9:00am (EST) continued…

The Dow added 43 points, or 0.3%, to finish at 13,208 on Friday.  The blue-chips held the 13,100 level and peaked at 13,215.97 on Tuesday while Friday’s 13,094 print was the low for the week.  The next wave of resistance is now at the May peak of 13,338 and we have said a close above 13,350 could signal a bullish breakout.  The bears will try to get a close below 13K, first, and then target a test back to 12,800.  The Dow came into the week at 13,096 and was up 112 points, or 0.9%, by Friday’s close.  For 2012, the blue-chips are showing a gain of 991 points, or 8.1%.

 Here is last week’s chart of the Dow:

The S&P 500 gained 3 points, or 0.2%, to settle at 1,406.  The index held green all week and the low came on Monday’s open which was at 1,391.  The close above 1,400 on Tuesday was bullish after the intraday high of 1,407.  We have said a close above 1,400 could lead to a test to 1,425 and if cleared, it could be the start of a bullish trend through yearend.  The bears will try to get the action back below 1,400, quickly, and would like to push 1,390 to start the week.  From there a test back to 1,375 could be in order.  The S&P 500 was at 1,391 to start Monday’s open and popped 15 points, or 1.1%, for the week.  For the year, the index is higher by 149 points, or 11.8%.

Last week’s chart for the S&P 500:

The Nasdaq advanced 2 points, or 0.2%, to end at 3,020.  Tech opened the week at 2,978 and traded to a low of 2,974 on Monday’s start of trading and opened at 3,002 on Tuesday which held for the rest of the week.  The close above 3K was bullish and now puts 3,100-3,150 back on the map.  We would wait for a close above the latter to confirm a possible trend change.  The bears will try to crack 3,000 to start the week and could push 2,950 on any bad headline.  They would feel safer if Tech plunges 3% to 2,900 and the 50-day MA but that would be asking a lot given the tight range we just went through.  The Nasdaq started the week at 2,968 and was higher by 53 points, or 1.8%, by the weekend.  Year-to-date, the index is up 416 points, or 16%. 

Here is last week’s chart for Tech:

The Russell 2000 slipped a little over a point to close at 801.55.  The small-caps opened the week at 789.27 which was the low and closed above 800 on Tuesday.  We said last week the bulls had a good chance of clearing 800 which could lead to a possible run to  825.  Wait for a move above 810 to confirm.  The bears will look to trip the bulls back below 800 but they will need to push 790, quickly, if they are going to keep the action contained.  The Russell 2000 came into the week at 788 and was able to tack on 13 points, or 1.7%, for the 5 trading days.  For 2012, the index is higher by 61 points, or 8.2%.

Here is last week’s chart for the Russell 2000:

The S&P Volatility Index ($VIX, 14.74, down 0.54) dropped 3% on Friday following a $1 billion buy order at the close which gave the market a lift.  The talking heads were tripping over themselves to make this announcement by the bell and the close below 15 was bullish.  We said last week to watch the mid-July low of 15.45 which triggered on Tuesday and Wednesday’s close on the VIX was 15.32.  The next downside is now at 14.43 which is the VIX closing low from mid-March.  The intraday low was 13.66 and when the S&P reached its peak for the year.  The bears will try to push a pop back above 15 to start the week and a finish above 17.50 would signal a top could be in for the indexes.   

Last week’s chart of the VIX:

For kicks and giggles:

We are neither bullish nor bearish at this point as we have said the market could test the top of its trading range after the S&P cleared 1,375 at the beginning of the month.  Although we haven’t purchased call options for the Daily, the 3-month trading range has been good for our Weekly Wrap as we could be closing up to 3 trades this week.  Trading ranges causes option premiums to evaporate which allows us to write more options to lower our cost in the stocks we have in the Weekly portfolio.  Also, some of our “diamonds in the rough” are going to be huge triple-digit winners down the road so we aren’t worried about trading ranges or an up or down market. 

This doesn’t mean we won’t be purchasing call options for the Daily if there is a breakout and a new trend change as we have a number of trades on our Watch List to play a test to the 52-week highs.  We may also release 2 or 3 trades on Monday’s open just to play for the week.

However, we want to stress we can play it cool while we wait for a breakout or a breakdown.  We mentioned last week there will be plenty of time to by calls and participate in a blue-sky breakout but we just don’t feel safe in doing so until that happens.

The charts are still showing mixed signals with the Dow and Russell 2000 pinned under their middle uptrend channels while the S&P 500 and the Nasdaq are showing some strength.  The VIX appears to be headed lower but volatility is at historic levels that often signal a reversal. 

Earnings are starting to wind down with nearly 450 of the 500 S&P companies having confessed.  The numbers are showing nearly 70% of them have beat earnings but we are more interested in how many companies missed on revenue and lowered guidance.     

The tight trading range is normal during the summer doldrums and the test at this next level of resistance has come on very low volume.  There were no convictions on any of the pops higher throughout the week as you can also see in the charts.  Wall Street is bracing for the Fed and Europe (and now China) to do something by the end of the month. 

While this week is options expiration, which usually brings added volatility, it wouldn’t surprise us if the market stayed range bound near the top for another week or two and pushed new highs.  Economic news this week has the potential to move the market 2%-3% which would get the indexes near their peaks for the year or back to near-term support which we have outlined.

We mentioned last week that we aren’t missing anything if this rally is sustainable because there could be another 5%-10% move if the 2012 highs are cleared.  On the flip side, the downside offers much more profit potential as you can see from the breakdown in May to June on the charts.  The Nasdaq hit an intraday high of 3,085 on May 1 and was at a low of 2,726 by June 4.  This was a 12% drop in a month.

Again, we are neutral on the market because trying to trade the market at these crucial levels is hard, very hard.   We have outlined targets which will define the next trend. 

We were bullish to start the year as you can see the rally from late December to the beginning of April on the charts.  Many of the talking heads and market pros were bearish because the “Christmas” rally never came but we started to load up on call options.  The suit-and-ties called for a market pullback all January long and into February which is when we hit a mini trading range.  In April, we went bearish when all of the knuckleheads said the market would rally and by the end of the month, we started banking profits for our May put options.

The pros were still bullish for May as they said there wouldn’t be a “sell in May and go away” downturn.  There was and we continued to lock-in profits with put options.  The dip in June is when we opened our last “batch” of trades for another possible leg lower but support held when the market was on the verge of collapsing.  We are still trying to get through these trades but some of them may not recover.  We have closed 7-out-of-our last 8 option trades as winners but we could get caught with the remaining August puts as we will run out of time by Friday’s close.  

The bounce back to the top of the trading range that has ensued over the past few months has produced mixed results but we try to trade through trading ranges with the expectations of hitting on half of our trades.  For the year, we are at 112-31 for ALL of our trades which is a 78% win rate so we can be patient.   

Trading at these key levels of support and resistance is one of the hardest tasks as an option trader and as aggressive as we can be, we have cut back on our trading.  We don’t mind trading through them if they are short in nature but this one has dragged on for 3 months and could go on for the rest of the month. 

We have learned over the years to scale back when we encounter them but the good news is that we have plenty of room to add new trades on a breakout or breakdown.  And our Weekly Wrap always keeps us “in the market” as we manage our positions daily on monthly when we sell options.

 Again, we can be bullish if we need to be but we are still expecting a trading range that could produce a test to the 2012 highs or a slight pullback to support which was prior resistance – until the Fed or Europe makes a move.

As we head to press, futures are showing a slightly lower open this morning.  Dow futures are down 8 points to 13,164 while the S&P 500 futures are lower by 2 points to 1,400.  The Nasdaq 100 futures are off a point to 2,722. 

 

Do not risk more than 5% of your trading account on any one trade but do try to take ALL of the trades.  Please remember, ALL “Exit Targets” and “Stop Targets” are targets.  You should not have any “Hard Stops” entered to close any trades or “Exit Orders” in your brokerage account unless we list one.  We will send out a “Profit Alert” or “Trade Update” if we want you to close a position OR if a new trade comes out.  Otherwise, follow instructions at all times in the 9am and 1pm updates.  Also, we will usually give you a heads-up if we think we are going to send an email outside of these time frames.

 

Wynn Resorts (WYNN, $101.83, up $0.30)

September 80 puts (WYNN120922P00080000, $0.30, down $0.05)  

Entry Price:  $0.85 (8/2/12)

Exit Target:  $1.70
Return:  -65%
Stop Target:  None

Action:  We suggested these puts when shares were under $95 and knocking on $90’s door.  The move back above $100 was bullish but shares did trade to a low of $99.87 on Friday.  We would like to see a move back below $95 this week but if shares pop above $105, we may add the September 115 calls (WYNN120922C00115000, $0.50, down $0.05) and make this a strangle option trade.  A move above $105 could lead to a test to $112.   

Veeco Instruments (VECO, $37.77, down $0.34)

September 30 puts (VECO120922P00030000, $0.35, up $0.05)

Entry Price:  $0.90 (8/2/12)

Exit Target:  $1.80
Return:  -61%
Stop Target:  None

Action:  We said we would consider adding call options on a close above $38 which happened on Thursday.  However, we don’t really like buying options on Friday’s but we are still considering adding the September 41 calls (VECO120922C00041000, $1.00, down $0.10) if shares hold $38 again this week.  We would like to see a close below $36 this week.

Apollo Group (APOL, $28.61, up $0.16) 

September 24 puts (APOL120922P00024000, $0.50, down $0.05)

Entry Price:  $1.10 (7/31/12)

Exit Target:  $2.20
Return:  -55%
Stop Target:  None

Action:  Apollo Group rebounded last week to close above $28 which was disappointing given the earnings news from DeVry on Thursday.  We have traded Apollo for years and we recently closed our August puts for a 67% profit but sometimes the tape can go against you no matter how good the downside story is going to be.  We may close this trade on a move above $30 but we still believe at some point shares will test the teens.   

Other 2012 Portfolio OPEN positions (8):  These are trades that are still open in the portfolio but are down over 50%.  They have longer expiration dates and are on “hold” but are not worth mentioning until they turn around.  This means we would not open any new positions.  We are still keeping track of the trades and we will record the results, accordingly, when we close them or if the options expire.  Click on the 2012 Portfolio link in the Members Area to view ALL open/ closed trades.

 

Bank of America January 12.50 calls 2013 (from March 2012)

iShares Dow Jones US Real Estate August 57 puts (from June 2012)  

AOL August 24 puts (from June 2012)  

Consumer Discret Select Spiders August 41 puts (from June 2012)

Freeport McMoRan Copper & Gold August 29 puts (from June 2012)

PowerShares QQQ August 59 puts (from June 2012)

Dow Jones Industrial Average Spiders September 119 puts (from July 2012)

S&P 500 Spiders September 123 puts (from July 2012)

 

WATCH LIST SECTION

 

These trades are NOT recommendations.  They are trades that we like but have not added to the portfolio as an official recommendation because of market conditions or because we are waiting for better entry prices.  We try not to have more than 12-15 open trades at any one time which is why we created a Watch List.  We will not list entry prices because these stocks are on the verge of breaking out or they could sell off but these are the trades we are watching as new candidates. 

 

Pepsi (PEP, $72.13, down $0.01)

September 72.50 calls (PEP120922C00072500, $0.67, down $0.08)

October 75 calls (PEP121020C00075000, $0.38, down $0.05)

January (2013) 75 calls (PEP130119C00075000, $1.00, down $0.05)

Thoughts:  This is a 5-year monthly chart for Pepsi which clearly shows the breakout.  A run to $80 could be in the cards if support at $70, which was prior resistance, holds.  If you buy any of the aforementioned calls, use $67.50 as a stop.  We like the January 75 calls the most and if we make an official recommendation this morning or this week we will send out a Trade Alert.

Taiwan Semiconductor Manufacturing (TSM, $14.49, up $0.16)

January 15 calls (TSM130119C00015000, $0.70, flat)

Thoughts:  We said we would wait for a move above $14.50 but let’s make it $14.75 to be safe if we do decide to add these call options.

Buffalo Wild Wings (BWLD, $72.44, down $0.10)

September 80 calls (BWLD120922C00075000, $0.55, down $0.10)

September 65 puts (BWLD120922P00065000, $0.95, flat)

Thoughts:  Below is a 3-year chart for BWLD.  In late July, the stock fell from $78.90 to $70.43 the day after the company reported earnings and traded down to $68.71 intraday.  The recovery high was $75.01 which is near-term resistance.  This is the level we will need to watch for a bullish breakout and buy calls. A move below $70 would suggest we use put options for a possible test down to $65-$60.  If shares can clear their 50-day MA there is a chance for a quick run to $80.  

SanDisk (SNDK, $41.40, down $0.19)

September 45 calls (SNDK120922C00045000, $0.55, down $0.10)

September 38 puts (SNDK120922P00038000, $0.70, flat)

October 35 puts (SNDK121020P00035000, $0.80, flat)

Thoughts:  We would wait for a move past $42.75 before going long which is the end of July high and a break above the middle channel.  A close below $40 would be bearish and could lead to retest of $38 or worse.  

Dillard’s (DDS, $74.16, down $0.03)

September 75 calls (DDS120922C00075000, $2.90, down $0.20)

September 60 puts (DDS120922P00060000, $0.40, down $0.05)

Thoughts:  Shares have gone ballistic and could push $80 over the near-term while a break below $70 would end the momentum.   

Broadcom (BRCM, $35.35, up $1.02)

September 35 calls (BRCM120922C00035000, $1.50, up $0.55)

September 32 puts (BRCM120922P00032000, $0.40, down $0.20)

Thoughts:  The 52-week high is $39.66.  We would wait until shares clear $36 before going long and on a break below $34 we might look to go short.

Ingersoll-Rand (IR, $45.08, up $0.35)

September 40 puts (IR120922P00040000, $0.35, down $0.05)

September 45 calls (IR120922C00045000, $1.55, up $0.10)

Thoughts:  We said a move above $43.50 could lead to a test of the 52-week high which is $45.62.  Shares could continue higher and make a run at $50 over the near-term but a drop below $41-$40 would be bearish.   

Akamai Technologies (AKAM, $35.97, down $0.24)

September 34 puts (AKAM120922P00034000, $0.72, down $0.01)

September 38 calls (AKAM120922C00038000, $0.67, down $0.15)

November 45 calls (AKAM121117C00045000, $0.55, down $0.11)

January 45 calls (AKAM130119C00045000, $1.00, down $0.15)

Action:  A close above $37 could lead to a test of the 52-week high of $39.14.  If shares make a move past $40 it would represent blue-sky territory and a possible push to $45-$50.  A drop below $34 would be bearish and could lead to a test of $30.  We have adjusted the calls and puts to represent a strangle option trade.  We have also listed the January and November 45 calls on a possible run to $50 and would give us an additional 2-4 months to play a breakout.

KLA-Tencor (KLAC, $53.12, up $0.06)

September 55 calls (KLAC120922C00055000, $0.80, flat)

September 50 puts (KLAC120922P00050000, $0.65, flat)

Thoughts:  We said early last week it might be time to get bullish if $50 continues to hold.  Shares look headed to double-nickels ($55) and a blue-sky breakout could be in the mix.  A move below $51-$50 would reverse the recent uptrend.  This could also be a good strangle setup for the next 6 weeks.