Market Spins Around Ahead of Apple

The market is set to open slightly bullish after BAC reported earnings that were better than expected. There is no indication yet that the SPX and the Dow are ready to roll over. If the indexes hold up through most of the day, then expect traders to look towards AAPL's earnings after the close to act as the catalyst for whether or not the short term bounce continues for another day or two.

6:00 pm MT: Market Wrap: The stock market spun around in circles as traders held on to some of the recent movers like Banks and Cyclicals, while piling into Energy and Commodity based stocks on a relief bounce. Brokers, Retail, Airlines, Drugs, and Chips all rolled over a little bit. The Dow and SPX both had Spinning Top - like candlesticks, and the Naz kind of just hung around. Oil futures went up a little and Steel had a strong day. In addition, traders started nibbling back into Gold stocks, perhaps as a hedge against a short term rollover in the market.

The net result was a bounce in Energy and Commodity stocks like Chemicals, Steel, and Coal, and some short term nibbling in Gold stocks.

Here is a summary of what I (paper) traded today:

ENERGY: Early in the day I picked up calls on RDC, and sold half the position by the close for a .55 cent profit, or 13% gain intra-day. I like the bounce on RDC, CAM, SLB, ESV, and SII. I picked up some CAM calls to go with my RDC calls just before the close. I will look at SLB for calls tomorrow morning.

GOLD: I picked up calls on GG early in the day as it was forming a small hammer. I will look at calls on ABX tomorrow morning.

CHEMICALS: I picked up calls on MOS and TRA in the mid-morning. I sold the MOS calls for an .80 cent profit, or 5% gain about half an hour before the close. I sold part of the TRA calls for a .43 cent profit, or 9% gain so far. I like the look of the bounces on TRA and MOS, but I will wait for a pullback on the 60m charts before re-entering MOS.

TECH: I bought the AAPL August Earnings Strangle for a Short Swing just like I said I would. In addition, I bought a September Earnings Strangle to demonstrate how to handle a Normal Swing on a Strangle.

Here's where the AAPL Strangle gets really fun (and I hope some of you paper traded this). I picked up the August 170/160 Strangle for a net debit of $13.90. I picked up the September 170/160 Strangle for a net debit of 19.50. AAPL lowered their forward guidance on the company earnings report after the close. And as you should know by now, lowering guidance on a Cult Stock to the Kool-Aid Crowd is somewhere between a hot fireplace poker in the eye and duck taping your knees to your chest and getting dragged through a sea of glass-shards by a Hummer.....It's not a pretty sight. AAPL is down over $16.00, or almost 10% in after-hours trading. So here is how I'm going to play this. If AAPL gaps down into the 148-149 area it may take a quick drop to the next support at 145. And if the August Strangle is going for around $16.00 - $17.00 or more I will unwind the whole thing and walk away with $2.00 - $3.00 of profit for a very quick trade. The September Strangle will be a little different. At the open I will immediately sell the 170 call and then let the 160 put ride for a swing down, which could go several more days and possibly drop as far as the 130 - 140 area.

So there is how to handle a short month Earnings Strangle and a medium month Earnings Strangle. It should be a fun ride in the morning.

Here is a chart of AAPL showing where it is set to open tomorrow morning (red circle), and also the next potential support areas, which the stock could hit even by tomorrow.
(click on image to enlarge)

Here is another important thing about your (paper) trading tomorrow: In addition to AAPL, AXP blew earnings and is set to take Financials down a little. Here are more earnings tidbits: MRK and SGP look like they are going to take down Drugs. And TXN and SNDK look like they are going to take down Chips. Tomorrow before the open: BHI, HAL, and XTO will affect Energy a little. CAT and DD will affect Cyclicals. UNH will affect HMO's. UPS will affect Transportation Services. And AKS will affect Steel. And that's not all the earnings to report, we really get hit hard with the reports this week.

As it is, unless we get some very good reports in the morning, the market is set to roll over on AAPL and AXP. That means Gold may be up and Tech may be down. Financials may see some pullback finally, and Energy and Commodities may actually continue to bounce a little, especially if oil prices hold up and the earnings come in better than expected.

I will look for calls on ABX (I already have GG) in Gold. I will look for calls in SLB (and perhaps one of the earnings Energy stocks), and I'm sitting on RDC and CAM. I may look for calls on MOS, and I'm sitting on TRA (in Chemicals). And you know what I'm doing with the AAPL Strangle. In addition, I may pick up puts on DIA (we'll see how CAT and DD do), and SPY. But I want to see them start to roll over first, and I'm not planning on being in the puts very long. I will also look at QQQQ puts and perhaps another Tech stock like RIMM.

We'll see how this all plays out.....