11:30pm (EST)

1. Commentary
2. Checking in on the VIX 

3. Baltic Dry Index Continues To Tank

4. Earnings

5. Current Trades
6. Closing Thoughts

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1. Commentary

The bears started the week as if they were serious but the bulls made it clear they weren’t going anywhere last week as the Dow has closed higher for the five of the last six weeks. The 2% sell-off we got on Monday was a reaction to China’s Shanghai Index which experienced its biggest percentage decline since November.  Tuesday was a rebound but Wednesday was the key as the bulls battled back following another sell-off in the Chinese market.

The Dow fell to a low 9,099 on Wednesday and was threatening to take out Monday’s low of 9,078 before backup came.  Like a 40-year old coming off the bench to bring their team back, the bulls willed their way to victory in dramatic fashion.  By Friday, the Dow had closed above 9,500 and the bears were left feeling dejected.  At 9,505, Friday’s 155 point gain left the Dow at its highest level for the year.

In fact, all three of the major indexes made fresh 2009 highs on Friday.  The Nasdaq finished the week with a 35 point gain, or 1.8%, to close at 2,020 while the S&P 500 ended with a 22 point pop and settled at 1,026 for the week, a 2.2% rise.

July home sales were surprisingly better-than-expected and there were other bits of good economic news that helped provide a case for the bulls.  Bernanke, who’s own stock seems to be rising, said that he believes a return to growth in the near term appears likely and that also seemed to help the bulls case.  Still, one thing was certain and that was volatility picked up.  This is a sign, folks, as we head into September and October.  Although no one can predict where the market will be next month of 8 weeks from now, we can prepare for it.

The market is right at the levels I had expected it to be back in July and I go into more detail on where the ranges could be in the “Closing Thoughts” section.  There is still a good chance we go higher but the volatility has me thinking this battle between the bulls and bears could get ugly.

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2.  Checking in on the VIX

The CBOE Volatility Index (VIX) measures “fear” on Wall Street and is one indicator I like to follow to try and get a read on the market.  High readings mean that Wall Street is nervous and bearish.  A low reading indicates calm and the Street is bullish.  The VIX has traded as high as 90 and as low as 18 over the past year and currently stands at 25.

For you history buffs, if the VIX is at 30 or more then it means the market is nervous. If the VIX is under 20, the market is confident.

In September 2008, I watched the VIX spend 10 trading sessions in the 30’s and it looked poised to jump into the 40’s, which at the time was suggesting Wall Street was anticipating a dramatic price decline in the market.  As we headed into October the VIX kept rising and we saw the market fall to a fresh low a few weeks later as the Dow hit 7,773.

The VIX hit a high of 90 once we bottomed and fell to a low of 44 right before the Presidential election which was still high.  In March, the VIX hit a high of 50 when the market bottomed once again as the Dow hit a low of 6,440.  The point is, the VIX has settled back down into more historic ranges but watch for a sign over the next few months as to where we are headed.

Again, the VIX is not a crystal ball but it helps to know what it is and where we are at.

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3. Baltic Dry Index Continues To Tank

The Baltic Dry Index (BDI), which measures dry bulk shipping rates, has been getting hit like ton of bricks lately as imports of iron ore and coal slows down.  Friday, the index closed at 2,468, down 66.

There are a lot of moving parts when it comes to these stocks but one thing that is hurting the sector is that imports have slowed because of the China steel mills and the negotiating on pricing of iron ore imports over the next year.

The BDI had a sweet rally off of its December low of just under 700, rising to nearly 4,300 by June.  Since then, the bottom has been falling out and we are now near a 50% retracement.  Despite the volatility the BDI is seen as a good indicator of future economic growth and productivity.

The sector is exciting to follow and there are five stocks I have on my Watch List that usually move with the BDI.  All five of these stocks have options and quotes are from Friday.  I often talk about DryShips the most because it is more liquid than the others.

DryShips (DRYS, $6.02, up $0.12)

Eagle Bulk Shipping (EGLE, $4.99, up $0.11)

Excel Maritime Carriers (EXM, $6.98, up $0.06)

Navios Maritime Holding (NM, $4.87, up $0.17)

TBS International (TBSI, $7.21, up $0.29)

We had some success playing DryShips in late July as two call option trades returned 160% and 43%, respectively, in a week’s time.  I’m not ready to jump back into any option trades just yet on DryShips but it does get interesting when the stock dips below $6.

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4. Earnings

Monday: Accuray (ARAY, $7.40, up $0.13), China Nepstar Chain Drugstore (NPD, $6.89, up $0.34), Noah Education Holding (NED, $5.10, up $0.22) and Winn-Dixie Stores (WINN, $15.58, up $0.68).

Tuesday: American Woodmark (AMWD, $24.39, up $0.13), Bank Of Montreal (BMO, $47.03, up $0.61), Big Lots (BIG, $23.81, up $0.81), Borders Group (BGP, $3.69, up $0.12), Burger King (BKC, $17.48, up $0.09), Chico’s FAS (CHS, $12.09, up $0.22), Corinthian Colleges (COCO, $16.88, up $0.27), Medtronic (MDT, $37.80, up $0.17), Sanderson Farms (SAFM, $39.71, up $0.28) and Staples (SPLS, $22.49, up $0.80).

Wednesday: Coldwater Creek (CWTR, $6.97, up $0.19), Dollar Tree Stores (DLTR, $46.04, up $1.35), Guess (GES, $30.58, up $0.42), Kirkland’s (KIRK, $11.60, down $0.39), Sigma Designs (SIGM, $16.56, down $0.11) and TiVo (TIVO, $10.36, up $0.46) and Williams-Sonoma (WSM, $14.85, down $0.05).

Thursday: American Eagle Outfitters (AEO, $14.67, up $0.50), Aruba Networks (ARUN, $8.24, down $0.05), Bebe Stores (BEBE, $6.97, up $0.26), Dollar Financial (DLLR, $15.95, up $0.44), Fred’s (FRED, $13.29, up $0.29), J. Crew Group (JCG, $31.50, up $0.11), LaBarge (LB, $10.21, up $0.51), Novell (NOVL, $4.69, up $0.12), OSI Systems (OSIS, $20.32, up $0.07), Royal Bank Of Canada (RY, $47.43, up $0.41) and Toll Brothers (TOL, $22.70, down $0.80).

Friday: Frontline (FRO, $23.83, up $0.63) and Tiffany (TIF, $32.10, up $1.32).

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5. Current Trades & Closed Trades

Bank of America (BAC, $17.46, up $0.32)

January 20 calls (BYOAT, $1.35, up $0.10)

Entry Price: $1.18 (8/12/09)
Exit Target: $2.20
Return:  14%
Stop: $1.15

Action:  BofA made a high of $17.60 on Friday and resistance is right at $17.85.  This was the December high and if we can clear that with the bulls behind us then we could see $20, quickly.  That would be the ideal exit target so we will see how this plays out.

Citigroup (C, $4.70, up $0.22)

January 7.50 calls (CAQ, $0.25, up $0.06)

Entry Price: $0.14 (8/12/09)
Exit Target: 50 cents
Return: 79%
Stop:  21 cents

January (2011) 10 calls (VRNAB, $0.57, up $0.08)

Entry Price: $0.40 (8/12/09)
Exit Target: 80 cents
Return: 43%
Stop: 50 cents

Action:  There was no stop for these positions when we started the trade but we will put one on now that we have a tidy profit.  I hate to place a stop on this trade because we could get closed out at any time.  However, it is imperative that you take what the market gives you.  I didn’t expect Citigroup to have such a huge week but it did.

The High was 28 cents for the 7.50’s and 66 cents for the 10’s.  That was a 100% return for the 7.50’s…

Imax (IMAX, $9.56, up $0.36)

September 7.50 calls (IMQIU, $2.05, up $0.30)

Entry Price: $1.90 (8/4/09)
Exit Target: $3.00
Return: 8%
Stop: $1.00, raise to $1.50

March 2010 12.50 calls (IMQCV, $0.50, up $0.05)

Entry Price: $0.45 (8/10/09)
Exit Target: $1.00+
Return: 11%
Stop: None

Action:  Imax caught fire in the afternoon on Friday after Avatar pre-screening tickets went up for sale online.  The 15-minute clip was an introduction to a movie that isn’t being released by 20th Century Fox until Christmas.  However, the introduction has caused an early buzz that is bound to grow bigger in the weeks and months ahead.

Imax started to move late in the day after showing strength all day.  It was reported that 90 seconds after tickets were made available to the public, 17,000 of the 68,000 tickets were gobbled up before the servers bogged down.  Imagine that.

The good news for us is that the two screenings at nearly 130 Imax theaters were booked solid.  The movie Avatar cost nearly $240 million to produce and when you throw in the promoting, it’s gonna push it closer to $300 million.

20th Century Fox covered the costs of the Imax screenings and I’m not sure how much tickets went for.  However, little events like this that makes Imax such a compelling play.  Avatar is directed by James Cameron.. the dude who’s last movie was Titanic.  He has spent the last twelve years behind closed doors and Avatar is “his “baby”.  Oh yeah, Titanic was the biggest movie of all time, grossing nearly $2 billion worldwide.

If Imax can make some serious cash with events like this, what would happen if they ever got the SuperBowl or the Indy 500?  Folks, watch this 3-D revolution.  The Beatles sung about it and maybe Imax can has a “revolution” as well.  The roll-out of their digital projectors and content is exciting and I’m looking for another pop to over $10 this week.

Potash (POT, $96.04, down $1.12)

September 110 calls (PYPIB, $1.10, up $0.30)

Entry Price: $1.35 (8/20/09)
Exit Target: $2.10+
Return: -19%
Stop: 65 cents

Action:  Continue to hold.

Sirius XM (SIRI, $0.70, up $0.02)

December 1 calls (QXOLA, $0.15, flat)

Entry Price: $0.15 (8/21/09)
Exit Target: $0.30
Return: 0%
Stop: none

Action:  Pretty simple math here folks.  If Sirius is at $1.30 or higher by December then we double our money.  Or sooner.  At $1.45 our return is 200%.  The 52-week high is $1.41.

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6. Closing Thoughts

The market has had an incredible run and the key levels we are watching are as follows.

For the Dow (currently 9,505), watch for 9,625 which was the November high.  A run above this level clears the way for…dare I say it….Dow 10,000.  There is support at 9,000 but a break below 8,900 would send up a warning signal.

As for the Nasdaq (2020), it looks like 2,100 is smooth sailing as long as the bulls continue to run this week.  Above that, we get choppy but we could get a run to 2,275.  Support is at 1,930 and further down at 1,800 or so.  A break below that could lead to 1,600.

The S&P 500 (1,026) could easily make a stab at 1,100 now that it has surged past 1,000 but 979 will be key support near-term.  There is really nothing stopping the index from hitting 1,150-1,175 which is where headwinds will pick up.

Rick@MomentumOptionsTrading.com