Option Investor
Newsletter

Daily Newsletter, Saturday, 12/19/2009

Table of Contents

  1. Market Wrap
  2. Index Wrap
  3. New Option Plays
  4. In Play Updates and Reviews

Market Wrap

Another Round Trip

by Jim Brown

Click here to email Jim Brown

The Dow traded on both ends of its recent range to make four consecutive weeks of round trips from top to bottom. The quadruple witching produced volume of more than 11.3 billion shares on Friday but no real market gains.

Market Statistics

There is more red and green in the market stats graphic above than I have on our Christmas tree. The last couple of weeks have been full of volatility but no real market gains. The closer we get to year-end without an apparent direction the more I become concerned about the first week of January.

There were no economic reports of note on Friday. The Regional and State Employment showed that the unemployment rate fell in most states as seasonal hiring put people back to work. 36 states reported a smaller unemployment rate. Only eight states reported a higher unemployment rate. Employment increased in 19 states. Michigan still has the highest unemployment rate at 14.7% but that actually improved slightly from 15.1% in October.

On the surface these numbers would appear positive but falling unemployment does not always mean more people went back to work. The unemployment rate falls when people exhaust their unemployment benefits and fall off the state list. They are still unemployed but are no longer counted.

The calendar for next week only has a couple of reports of interest but I seriously doubt anyone will be paying attention. Monday has the Chicago Fed National Activity Index and Tuesday the Richmond Fed Manufacturing Survey. Normally those would be of average interest but I suspect next week they will be ignored.

The Q3-GDP on Tuesday is just another revision and no major changes are expected. That revision probably has the biggest opportunity for a market surprise simply because nobody is expecting a major change. Everything else is filler on a week that few traders will be at work.

Economic Calendar

Friday was a quadruple witching expiration with options and futures expiring. It is called quadruple witching because stock index futures, stock index options, stock options and single stock futures expire. There are four quadruple witching Fridays per year at the end of each quarter.

The quad witch produces strong volume as traders square their positions going into expiration. Time has run out and everybody has to pay the piper or be paid by the piper if they are fortunate enough to be on the winning side of the trade.

S&P takes advantage of the increased volume to rebalance their indexes once per quarter. With all the new stock being issued over the past several weeks there were some monster changes in individual stocks. Citigroup priced a huge secondary offering earlier this week and the new S&P weighting forced index fund managers to add $2 billion in exposure to Citigroup at Friday's close. Citi traded over 2.147 billion shares. When your stock is trading at $3.20 it takes a lot of volume to equal $2 billion.

Wells Fargo (WFC) was another stock managers had to buy along with Lennar (LEN), Freeport McMoran (FCX) and Priceline (PCLN). Stocks that were weighted lower due to buybacks and other events included Travelers (TRV), WellPoint (WLP) and ExxonMobil (XOM). Those stocks saw selling at the close.

Visa was added to the S&P at the close and had been on a vertical ramp all week. Nearly $4.3 billion in Visa shares had to be bought at the close. Visa hit $89.69 intraday after last Friday's close at $81.34. S&P announced the addition of Visa after last Friday's close.

The volume rose all week to top 11 billion shares on Friday. That is the strongest volume day since October 30th when the Dow dropped -250 points. Other than Monday I doubt we will see 8 billion on Tuesday and we could be under 7 billion the rest of the week. After Monday's expiration clean up day there will be nobody at the trading desks for the rest of the week. With Christmas on Friday everyone will be heading to the malls or traveling to mom's house after option settlements on Monday.

Market Internals Table

Big movers in the market on Friday included Research in Motion (RIMM), which rallied +10% on their outstanding earnings news. I wrote about this last week regarding the expected post earnings volatility. The volatility was right on target and they beat as I expected. Quite a few analysts were pounding the table on Friday to sell/short RIMM on the bounce because they think the iPhone and the Google Android are going to be even stiffer competition in 2010.

One of the bulls was an analyst at Deutsche Bank who upgraded RIMM to a "hold" after their earnings. He really went out on a limb with that upgrade. I don't understand this with earnings for the quarter up +59% and revenue up +41%. International growth was +38%. RIMM also raised their Q4 forecast to $1.23 to $1.31 on revenue of $4.3 billion. Analysts were expecting $1.12 and revenue of $4.1 billion. A Bank America analyst got it right and said, "We believe consensus estimates fundamentally under-appreciates RIM's messaging as a killer-app differentiator for smartphone adoption."

RIMM shipped 10.1 million Blackberries during the quarter and added 4.4 million new subscribers. Analysts were expecting 9.5 million phones sold and 4.1 million new subscribers. I would remain a buyer of RIMM on a January pullback.

Chart of Research In Motion

Palm (PALM) was the black sheep of the Thursday earnings list and lost -13% in Friday's trading. I was worried that Palm might disappoint and that is why we executed our profitable long in Option Writer on Wednesday.

Palm posted a loss of -54 cents for the quarter compared to analyst estimates for a loss of -32 cents. A -29% decline in Palm smart phone sales suggests there is trouble ahead. The Motorola Android is rapidly gaining in popularity and while it has not yet eroded Apple's lead it is definitely pushing everyone else but RIMM to the sidelines. Palm was a clear result of that growing Android market share. RIMM was unconcerned. Android who? It appears Blackberry buyers are not being swayed by the Droid marketing but Palm prospects are definitely being seduced away.

The next big splash in the smartphone pond will be a Verizon powered iPhone and analysts expect to see that in 2010. With Verizon's much better 3G network that phone should explode into instant acceptability. When that phone is announced short AT&T.

Chart of Palm

Oracle posted earnings of 39 cents per share compared to analyst estimates of 36 cents the stock rallied $1.46 on the news. That does not sound like much but it was a +6% move and a new 52-week high at $24.34. Revenue rose +4% to $5.9 billion. However, it was not widely reported that excluding the impact of currency exchange rates their overall revenue was flat and software sales would have been down -5%.

The earnings were not the big news. The market moving news had this been other than a quadruple witching day was that Oracle was seeing a sharp improvement in activity. "We are definitely seeing customers back and buying, and it is extremely widespread." On any other day this would have been a major market mover.

Oracle talked more about the SunMicro acquisition than their own results. The president, Safra Catz, is 100% sure they will eventually get approval from the EU and Sun will provide $1.5 billion in new operating income in the first year after the acquisition is closed. Oracle is planning on offering fully featured "high performance" systems loaded with Oracle software. I would probably be a seller of Oracle here but I have a negative bias against the company.

Chart of Oracle

Boeing was flying high on Tuesday after the first flight of the new 787 Dreamliner. But, that was Tuesday. On Friday Ireland's Ryanair ended talks to buy 200 737 planes from Boeing. Ryanair said both parties had reached an agreement on pricing but could not come to terms on delivery dates. Boeing lost a buck on the news and Ryanair gained +6% in the UK. Ryanair said it had planned on offering inexpensively priced "bar stool seating" on some flights.

A spokesman for Teal Group said, "Boeing did the right thing in not selling profitless airplanes for accelerated delivery so Ryanair could sell profitless tickets and undercut the market." By refusing to sell cheap planes Boeing supported other carriers currently paying market rates for fully configured aircraft. If Boeing declines to its 100-day average at $50 I would be a buyer.

Chart of Boeing

What the heck happened to Starbucks? The stock exploded higher on Friday on no news and three times normal volume. Late in the afternoon there was one order to buy for 7 million shares. Option volume was through the roof. Did they find an addictive chemical to put in their coffee that will make us all stop by three times a day for a $5 fix? There is no news to explain the spike. James was long SBUX in Premier Investor.

Chart of Starbucks

What kind of week would it be without volatility in oil prices? After trading down to $68.39 on Monday we saw crude prices hit $74.69 on Friday. Inventories fell for the second consecutive week by -3.7 million barrels and distillates actually fell by -3.0 million barrels. Let's see, a week ago analysts were talking about slowing demand and inventories at Cushing were nearly maxed out. What a difference a week makes when everyone is short.

Cold weather in the North East prompted large declines in heating oil as winter finally arrived. Coincidently natural gas saw the biggest decline in inventory levels of -207 Bcf since last winter. This spike in crude prices has nothing to do with demand. It is simply a short squeeze as the January contract expires on Monday. It was a nice run but the contract is over.

Crude fell to exactly uptrend support and when sellers could not break support there was a rush to the exits. Add in the positive economic news and some geopolitical events and you have an instant rebound.

Yes, geopolitical events have come back into play. Iran is seeking to distract attention from its nuclear deadline at year-end by playing the oil card. According to Iraq, Iranian troops crossed the border and seized an oil well in the al-Fakkah field. Armed soldiers in a 25-vehicle convoy seized the well on Thursday night and ordered the Iraqi workers to leave. They raised the Iranian flag over the well and left the area Friday evening.

Iran is trying to accomplish two things. They are making a statement ahead of the coming Iraq elections. We are always going to be here and your American friends are leaving. Be careful whom you elect. Secondly they are playing the oil card in the current nuclear standoff. By creating an incident over oil they are warning the world that any attack on them could result in an attack on the oil supply lines. They can shut the Straits of Hormuz where 25% of the world's oil travels every day. I know that is a big jump from a one-day occupation of an Iraqi well but it was a carefully played card.

Iran is afraid of an Israel attack and according to second hand intelligence that threat is growing. Iran announced last week it was now making more efficient models of centrifuges that will be in use by 2011. Iran continues to be defiant over the U.N. demand they halt enrichment and said instead they were going to escalate it ten fold. Iran said it now had 6,000 working centrifuges, 2,000 more than previously thought.

Last week Iran also launched a missile test, which Iran says is capable of striking Israel, Europe and U.S. bases in the gulf region. The U.S. State department said Tuesday they are investigating reports that Iran has been working for 4-years on a neutron initiator or trigger for a bomb. Israel's top intelligence chief also said on Tuesday they believe Iran now has enough uranium to build a bomb and is on the brink of a "technological breakthrough" that would enable it to create the weapon.

U.S. Lt. General Patrick O'Reilly said last week that the U.S. was about to test a defensive missile in a simulated Iranian attack on the U.S. It has long been known that Iran wants to launch a nuclear weapon over the USA to create an EMP blast that would instantly destroy all electronics in the U.S. President Obama has given Iran until year-end to halt enrichment or face new tougher U.N. sanctions.

I know that was a lot of facts to list on why oil prices may be headed higher but you can see by the number of events there is a confrontation brewing. Refiners can also see this and they could start to stockpile oil again just in case. If a fighting confrontation did erupt we could see $125 oil again within days. I don't expect it to happen but there are lots of fingers on too many triggers to say it won't happen.

Chart of January Crude Oil Contract

Over the last 12 years I have written well over 1,500 market commentaries in this newsletter. Before 2009 I probably wrote about the dollar less than 50 times. It seems like I have done that more than 50 times in 2009 alone. I do not remember in prior years of the dollar impacting our markets to the extent it does today. I know for most readers they just skip this paragraph just like they do conversations about bonds. However, this year, or at least the last six months, it has controlled our market.

The dollar rally last week was the strongest week in eight months. Fueling the rise was the debt crisis in Dubai and sovereign debt downgrades on Greece, Spain, Italy and Mexico. Analysts believe it will only be a matter of time before the UK loses its AAA rating. Helping fuel the short squeeze was better than expected economic data.

Most analysts believe this is just an end of year adjustment as traders exit their positions before year-end. The "short the dollar, long commodities" trade is very long in the tooth and it appears to be reversing. Gold is struggling to hold the $1,000 level and we saw what happened to crude oil when the dollar spike began.

If this is just an end of year position adjustment then early January could see another reversal. However, every time we get more news about an improving economy we get that much closer to a Fed rate hike and the dollar will begin on a long-term rally when that happens.

It really frustrates me not to be able to trade stocks on fundamentals because of the whipsaw in the dollar. Hopefully we will see an end to this inverse relationship early in 2010.

Chart of the Dollar Index

What are we going to do for excitement next week? Traders and analysts pretty much agree that institutional trading for 2009 is over. It is sit on your hands time in hopes that your current positions hold the current level until year-end. I continue to hear that quite a few funds are heavily into cash in expectations for a buying opportunity from a January decline.

That suggests there is going to be a serious lack of volume over the next eight trading days. What volume we do have as long as the indexes remain over support will be window dressing in hopes of keeping stocks at their current level.

The continued failure at resistance on the Dow is a sign there is no bullish conviction. Traders are buying the dips but they are also shorting the highs. This is not institutional buy and hold and the charts suggest the level that will fail first is support rather than resistance.

With my neck stretched out on the chopping block with that prior statement we have to remember that the last week of the year is typically bullish. Retail investors have their bonus money burning a hole in their pocket and they use time off during the holidays to research stocks and make those buying decisions. The first few days of the new-year have been bullish in the past as end of year IRA and 401K money hits the market.

Last year may not be a great example given the huge decline from September to late November but the end of year was classic. The Dow was range bound for most of December just like we are today. The market started to rally on Christmas Eve but did not find traction until Dec-29th. On the 29th it closed +120 off its lows for the day and rallied through Friday Jan 2nd. The January 2nd close was an 8-week high and the Dow held that level for two days. On the 6th it made a higher high at 9088 intraday and managed a positive close but on the 7th the bottom fell out culminating at 6626 on March 9th.

Nobody expects a repeat of January 2009 but a repeat of those seven days around new years is a definite possibility. End of year window dressing followed by a retirement fund spurt the first couple days of January then a profit taking dip to who knows where? A dip to Dow 10,000 may be all that is necessary for those funds sitting on cash to call it a correction and jump back in. On the mild side if we simply return to resistance at 10,500 before year-end then a return to 10,250 in January may be all that is needed. I tend to believe that won't be enough.

Dow - End of Year 2008

At the risk of repeating myself too many times I believe there are lots of money managers just waiting for the tax year to roll over so they can take profits in a different year. I could be entirely wrong and will be proved right or wrong very soon.

I believe the financial sector is pointing the way. With most banks up +100% to as much as +300% since March there is a lot of profit waiting to be captured. Quick, who is the strongest financial company? Most believe it is Goldman Sachs. They rallied from $47 to $193. Have you noticed their chart lately? They have declined to just over $160 despite every analyst screaming buy. That is a 10% decline already and I believe they could decline to $140 in early January as fund managers take profits.

Chart of Goldman Sachs

It is not just Goldman. Look at the XLF. Everyone but Meredith Whitney believes the banks are in better shape today than in October but the Financial ETF is on the verge of a breakdown. I know there was a lot of dilution over the last month and maybe that is the problem but there is still a lot of uncaptured profits. If the XLF breaks support at $14 it could easily trade to $11.50. That would be a major move in the banking sector.

Chart of the XLF

Let's just say that a short decline in early January is one possibility and keep it on our watch list so we will be ready to buy the dip if it occurs. I don't think anyone believes that the markets will trade down in 2010. I know for a fact that everyone expects strong Q4 earnings in January and a lot of earnings beats. If guidance improves we could be off to the races. Alcoa leads the earnings parade starting on Jan-11th but the real earnings activity does not accelerate until the week of Jan-26th. That gives money managers plenty of time to shuffle portfolios and reload before the earnings cycle kicks into high gear.

Focusing on the Dow, it has made four round trips from 10,260 to 10,500 and back. Friday's low was 10,263. This range bound trading will eventually break and based on the chart the risk is to the downside with a target an initial around 10,000. If we did move higher and succeeded in breaking over 10500 the new target would be in the 10,750 range.

Chart of the Dow

The chart of the S&P is no different from the Dow other than Friday's low did not quite reach support. That was due to Oracle, Apple, Celgene and RIMM boosting the S&P gains. SPX 1085 remains support with a potential dip to 1030 if the January surprise occurs.

Chart of the S&P

The Nasdaq remains at the top end of its range and it was helped by those same big cap techs that kept the S&P afloat on Friday. RIMM, APPL and CELG were the biggest Nasdaq supporters. The Nasdaq has moved from a bullish uptrend to a rising wedge pattern and these normally resolve to the downside rather than break higher.

What news are we going to have in the tech sector over the next two weeks to power techs higher? All the major techs stocks have reported earnings and we are approaching the point where surprise earnings warnings are more likely than surprise guidance upgrades.

I was happy to see the +31 points on Friday and another close over 2200 but the pattern is still bearish until we get a substantial breakout to the upside. Overhead resistance is around 2235 with support at 2175 and 2160.

Chart of the Nasdaq

The Russell managed to stay over support at 606 and closed at 610 on Friday. This is bullish BUT the lack of range is a warning flag. Moving 3-5 points a day is not evidence of strong conviction. However, fund managers appear to be nibbling at small caps and that is not bad. Is it just window dressing until year-end? We won't know until January. Next material resistance is 623.

Chart of the Russell 2000

The NYSE Composite appears to be the weakest index with a declining flag pattern. However, it respected support last week, as well as resistance. The chart still looks heavy to me and without a catalyst I am worried that the NYSE could drift lower and a break below 7000 would be bearish.

NYSE Composite Chart

In summary, I believe volume next week will be minimal but window dressing may keep the indexes in their range until year-end. Once into January I am concerned we could see a sharp but temporary decline. I view this as a buying opportunity if it happens.

There are relatively few news events on the calendar for next week and most professional traders will be gone. Ships can sink in calm seas but it is far less likely. I plan on clearing positions so I am not tied to the computer instead of preparing for family coming in for the holidays. I suspect many readers will have the same plan.

*** Important *** Over the last week we experienced a random problem that prevented some people from signing up for the End of Year Special. That problem has been corrected. If you were having trouble last week please try again now.

We are coming to the end of the Renewal Special promotion. If you have not already taken advantage of this special you need to do it soon.

How much is Option Investor worth to you? At the $499 End of Year Special price ($1.36 per day) only one profitable trade pays for the entire year's subscription. Just one critical point in a market commentary can make you hundreds or even thousands of dollars. Just one warning comment about an impending event could save you thousands.

If just one comment or profitable play can cover the entire cost of the subscription then the other 364 days of the year are free. Don't wait any longer! Renew your subscription today and then keep track of the money you make or save in 2010. I think you will be surprised!

For one low price you will get the following:

Option Investor
Premier Investor
Option Writer
LEAPS Trader
Couch Potato Trader
Profit with Index Options DVD
Advanced Strategies for Option Traders DVD
Insider Strategies for Profiting with Options DVD
Special Report: Peak Oil Postponed Not Canceled
Two Option Expiration Calendar Mouse Pads (New symbol format!)

You get everything listed above for the low price of $1.36 per day!


Jim Brown


Index Wrap

A Mixed Picture

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The longer this sideways move goes on the more it seems like the S&P and Dow at least, could be building a top, although we also need to wait for a decisive break below the low end of the 5 week old trading range to 'confirm' that. Meanwhile, the Nasdaq made a new weekly high and looks poised to breakout to the upside, so go figure. It's the market and at times it confounds all of us!

Before I get into a more detailed analysis of the indexes, just to say that I hope you renew your subscriptions for the coming year and have had and have a happy holiday period.

For one low price the 2009 EOY package includes a full year of Option Investor, Premier Investor, Option Writer, LEAPS Trader and Couch Potato Trader. You get daily market commentary and plays every week in nearly every possible strategy. Plus you get two Option Expiration Calendar Mouse Pads with the "NEW" option symbol format for 2010. You get three DVDs with 254 minutes of option education. You get all of this for the unbelievable low price of $1.36 per day. If you have not signed up take two minutes and do it now!


INDEX WRAP:

The longer this sideways move has gone on and it's been a pretty narrow trading range too, I've also wondered if a top is forming. However, the Nasdaq has become more buoyant of late and if the Composite breaks out above its line of resistance of the past 5 weeks, it should also lend support to the S&P and Dow.

There's two ways to consider the major indexes technically as far as the rectangular trading range. Sideways moves after a strong prior run up tend to be consolidations of the prevailing trend. On the other hand, the same lateral trend AFTER such a huge prior advance could suggest a rectangle top. After all, some tops take on just this appearance.

While I remain bullish in the longer-term, I also recognize that a second correction (and there's only been one pullback deep enough to qualify as that since the rally began in March) is sort of 'due'. After taking a second look on what's to be seen technically, I wrote a Thursday Trader's Corner article on some OTHER technical considerations that might be relevant here. Ones that are mostly bearish chart and indicator aspects, as opposed to the view that yet another up leg will be a resolution to the current pause. Things to consider other than the sideways trading range itself, which is a 'neutral' pattern. Until, at least, there's a breakout above or below the two level lines connecting reoccurring multiple highs and reoccurring lows.

To not cover that same ground again here and if you haven't already perused it, you can go to my recent related (12/17) analysis piece by clicking HERE. By the way, my weekday Traders Corner articles are often an adjunct to and sometimes a continuation of, earlier technical thinking expressed in my weekend Index Wrap.

On balance, the same 'indecision' pattern continues. A decisive upside OR downside breakout above the lines of support and resistance is needed to suggest a directional move. The Nasdaq looks like it stands a better chance of breaking out ABOVE its resistance. The S&P 500 (SPX) and Dow 30 (INDU) continue to show support at prior recent lows.

The S&P 100 (OEX) showed technical support by also bouncing off its 50-day moving average. Next week, being not only short but with many traders heading for the ski slopes, fireplace chats, or warm shores, doesn't seem like it will provide a game changer.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

If the S&P 500 (SPX) index breaks out above the upper highlighted trendline (the upper level line) seen below, a potential objective is to the 1149-1152 area. If SPX pierces 1083, at the line of support, a potential downside objective becomes for a pullback to the 1050-1047 area, although the low end of its current uptrend channel would suggest support coming in around 1060.

The biggest upside move I can current envision is to the 1200 area, the biggest downside objective is to the 1029-1000 price zone.

While prices have repeatedly hit closing highs in the same area and gone sideways in this respect, the Relative Strength Index or RSI has been declining on balance, which can suggest waning relative strength and a bearish price/RSI divergence.

On the other hand, in a more bullish interpretation, the sideways move has also 'thrown off' the overbought RSI readings seen at the start of this multiweek sideways move. If the market has the same internal strength it had previously, a next rally would start after the RSI dropped back to more neutral or mid-range reading.

SENTIMENT

Bullish sentiment has continued to retreat on balance and in a way this also is starting to throw off a different type (than that of the RSI) of 'overbought' extreme. I would rate my sentiment indicator as also somewhat 'neutral' at this juncture. The sideways trend of course tends to scare off some would be call buyers and shorting is not always a common strategy in indexes. There has been however some increased put buying as a hedge, speculative or versus stock, against a correction after the major strength of prior months.

S&P 100 (OEX) INDEX; DAILY CHART

518-520 is still the pivotal resistance, with the key line of support unchanged at 504-505 in the S&P 100 (OEX). I wrote last week that I was anticipating greater upside potential than downside. Now that the OEX has again retreated to the low end of its narrow 5-week old trading range, I don't find myself leaning either way as far as upside OR downside expectations. Can't go up, won't go down much. However, something comes along usually that propels a breakout move so I'm on the sidelines waiting for that.

I'd also repeat from last week that a close below the 50-day moving average (505 currently) would put me on a bearish alert. Below 504-505, next support looks like 490, then in the area of the prior 479 (down) swing low.

Upside potential on a move above the 518-520 resistance is to 536-536, perhaps up to the 540 area.

The RSI has again retreated to a 'neutral' mid-range reading and this in the past has prefaced trading rallies that followed. If so, this will be somewhat amazing, as such consistent past performance relative to indicator patterns are rare for such a lengthy period.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) Average's most prominent chart pattern is seen with the highlighted 'rectangle' below. Key resistance remains 10500-10520 and pivotal support coming in around 10230 and is also unchanged from my last week's comments. The difference THIS week is that INDU is near the LOW end of its multiweek trading range rather than nearing the high end (as it was last week). Back and forth, to and fro, suggestive of a relative balance between buyers and sellers.

In the event of a downside breakout below 10230-10200 support, a possible next target is to the 9900 area. Major support is suggested by the prior intraday Dow low in the 9679 area.

Upside potential on a corresponding upside breakout (above 10500-10520) is to 10800-10820.

I highlighted the diverging RSI: relative to the sideways price trend of INDU, RSI has been declining. In a 'normal' market, one that hasn't been so strong in one direction (up), this type price/RSI divergence is a bearish omen. It may be here also, but stay tuned on that.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite of course has been in trading range too but a more 'ragged' one. The highs have formed a repeated line of resistance and formed an upper resistance trendline similar to the S&P and Dow. The lows however have ranged from 2115 to around 2150 in COMP. 2150 is a key technical support. 2213 to 2120 is the pivotal near resistance.

If there is an upside breakout above resistance and it seemed that COMP was trying on Friday for this, a next potential target is to 2300. Major resistance is near 2375 if judged by the upper end of COMP's broad uptrend channel.

If there was instead a break below 2150-2115, a next key technical support is well below, at 2030-2024.

Once again COMP could be poised to diverge from the S&P and could even lead a rally. At a minimum, given that the S&P and Dow have pulled back again into a support area, strength in tech should at least provide a related support floor to SPX, OEX and INDU.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) trading range of recent weeks pegs key resistance around 1814 and support in the 1758-1750 area. A breakout above resistance suggests upside potential to around 1870, perhaps to 1900. Conversely, a downside penetration of 1758-1750 suggests potential for NDX pulling back to around 1690, perhaps to a re-test of the prior 1652 swing low.

It looks like some key tech stocks (e.g., AAPL, INTC, CSCO) are in or are rebounding from fairly solid support. Based on the chart, I would rate NDX as having decent potential to pierce its upper line of resistance. It wouldn't be too surprising to see tech lead the market again for a time; a 'Santa Claus rally'?

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

There's not much more to say with QQQQ than already noted about NDX. Key resistance in the Q's is at 44.8, with potential for rally to 46.5 if the stock can break out above this line of resistance.

Key near support is at 43.5, extending down to the 43 area. A decisive downside penetration of 43.0 would suggest a downside objective to as low as 41.2, or even a test of the prior intraday low at 40.6.

Volume picked up substantially on Thursday, when QQQQ dipped below 44 and this daily trading volume surge continued on Friday on the tech-based rally, all of which is an associated bullish sign of potential for NDX to gain some further upside. A move above the upper line of resistance may bring in another volume surge on short-covering.

RUSSELL 2000 (RUT) DAILY CHART:

Signs of life occurred in the Russell 2000 (RUT), as it rallied to near resistance. RUT looks now like it can hold above 600 technical support and perhaps challenge key resistance at 625. Next resistance than comes in around 640.

I don't see a lot of upside potential just yet but the chart would turn decidedly more bullish if RUT could gain some further upside traction above Friday's 610 high. The prior double top at 625 then looms even larger as an important resistance.

The worst downside case I see current is to the 570-568 area and perhaps to a re-test of the 553 low.

GOOD TRADING SUCCESS!



NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS

CHART MARKINGS:

1. Technical support or areas of likely buying interest and highlighted with green up arrows.

2. Resistance or areas of likely selling interest and notated by the use of red down arrows.

I WRITE ABOUT:

3. Index price areas where I have a bullish bias or interest in buying index calls, selling puts or other bullish strategies.

4. Price levels where I suggest buying index puts or adopting other bearish option strategies.

5. Bullish or Bearish trader sentiment and display the graph of a CBOE daily call to put volume ratio for equities only (CPRATIO) with the S&P 100 (OEX) chart. However, this indicator pertains to the market as a whole, not just OEX. I divide calls BY puts rather than the reverse (i.e., the put/call ratio). In my indicator a LOW reading is bullish and a HIGH reading bearish, consistent with other overbought/oversold indicators.

Trading suggestions are based on Index levels, not a specific option (month and strike price) and entry price for that option. My outlook often focuses on the intermediate-term trend (next few weeks) rather than the next several days of the short-term trend.

Having at least 3-4 weeks to expiration tends to be my guideline for trade entry choice. I attempt to pick only what I consider to be 'high-potential' trades; e.g., a defined risk point would equal in points only 1/3 or less of the index price target.

I tend to favor At The Money (ATM), In The Money (ITM) or only slightly Out of The Money (OTM) strike prices so that premium levels are not as cheap as would otherwise be the case, which helps in not overtrading an account. Exit or stop points, as well as projected profitable index price targets, are based on my technical analysis of the underlying indexes.


New Option Plays

Medical Supplies and Appliances

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new trading candidates readers may want to check out the REIT and property/real estate stocks like ARE, AVB, ESS, JLL and SPG. This industry has been showing relative strength.


NEW DIRECTIONAL CALL PLAYS

Mettler Toledo - MTD - close: 103.03 change: +2.05 stop: 99.45

Why We Like It:
MTD is a healthcare instrument and supplies company. The stock has broken out past resistance near $100. Traders bought the dip back near $100 late last week. It looks like this rebound continues. I am suggesting small call positions now or on a dip back toward $100. We'll use a relatively tight stop loss at $99.45. Our first target is $109.00.

Suggested Options:
This should be a short-term trade. I'm suggesting the January calls. My preference is the $105 strike.

BUY CALL JAN 105 MTD-AA open interest= 79  current ask $2.00

Annotated Chart:

Entry  on  December 19 at $103.03 (small positions) 
Change since picked:       + 0.00
Earnings Date            02/04/10 (unconfirmed)
Average Daily Volume =        106 thousand
Listed on  December 19, 2009         


Whirlpool - WHR - close: 80.69 change: +1.53 stop: 74.99

Why We Like It:
Appliance maker WHR has been showing some relative strength. The stock broke out over key resistance at $80.00 on Friday. After more than six weeks of consolidating sideways the stock looks poised to run higher. I'm suggesting small call positions now with the stock above $80.00. We'll use a stop loss at $74.99. More cautious traders may want to consider a tighter stop loss. Our first target to take profits is at $84.75. Our second target is $89.00. FYI: The Point & Figure chart is bullish with a $103 target.

Suggested Options:
I would prefer to buy February options but they're not available yet. That leaves us March or January. I'm suggesting January calls with a preference for the $85 strike.

BUY CALL JAN 85.00 OFW-AQ open interest=2689 current ask $1.35

Annotated Chart:

Entry  on  December 19 at $ 80.69 
Change since picked:       + 0.00
Earnings Date            02/08/10 (unconfirmed)
Average Daily Volume =        1.6 million  
Listed on  December 19, 2009         



In Play Updates and Reviews

Stocks Remain Range Bound

by James Brown

Click here to email James Brown

The stock market has been unable to breakout from its trading range and now with the last two weeks of the year upon us volume will really start to fade.


CALL Play Updates

EQUINIX Inc. - EQIX - close: 106.49 change: +1.87 stop: 99.75

The bounce in EQIX looks strong with a rebound off the rising 10-dma. Our first target is $109.50. I am adding a second target at $113.50. If you were looking for a new bullish entry point to buy calls then this is it. Consider raising your stop loss toward $103. The plan was to use small position sizes to limit risk.

Suggested Options:
Previously I suggested the January calls with a preference for the $105 strikes. I would now consider the $110s or the March strikes.

Annotated Chart:

Entry  on  December 09 at $103.02
Change since picked:       + 3.47 
Earnings Date            02/10/10 (unconfirmed)
Average Daily Volume =        501 thousand 
Listed on  December 09, 2009         


Infosys Tech. - INFY - close: 54.64 change: +0.39 stop: 49.90

INFY bounced strong off its intraday lows. The most almost looks like a mini bull-flag pattern. I would be tempted to open new positions if you raised your stop loss. Our first target to take profits is at $55.75. Our second and final target is $59.50. We will plan to exit ahead of the January 12th earnings report.

Suggested Options:
If you choose to buy the bounce I would use January calls since we plan to exit ahead of the January earnings report.

Annotated Chart:

Entry  on  December 05 at $ 51.88 /gap down entry point
                           /originally listed at $52.46
Change since picked:       + 2.76
Earnings Date            01/12/10 (confirmed)
Average Daily Volume =        1.4 million  
Listed on  December 05, 2009         


General Dynamics - GD - close: 68.24 change: -0.27 stop: 67.45

The correction in shares of GD has lasted four days and the stock has dipped to technical support at its long-term trend of higher lows. I would buy calls on this intraday bounce from $67.75 (Friday's low). More conservative traders could wait for more confirmation on the bounce.

Our first target to take profits in GD is $74.95. FYI: The Point & Figure chart is bullish with a $105 target.

Suggested Options:
I am suggesting the February calls. My preference is the $70 or 75 strikes.

Feb. $75 call is GD-BO. The Feb. $70 call is GD-BN.

Annotated Chart:

Entry  on  December 14 at $ 70.66 (half position)
Change since picked:       - 2.42
Earnings Date            01/27/10 (unconfirmed)
Average Daily Volume =        1.6 million  
Listed on  December 14, 2009         


Norfolk Southern - NSC - close: 52.04 change: -0.02 stop: 49.75

The railroad stocks are still stuck in their trading range much like the major averages. At this time I'd either wait for another bounce from the $50.00 level or look for a move over $53.25 before considering new bullish entries. Our first target is now $56.50. Our second and final target is $59.50. Our time frame is several weeks. FYI: The Point & Figure chart is bullish with a $65 target.

Suggested Options:
Previously I suggested the January calls with a preference for the $55 strike. Today I'd still consider that option or the March calls if NSC produces a new entry point.

Annotated Chart:

Picked on  November 21 at $ 51.84 (small positions)/gap higher entry
Change since picked:       + 0.20
Earnings Date            01/27/10 (unconfirmed)
Average Daily Volume =        5.4 million  
Listed on  November 21, 2009         


Precision Castparts - PCP - close: 112.38 change: +1.66 stop: 107.25

Traders are buying the dip and PCP looks ready to hit new highs again. This looks like a new entry point but you might want a tighter stop loss (maybe near $108 or $109). PCP has already hit our first target at $112.45. Our second target is $118.75. The Point & Figure chart is bullish with a $131 target.

Suggested Options:
I would consider the January or March calls with a preference for the $110 or $115 strike.

Annotated Chart:

Picked on  December 01 at $107.35
Change since picked:       + 5.03
                            /1st target hit $112.45 (+4.7%)
Earnings Date            01/20/10 (unconfirmed)
Average Daily Volume =        817 thousand 
Listed on  November 28, 2009         


Stifel Financial - SF - close: 56.97 change: -0.40 stop: 54.95

SF spiked higher on Friday morning but failed to hit the $58.00 level. Traders bought the dip midday near $56.00. I don't see any changes from my prior comments. I'm suggesting a trigger to buy calls at $58.05. If triggered our first target is $64.50. Our time frame is January expiration. The P&F chart is bullish and points to a $70 target.

Suggested Options:
I would prefer to use February calls but they're not available yet. That leaves us January or Aprils. Given that choice I'd pick January calls. My preference is the $60 strike.

Annotated Chart:

Entry  on  December xx at $ xx.xx <-- TRIGGER @ 58.05
Change since picked:       + 0.00
Earnings Date            02/11/10 (unconfirmed)
Average Daily Volume =        207 thousand 
Listed on  December 16, 2009         


UnitedHealth Group - UNH - close: 31.54 change: -0.28 stop: 27.99

UNH reached overbought levels midweek so it's not surprising to see some profit taking. I'd consider buying new call positions on a dip or bounce near $30.50-30.00.

Our first target is $34.00. Our longer-term target is $36.00. Our time frame is several weeks. If you buy March calls you might want to think about holding over the late January earnings report.

Suggested Options:
If UNH provides an entry point I would use the January or March calls.

Annotated Chart:

Entry  on  December 10 at $ 30.31 
Change since picked:       + 1.23
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =        819 thousand 
Listed on  December 10, 2009         


United Tech. - UTX - close: 69.46 change: -0.12 stop: 67.45

UTX had resistance at $69.00 and at $70.00. Shares broke through both in the last several days and hit our trigger to buy calls at $70.25. Now the stock is retesting the $69.00 level, which should be support. Readers can choose to buy the late afternoon bounce from $69 on Friday or wait for UTX to trade back above $70.25 again. More conservative traders may want to use a tighter stop loss. Our first target is $74.75. The Point & Figure chart is bullish with a $95.00 target.

Suggested Options:
I am suggesting the January calls with a preference for the $70 strike.

Annotated Chart:

Entry  on  December 15 at $ 70.25
Change since picked:       - 0.79
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =        4.0 million  
Listed on  December 12, 2009         


Valmont Industries - VMI - close: 80.28 change: +0.15 stop: 78.45

It's not surprising to see VMI close near the $80 strike price at expiration. Readers can use this dip to $80 as a new entry point or wait for a rebound back above $81.00 to launch new positions. Our first target to take profits is at $84.90. Our second target is $88.75. FYI: The most recent data list short interest at 9% of the very small 20.1 million-share float.

Suggested Options:
I'm suggesting the January calls with a preference for the $85 strike.

Annotated Chart:

Entry  on  December 10 at $ 81.00
Change since picked:       - 0.72
Earnings Date            02/10/10 (unconfirmed)
Average Daily Volume =        238 thousand 
Listed on  December 05, 2009         


Vertex Pharma - VRTX - close: 42.34 change: +1.21 stop: 39.75 *new*

Expiration Friday turned out to be a strong session for VRTX. The stock rallied from the $41.00 level and closed near its highs with a 2.9% gain. I am raising our stop loss to $39.75. Our target to exit is at $44.25. My time frame is several weeks.

Suggested Options:
I could see opening new positions here but you may want to adjust your stop loss and your exit target higher.

Annotated Chart:

Entry  on  December 03 at $ 40.25
Change since picked:       + 2.09
Earnings Date            02/09/10 (unconfirmed)
Average Daily Volume =        3.2 million  
Listed on  November 23, 2009         


PUT Play Updates

Freeport McMoran - FCX - close: 76.54 change: +0.58 stop: 80.55

FCX managed to bounce twice intraday from the $75.50 region. Bulls may have grown bolder on the intraday decline in the U.S. dollar. The short-term trend for FCX is still down and I would watch for another failed rally under $80 as our next entry point.

Remember, we should consider this an aggressive, higher-risk trade because the dollar, commodities, and shares of FCX can be somewhat volatile. The plan was to use very small positions to limit risk. Our first target is $72.50. I'm adding a second target at $68.50.

Suggested Options:
If FCX provides a new entry point we want to use the January puts. My preference is the $75 strike.

Annotated Chart:

Entry  on  December 12 at $ 76.81 
Change since picked:       - 0.27
Earnings Date            01/26/10 (unconfirmed)
Average Daily Volume =       12.6 million  
Listed on  December 12, 2009         


Strangle & Spread Play Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)

Apple Inc. - AAPL - close: 195.43 change: +3.57 stop: n/a

AAPL erased Thursday's losses with a 1.8% gain. The positive earnings news from RIMM was also seen as a bullish sign for AAPL's business. Currently the short-term trend for AAPL is still lower. I am not suggesting new strangle positions at this time.

Our aggressive December strangle has expired. The options in the December strangle were the December $210 calls (AJL-LV) and the December $190 puts (APV-XR). Our estimated cost is $3.83.

The options in the January strangle were January $220 calls (AJL-LV) and the January $180 puts (APV-XR). Our estimated cost is $5.60. We want to sell if either option hits $10.00 or more.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on  November 30 at $199.91
Change since picked:       - 4.48
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =       15.1 million  
Listed on  November 30, 2009         


United Parcel Service - UPS - close: 57.98 change: -0.25 stop: n/a

UPS closed back inside its multi-week trading range. It was a quiet death for our December strangle. I hesitate to suggest new strangle positions but I can't imagine UPS will stay in this trading range once we hit January. You could opt for April options instead if you want to launch new positions.

(Closed) December Strangle
The options suggested for this trade were the December $60 calls (UPS-LL) and the December $55 puts (UPS-XK). Our estimated cost is $1.05.

January Strangle
The options suggested for the January strangle were the January $60.00 calls (UPS-AL) and the January $55.00 puts (UPS-MK). Our estimated cost was $1.35. I would plan to sell if either option hit $3.50 or more.

Suggested Options:
No new positions

Annotated Chart:

Picked on  November 21 at $ 57.99 /gap open entry
Change since picked:       - 0.01 
Earnings Date            02/02/10 (unconfirmed)
Average Daily Volume =        4.7 million  
Listed on  November 21, 2009         


CLOSED BULLISH PLAYS

Mosaic - MOS - close: 55.22 change: -0.81 stop: 57.95

A few days ago it looked like MOS was poised to breakout higher from its consolidation. Instead the stock broke down. Shares never hit our trigger to buy calls at $62.55. I am now removing MOS as a bullish candidate.

Chart:

Entry  on  December xx at $ xx.xx <-- TRIGGER @ 62.55
Change since picked:       + 0.00
Earnings Date            01/05/10 (unconfirmed)
Average Daily Volume =        5.8 million  
Listed on  December 16, 2009         


MSC Industrial Direct - MSM - close: 46.46 change: -0.24 stop: 44.90

We have run out of time and our December option expired. The long-term trend for MSM is still up but with the S&P 500 churning sideways for six weeks shares of MSM didn't make much progress. Readers may want to re-evaluate a bullish entry point here or look for a move over $47.75 as a new entry.

Chart:

Picked on  November 17 at $ 46.62
Change since picked:       - 0.16 <-- closed @ 46.46 (-0.03%)
Earnings Date            01/07/10 (unconfirmed)
Average Daily Volume =        513 thousand 
Listed on  November 17, 2009         


Weyerhaeuser - WY - close: 42.80 change: -0.19 stop: 40.75

I am temporarily giving up on WY but I would keep it on your watch list. A rebound past $44.00 or a new bounce from $40.00 may end up being a new bullish entry point.

Chart:

Entry  on  December 14 at $ xx.xx 
Change since picked:       + 0.00
Earnings Date            02/05/10 (unconfirmed)
Average Daily Volume =        1.6 million  
Listed on  December 14, 2009         


CLOSED STRANGLE & SPREAD PLAYS

Goldman Sachs - GS - close: 163.19 change: +2.26 stop: n/a

In spite of the down trend GS never broke the $160 level. Our aggressive December strangle has expired. The options suggested were the December $180 calls (GPY-LP) and the December $160 puts (GPY-XL). Our estimated cost is about $4.61.

Annotated Chart:

Picked on  November 21 at $171.67 /gap open entry
Change since picked:       - 8.48
Earnings Date            12/15/09 (unconfirmed, could be January)
Average Daily Volume =        9.5 million  
Listed on  November 21, 2009         


Ultra(Long)-S&P500 - SSO - close: 37.43 change: +0.40 stop: n/a

The S&P 500 has been unable to breakout of its trading range for six weeks now. It was the worst possible scenario for our strangle play. December options have expired. The options suggested for this strangle were the December $40 calls (SUC-LN) and the December $34 puts (SOJ-XH). Our estimated cost was $1.70.

Chart:

Picked on  November 11 at $ 37.08
Change since picked:       + 0.35
Earnings Date            --/--/--
Average Daily Volume =         32 million  
Listed on  November 11, 2009