirmed)
Average Daily Volume: 545,000
Listed on October 16th, 2010

Hansen Natural Corp. - HANS - close: 51.38 change: +0.48 stop: 46.90

Target(s): 50.00, 52.50,
Key Support/Resistance Areas: 45.00, 47.50, 50.00, etc.
Current Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below for details

10/27 & 10/28: We need to remain patient and use dips as buying opportunities. $49.25 could also be considered an entry point. This is near the swing low on 10/19 after HANS broke out higher. If readers are considering call positions on a dip I suggest buying the December strikes. I've also raised the stop to $46.90.

10/16: (James) HANS is probably best known for their Monster brand energy drinks. The stock has been a monster in its own right and shares have been a popular momentum trade over the years. Well once again shares of HANS are surging higher. We'd like to hop on board but we don't want to chase it at these levels. I'm suggesting a trigger to buy the stock (or call options) at $48.25 since broken resistance at $48.00 should be new support. I'm suggesting a stop loss at $44.95 but we may want to raise the stop closer to the rising 50-dma (technical support) currently near 46.20.

If triggered at $48.25 our first target is $51.00. Our second target is $52.50. FYI: The point & figure chart is very bullish and is forecasting a long-term target of $78.

Suggested Position: BUY the stock at $48.25

- or -

BUY the December $50.00 calls (on a dip at $48.25).

Entry on October xx
Earnings Date 11/04/10 (unconfirmed)
Average Daily Volume: 4.5 million
Listed on October 16, 2010

Jeffries Group, Inc - JEF - close 24.00 change +0.14 stop 22.75

Target(s): 25.00, 25.75
Key Support/Resistance Areas: 25.85, 25.25, 24.25, 23.50, 23.00
Current Gain/Loss: +0.13%
Time Frame: 3 to 4 weeks
New Positions: Yes

10/28: JEF looks to be on the verge of breaking out of its bull flag and should easily send the stock up towards $24.65 if the broader market cooperates. Readers may want to consider this level as a possible exit point which will produce almost a +3% gain. I continue to like the volume patterns in JEF and if the stock closes above its 200-day SMA we should be able to book a nice winner.

10/27: JEF is finding support at its 50 & 100-day SMA's which is the first time the stock has tested these since breaking higher last week. This is a logical spot for JEF to bounce to another high. Our first target is $25.10 but readers may also want to consider $24.65 as a possible exit point. This should produce almost a +3% gain.

10/26: After breaking out on 10/20 JEF has retraced all of the gains and is finding support near its 50-day SMA, which is also at a support level of $23.50. I view this dip as a buying opportunity with a tight stop below. The pullback over the past three days looks like a bull flag to me.

Current Position: Long JEF stock, entry was at $23.97
Options Traders: Long December $24.00 CALL

Entry on October 21, 2010
Earnings Date 1/20/11 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on October 19, 2010

Patriot Coal - PCX - close 13.39 change -0.09 stop varies

Target(s): 15.25, 15.95
Key Support/Resistance Areas: 15.30, 14.15, 13.00, 12.50
Current Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see entry point below

10/27 & 10/28: We are playing for a breakout in PCX with a trigger of $14.17. However, I think readers should consider bullish positions if there is a sell-off in the stock to $12.70, which I am adding as a second trigger. If we are triggered at $12.70 we'll use a stop of $11.80.

10/26: As signs of inflation begin to build momentum so are resource stocks. Many coal stocks have lagged compared to other names in the commodities space, but they are showing signs of momentum. PCX is forming a bullish cup and handle pattern and its volume patterns point to building bullish momentum. The stock surged higher on heavy volume in early October and pulled back on lighter volume. Now the stock is finding support at its rising 20-day SMA. I suggest readers use a trigger of $14.17 to enter bullish positions on a breakout. If the stock pulls back prior to breaking out we may consider a lower entry, perhaps near support at $13.00. We are looking for a move up towards the stock's 200-day SMA, or about $1.00 to $1.75 higher than our current trigger.

Note: I consider this an aggressive trade and readers should expect volatility. Please use proper position size to manage risk.

Trigger: $14.17 (stop = $12.90) - or - $13.70 (stop = $11.80)

Suggested Position: Long PCX stock at the above triggers
Options Traders: Buy December $14.00 CALL

Entry on October xx
Earnings Date More than two months (unconfirmed)
Average Daily Volume: 3.6 million
Listed on October 26, 2010

PerkinElmer, Inc - PKI - close 23.26 change -0.08 stop 22.32

Target(s): 23.60 (hit), 23.90, 24.40
Key Support/Resistance Areas: 25.40, 24.40, 23.30, 22.50, 22.15
Current Gain/Loss: +0.69%
Time Frame: 1 to 2 weeks
New Positions: No

10/28. Not much has changed with PKI as the stock is stubbornly trading around a long term pivot level at $23.30. Our target of $23.60 has been hit several times but the stock has been rejected from a breakout. The 20-day SMA and upward trend line from July are providing support, but now we need follow through to the upside. We are going to need help from the broader market but if things fall apart we have a tight stop is in place which will control losses.

10/26 & 10/27: PKI has found resistance at $23.75 with a possible bearish double top with the highs on 10/13. There is long term support at current levels, the rising 20-day SMA and upward trend line just below (both near $23.15). If our second target of $23.90 is reached I suggest readers use the strength to book gains or tighten stops to protect them.

10/25: PKI reached our first target today. The stock needs to take out today's high or it could pullback as a bearish double top pattern may be forming. There is support at $23.30, the rising 20-day SMA and upward trend line. Tighter stops could be considered near $22.75. I continue to view dips as buying opportunities.

10/23: PKI has bounced back nicely after the sell-off early last week. The stock close above a long term support/resistance level of $23.30 and is now dealing with a two month long congestion area (b/w $23.30 and $24.45) from March/April. I've adjusted the targets and suggest readers use strength as an opportunity to exit positions or tighten stops to protect profits. We've moved the stop up to $22.32.

Current Position: Long PKI stock, entry was at $23.10

Entry on October 12, 2010
Earnings 11/4/10 (unconfirmed)
Average Daily Volume: 1.4 million
Listed on October 11, 2010

TJX Companies - TJX - close 46.44 change +0.16 stop 44.55 *NEW*

Target(s): 46.70, 47.20, 47.95
Key Support/Resistance Areas: 48.50, 47.00, 45.40, 43.50
Current Gain/Loss: +2.02%
Time Frame: 2 to 4 weeks
New Positions: No

Comments :
10/28: TJX pulled a repeat of yesterday. After gapping higher the stock immediately sold off to support and bounced hard into the close. I am concerned about the bearish head and shoulders pattern forming on its hourly chart, while there is also a hanging man candle on its daily chart. These tend to signal reversals so I want to raise the stop to $44.55 which will keep losses small if there is in fact a reversal. $46.70 and $47.20 are my primary targets and suggest readers consider taking profits and/or tightening if they are reached.

10/27: after a pullback to support at $45.40 this morning, TJX closed near the highs from yesterday. The stock continues to look bullish but I am concerned of about the overbought conditions in the broader market. $46.70 and $47.20 are my primary targets and suggest readers consider taking profits and/or tightening if they are reached.

Suggested Position: Long TJX stock if it trades to $45.52

Entry on October xx
Earnings Date 11/16/10 (unconfirmed)
Average Daily Volume: 3 million
Listed on October 18, 2010

BEARISH Play Updates

Leggett & Platt, Inc. - LEG - close 20.36 change -0.09 stop 21.75

Target(s): 19.80, 19.20
Key Support/Resistance Areas: 22.00, 21.70, 21.50, 21.30, 20.55, 19.70, 19.00
Current Gain/Loss: +0.63%
Time Frame: 1 to 3 weeks
New Positions: Yes

10/28: LEG is consolidating near its lows after the post-earnings sell off. Any broader market weakness should send the stock towards our targets in a hurry. I still like new short positions, especially on bounces.

10/25: LEG triggered our entry for bearish positions at 20.49 as the selling continued and the stock broke below Friday's low. We are looking for a quick move towards the July and August lows. I've lowered the stop $21.75 and raised our targets by 10 cents each. My comments from the play release are below.

10/23: Shareholders of LEG have been taken on a wild ride as of late. After plummeting -24% from its May highs to August lows, the stock went up in a straight line until 10/13, gaining +26% along the way. On Thursday after the bell the stock reported earnings and they were terrible. The company missed earnings, missed revenues, and lowered guidance. The company said that "certain markets primarily related to residential furnishings, weakened noticeably in the third quarter and as a result, third quarter sales were lower than those in the second quarter, which rarely occurs." The stock lost -8% on Friday and I do not believe the selling is done. I suggest we capitalize on the momentum and initiate short positions if LEG trades to $21.46 (above Friday's high and near the 200-day SMA) or breaks below $20.49 (below Friday's low). Conservative traders may want to wait for the break down. All of the moving averages are overhead and I suspect there are still many unhappy investors looking to dump the stock. We'll place a tight initial stop overhead at $22.05.

Trigger: $21.46 or $20.49

Suggested Position: Short LEG stock
Options Traders: BUY the December $20.00 PUT, current ask $0.75

Entry on October 25, 2010
Earnings Date: More than two months (unconfirmed)
Average Daily Volume: 1.5 million
Listed on October 23, 2010

Mechel OAO - MTL - close 22.83 change -0.31 stop 24.47

Target(s): 22.30, 21.25, 20.25
Key Support/Resistance Areas: 24.25, 24.00, 23.60
Current Gain/Loss: Unopened
Time Frame: 1 to 3 weeks
New Positions: Yes, see trigger

10/28: I was hoping for a bounce up towards MTL's 200-day SMA but it doesn't appear we are going to get it as the stock is hanging out in a bear flag. Let's lower the trigger to $23.30 which near is today's highs. My comments from the play release below remain valid.

10/27: The steel sector has come under pressure as earnings and guidance have failed to impress investors. MTL finds itself in a bear flag and is consolidating under its 200-day SMA, while its 50-day and 20-day SMA's are just overhead. Conservative traders will want to see the stock break below $22.25 before launching bearish positions. However, considering the overbought broader market conditions initiating positions on a bounce sets up a very good risk reward trade. There is solid resistance in the $23.60 to $24.20 area so I suggest launching bearish positions at $23.55 (lowered to $23.30). Our stop will be above the 20-day SMA at $24.47 (which is rolling over and declining). If triggered our first two targets are -5% and -9% lower.

Trigger: $23.30

Suggested Position: Short MTL stock
Options Traders: BUY the December $23.00 PUT, current ask $1.50, estimated ask at entry $1.30

Entry on October XX
Earnings Date: More than two months (unconfirmed)
Average Daily Volume: 2.1 million
Listed on October 27, 2010


Mylan Inc. - MYL - close: 20.50 change: +0.25 stop: 18.65

Target(s): 19.80 (hit), 20.40 (hit), 21.00, 22.00
Key Support/Resistance Areas: 18.50, 19.25, 19.80, 20.50
Final Gain/Loss: +5.97%
Time Frame: 4 to 6 weeks
New Positions: Closed

10/28: We used the strength since yesterday morning in MYL to our advantage and closed positions for a +6% gain. The stock is entering a congestion area from April and May which was just before the stock cratered -20%. This is a solid resistance area and I suspect there will be a pullback, especially considering the broader market's overbought conditions. $19.80, $19.25, and $19.00 are areas to watch for on dips. Tighter stops should be considered in the $20.15 to $20.30 area with looser stops around $19.70.

10/27: MYL made a remarkable +5.7% recovery from its lows today and gained +3.3% on the day. Our current gain is better than 5%. If MYL heads higher before pulling back readers should consider taking profits and possibly re-entering positions on a pullback. $19.80 should offer solid support on dips.

10/26: I do not see many changes from my comments last night. MYL is consolidating near its highs. If the stock can break above $19.80 there is little resistance until $20.50. If our second target of $20.40 is reached I suggest readers use the strength to book gains or tighten stops to protect them.

Note: I do consider this an aggressive trade so keep your positions somewhat smaller. Buy the stock now (or the calls) and target a move to $20.00, $21 and beyond. FYI: The P&F chart is forecasting at $33 target.

Closed Position: Long MYL stock at $20.40, entry was at $19.25

Annotated chart:

Entry on October 18, 2010
Earnings Date 10/28/10 (unconfirmed)
Average Daily Volume: 4.5 million
Listed on October 16, 2010


Pulte Group, Inc - PHM - close 7.86 change -0.08 stop 8.15

Target(s): 7.85 (hit), 7.30, 7.00
Key Support/Resistance Areas: 9.00, 8.00, 7.00, 6.50
Final Gain/Loss: +3.68%
Time Frame: 1 to 3 weeks
New Positions: Yes

10/28: PHM hit our immediate target of $7.85 multiple times today. Per last night's updates we have closed the position for a small +3.68% gain. The market simply refuses to correct right now and I am leery of holding positions over the FOMC meeting next week. The Fed could easily announce some sort of QE2 that will benefit the home builders, i.e. resuming open market purchases of mortgage-backed securities. I thought we would see a more meaningful correction prior to next week but it's not happening so it is time to take the gain and protect capital. If positions are open I would keep a tight stop near $8.15. Looser stops could be considered near $8.40 which is above the 50-day SMA.

10/27: This is the lowest close PHM has printed since 8/26. The stock looks like it could crater towards $7.30 but there is support at $7.70 and the housing data is not getting worse, which may be the signs of a bottoming process. I suggest readers protect profits and begin looking for an exit. I've raised the target to $7.85 and suggest we book the small gain if we get there. I'm also going to lower the stop to breakeven at $8.15 and suggest we get out of the way if PHM bounces from here.

Note: We will most likely experience some volatility in this trade so please use appropriate position size to manage risk. I also like an option play here so that your risk is better defined.

Closed Position: Short PHM stock at $7.85, entry was at $8.15

Annotated chart:

Entry on October 21, 2010
Earnings Date 11/3/10 (unconfirmed)
Average Daily Volume: 4.5 million
Listed on October 16th, 2010