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As a result, the Dow lost 200 points and finished at 8,339.  The Nasdaq gave back 60 and closed at 1,766 while the S&P fell 28 points and finished at 893.  The S&P 500’s break below 900 was not good.  As a mental note for myself (and for you) here is what I have posted on my desk right now (from the June 16th Blog):  

 

“For weeks, we have been in a tight trading range and last Thursday and Friday, we hit the top of those trading ranges. Yesterday’s drop hasn’t even brought us to the middle of those trading ranges. To put things in perspective, the Dow has resistance at 8,900 while there is a floor of support at 8,250 and then further support at 8,000. When we BREAK those levels, then it might be time to turn bearish.

 

As far as the other indexes, pull up a chart and take a look. The Nasdaq, currently at 1,823, has serious resistance at 1,850 and then 2,000 would come into play. For support, there is a nice resting area at 1,700 then 1,600. Below that, we get nervous. For the S&P 500, which is at 923, we are targeting 960 and then 1,000. The breakdown would be at 870 and 800.” – (END)

 

I keep these types of trading ranges posted to remind myself of how I was feeling or what I am seeing down the road and I pay attention to them.  We have a number of long positions open and if you will notice, we went out longer-term to protect ourselves in case we did head lower.  But we also didn’t want to miss the next leg of the rally if we get one in July.  Also, if you will notice, I have been recommending put options as a way to play the downside over the short-term.

 

Last Friday, we closed out a two-day trade on Abercrombie & Fitch (ANF, $25.67, down $0.34) that netted 25%-50% and today it was a Potash (POT, $87.27, down $5.45) trade that quickly gained 30%.  Monday morning and last week I had mentioned a couple of put options to watch and we jumped on one of them like grass on dirt a couple of hours after the market opened.

 

The ANF July 25 puts (ZWRSE, $1.25, up $0.05) traded as high as $1.40 today although we were out at $1.20 on Friday.  I had a few emails today about this trade and remember, it is already closed.  However, a break below $25 could spell trouble for the stock.

 

As far as the Potash position, we got into the July 80 puts (PVZSP, $3.40, up $1.15) at $2.60 before lunch with a limit price of up to $2.75.  The initial target was $3.00-$3.25 and the purpose was to make $500 on a 10-lot trade.  We got that and then some.  If you didn’t get out today, set stops at $3.00-$3.10.  There is “a little” support for Potash at $84 but if that breaks, we could see a trip to the lower $80’s. 

  

That was the good; the bad: 

 

Bank of America (BAC, $11.94, down $1.28) had a terrible day as it dropped 10%.  The November 15 calls (BYOKO, $1.10, down $0.50) were entered at $1.50 and were positive coming into today.  We have a stop of 55 cents on this one.

 

Cisco Systems (CSCO, $18.41, down $0.51) fell over 2% and the October 20 calls (CYQJD, $0.95, down $0.20) dropped 20%.  Our entry price was $1.50 and the stop is set at 75 cents.

 

Dendreon (DNDN, $24.54, down $1.54) got crushed and it is time to close the July 30 calls (UQBGF, $0.28, down $0.11).  I wanted to leave them open but today’s drop forced our hand.  These calls were profiled at 80 cents and we were right at a 50% stop anyway.  I know I said this was a pure play on Biotech but this breakdown was a killer for the July calls.  The August 30 calls (UQBHF, $0.95, down $0.40) were profiled at $1.50 and you should place a stop of 70 cents on them to limit losses.

 

Ah, now it’s time for the ugly. 

 

Ford (F, $5.38, down $0.34) took one on the chin but I kinda knew this one was coming.  I went all the way out to December on playing Ford and these positions should be closed if Ford drops below $5.  The December 6 calls (FLI, $0.88, down $0.23) were entered at $1.25 while the entry price for the December 7 calls (FLJ, $0.58, down $0.20) was $1.00.  It would be disappointing if Ford falls back below $5 but you can’t fight the trend.

 

JDS Uniphase (JDSU, $5.48, down $0.39) is a “lottery” play and we entered the September 7 calls (UQDIJ, $0.10, down $0.10) at 35-40 cents. One contract would have cost you $40 or 5 contracts would have cost $200.  When I say a trade is a “lottery” trade that means there is no stop for these positions because they are just that..lottery picks.  As you can see, we will have to wait this one out.

 

Some of these trades were positive going into Monday but the market’s steep drop is telling us something.  My guess is that we could test the aforementioned areas of support over the next couple of weeks which would lead us into 2Q earnings at the start of July.  From there it could be a war between the bulls and bears that could determine the trend for the rest of the summer.

Rick Rouse

Rick@TheOptionInvestor.com