Option Investor

Daily Newsletter, Thursday, 11/4/2010

Table of Contents

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

Market Wrap

What A Difference A Day Makes

by Keene Little

Click here to email Keene Little
Market Stats

In Tuesday's newsletter I had mentioned I thought the sell-the-news expectation may be getting a little too crowded and that I don't like being part of the crowd (except in a momentum move). With the crowd looking for a reversal after the FOMC announcement I thought it was ripe for a big short-covering squeeze. When the market didn't sell off after the FOMC announcement on Wednesday, followed by buying in the futures Wednesday night/early Thursday morning, we were looking at a monster squeeze and that's what we got.

Now the question is whether or not enough shorts were squeezed out of the market to make it vulnerable to the downside now. The answer of course will be determined by the amount of new money coming into the market vs. short covering. The rally finished at the high of the day and in the past this has typically been the result of short covering right into the close. The risk therefore is that today was a one-day wonder rally that will not see any follow through. That's of course the bearish perspective. The bullish perspective is that we just kicked off the next leg of this great bull rally and SPX 1250 here we come.

The DOW blasted past its April high near 11258 (gapped right over it) while SPX inched higher into the close by about 2 points. The NDX of course has been above its April high since gapping above it on October 15th. The RUT is the laggard in comparison, still under its April high by about 12.50 points (1.7%). So we've got a mixed bag between the indexes in regards to the April highs but clearly the market looks bullish at the moment. Prior to today we had bullish sentiment (as measured by trade-futures.com with the Daily Sentiment index readings) exceeding previous market highs so I can only imagine what the readings will look like now.

But interestingly, the DSI bullish sentiment has been dropping back over the past week or so. It seems even the bulls recognize we've run too far too fast. While today's rally could spark a lot more bullish sentiment, it also remains possible more bulls will be feeling very nervous up here, especially if the bulk of the buying was more short covering than anything else and we fail to see follow through. At past highs we've seen sentiment tail off even as the market made a new high. The chart below shows the highs in sentiment and then higher market highs with lower sentiment. It's another form of bearish divergence and it's showing up again.

SPX vs. Daily Sentiment index, chart courtesy elliottwave.com

As noted on the above chart, in April the DSI peaked on April 14th while the market peaked April 26th, a Fibonacci 8 trading days later. So far we've got a peak in DSI on October 18th and today's new high is a Fibonacci 13 days later. Does that mean today's high will be THE high? I have no earthly idea and I'm sure not recommending that you go ahead and short it right here. My tactic, as I've been saying for weeks now, is to follow this higher since I don't like the risk playing the upside (although in hindsight there clearly was very little risk) and I'm trailing up my key levels that indicate when a top has been made and when it's safe for bears to get back in the water.

One bullish sentiment that hasn't pulled back yet is from the AAII (American Association of Individual Investors). The bullish minus bearish sentiment had a reading of 29.60 as of last week and as the chart below shows, this puts it higher than all of the highs since 2007. Each time it has reached 26-29 it has marked an important high, even if it was good for just a stronger pullback. But more bullish sentiment at a retest of the April high for SPX is probably not something the bulls want to see. Sentiment can easily go higher but when it gets this high it usually makes good sense to start watching for reversal patterns rather than continuation patterns.

AAII Bulls minus Bears Sentiment, chart courtesy elliottwave.com

Following the Fed's desire to crush the U.S. dollar, um, I mean, insert more money into the banking system, the rest of the world's bankers are not very happy with US. And I don't blame them. Geithner, et al, said at the G-20 meeting a couple of weeks ago that the U.S. supports a strong dollar. Once again he's proven that if his lips are moving he's lying. Our government and the Federal Reserve continue to take the U.S. down a lonely path and it's "damn international opinion, full speed backwards".

Last night, following the Fed's decision, Bloomberg Asia analysts discussed the idea that they thought the U.S. was running a giant Ponzi scheme, which echoes Bill Gross' (PIMCO) statement made last week. You can see how the Fed, and the U.S. in turn, is losing credibility and quickly. A country with the world's reserve currency needs to be more responsible to the world community and our government and Fed are clearly showing a complete lack of responsibility to the rest of the world (imho). If this is what Obama meant by "change" and making an effort towards reconciliation towards other countries, he has a funny way of showing it (end of political commentary).

Of course the government has been running one of the biggest Ponzi schemes ever created--the Social Security system. If the U.S. ever tries to push China in the future to let their currency rise and to stop manipulating it, China will have every right to jam those words down our throats and demand that we practice what we preach. We have clearly lost the moral high ground (many would argue we lost it years ago).

Europe's central bank, the ECB, has been talking about removing some of the stimulus as they're worried too much will cause an inflation problem that could get away from them. Of course they've got their own internal problems with very different economies to deal with. Strong exporting countries like Germany are leading the effort to deflate the value of the euro in order to make their exports cheaper to the outside world. Now the Fed has taken a big step towards a continuing to deflate the dollar in an effort to do the same for the U.S. It's a race to the bottom and exactly the same thing that happened in the 1930s. That didn't work out too well for the world back then and I seriously doubt it will work out any better this time. From the man who supposedly understands the Great Depression Bernanke sure is repeating a lot of the same mistakes.

Europe and the U.S. economies are performing roughly the same. But the Fed and ECB have disagreed on how best to proceed. The Bank of England and ECB have parted company with the Fed as they don't believe more QE is the answer. They announced today that they would hold rates the same and that they would not be expanding their own bond purchasing program. Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam, said, "That reflects a deep-seated difference in central bank philosophies. The ECB is happy with moderate growth and moderate inflation; the Fed finds it totally unacceptable."

I think one of the missing pieces here is that the Fed wants the stock market to rally in hopes it will spark positive consumer sentiment, which in turn will spark some buying interest and get the economy moving. It's a dangerous game he's playing and one that I think will fail miserably. But he clearly feels he's running out of options and does not want to go down in history as someone who didn't try everything at his disposal to fight deflation. I expect he'll soon throw a kitchen sink into the middle of the stock market trading floor.

But for the time being Bernanke's plan is working like a charm--the DOW is up about 15% from August and more than 18% from July. Not a bad return if you bought those lows. For the year the DOW is up about 7.5% which is still a very good return, especially on top of the 2009 return. The DOW is now challenging the level seen in September 2008, just before the crash, so back to break even on that time frame.

Back to the September 2008 level. Think about that for a minute. This was just before the Lehman Brothers collapse and bankruptcy. From there the market crashed lower into October/November 2008 based on fears of a poor housing market, overleveraged banks and a slew of bad investments called mortgage-backed securities and the alphabet-soup of derivatives based on those securities. Have we seen any improvement in these areas? I'd say no and in fact they've gotten worse. We now know the banks may soon be forced to take back many of these MBS products that they fraudulently sold as AAA investments. Housing looks ready for another leg down as mortgage resets continue to spike higher (and the foreclosure rate with it). If not for FASB (Financial Accounting Standards Board) rulings, such as allowing the banks to carry mortgage assets at full value instead of market value, the banks' balance sheets would be toast. So have we simply returned to the scene of the crime, ready for another whipping?

I'm going to look at the DOW's weekly chart tonight because it has jumped above its April high and reached a potentially important level. Back in July-September 2008 price was consolidating in a sideways triangle from which the DOW then broke down. The apex of these continuation patterns is often support/resistance when retested. This is the first time the DOW has made it up to this level and therefore a retest and kiss goodbye is a distinct possibility. Any reversal from here that drops below the week's low (Monday's low at 11062) would be a sell signal. So bullish above and bearish below (call it 11K).

Dow Industrials, INDU, Weekly chart

The daily chart shows a little more upside potential, to about 11500, if it's headed for the trend line along the highs since September 21st. It might even do a little throw-over above the line if we're into a blow-off finish. If the market is going to work its way higher this month it will still (typically) need a little pullback before making a final(?) high later this month, shown with the dashed line. In this case the upside target would be near 11725 which is where the 2nd leg up in the a-b-c bounce off the July low would achieve 162% of the 1st leg up. It takes a drop below 11097 to tell us the top is already in place.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 11,260
- bearish below 11,097

One could argue that the price shelf of support back in August/September 2008 was near 1235 and once that level was broken in September the flood gates opened and flushed the market away. Therefore a return to that level could be the "thank-you-God" opportunity for many. This is the level that caught longs by surprise, they held during the entire decline, swear at themselves for not using a stop and then promise their god that if and when price gets back to that level they'll get out of their position and promise never to trade without stops again (until next time, wink). So, will we see these players get out at or near 1235? Interestingly, the 162% projection for the 2nd leg of its a-b-c bounce off the July low is near 1231. As for today, SPX ran up to its trend line along the highs since September 21st and is therefore vulnerable to a reversal from right here, or at least a pullback before proceeding higher later this month.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1202
- bearish below 1183

The 60-min chart below shows how exact SPX tagged its upper trend line. More than a few traders are watching that line. As noted on the chart, the uptrend line from October 4th and the trend line along the highs since September 21st creates a parallel up-channel, which are typically very good for trading. Therefore it's a setup for at least a pullback and if the pullback is a choppy sideways/down kind of consolidation/pullback then we'll have a good idea that another leg up would be coming, shown with the dashed line. That would create a 5-wave move up from November 1st and could complete the rally (emphasis on "could"). Otherwise a stronger and steeper (impulsive) decline would be a heads up that the market is breaking down. A break below 1183 is needed to confirm the high was made.

S&P 500, SPX, 60-min chart

For NDX I've been watching the 127% extension of the April-July decline as a potential upside target (common reversal Fib extension). This morning's gap up cleared that hurdle and the next Fib extension that I often see as a reversal level is the 138.2% extension. That's at 2196.70 which was missed by about 3 points today. It's also near the top of a parallel up-channel for price action since the October 4th low. Today left a big gap to close but if we get a price consolidation near the high we could see price press higher to its October 2007 high near 2239 (shown with the dashed line). Also near that level is a price projection for two equal legs up from August, near 2242, to finish off a double zigzag wave count (a-b-c-x-a-b-c) for the corrective bounce off the July low. Bears need to see NDX back below 2132, Wednesday's low, in order to get confirmation that the top is in place and you're free to start shorting rallies. Bears need to stay very defensive in the meantime.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 2160
- bearish below 2132

The RUT has been playing serious catch-up the past 3 days, especially Tuesday and today. It's the last one to get above its April high and clearly trying to get there fast before the others leave it in their dust, which might be back down. But for now it clearly looks bullish with upside potential to its April high near 746 and possibly 760 if we see just a pullback and then press higher into mid to late November. A break below 705 and its uptrend line from August would tell us it already made its high, otherwise continue to respect for the potential for more rally.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 720
- bearish below 705

Since the Fed is intent on keeping downward pressure on bond yields, especially the 10-year (since that rate has the most influence on loan rates, including mortgages), it will be important to keep an eye on the TNX (10-year yield) over the next few weeks. The bond market will tell us whether or not the Fed will be successful and based on what the bond market tells us we'll have a better sense of what the stock market could do next. TNX broke its downtrend line from April on October 22nd but appears headed back down to it for a possible retest. The bullish implications of a test would of course thwart the Fed's efforts to keep rates down. If the Fed is failing then the stock market would eventually take notice. A drop back below 2.33%, the October 8th low, would say the Fed is being successful with their QE program.

10-year Yield, TNX, Daily chart

In Tuesday's wrap I has looked at HYG the High-Yield Corporate ETF, and suggested it was setting up for a move down after bouncing back up to its broken uptrend line from May. Not so fast is what the market said yesterday and today. Especially after today's strong rally it spiked well above resistance near 91. Plus a reader emailed me (thanks Don) to let me know that HYG kicks out a 60-cent dividend on the 1st of every month and that's how much it had dropped on Monday (you can see how important it is to know such things if you're trading ETFs).

Since this is an important sector to watch (an indication of willingness to take on higher risk) I wanted to see why it stopped where it did today. The weekly chart below shows it rallied up to the level where it broke down (seriously broke down) in September 2008. So another symbol back to the scene of the crime. Now we'll see how many decide to take profits and get out while the getting is good.

High-Yield Corporate Bond ETF, HYG, Weekly chart

The real beneficiaries of the Fed's QE program will be the banks (of course). They can borrow from the Fed for virtually free and then use the money to buy the Treasuries and get an immediate no-brainer return on the interest rate spread. And for this their managers get paid huge bonuses for being so brilliant. So the banks have enjoyed a rally the past two days with the broader market, they continue to significantly lag in the rally off the August lows. The BIX, the S&P bank index, has done marginally better than the BKX, the KBW bank index, and today exceeded the September highs near 132.50 (BKX has not been able to do the same yet).

Not much higher for BIX is the price projection at 135.22 where the bounce off the October low would have two equal legs up. The multitude of 3-wave moves in this index tells us that level could be tough. Slightly higher is would close its gap from August 10th, at 135.86. And then at 137.17 is where the bounce off the July low would have two equal legs up. So there's a little more upside potential but the risk is for the banks to start selling off hard (dark red line). The other possibility, shown with the dashed line, is for the market to continue higher into the end of the month (Thanksgiving day finish?) and then start a serious selloff. The bottom line is that between price projections, trend lines and the 200-dma, all in a range of 135-140, it's going to be very difficult to climb through all that, especially with an overbought market.

Banking index, BIX, Daily chart

The TRAN almost made it up to its trend line along the highs since early September, currently near 4970. As with the other indexes and sectors, this could be ending the rally from August or we could get a pullback and then another new high later this month. A break below 4800 is needed to confirm the top is in.

Transportation Index, TRAN, Daily chart

Thanks to the Fed the dollar took another hit today and dropped to a new low for its decline from June. It's now poking below the uptrend line from 2008 through the November 2009 low, currently near 76.27, with today's close at 76.02. Since the June 8th closing high the dollar is down -14%. Since the June 8th closing high of 1062 on SPX it's up +15%. That means foreign holders of U.S. stock have gained a whopping +1%, thanks to the depreciation in the dollar. Gold is up a little less than +12% over the same period so foreign holders of gold have lost money even after what looks like a strong rally in gold. The bottom line is foreign holders of U.S. securities, be they bonds, stocks or commodity ETFs, will soon tire of the Fed's refusal to accommodate anyone other than their own interests and start selling U.S. assets. With such an overbought market--in bonds, stocks and commodities--it wouldn't take much foreign selling to get the ball rolling down hill.

At this point it looks like the dollar could drop down to a trend line along the lows since August, currently near 75. I'm not sure if yesterday's low on the chart is a bad tick (happened right after the FOMC announcement) but at 75.235 it could be where the dollar is headed. Sometimes these "bad" ticks have a way of predicting where price is heading. In any case, I expect to see the new low met with bullish divergence and set up a strong rally leg, which will catch about 97% of the traders leaning the wrong way (that's the bearish sentiment on the dollar right now).

U.S. Dollar contract, DX, Daily chart

With the dollar dropping we've seen a concurrent rally in the euro as investors sell the dollar and buy the euro, which makes it more difficult for the Europeans to compete with their international trading partners. The weaker dollar/rising euro, as well as the lower Treasury rates, is also forcing investors to seek commodities as investments, which is forcing commodity prices higher and will add to inflation pressures. Today we saw a big spike across the commodities, including the metals (precious as well as copper), soft commodities (grains, sugar, coffee, etc.) and oil. Certainly I would expect the decline in the dollar and rise in commodity prices to be at least a little disconcerting to the Fed. If not then they really do have their head in the sand (I'm trying to keep it clean, smile).

The commodity related equity index, CRX, took a big jump up today and smacked its head at the top of a parallel up-channel from August. If the dollar finds its footing and leaves just a throw-under below its uptrend line from 2008 and starts rallying from here we could see CRX tuck tail and dive lower from here. Otherwise it remains bullish as long it stays inside its up-channel.

Commodity-related Equity index, CRX, Daily chart

Another weekly chart of a commodity, one that I showed on Tuesday, is copper. This is a reflection of both commodity prices in general (especially with a weak dollar) and global economic conditions/expectations. It has been pushing up underneath its broken uptrend line from early 2009 and today it pushed right back up to it again. Unless it can climb back above this trend line, it's a bearish setup, especially with the bearish divergence at the new highs. But it needs to break below last week's low (370.35) to confirm it.

Copper continuous contract, HG, Weekly chart

Gold made a new high today and in so doing it ruined a perfectly good EW setup for an impulsive decline. I hate it when that happens. But the impulsive leg down from the October high should still mean the trend has changed to the downside. Today's new high, which could press a little higher, is part of a more complex corrective pattern that will unfold to the downside. It means the downward projection will be more difficult to determine. But especially with the bearish divergence at the new high, I'd be looking for a selloff rather than a continuation of the rally.

Gold continuous contract, GC, Daily chart

Oil came very close to testing the May high at 87.15 (today's high was 86.83). The new high above early October's is showing bearish divergence so far and therefore the risk for bulls is a double-top failure of the rally (dashed line). But we could see just a pullback and then another press higher into later this month (like the stock market) in which case a 113% Fib extension of the May decline, at 90.13, could be the upside target. This is the first Fib extension to watch for a possible double-top pattern if it makes it through the previous high. Not shown on the chart is the 50% retracement of the 2008 decline which is at 90.23.

Oil continuous contract, CL, Daily chart

Today's economic reports were pretty much ignored. The big gap up had everyone feeling bullish no matter what the reports said. In previous weeks the market rallied on the "less bad" news about unemployment claims. Today's number showed an unexpected jump back up -- +20K to 457K vs. expectations for 442K. Ach, don't bother me with deteriorating fundamentals, I've got a rally to attend!

The other reports, Productivity and Labor Costs showed some improvement but the positive productivity number (+1.9%) was merely a reversal of the previous month's -1.8%. If you look at the chart of productivity and labor costs since 1994 you can see the trend for the past few quarters is not good. Labor costs have bumped up this year but still in negative territory (part of deflation). Productivity has taken a sharp turn back down once the government stimulus money ran out.

Productivity and Labor Costs, chart courtesy briefing.com

Friday's reports include the very important nonfarm payrolls number, unemployment rate (which no one believes), earnings, work week, home sales and consumer credit. It's a full docket and could be market moving, especially before the bell.

Economic reports, summary and Key Trading Levels

If today's rally was mostly short covering, which I have no doubt considering the number of people piled up on the sell-the-news side of the fence, and considering the market closed at its high, there's a good possibility we'll see a reversal of at least some of today's rally. This makes the pre-market economic reports potentially explosive. However, if there's any hint of trouble for the rally we might see "someone" step in to help it before the market opens. That's pure speculation on my part of course. Just be careful of any early volatility one way or the other.

When the market has had a strong up day, closing near or at its highs, the following day has tended to be weak. I've mentioned this many times before -- it's like little capitulation days and then there's nothing to follow through the next day. The shorts had to get out and usually end-of-day short covering by the last to throw in the towel leaves no one to buy the next day. So that's the setup heading into Friday.

The Fed and their minions would love nothing better than to see the week close out near today's highs. That way they avoid the embarrassment of a failure of the market to support the Fed. So how active some will be to support the market tomorrow can't be known but consider the possibility if you're thinking of playing the short side.

It being a Friday, there's also a good chance we'll see the market simply digest this week's price action. I think both sides are going to be a little leery about what's next. The bulls know this market has gone too far too fast even if they're enjoying the ride. Fear of losing profits may become too strong for some. Bears know they've been steam-rolled multiple times by a market that constantly gives off sell signals and setups and yet refuses to sell off. They're going to be on the sidelines licking their wounds and letting the market prove it's done before they enter the fray. The combination could result in a very quiet market tomorrow.

So I see either a selloff because there are simply no more buyers and the early economic reports start the snowball or we'll see a consolidation/choppy pullback in preparation for pushing higher next week. Don't be anxious to short this market -- keep following it higher with the key levels. It's an irrational and exuberant market right now, one that's very dangerous for both sides but especially the bears.

Good luck and I'll be back with you next Thursday.

Key Levels for SPX:
- cautiously bullish above 1202
- bearish below 1183

Key Levels for DOW:
- cautiously bullish above 11,260
- bearish below 11,097

Key Levels for NDX:
- cautiously bullish above 2160
- bearish below 2132

Key Levels for RUT:
- cautiously bullish above 720
- bearish below 705

Keene H. Little, CMT

New Plays


by Scott Hawes

Click here to email Scott Hawes


SPDR Financial ETF - XLF - close 15.23 change +0.49 stop 14.45

Target(s): 15.05, 16.05, or higher
Key Support/Resistance Areas: 16.10, 15.75, 15.55, 15.00, 14.75
Current Gain/Loss: Unopened
Time Frame: 2 to 4 weeks
New Positions: Yes, see trigger

Company Description:
Financial Select Sector SPDR Fund (the Fund) seeks to provide investment results that correspond to the price and yield performance of the Financial Select Sector of the S&P 500 Index (the Index). The Index includes companies from industries, such as diversified financial services, insurance, commercial banks, capital markets, real estate investment trusts (REITs), consumer finance, thrifts and mortgage finance, and real estate management and development. (source: company press release or website)

Why We Like It:
Financials have seen two pieces of good news over the past two days. First, the QE2 program announced yesterday is targeted towards the short to middle end of the yield curve, not the long end as many thought. This should make the yield curve steeper which is likely to enhance bank profits. Second, the WSJ said today that the Fed is considering removing restrictions from allowing TARP banks to pay dividends. And this is sure to attract investors into financial stocks. More nimble traders may consider launching positions now, however, there could be a dip in the broader market so it can gather energy for another move higher. Technically, XLF broke over long term resistance at $15.05 today. We want to use this area as a trigger to launch bullish positions at $15.10. Our initial stop is $14.45 which is below the rising 50-day SMA at $14.49. We are targeting a move towards the May highs.

Suggested Position: Buy XLF stock if it trades to $15.10
Options Traders: Buy December $15.00 CALL

Annotated chart:

Entry on November XX
Earnings Date N/A (unconfirmed)
Average Daily Volume: 83 million
Listed on November 4, 2010

In Play Updates and Reviews

Stocks Breakout To New Highs

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:

BULLISH Play Updates

Citigroup Inc - C - close 4.33 change +0.14 stop 3.88

Target(s): 4.60, 4.75, 4.90
Key Support/Resistance Areas: 4.40, 4.30, 4.00
Current Gain/Loss: +4.09%
Time Frame: 3 to 4 weeks
New Positions: Yes, on dips

11/4: C has closed above $4.30 resistance for the first time since May 3rd. On May 10th (the Monday following the flash crash) C made a high of $4.35 which could be a resistance point. So far so good with long positions but I would caution readers to expect some dips, of which I would view as buying opportunities.

11/3: It will be interesting to see how the market reacts to the post FOMC QE announcement which will likely determine the furture direction of C. Equities have seen some sharp post FOMC sell-offs recently, however, this monetary policy announcement was loaded with billions of dollars of planned asset purchases. Will things be different this time? C has been trading in a tight range above its 20-day SMA for the past week and a half. I think giving this some room to work could payoff, however, we still need to manage risk. I've raised the stop to $3.88 which is below an uptrend line and all of the stock's moving averages. Readers may also want to consider a tighter target of $4.40 which represents a gap fill and prior resistance. The comments below remain valid.

11/2 (James): Moody's issued some bearish comments on the banks this morning, which pushed the financial sector lower. Shares of C dipped toward $4.10 before bouncing back and the stock churned sideways in a very narrow range for the rest of the session. The trend of higher lows in C is bullish but banks have been lagging the market for weeks. Personally I'm too cautious on the financials right now to launch new bullish positions. More cautious traders may want to consider upping their stops close to the $4.00 level.

Suggested Position: Long C stock, entry was at $4.16
Options Traders: Long December $4.00 CALL

Entry on October 27, 2010
Earnings Date More than two months (unconfirmed)
Average Daily Volume: 523 million
Listed on October 25, 2010

Hansen Natural Corp. - HANS - close: 51.12 change: -0.17 stop: 43.90

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

11/4: HANS reported Q3 earnings after the bell of $0.72 vs $0.71e with revenues coming in at $382M vs $361Me. Gross margins were 51.9% vs 53.6% y/y. There is little reaction in the after hours at the time of this writing. I agree with James that there is likely to be some post earnings profit taking. Our trigger remains at $45.50, however, $48.25 should offer support as it is a prior resistance area and just above the rising 50-day SMA.

11/2 (James): There is no change from our prior comments. We're waiting for a correction! Don't forget that HANS is due to report earnings on November 4th, after the closing bell. With the stock at multi-year highs I think odds are good it could see some post-earnings profit taking.

10/30 (James): HANS is one of those stocks that has continued to run away from us. We don't want to chase it. The good news is that I'm expecting a market correction soon, following the FOMC announcement on Wednesday. The bad news is that HANS can be a volatile stock. While I agree that the $48.00 level should be support I suspect that HANS will fall further than $48. I'm adjusting our trigger to open positions to $45.50 (down from $48.25). We'll move our stop loss to $43.90. Hopefully we'll get triggered in the next week or two.

Suggested Position: BUY the stock at $45.50

- or -

BUY the December $50.00 calls (on a dip at $45.50).

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

Kroger Co. - KR - close 23.21 change +0.46 stop 21.50

Target(s): 23.15, 23.60
Key Support/Resistance Areas: 23.75, 23.25, 22.80, 22.30, 20-day SMA
Current Gain/Loss: Unopened
Time Frame: 2 to 4 weeks
New Positions: Yes, see trigger

11/4: We were hoping for a dip to launch bullish positions in KR, but the stock gapped higher today along with the broader market. KR actually closed near our first target and chasing it at these levels is a higher risk play. At a minimum KR should fill today's gap at $22.75, but I think it trades to the $22.50 level before going too much higher. Let's remain patient and we'll reassess conditions after this week's close.

11/3: KR has broken out of of an ascending triangle with prior resistance at $22.30 which should now act as support. We are looking for KR to pullback to $22.30 which is the trigger I suggest readers use to launch bullish positions. The rising 20-day SMA should act as support on dips. Our intitial stop is $21.50 and we are targeting a +4% to +6% move higher.

Suggested Position: Long KR stock at $22.30

Entry on November XX
Earnings Date 12/8/2010 (unconfirmed)
Average Daily Volume: 6 million
Listed on November 3, 2010

BEARISH Play Updates

Leggett & Platt, Inc. - LEG - close 20.58 change +0.21 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: -0.44%
Time Frame: 1 to 3 weeks
New Positions: No

11/4: My comments from below haven't changed too much. LEG still looks bearish and the fact that the stock could not trade above its highs since 10/26 confirms the bearish thesis. Launching bearish positions with a tighter stop in the $20.75 to $21.05 range is a good set-up. However, if the broader market continues higher without a correction LEG is likely to follow eventually.

11/3: LEG managed to post a 2 cent gain today and continues to struggle near $20.50. Launching bearish positions with a tighter stop in the $20.75 to $21.05 range makes a lot of sense to me. However, we will need to see some broader market weakness to get a break down towards our targets.

11/2 (James): Stocks continue to weaken but LEG managed an oversold bounce from round-number support near $20.00 and shares gained +1.8%. I don't see any changes from our prior comments.

Current Position: Short LEG stock, entry was at 20.49
Options Traders: Long December $20.00 PUT

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


Cree Inc. - CREE - close: 54.79 change: +2.84 stop: 54.05

Target(s): 48.00, 42.50
Key Support/Resistance Areas: 54.00, 52.00, 50.00, 48.00, 46.00, 40.00
Final Gain/Loss: -4.65%
Time Frame: 4 to 6 weeks
New Positions: Closed

11/4: Today's strength was too much for our short positions in CREE as the stock broke through its declining 20 and 50-day SMA's and downtrend line that began in July. Our stop was hit so we are flat the position for a disappointing loss. The next level of resistance is in the $56 to $57 area.

11/3: CREE bounced with the broader market after the FOMC announcement, but the bounce was stopped in its tracks below $52.00 again. CREE remains below its declining 20 and 50-day SMA's and downtrend line that began in July. This is solid resistance and a good entry point to consider bearish positions. There is also resistance at $53.00 if the stock bounces further from here.

11/2 (James): CREE managed to erase most of Monday's losses with a +2.6% bounce. The market-wide rally certainly didn't help us any. Fortunately, the rebound stalled under short-term resistance near $52.00. I would still consider new bearish positions here at current levels.

Closed Position: Short CREE stock at $54.05, entry was at $51.65

Annotated chart:

Entry on November 1, 2010
Earnings Date more than two months (unconfirmed)
Average Daily Volume: 4.9 million
Listed on October 30, 2010

Mechel OAO - MTL - close 25.27 change +1.68 stop 24.60

Target(s): 22.30, 21.25, 20.25
Key Support/Resistance Areas: 24.25, 24.00, 23.60
Final Gain/Loss: -5.58%
Time Frame: 1 to 3 weeks
New Positions: Closed

11/4: Yesterday's failed rally at MTL's 20 and 50-day SMA's proved to be a head fake. The stock ripped +7% higher today and through our stop so we are flat the position for a loss. There is resistance at $25.50 and if MTL breaks through this level it could easily run another $1 higher.

11/3: The bounce in MTL looks like it has failed at its 20-day SMA as the stock lost -1.30% today. However, MTL found support at its 200-day SMA, which is also near the top of a prior congestion level from last week. If MTL breaks below today's low of $23.31 I anticipate a retest of the 10/22 lows.

11/2 (James): We need to be nimble here. The $23.50-24.25 zone should be overhead resistance for MTL. The stock has managed to rally past $23.50 and its 200-dma and today saw shares challenge its 50-dma and $24.25 area. This could be a new bearish entry point but I'd like to see the stock roll over first!

Closed Position: Short MTL stock at $24.60, entry was at $23.30

Annotated chart:

Entry on October 29, 2010
Earnings Date: More than two months (unconfirmed)
Average Daily Volume: 2.1 million
Listed on October 27, 2010

SPDR S&P Retail ETF - XRT - close: 44.93 change: +1.14 stop: 44.55

Target(s): 41.40, 40.60
Key Support/Resistance Areas: 44.30, 42.50, 41.20, 40.40, 50-day SMA
Final Gain/Loss: -2.30%
Time Frame: 1 to 2 weeks
New Positions: Closed

11/4: XRT broke higher today and hit our stop for a small loss. We were anticipating a break lower but the market reacted opposite of our thesis, which is why we use stops. Next resistance is April's highs near $45.60.

11/3: XRT manage a measly 4 cent gain today and is consolidating between $43.00 and $44.00. We are anticipating a break lower towards the 50-day SMA, however, we have a tight stop overhead if doesn't happen.

11/2 (James): I agree with Scott's assessment on Monday. This retail ETF does have a lot of potential to correct lower although more conservative traders may want to look for a move under $43.00 to initiate positions.

Closed Position: Short XRT at $44.55, entry was at 43.55

Annotated chart:

Entry on November 2nd @ 43.55
Earnings Date N/A (unconfirmed)
Average Daily Volume: 10 million
Listed on November 1, 2010