FXI Long Puts

Chinese etf (FXI) is looking to breakdown from a head and shoulders on the 60min chart and I think this is a good play on the downside as the commodities are selling off and dollar is rallying. Target on this trade will be 39.50 as that is roughly a measured move from neckline of H&S pattern.

I like the Sept 43 puts as a nice in the money play at 3.25. Alternatively for a more aggressive trade you can buy the Sept 41s around 2.10. Either way I think the next few days to a week can see selling pressure on FXI. Cut losses if FXI trades above 42.50.

Weekly Watchlist 8/10

Bull markets typically end with great news as the final few "bulls" buy in and catch the top because they have finally seen "the evidence" that tells them the sky's the limit.

Whether we have reached that point last Friday as the jobs report sent everyone home for the weekend cheerful and giddy is yet to be seen. However, with plenty of sentiment polls showing the most optimism since May 08, it gets me cautious. On the other hand, not many bull runs have ended in the middle of August so we could grind out in this area or a bit higher thru Labor Day and then see a possible correction.

With that said, I think you have to be cautiously bullish this week with the expectations of higher prices but not be surprised if the rally stalls and rolls over.

The currency markets were jumping on Friday after the jobs data as the dollar soared against the Euro and the Yen got absolutely crushed. This was a very strange thing to see as stocks rallied as well. Perhaps it was just a one day event but if the dollar continues to rally this week it could be a red flag for the stock market as currencies usually know best.

The watchlist:

Longs>>> BKC, IVN, HAS, CTXS, TK, URS, DPTR

Shorts>>> SFD, SWY, MCO

Do You Use Protection?

As the market stair steps away and people getting a smidge on the complacent side, we have the VIX (the price of put protection or the fear barometer) at the lowest levels in 12 months. August is also traditionally the time of year when volatility starts to show signs of perking up into the fall. So without even taking into account where the market is or where it has come from, you should know that if you plan to insure your portfolio into the end of year, now is the time to do it. Institutions have been buying up volatility on the cheap recently in the form of VIX calls. So does that mean you should too?

Well, I really am no VIX expert by any means. That title would go to Adam Warner over at Daily Options Report.

However, I do know that the market has ripped higher in the last month and we are bumping up against severe resistance in the Nasdaq from last fall and some significant long term fibonacci retracement levels and confluences are nearing here in the 1000-1050 region. Nasdaq has retraced roughly 50% of the bear market decline and the SPX is at about a 38.2% retrace.

Tomorrow's jobs report has been on everyone's eyes all week and that has bid up the implied volatility into it. Notice the VIX actually up most of the time this week even when the market was up. After the jobs report comes out in the morning you will be able to purchase put protection at a slightly lower cost.

And if you can't sleep at night lately because you are over-exposed on the long side, then you will benefit from buying some cheap insurance for your stocks you plan to hold. You insure your home and car, why not your stocks?

If you are feeling nervous and can't sleep at night lately, then you are probably over-exposed to the long side. If you are long stock you can also form a collar in which you sell an OTM call and put and OTM put for ideally even money. This caps your upside but protects you from any surprise selloff.

Market Feels Vulnerable

Well it's midweek and the market is still holding the 1000 mark. However, I am a bit more cautious than I was a few days ago simply because the euphoria is mounting. In fact, the past few days I have seen Larry Kudlow and the Dennis Kneale's of the world just about as bullish as is humanly possible. I believe Kudlow was yelling for SPX 1200 the other day, lol. Too funny.

Anywho, on top of this, the CBOE equity put/call ratio slipped under 0.50 today for only second time since October 07 I believe. The total put/call ratio which I also watch hit 0.67 at the open as well. When this gets below .60 and even more so below .50 it tells me the market is much too bullish and an imminent correction will happen. Bill Luby has some great insights on this as well.

We have Euro Bank and Britain interest rate decision in a few hours so that will get the currencies moving. If the dollar cannot sustain this breakdown and push lower then it may end up being a nasty little bear trap in the dollar index, followed by a rally, which means a selloff in stocks. Jobs report on friday morning is gonna be huge imo to determine where this market goes. I think we have the possibility of seeing a blowoff top type of move into SPX 1050 if and ONLY IF all variables setup properly.

If dollar sells off and that is followed by a big positive surprise in jobs then we could rally big time into the weekend. In which case I'd be selling all longs and perhaps even going a bit short. Should be fun to see what happens!

CSCO Calendar Spread

Cisco (CSCO) is reporting earnings after the bell and trading a bit lower on the day with the market so far. The stock has had quite a run over the last few weeks and now sits above 22. I think even if CSCO pulls back that 20-21 is a great buying level as tech is still the leader. Just as MSFT sold off on earnings two weeks ago, it has bounced back more than a dollar higher so any dip in tech is a buy. As for CSCO, I think the play is to buy a call calendar spread at the 23 strike.

The Aug options are priced a bit higher than the Sept because of earnings bid up so we have the Aug IV near 45% and Sept IV near 36%.

I want to buy the Sept 23 call and sell the Aug 23 call. This can be done for a debit of $0.24 right now per spread.

Breakeven at Aug expy is anywhere between 21.3-25. Max profit is if the stock is at 23 at expy. You can always take the short call off after earnings and hold the Sept into a larger rally. But by selling the August you will be collecting some nice premium.

PNC Long Calls

PNC Financial (PNC) has been consolidating lower the last few months and largely not participating in the recent rally to the moon. This week it seems to be breaking out above this consolidation. I think you gotta be a buyer of PNC on any retrace back to 37-38, if you can even get that.

I see a move into the low 40s coming with the potential for 44 eventually. Stop out on a close under 36.

Buy the Sept 36 calls for $4.00 or better. If we get a quick move higher you can sell some August otm calls to collect some premium against your long itm calls.

Weekly Watchlist 8/3

Going into August the SPX is sitting just a bit below that 1000 mark and we have a gap still waiting below on the ES around 975. The jobs reports is out friday and whatever the move is into the report, look to fade the other way. I am still bullish and think this market is going higher until it shows otherwise. Although we could pullback a bit here to fill that gap, especially since the closes on Thursday and Friday were not too inspiring.

In the chart above I slapped on some fibs from the previous move down from mid-June to mid-July and as you can see we have retraced more than 127.2% of that move. The next target above is the 161.8% retracement which would bring us to about 1010 in the SPX. I like to use fib extensions to project price targets based on the previous move. This is a great way to stay objective and have a realistic target set.

Watch the euro to see how it acts around 1.43 and if the dollar index can't hold 78 this week, it could be off to the races in the major stock indexes. I still see no reason to be calling the top in this market.

The watchlist:

Longs>>> AAV, IVN, RT, IGT, EAT, PNC, TIE, CME, TV, JCP

Shorts>>> BA, NOC, MCO