DIVERGENCE

There are several divergences that are developing in this market. We already know that the market is overbought, but know we are seeing clear divergences that could signal an upcoming pull back. Look at the RSI. It is above 70...a clear overbought condition...and there is a clear divergence as the RSI reached a lower high as the market hit a higher high. The MACD also shows a divergence, especially on the MACD histogram. We are also well above the 50 day MA. This doesn't necessarily mean that the market will drop in any big way. We could bounce around sideways as the market digests these latest gains. You can either look for some overbought or down trending stocks to buy puts, or wait for the pull back and look for more call option trades. BA broke below its 10 day MA on Monday and it might be a good candidate for an overbought stock. I do have a few bullish picks, even though I'm expecting a pull back in the market. These picks are a bit longer term in nature so even if we do pull back a bit, they should work out. The first one is VCI. I've got a short term profit target around $32. I also like IGT. The trend on the daily chart is down, although the stock is above its 50 day MA. I like the pattern on the weekly chart...a beautiful bullish ABC pattern with the 50 week MA trending upward. I'm looking at the July 20 calls. I'm using the 9/15/09 high as a target which could be near a 200% return. There is a leveraged buyout rumor on this stock and high institutional option buying. In other words, the institutional option buyers are expecting something big to happen in the future. This doesn't always mean they are right, but I'll assume they know more than I do about the stock. I probably won't use a stop since the option price is under $1.50. I'll look to sell half the position if the option doubles in price. This one may sound crazy, but I will look to buy puts on AAPL if it closes below its 10 day MA (maybe even a close below its 5 day MA). This trade would be riskier because it is a counter trend trade, but AAPL is very overbought and could have a $10 to $15 point move down if it starts to sell off. I would place a stop above the most recent high. I'll do the same thing with BIDU.