9:00am (EST) continued…
The Dow fell 49 points, or 0.4%, to end at 13,437 on Friday. The blue-chips traded to a low of 13,367 and we warned of a dip to 13,350 once 13,500 cracked. The next level of support comes in at 13,200 and then the all important 13,000 level. The bulls will need to clear 13,500, first, and then 13,600 which has been a brick wall. The index missed testing our fluff targets of 13,800-14,000 but they are still in the mix if the bulls rebound. The Dow came into the week at 13,579 and lost 142 points, or 1.1%, by Friday’s close. For 2012, the blue-chips are higher by 1,220 points, or 10%.
The S&P 500 dropped 6 points and finished at 1,440. The index held 1,450 to start the week but Tuesday’s pullback to 1,441 got 1,425 in the mix. The S&P kissed a low of 1,430 on Wednesday which was the low for the week. A break below 1,425 gets the psychological 1,400 level back in play. A pop back above 1,450 get 1,475-1,500 back into the picture which were our fluff targets for September had the rally remained strong. The high of 1,474.51 came mid-month. The S&P 500 started Monday at 1,460 and was down 20 points, or 1.3%, for the week. For the year, the index is up 178 points, or 14.6%
The Nasdaq declined 20 points, or 0.7%, to close at 3,116. Tech came into the week looking to clear our upend targets of 3,200-3,250 but ran started the week off in the red. The bulls needed to hold 3,100 or they faced further pressure down to 3,050 and this level was tested on Tuesday’s close of 3,117. The Nasdaq closed below 3,100 on Tuesday to 3,093 after testing 3,080 during the session. The bulls reclaimed support by Thursday and it held on Friday but any further weakness could lead to a test down to 3,000 coming into October. The Nasdaq started Monday at 3,179 and ended the week down 63 points, or 2%. YTD, the index is showing a gain of 507 points, or 19.6%.
The Russell 2000 gave back a 6-pack, or 0.7%, on Friday and went out at 837. Short-term support had been steady at 850 but the dip to 849 to start the week was a warning sign. The small-caps closed at 839 the following session and tested 831 on Wednesday. There is still risk down to 820 but a break below this level would get 800 back on the bears map. Our 900 fluff target would have triggered if the bulls cleared 875 in September but the best they could do was 868 mid-month. The Russell 2000 began the week at 855 and was down 18 points, or 2.1%, following Friday’s close. For 2012, the index has advanced 97 points, or 13%.
The S&P Volatility Index ($VIX, 15.73, up 0.89) popped 6% on Friday after coming into the week at 13.98. The VIX touched a high of 15.06 to start the week as the bears let the bulls know they were ready to play. The index reached a peak of 17.08 on Wednesday and before Thursday’s rally which saw the VIX close back below 15. We mentioned last week Wall Street wouldn’t get nervous until 20 triggers and if Monday is a negative day, this level could get here quickly. A move past 17.50 would be confirmation as you can see from the chart below.
Although the bulls slipped again last week, September was a month to remember as the market rallied 4%, on average. The indexes failed to make a run at our fluff targets but came close. If there is a pullback or correction, these fluff targets could become year end targets depending on how much damage the bears do.
For the month, the Dow was up 347 points or 2.6% while the S&P 500 gained 34 points, or 2.4%. The Nasdaq popped 50 points higher, or 1.6%. For the third quarter, the Dow was up 4.3%, the S&P 500 was higher by 5.8%. The Nasdaq popped 6.2% for 3Q.
We warned on Tuesday that the market had its first Friday/ Monday negative close in 6 weeks and Friday’s drop is cause for concern. The trading range over the summer provided up and down Friday and Monday’s which is typical but if we get a lower Monday a trend change could be coming.
We have one more week before earnings season starts and the laundry list of companies that have already pre-warned include: Caterpillar (CAT, $86.04, down $0.88), Dow Chemical (DOW, $28.96, down $0.20), FedEx (FDX, $84.62, down $1.15), Ford (F, $9.86, down $0.16), Procter & Gamble (PG, $69.36, up $0.06), Norfolk Southern (NSC, $63.63, down $0.55) and U.S. Steel (X, $19.07, down $0.24).
Perhaps the bar has been lowered enough, again, that the companies that do beat estimates could prop the market up in October. Our feeling is there could be a slew of companies that miss by a penny or two which is why they didn’t warn Wall Street. If it’s more than that, the market could take a serious hit. Alcoa (AA, $8.86, down $0.13) will be the first Dow component to announce and they will confess on October 9. If shares are up this week, they could have a good quarter in store. If shares trade lower, it could be a warning sign.
October has a history of famous stock market “crashes” so we did some research over the weekend. Believe it or not, September is technically the worst month for stocks but October is more remembered because of scary Halloween’s and the “Black” days.
There are a few investors who may remember the first stock market crash back in 1929 and we were just a teenager when the market tanked in the 80’s which gave us an early lesson in life. The message was not to ever take the market for granted because in one day things can go south in a hurry. It is why we have always respected the bears and why we learned how to short stocks and how to use put options before we ever invested.
In 1929, the Dow dropped 11% intraday on October 24 falling from 305 the previous day before recovering to end the session down only 2%. The day was labeled “Black Thursday”. Four days later, “Black Tuesday” marked the start of the Great Depression as the Dow dropped 11% from a previous close of 260 to 230.
These two days were significant as the Dow tanked 25% in four days following Black Tuesday and 90% in 3 years after Black Thursday occurred.
In 1987, we remember October 19 which would become known as “Black Monday”. The Dow was at 2,246 and plummeted nearly 23%, or 508 points, to end the session at 1,738. Many investors took a tremendous hit to their 401K and retirement plans.
We were a teenager in the 1980’s and just getting our feet wet in the market. Although we personally didn’t take a hit because we weren’t in the market in 1987, it taught us a very valuable lesson and that was to respect the bears. It is also why we learned how to short the market and buy put options which served us well before the crash of 2000.
We aren’t ready to go on record to say there will be a “correction” or a crash this month but we have experienced several October storm clouds over the past 25 years and we typically LOVE them. If there is panic, and the market does start to drop like a rock, buying puts will be very lucrative.
We aren’t sure what the Vegas odds would be on a correction but with so many fundamentals looking bearish, it is something to think about. We have defined clear support and resistance targets so if there is a breakdown or breakout, we should get a few warnings signs.
As we head to press, futures are showing a slightly higher open this morning. Dow futures are up 60 points to 13,415 while the S&P 500 futures are higher by 5 points to 1,439. The Nasdaq 100 futures are popping 15 points to 2,807.
MEMBERS AREA
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. Closed Trades for 2012 (131-43, or 75% win rate, including Weekly Wrap which is 24-0).
JC Penney (JCP, $24.29, down $0.16)
November 22 puts (JCP121117P00022000, $0.95, flat)
Entry Price: $0.95 (9/28/12)
Exit Target: $1.90
Return: 0%
Stop Target: None
Action: Shares closed below $25 for the week which should serve as resistance going forward. The break below the 50-day and 100-day MA’s should lead to a test to $20 by mid-November. We have a longer-term target of the low teens for JCP.
First Solar (FSLR, $22.15, down $0.97)
October 20 puts (FSLR121020P00020000, $0.90, up $0.15)
Entry Price: $0.85 (9/28/12)
Exit Target: $1.70
Return: 6%
Stop Target: None
Action: We are expecting a test down to $20 and the 50-day MA this week. Resistance is at $24 but the decline should pick up steam once $22 cracks.
Tiffany & Co. (TIF, $61.88, down $0.02)
October 60 puts (TIF121020P00060000, $0.95, down $0.05)
Entry Price: $1.25 (9/26/12)
Exit Target: $2.50
Return: -24%
Stop Target: None
Action: Shares traded to a low of $60.69 on Friday but nearly finished even for the session. We would like to see a drop below $60 this week which would get the 50-day MA in play. A move below this level could lead to double-nickels if $58 fails to hold. Resistance is at $63.
Buffalo Wild Wings (BWLD, $85.74, down $0.05)
November 70 puts (BWLD121117P00070000, $1.20, down $0.05)
Entry Price: $1.25 (9/26/12)
Exit Target: $2.20
Return: -4%
Stop Target: None
Action: There is risk for a back test to $87 this week but we are looking for a drop down to $82. A break below this level will get $80 and all the MA’s in play.
TiVo (TIVO, $10.43, up $0.11)
November 10 calls (TIVO121117C00010000, $0.85, up $0.10)
Entry Price: $0.70 (9/25/12)
Exit Target: $1.40
Return: 21%
Stop Target: None
Action: Shares traded up to $10.45 twice last week and you can see resistance at $10.50 on the chart is strong. A move above this level should lead to a run at $11-$11.50. Support should hold at $10 on a pullback which was prior resistance.
KLA-Tencor (KLAC, $47.71, down $0.20)
October 45 puts (KLAC121020P00045000, $0.40, up $0.05)
Entry Price: $0.55 (9/20/12)
Exit Target: $1.10
Return: -27%
Stop Target: None
Action: We got into this trade after shares broke below $50 which should serve as resistance going forward. The low of $46.42 came midweek and shares could test the low $40’s on a break below $46.
Akamai Technologies (AKAM, $38.26, down $0.23)
October 40 calls (AKAM121020C00040000, $0.50, down $0.05)
Entry Price: $0.90 (9/17/12)
Exit Target: $1.80
Return: -44%
Stop Target: None
Action: We were looking for a close above $39 on Friday and the high for the week came in at $39.47. The 52-week high of $39.67 was hit in mid-September. A move above $40 would be super bullish and could lead to a test of $42.50 which would get these calls options north of $2. Support has been strong at $38-$37.50 but a drop below this level could force us out of the trade as these options expire in less than 3 weeks.
Taiwan Semiconductor Manufacturing (TSM, $15.82, up $0.22)
October 15 calls (TSM121020C00015000, $0.90, up $0.20)
Entry Price: $0.45 (9/11/12)
Exit Target: $0.90 (closed HALF at 80 cents on 9/28/12)
Return: 89%
Stop Target: 45 cents
January 15 calls (TSM130119C00015000, $1.35, up $0.10)
Entry Price: $0.90 (9/11/12)
Exit Target: $1.80
Return: 50%
Stop Target: 90 cents
Action: Shares closed above $15.75 target on Friday and we lock-in half profits on the October 15’s in the process. Friday’s high was $15.83 and we are looking for shares to challenge the 52-week high of $16.15 this week. If cleared, shares could make a run at $20. Support at $15, which was prior resistance, should hold on a back test but we will exit all positions if shares retreat.
Solazyme (SZYM, $11.49, down $0.20)
December 12.50 calls (SZYM121222C00012500, $0.65, down $0.10)
Entry Price: $0.70 (9/5/12)
Exit Target: $1.40
Return: -7%
Stop Target: 50 cents
Action: Shares cleared $12 to begin the week but traded to a low of $11.29 on Tuesday. The current range is due for a breakout (or breakdown) soon. Support has been solid at $11 with backup at $10. A move above the 100-day and 200-day MA’s would be bullish and could lead to a test of $12.50.
Knight Capital Group(KCG, $2.68, up $0.01)
January 2.50 calls (2013) (KCG130119C00002500, $0.40, flat)
Entry Price: $0.70 (8/21/12)
Exit Target: $1.40
Return: -27%
Stop Target: 50 cents
Action: Shares made a sweet surge off the low of $2.34 last week and a pop over $3-$3.50 would be bullish and could lead to short-covering. There is still risk down to $2. Shares were near $2.80 when we entered this trade back in August after tumbling from $10 to $2.50 in late July on the company’s trading fiasco. We think a buyout offer north of $5 could be in the cards by year end.
Other 2012 Portfolio OPEN positions (4): 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.
Apollo GroupOctober 24 puts (from August 2012)
Pepsico October 75 calls (from August 2012)
Bank of America January 12.50 calls (2013) (from March 2012)
eBay October 52.50 calls (from September 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.
Caterpillar (CAT, $86.04, down $0.88)
October 82.50 puts (CAT121020P00082500, $1.00, up $0.10)
November 80 puts (CAT121117P00080000, $1.70, up $0.15)
Thoughts: We might go with one of these put options if shares fall below $85.
Coinstar (CSTR, $44.98, down $0.05)
October 42.50 puts (CSTR121020P00042500, $0.95, flat)
Thoughts: Resistance at $45 is trying to stick.
Ralph Lauren (RL, $151.23, down $0.74)
October 140 puts (RL121020P00140000, $0.85, flat)
Thoughts: Shares could retest $140-$135 if $150 fails to hold..
Lions Gate Entertainment (LGF, $15.27, up $0.37)
October 15 puts (LGF121020P00015000, $0.35, down $0.15)
November 14 puts (LGF121117P00014000, $0.40, flat)
Thoughts: We would wait for shares to drop below $14 to confirm a breakdown that could push shares as low as $10.
Netflix (NFLX, $54.44, down $1.11)
October 50 puts (NFLX121020P00050000, $1.10, up $0.15)
Thoughts: There is still risk up to $57 but we liked the close below $55.
Fossil (FOSL, $84.70, down $1.62)
October 75 puts (FOSL121020P00075000, $1.00, up $0.10)
December 55 puts (121222P00055000, $0.70, up $0.20)
Thoughts: We have a near-term target of $80 which would likely trip on a move back below $85 and a 6-12 month target of $40 if shares fall below $60.
Monster Beverage (MNST, $54.06, up $0.62)
October 50 puts (MNST121020P00050000, $0.65, down $0.15)
October 52.50 puts (MNST121020P00052500, $1.15, down $0.35)
Thoughts: We have a feeling shares are going to test $50 again and a break below this level should lead to a quick trip to $45.