Price Patterns

Triangles

KMB, PX, HPQ, FLS, RIMM, MICC

Double Bottoms

AMN, VMI, PCP, JEC, SSL, SGR, USM, LLY, HSC, ITT, RMD, BG, CAT, CMG, FDX, EXC, FO, EMR, FISV, CTAS, LECO

"Buy the Dips" (Bullish Stocks Near Support)

RNT, RCII, PG, STRA, APEI, BRP, PGN, LG, PG, CL, CHD, ETR, ASA, CEPH, AFAM, CRAI, HURN, AVAV, WGL

"Sell the Rips" (Bearish Stocks Near Resistance)

PTV, THOR, BBT, MSTR, R, KR, EQ, MVL, JLL, PPH, WAT, RL, ALOG, HUBG, DST, JOE, SWY, TMO, RCI, NVS, WLP

Breakouts/Breakdowns

COGT, GVA, ASEI, DLTR, NCIT, AXYS, RGLD, SHEN, PNY

Good evening!

This weeks watchlist is being delivered in written format. Below are the traditional categories I usually cover, with hyper links that point to watchlists of thumbnail charts for each of the categories (similar to the daily watchlists). Despite the shortened week this week, start by checking out the economic calendar below for upcoming announcements.

Economic Calendar

Price Patterns

All Triangles- GHL, KMB, HEW, ETR, NWN, RIMM, WY, AME, GOLD

Buy the Dips (Bullish stocks near support)

LG, WTR, TAP, ADM, ABV, AEM, GDP, TNH, GMCR, APOL, ALGT, STRA

Sell the Rips (Bearish stocks near resistance)

GIS, NKE, TM, EGN, BWA, GYMB, SAFM, FCN, HPQ, PHI, GPS

Range Bound Stocks for Breakouts/Breakdowns

PEG, NJR, PCLN, FE, WYE, AYE, PPL, ETR

If you are an option trader, I am sure you've had the VIX on your radar since it initially started climbing past 26. Back then that level was concerning, now I wish it were anywhere near that level.

This high volatility environment has option prices overly inflated, which in combination with the widening of bid ask spreads over the last several weeks has made it difficult to trade options. However, I am seeing some positive changes in the elements that lead me to believe that trading options will start to get easier shortly.

First, take a look at the VIX...

Throughout this huge swing higher, the VIX has remained above it's 10 day moving average since the beginning of September; or at least closed above this indicator over that duration. Lately I have been using the 10 day on the VIX to determine any short term changes in the trend. Looking at the chart, you'll see that the 10 day acted as support dating back to the beginning of September, and prices have not closed below this indicator since. However, yesterday was the day that prices finally closed below this indicator.

You'll also notice that recent price action resembles that of a double top. Not just the pattern, but a confirmation as well (if you use closing prices). This should mark a short term top in the VIX, and a possible 15 point decline, taking the VIX back down to the 40's.

Not only that, but I have been seeing bid/ask spreads start to narrow. This is specific to more liquid options products, such as ETFs or very liquid stocks, but this is the most promising sign I have seen yet.

I will stick to my original claim that by the time earnings season is over, option trades will start to return to a relatively normal level. In fact, if you are a seller, over the next few days I would look to start selling some premium here ahead of a potential contraction in the VIX. Not to mention, but after earnings season, individual implied volatility is relatively cheap.

Use this in correlation with a positive move in the Dow. If the Dow prints 9300, sell premium quickly.

OA

It's expiration week and I'm sure your guess is as good as the market makers in terms of where prices finish on Friday. Let me tell you though, after looking over option prices at the close today, there is a ton of premium that will expire worthless on Friday. Do you have the cojones to sell any options here? Me neither. However, if you are looking to grab a piece of the pie before its gone, cover a short call with a long OTM call. While you have some significant gamma risk heading into expiration, you can still generate decent credits going 10% OTM.

There is very little I like in terms of going long, and plenty out there to short. Some of the Ag names have held up well over the last few days, and you might be able to ride a few financials and tech stocks higher ahead of their earnings announcements, but other than that the best longs are ultrashort ETFs. Sell a call with them at the time of purchase to give you a little wiggle room to the downside, if that's your fancy.

If you are on the sidelines, get into an intra-day chart and start daytrading. There is a lot of room for error when the Dow has an ATR of 550 points, and collapses several hundred points into the close of most trading sessions. "Be the ball."

Peace,

OA

11%. That is nuts.

Honestly, whether or not we hold these gains is irrelevant in my eyes. As long as the price action is mixed up from here, it will make trading the swings so much easier; if swings are reinvented in the market place.

In regards to trading options, I hope you are content trading stocks for the short term. Options are barely tradeable as they stand. In fact, let me give you a quick run down of why options are not worth the expensive price tag...

Last Friday, I watched the DIA open at $82. The Oct 82 call opened at $4.65.

From that point, the DIA plunged, bottoming at $78.84. The call had only dropped to $3.00.

From the bottom, the DIA rallied to its daily highs at $89.08 (a 13% move), the call traded up to $8.30.

At the close, the DIA settled at $83.74, while the 82 call closed at $6.20.

After observing these unbelievable moves in the averages, I realized that had you owned this call (open-close), you would have earned a 78% return. Disgusting, considering that the Dow moved so much in a short period of time.

To put this into perspective, with reasonable levels of volatility, you would only need a 1-2% move to make that type of return.

In closing, buy Stock.

OA

Another 3:30 futures led sell-off ruined what looked like a fairly constructive trading session. Now you must be wondering what upcoming effort by the government will be deployed next, only to get stomped to death by mother market?

If you are afforded the luxury of daytrading, why are you not focusing on that? All you have to do is pick a direction set a tight stop and watch the market move 2 or 3 percent in only a few minutes. If you've never traded futures before, that is the equivalent of a new car, a loss of 20 pounds, and a year removed from your life time on every trade. Do it!

If you decide to swing trade this market, I'd short REITS after another days rally, medical device makers, deep discount retailers, and a few other odds and ends. It's a stock pickers market, so don't discount taking easy to manage entry/exit points. Pair all shorts with a long, and try to ride out the volatility.

Finally, as I rejoice over the lifting of the short selling ban, I will celebrate by shorting a bank.

That's all I got tonight. I am spent.

OA

History is being written, folks. These are exciting yet difficult times to trade in. At least one day you can look back on this period in the markets smiling- or scoffing and cursing if that's how you roll.

It is becoming increasingly risky to short at these lows. There have been few rips to sell, and if you don't catch them quickly, they are gone. My best advice to you is to check the chart toppers each day and go over the dollar gainers on the NYSE and NASDAQ (I never trade stock on the AMEX; don't ask). Use these as search parameters to sell anything positive in this market for short term swings.

I would take note in the VIX divergence that occured today. While the averages hit new lows, the VIX printed a lower high.

Speaking of VIX, the options market will hopefully return back to its normal, over-priced self tomorrow as the restrictions on the short selling of financial stocks will be lifted. This won't drive liquidity into the market, but the spreads should narrow to a degree. I am finiding that a good option to trade now days is a matter of randomness. Super liquid stocks could have ridiculously weak options, while not so liquid stocks on occasion have decent options available. This has limited my ability to take down less than a third of the good looking set-ups I have been finding. In fact, I have traded just as much stock in the last couple weeks as I have options. Weak!

Continue to diversify your plays, and keep a small position size. I am trying to price in the "bearded-halt" which could come at any sign of capitulation, and have priced in the rate cut, which is increasingly insulting as the days go by.

Going forward I'd use a rally in crude to buy an airline stock, short anything global growth related, and kick off tomorrow's trading session by shorting a bank- because I can.

In the mean time, keep it real- except for those of you who can't.

OA