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Daily Newsletter, Saturday, 1/2/2010

Table of Contents

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

Market Wrap

Preview of Things To Come?

by Jim Brown

Click here to email Jim Brown

The Dow lost -120 points on Thursday and most of that in a major sell program at the close. That was the second of the last three trading days to implode in the last 30 minutes.

Market Statistics

The window dressers were unable to hold the line on Thursday and keep the averages pinned at their highs for year-end. With father time looming in the background as the clock wound down a major sell program hit the tape and in the thin market the result was instantaneous.

It was the lightest volume day of the week and most of that volume was at the open. At least until the last 25 minutes when the sell program triggered stops and produced the highest volume since the first five minutes of the day.

You have to wonder if this was not a calculated play to trigger a major sell program in the last 30 minutes of trading on New Year's Eve. I doubt they were just exiting positions but instead they were trying to drive the market lower knowing there was going to be almost no volume 30 minutes before the close. Had they built up some large short positions going into January and were trying to poison sentiment for Monday morning? Time will tell but it appears very suspicious.

The beauty of having 12 years of market wrap history on Option Investor is that you can go back and review prior years and events. It is like writing a history book on the market one page at a time. I went back to the prior two year-end commentaries and pulled the information for the following graphics.

The headline you will see in the newspapers will look something like "Markets post best yearly gains since 2003." If you only looked at the headline you would think the markets had a banner year. In fact it was the best year for the markets since 2003, which also sounds very bullish when mentioned by itself.

There were some spectacular full year gains in 2009 but as we all know this is not the entire story. In the graphic below the Dow is showing a +19% rally in 2009. However, look at the drop from 2007 to 2008 and compare it to the gain for the Dow in 2009. There is a BIG difference in the numbers suggesting the Dow has a long way to go to catch up and that would be correct. But again, that is not the entire story. It was a good year, best since 2003 if you believe the headlines but it was far better than the official calendar year statistics indicate.

Market Stats 2007 to 2009 by Calendar Year

I know these graphics look a lot alike but bear with me. In the graphic below I took the same 2007/2008/2009 numbers and added two more columns with the change based on the 2007 close compared to the 2009 close. As you can see in the last two columns everything with the exception of the biotech index and gold is still well below the 2007 close. Again, this is only one way of looking at the statistics and it does not represent the real story.

Market Stats 2009 VS 2007 Close

Here is the real story! The next graphic eliminates the artificial limits of the year end calendar closes in 2007/2008 and simply shows the drop from the 2007 highs to the bear market lows and the subsequent rebound in 2009. This is the real deal and it may be the epitaph on the market tombstone for early 2010.

This graphic shows the massive market drops over the last two years and the true rebound percentages for each index. The number in the far right column is the rebound from the bear market bottom, mostly in 2009 but a couple were late 2008. Any market that rises +140%, 123%, even +80% in the space of less than a year would be construed by most as very overbought. Given the depth of our drop that may be true but not necessarily as badly overbought as it appears.

If you look at the drop from the 2007 highs using the Dow for an example it was down nearly 8,000 points in less than two years and has rebounded nearly 4,000 points in less than a year. Is that overbought or just a healthy rebound? I would say both.

It was a healthy rebound and is still well below its three-year highs but it is over extended in the short term. Same with the Nasdaq, S&P, etc. I believe nearly everyone, except maybe subscriber Rodney, expects the markets to end significantly higher in 2010. The only factor influencing the short-term performance is the outstanding rebound in 2009. The rally far out paced the economic fundamentals and I believe the market will pause soon to allow those fundamentals to catch up with expectations.

Note that gold rallied +103% from the 2007 lows as the financial crisis worsened and the dollar declined.

Rebound Statistics from Bear Market Lows

Just to refresh your minds on how bad 2008 really was I pulled this graphic from my New Years commentary in 2009. The two that really stand out for me are the average daily point range for the Dow for the year (280.8) points and the average daily point range for the last four months of the year. (421.01) I had already forgotten how bad the markets had become. I heard an announcer on Thursday bemoaning the fact that the Dow lost -120 and it was the biggest one day point loss in two months. I think the announcer was wrong but it was very close with only a few points difference. I think we would all agree that we don't want to live 2008 over again in the near future without prior specific knowledge it was coming.

2008 Market Records

For 2010 I expect some volatility early but then a bullish trend to higher levels by year-end. The economy is not rebounding as fast as the markets and I believe we will have to reconcile that fact over the next six months. The biggest problem that will come back haunt us over and over is the unemployment.

The government only reports the employment based on those still on unemployment and based on the household survey. Both are not accurate because they don't report the real facts. The government has another statistic called the U6 unemployment and counts everyone including those who have fallen off the rolls, those who have become discouraged in looking for work and are no longer actively searching and those who have taken a part time job to pay the bills while looking for full time work in their field. The U6 unemployment rate is now over 20%.

The current labor force participation rate is at a record low for this cycle at 65%. That means only 65% of all people able to work are actually working. Of course not everyone "able to work" is actually looking for jobs. Some are homemakers, housewives, retired or simply have no financial need to work. Still this is the lowest participation rate since 1988 and is indicative of the overall employment situation.

Employment appears to be improving in the U.S. and it is the lightning rod by which all other economic indicators are judged. In the weekly jobless claims released on Thursday the number of new claims fell to 432,000 and the lowest level since August 2008. However, I don't give that number much credence since only the most financially destitute would have gone immediately to the unemployment office if they were laid off during the holiday week. Weekly jobless claims need to fall to 350,000 or lower before we see any meaningful rise in employment numbers.

I expect we will see a major spike in claims over the next two weeks as those recently terminated and those being let go from seasonal employment line up to file claims again. However, there was a minor positive data point in the Thursday report. The continuing claims (orange line) continue to decline with a drop of 57,000 in the prior week. These are people who have been on unemployment for some time, approximately 4.981 million, and have either found jobs or have exhausted benefits and fell off the rolls.

Weekly Jobless Claims

Next Friday is the Non-Farm Payroll report for December and the consensus estimate is for a GAIN of +25,000 jobs. I don't have to tell you this would be a major press event even if it were simply a blip in the data stream from seasonal hiring in December. A positive number will draw politicians to a microphone like moths to a flame. Since the U6 unemployment number is still rising I seriously doubt a positive number will be more than a one-month wonder and back to job losses in the February report.

Non-Farm Payroll Chart with expected +25,000 gain

Other economic reports for next week include the FOMC minutes on Wednesday and Non-Farm Payrolls on Friday.

The ISM Index fell -2 points in November to 53.6 but still in expansion territory. Another decline could be problematic and indicate the bounce from the last eight months had peaked. The estimate is for a minor gain to 54.0 but there is no confidence in that number. This could be a leading indicator for the week. ISM services will be released on Wednesday.

The FOMC minutes on Wednesday are the second most important economic event of the week. This will be the inside look at what the Fed was really thinking when they met in December. Since rate decisions are on everyone's mind this will be a closely watched event.

With the expected gain of +25,000 jobs in the Friday report this could be a very volatile event. Anything is possible and it is sure to be a market-moving report. We are also getting very close to the major benchmark revisions in the payroll report in February. We could see a revision of more than 800,000 jobs and that may not sit well with traders.

Economic Calendar

TrimTabs CEO Charles Biderman said there were positive inflows into stock funds over the last five days of the year but that was normal for retirement funds. He said by far the biggest move for the year was money leaving stock funds for the safety of bonds. Despite the massive gains in the equity markets there was a constant flow of funds out of stocks and into bonds.

He said there were record lows for stock buybacks, record lows for insider buying and record levels of new offerings. Over $1.1 trillion dollars of new offerings were absorbed by the markets and they still moved higher. Most of the new offerings were secondary offerings by banks and financials and that was the worst performing sector for the year.

Biderman also said take home pay for all U.S. taxpayers fell -12% in 2009 to $5.8 trillion. The $800 billion drop came from layoffs, downsizing and pay cuts. At the same time the market value of all U.S. stocks rose +$3.5 trillion or +12% to $16 trillion. He said the stimulus did nothing to restart economic growth compared to the $3 trillion that was taken out of home equities between 2003-2007. He said cutting taxes would have been far better in restarting the economy because it gives real money to those trying to spend and start new businesses.

Competing with equities was the record sales of government debt of $2.1 trillion in 2009. That will rise to $2.5 trillion in 2010 and that continues to be a huge worry for economists and institutional investors. To date there have been no problems in the monthly treasury auctions but the worry is growing. The government was able to sell the $2.1 trillion in 2009 because it weighted the offerings heavily into the 3-6 month notes and 2-3 yr treasuries.

Getting investors who are afraid of the market to invest in treasuries for the short term is not nearly as difficult in selling them long term notes. Unfortunately that is where the government wants to go in 2010. They are moving up the term ladder to the longer term multiple year notes. Reselling billions in securities every 3-6 months is weighing on the government and they want to lock in some long-term money while the rates are still low. Hopefully if they offer long term notes the buyers will come but that remains to be seen and is still the biggest risk for the markets in 2010. The Fed has said it will quit buying treasuries as of February 1st and that could be the straw that breaks the auctions back. Does anyone else think it is strange that a quasi government agency, the Fed, buys government debt? I know the reason was to provide a market and keep rates low but every time I hear it that question pops up again.

There was roughly $50 billion in net cash going into U.S. stock funds, $65 billion into emerging market funds and just over $400 billion into bond funds. I actually view this as a positive for the equity markets. If equities don't implode in early 2010 then those cautious investors in bond funds should start to become more comfortable with equities and start moving money back into the market. I would look for that to happen later in the year once the markets start hitting new highs again on stronger economics.

There were no banks closed this week but there were six the prior week bringing the final total for the year to 140. The FDIC said the banking sector was improving but they still expect a large number of closures in 2010 and a continued drain on the FDIC fund. That is also a weight on consumer sentiment to see their neighborhood banks change hands overnight.

The banking sector remains under pressure and some of that pressure is coming from the massive new offerings. People expecting a banking rebound when they bought those new shares are becoming discouraged and those without lockup periods are probably going to exit if a bullish trend does not appear soon. Many are just waiting until the calendar rolls over to 2010 so they can take profits and move on to something that is not dead money.

Banking Index Chart

Oil prices rose to $80 on Thursday for an $8 gain over the last three weeks. The better than expected jobless claims helped push prices higher on Thursday along with a falling dollar early in the morning. When the dollar rebounded late in the day oil prices declined to nearly $79 before firming. This was the best year for crude oil since 1999. That may be surprising since oil hit $147 in 2008 but remember it also crashed to close at $45 before the year was over. I am planning on shorting oil next week assuming the Iran problem does not heat up.

Chart of Crude Oil

Oil had the best year since 1999 but oil stocks were the fourth worst performing sector. Technology was the leader with banking the worst. I continue to find it strange that airlines are doing so well when they constantly whine about falling passenger traffic and oil prices are rising.

Best - Worst Sectors

Q4 earnings begin in about two weeks when Dow component Alcoa reports on the January 11th. This will begin the Q4 earnings cycle but they really won't begin to flow in quantity until the week of the 18th and don't get heavy until the week of the 25th. January normally gets off to a slow start because of the holiday confusion and vacations.

The key here is the expected quality of earnings. Rather than earnings from cost cutting most analysts are expecting to see an uptick in earnings from rising revenue. This will be a sticking point for the market. If revenue numbers disappoint and companies are still reporting cost savings then this earnings cycle could end badly. The markets are priced to perfection and it will take some stellar results to keep the rally moving otherwise we could have a rocky summer. Since earnings in Q4 2008 were dismal the easy comparisons should produce a blowout quarter.

Market breadth is lousy and getting worse. However, we really can't apply much weight to the last two weeks because of the holidays. Most institutional traders were done weeks ago with their bonuses locked in and no reason to put any money on the line. Starting next week they will have to earn their bonus all over again for 2010. You can bet they are not going to come back from the holidays and go long everything in sight. This is going to be a wait and see market and it should not take long to tell which way we are going.

Institutional traders are going to be looking for a dip, probably a sizeable dip before committing too much money. With the rally very long overdue for a decent correction it may appear relatively quickly and be powered by a buyer boycott rather than a sudden urge to raise cash.

I am sure there is going to be a fair amount of tax selling now that the calendar has turned over to a new year. Whether that is in the first couple weeks before earnings or in the weeks following the earnings surge remains to be seen.

One thing for sure, it will depend a lot on the banking sector. The financial sector is oil for the market and a collapse in bank stocks could keep any equity rally on hold until banks begin to recover.

Dow 10,265. Keep that number firmly planted in your memory. That is the number to watch over the coming weeks. This has been support since early November and odds are very good it will be tested again soon. If that level fails the next test I believe we could see Dow 9500 again. The Dow high close last week was 10,544. A 10% correction from that level would take us to 9489 and right above the 38% fib retracement from the March lows. This should be an area where traders would gain confidence about reentering the market and beginning to build positions for 2010.

The last six weeks of sideways movement has been a topping process where the desire to add to longs faded once bonus levels were decided. Because I believe the economy will improve in 2010 along with earnings I believe the markets will go higher. We had a once in a decade buying opportunity in March. That is over once the market corrects from the monster rebound. That correction will clear the decks for the next move higher. For the Dow I believe that means a dip to around 9500. I would be thrilled if it did not go that deep but I believe a shorter dip would not be met with the quantity of buying we need to move higher.

Dow Chart

On the S&P that same 10% correction level from the 1128 closing high equates to 1015. Since the 38% fib retracement is roughly 1010 that would be an excellent target for a correction dip. The S&P has decent support at 1085 and that would be the decision point between just a profit taking dip and the possibility of a real correction. A decline below Thursday's close at 1115 is another break of uptrend support that would immediately target 1085.

S&P-500 Chart

A 10% dip on the Nasdaq would take it from the 2291 high close to 2061. That is only two points away from the 2063 50% fib retracement so it is definitely a target. The Nasdaq broke out of its bearish wedge and surged the week before Christmas but found absolutely zero follow through last week. The window dressers did an admirable job in keeping it pinned to the 2280 level until Friday's close. Uptrend support comes back into play around 2225 and horizontal support around 2150. If 2150 breaks it should be a straight shot to 2060.

Nasdaq Chart

The Russell 2000 chart pattern is a little easier to see with the 10% correction a dip to 570. That just happens to be decent support from late November and not as dramatic a breakdown in chart as we saw in the other indexes. Russell 538 and 550 are pretty decent support points. As with any new trading year rebound we should watch the Russell for signs of strength. Funds like to buy small caps early in the year and then move extra cash to liquid large caps as the year comes to a close. A strong rebound from 550-570 would be a huge buy signal.

Russell 2000 Chart

The first thing to remember about January market moves is that corrections don't always appear on schedule and they don't always go in a straight line. I posted the chart below several weeks ago showing the similarity between Nov-Dec 2008 and what we were seeing in 2009. Same Thanksgiving drop, same December range. I suggested that we could see the false breakout to a new high early next week then a similar decline on profit taking into earnings.

I think we may have already seen that false breakout with the new highs last week. The sharp drop on Friday, a planned jam job by somebody, helped to convince me further that we might have seen the short-term high.

Dec08- Jan09 false breakout chart

Dow December 2009 Chart

Just because the market may rest in early January does not mean it is an immediate correction. If it decides to correct it could take a matter of days, weeks or even a couple months. Retail traders will be buying every dip and it could produce some erratic patterns.

The key point for traders is not to put all your eggs in one basket. Just because quite a few analysts are expecting a correction is no reason to go short your entire bankroll. Be patient, pick a few opportunities and concentrate on looking for that opportunity to go long ahead of the rally that should come later in the year.

If we have a strong jobs report on Friday we could be off to the races again with all thoughts of a correction discarded like last week's newspaper. Plan for a potential decline but also plan for an unexpected rally. The market exists to make fools out of the most people at any given time.

While reading the various end of year tidbits in the newspaper I jotted down some interesting factoids. I am a fact collector and I thought these were odd enough to be interesting.

100 years ago in 1909 women washed their hair an average of once a month.

In 1909 the average life expectancy was 47 years.

Only 6% of U.S. citizens graduated from high school.

Only 6% of people were born in a hospital.

Only 30 people lived in Las Vegas Nevada.

Quote from Warren Buffett:
"The great bull market from 1982 to 2000 was due primarily to four things. Those were low interest rates, low inflation, lower taxes and less government intrusion into business."

Ten years ago in 1999 there were less than a dozen ETFs. The QQQQ, SPY, DIA and a couple others. Today there are hundreds of ETFs for every conceivable trading strategy. My ETF tip for the next decade is buy a platinum or palladium ETF whenever it is created. The gold ETF (GLD) now owns $43 billion in gold and I believe it has positively impacted the price of gold. Platinum is much more rare than gold and should an ETF ever make it to market I believe it should be a long term holding.

I want to thank everyone who took advantage of our end of year renewal special. It is always gratifying to see how many people return year after year to support the newsletter.

We are going to leave the subscription page up for a couple more days because I know some people were waiting for 2010 to subscribe because they already used up all their tax deductions for 2009. Some people are still on vacation and won't really get serious about the market again until late next week. We have about 70 DVD sets left and that will be the deciding factor. When those are gone we will cut off subscriptions. Thank you again for your support.

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Jim Brown


Index Wrap

Not So Fast

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

Sellers in last half hour whacked the market on the last trading day of the year. Various 'reasons' were cited. I chalk this up to (mostly) nervous profit taking ahead of a long weekend and an 'overbought' market condition. Tony Soprano couldn't have done a whack job as it seemed to come out of nowhere.

The S&P 500 (SPX) dropped back under its recent 'breakout' point and back into its prior trading range. I don't see this as marking a major top but this is typical of the kind of sharp reactions that can occur when the market is relatively overbought, as is the case currently. Nevertheless January should be an up month especially based on historical trends.

Bullish sentiment remains quite high among traders and this is a proverbial 'fly in the ointment' that suggests not being too complacent and over-leveraged in bullish positions. By the way, I don't suggest buying index options on chart 'breakouts'. The premiums get too jacked up too quickly in options. You can do this in index futures for a short-term trade sometimes.

HISTORY:

The S&P 500 (SPX) was up 23% in ‘09. The Nasdaq Composite (COMP) was up almost twice that as COMP gained nearly 44% on the year!

The first January following the end of a bear market has been pretty consistently strong, with an historical average 3.7% gain for stocks since the 1930s.

In the wake of the 14 bear markets since the crash of 1929, the S&P 500 index has risen 12 times, posting gains ranging from 0.7% in 1933 to 12.3% in 1975. (Two exceptions were January '39 and January '03, when SPX fell 6.9% and 2.7% respectively.

U.S. stocks in general tend to have fairly strong performances in January. For the Dow 30 (INDU), December, August and January have been the strongest months on average over the past 100 years. One nice thing about INDU is its LONG history.

There are some investment-related aspects to this seasonal tendency, especially investors selling underperforming stocks for tax purposes in the case of individuals and funds so as to look better in their year-end statements. This process usually extends through early-December. Then from mid-Dec through January investors tend to put new money to work in a search for 'undervalued' stocks that they think may outperform the market in the new year. This has often benefited small-cap stocks. In December, the trend seemed to have been at play as the Russell 2000 (RUT) was up 7.9% for the month, compared with 1.8% for SPX.

The VIX (the CBOE volatility index) and what some call the stock market's 'fear gauge', ended 2009 substantially lower than where it started. After opening in the year just ended at a relatively high 39.6, reflecting market uncertainty among traders, the VIX closed out 2009 at a more or less normal level (by historic standards) at 21.7. HO-HUM.

It seems, according to a (Wall Street) Journal article I read the other day, a number of investors are searching for better returns than the miniscule interest on money market accounts, etc., by selling covered calls. The thinking is that the best gains are behind us and 2010 may be a mostly 'flat' to slightly down year, or with just limited gains given the big run up in 2009.

With sort of 'normal' volatility returning to the market the call premiums won't be as fat, but if the market doesn't run away to the upside, or tank, the income aspects of covered call writes (while holding on to the stock) may work out as anticipated. Being a natural contrarian I find it hard to believe that the average individual investor is going to wholly succeed in this but maybe they'll turn out to be right or mostly right. A market outlook involved (a 'flat' 2010 market) may reflect an emerging consensus.

For sure, earnings prospects and trends are going to have to take over from the push provided by the stimulus. And profits don't look right now like they are going to come back strong in 2010. I myself am glad I don’t have to forecast the year ahead. I'll stick to trying to predict the coming week or two or few.

LAST BUT NOT LEAST:

If you haven't already done so, do make it part of your New Year's tasks to renew your subscription. Thanks for your support!

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MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

My 'minimum' objective for the S&P 500 (SPX) to 1149-1152 remains intact. I'm staying with that target although I also last week highlighted near technical resistance around 1140-1142. SPX got up to 1130 before it came off. SPX may have simply expanded its trading range, which will be especially apparent if the index drops again back to support in the 1100 to 1080 price zone, where I'd again be a buyer, with exit point if SPX falls below 1070.

Resistance is at 1130, extending to 1142-1145. Above this area, SPX would be in new high ground for the current move which makes it hard to project 'resistance'. Major resistance still looks like it would come in the 1180-1200 area.

The RSI again looks like it may drop back to, or under, a neutral or mid-range reading again rather than falling to an 'oversold' area. Rallies have been occurring when this has happened for the past few months. How long this pattern will go on is not knowable, but it's been fairly consistent since mid-August.

MARKET 'SENTIMENT'

Bullish sentiment in terms of its recent 5-day moving average numbers is showing a high level of bullishness. When this has occurred at least in the prior two months that SPX has been in a trading range, prices have pulled back to the at least the low end of the trading range.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) didn't follow big brother SPX in achieving a bullish 'breakout' above the top end of ITS 2 month plus trading range, as the index again was stopped in the 520 area. 520 becomes an even more pivotal resistance. I've noted 520-524 on the chart below as the key near resistance. Next resistance is in the 535-540 zone, with major resistance suggested by the top end of OEX's uptrend channel, currently intersecting near 550. Technical support begins around 509-507, extending to 504 and then to the 496 area, at the low end of the uptrend channel.

It would be consistent with the multimonth trading range to again see the OEX retreat to the lower end of this price range.

DOW 30 (INDU) AVERAGE; DAILY CHART:

I've highlighted an updated trading range for the Dow 30 (INDU) Average as 10580-10520 on the upper end and 10235-10200 on the low end. Support implied by the low end of INDU's uptrend channel is at 10345 currently.

Resistance above 10580 looks to be not much above recent highs, at 10650. Above this is a guess, but 10800 could be a next target on a renewed up leg.

There is not a lot more to say about this chart as INDU remains locked in its relatively narrow trading range as volatility damps down. The longer this sideways trend goes it would suggest the more potential there could be for substantial follow through on a decisive upside or downside penetration of the areas of repeat highs and lows that form the Dow's rectangle pattern.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) ran into selling and a lack of renewed buying once the index got up to 2293-2295. If you look at an hourly chart (not shown here) the line of stone wall resistance COMP hit in this area is especially apparent. Above 2295 to 2300, I estimate next resistance coming in around 2350.

2240 looks like a next support area, with even more pivotal support for the Composite being the line of prior highs around 2215 that COMP pieced on the strong rally that started two weeks back. Below 2215, support extends to around 2180.

Bullish sentiment has been on the high side recently and these numbers may need to come down some before the market will be in a position to mount a next sustained rally.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) also hit a solid wall of resistance/selling at 1881-1882. I think that resistance would extend up to 1900-1905 if/when NDX gets up into this area again. If there was a breakout above near resistance, a next upside target and further resistance, is at 1950.

NDX looks headed lower and its next support around 1852, then at 1825, with further support extending down to 1808-1800. The chart will maintain an overall bullish pattern as long as we don't start seeing the index closing under 1800.

The NDX started to come back down after the 13-day RSI got into the overbought zone noted on the chart below. The Nasdaq 100 index has been pretty consistent in seeing pullbacks develop after its 13-day Relative Strength Index got to or near an overbought situation as highlighted below on the RSI portion of the price chart.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) has what looks to be substantial resistance around 46.3. If this area was pierced on a renewed rally attempt, I've noted next resistance as 47.

Short-term momentum is down now so support levels become key areas of focus ahead. Near support is at 45.5, then comes in around 44.8 and lastly, at 44-43.7. A close below 44.0, that wasn't reversed (back to the upside) the following day would turn the chart bearish.

I am missing recent volume figures on couple of recent days and haven't been able to refresh those numbers. However, daily QQQQ volume didn't spike on the last day of 2009, so the selling that came in late in the session wasn't part of any major liquidation, at least not yet.

A final note: my QQQQ short-term trading system has gone from long (on 11/30) to short on 12/28.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) has pulled back to what could be a strong line of support around 625 after stalling in the 634-636 area. Above this recent resistance, I've note next resistances on the chart (red down arrows) at 646, then at 660.

Below 625 support, a next key support comes in around 607, at the long-standing up trendline dating from March of last year. A Close below this trendline would be technically bearish, especially if not reversed the following day.

As noted in my initial comments, small cap stocks have an historical tendency to do better in the early part of the year as January brings some new or recycled money into the investment game and the RUT stock grouping contain some that look relatively 'cheap'.

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

Delivery, Machinery and Volatility

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Volatility Index - VIX - close: 21.68 change: +1.72 stop: 18.95

Why We Like It:
Our market outlook for January is relatively bearish. Odds are good that stocks could see a correction. Any significant decline is going to drive up demand for put options and that's going to send the VIX higher. I'm suggesting we buy calls on the VIX now. Our first target to take profits is at 27.50. Our second target is 32.50. This index can be volatile (naturally) so I'm listing our stop loss at 18.95.

Suggested Options:
I am suggesting the February calls. That should give us enough time to capture any early 2010 correction. VIX options have their own expiration date. The February options should expire on Feb. 17th.

This is the new CBOE option symbol format:
The "10" in front of Feb is the year 2010

BUY CALL 10 Feb 25.00 VIX1017B25 open interest=192,867 current ask $2.90
-or-
BUY CALL 10 Feb 27.50 VIX1017B27.5 open interest=114,679 current ask $1.95

Annotated Chart:

Entry  on   January 02 at $ 21.68 
Change since picked:       + 0.00
Earnings Date            --/--/--
Average Daily Volume =        --- million  
Listed on   January 02, 2010         


NEW DIRECTIONAL PUT PLAYS

Fedex Corp. - FDX - close: 83.45 change: -1.72 stop: 85.51

Why We Like It:
FDX has been struggling ever since its December earnings report. The stock looks ready to breakdown under technical support at its 50-dma soon. I'm suggesting a trigger to buy puts at $81.90. If triggered our first target is $78.10 near the rising 100-dma. Our second target is $75.10. More aggressive traders could aim for the November 2009 lows near $72.00.

Suggested Options:
I am suggesting the February puts. My preference is the $80 strike.

BUY PUT FEB 80.00 FDX-NP open interest= 426 current ask $2.40

Annotated Chart:

Entry  on   January xx at $ xx.xx <-- TRIGGER @ 81.90
Change since picked:       + 0.00
Earnings Date            03/18/10 (unconfirmed)
Average Daily Volume =        3.3 million  
Listed on   January 02, 2010         


Flowserve - FLS - close: 94.53 change: -1.37 stop: 98.25

Why We Like It:
FLS produced a bearish double top with the peaks in October and November. Shares have been suffering under a trend of lower highs ever since. In the last two trading days FLS has broken down from a pennant-shaped consolidation pattern and now the stock is facing support at $94.00. I'm suggesting a trigger to buy puts at $93.85. If triggered our first target is the long-term trendline of higher lows, which places our exit around $88.50. I'm suggesting we exit 2/3rds to 3/4ths of our position at $88.50. We'll keep a small position and aim for $85.15.

Suggested Options:
I am suggesting the February puts. My preference is the $90 strike.

BUY PUT FEB 90.00 FLS-NR open interest= 55  current ask $2.55

Annotated Chart:

Entry  on   January xx at $ xx.xx <-- TRIGGER @ 93.85
Change since picked:       + 0.00
Earnings Date            02/24/10 (unconfirmed)
Average Daily Volume =        612 thousand 
Listed on   January 02, 2010         



In Play Updates and Reviews

It's Decision Time Again

by James Brown

Click here to email James Brown

Editor's Note:

Traders have a decision to make!

Stocks traded sideways for most of November and December. The Christmas week breakout higher was driven by the NASDAQ and the small cap Russell 2000 but the S&P 500 did break through significant resistance in the 1115-1120 zone. Unfortunately there has been no follow through this past week. To make matters worse in the last 30 minutes of trading on December 31st the bottom fell out of the market with stocks plummeting. It's possible this very late day sell-off was just a function of a severe lack of volume with most market participants already gone for the day and no one to balance out any sell orders. However, the sharp weakness has cast an ominous shadow across the first week of January.

Readers already know that we're concerned about January and strongly suspect that stocks will see a correction. Now that we're in the new year investors who have been holding on to gains can sell to lock in a profit and not have to worry about the tax consequences until April 2011. Was the late Thursday decline an early rush to lock in gains? Is it a sign of things to come? Again, it's hard to put much emphasis on the 30-minute move because volume was light.

It is always challenging to try and craft your trading strategy around a trend change especially when the reversal hasn't happened yet. I was expecting the market to reverse after the January 8th jobs report - essentially Monday, January 10th. In reality the reversal could happen any day, it could have already started on Thursday afternoon, or it may not happen at all. That's the problem with trying to predict the future. The last three quarters of 2009 was painfully surprising for traders trying to follow traditional bearish technical patterns that reversed or failed on a regular basis.

The big picture here is that the trend is still up for all the major market averages. Yet short-term stocks look tired and have begun to weaken. Is this just a short-term correction that will be over in a couple of days? Or is it the start of the deeper multi-week correction we've been expecting in January, which could ultimately be a new entry point for bullish positions.

Traders need to reconsider how much you're willing to risk in this market. Double check your stop loss placement. You may want to exit a number of your bullish positions or you might just want to raise your stop losses, or you could just exit all of them and start 2010 with a fresh slate. I'm going to trim our play list by closing some trades and raising stops on others.


CALL Play Updates

Intl. Business Mach. - IBM - close: 130.90 change: -1.67 stop: 128.90 *new*

IBM soared to new 52-week highs on Wednesday but gave back all of its gains with a 1.2% decline on Thursday. The stock had resistance near $130.00 and 131.50. I would look for the $130.00 level to offer some support. I'm inching our stop loss higher to $128.90. More conservative traders may want to place their stop closer to $130.00. I am not suggesting new positions at this time but a nice bounce from $130 could change my mind.

Our first target is $134.95. Our second target is $139.00. Our time frame is about four weeks. We do not want to hold over IBM's earnings report.

Suggested Options:
No new positions at this time.

Annotated Chart:

Entry  on  December 28 at $131.55
Change since picked:       - 0.65
Earnings Date            01/19/10 (unconfirmed)
Average Daily Volume =        5.8 million  
Listed on  December 26, 2009         


Infosys Tech. - INFY - close: 55.27 change: -0.44 stop: 53.85 *new*

INFY has been hovering in the $55-56 zone and broken resistance near $55.00 should offer some support. I am suggesting we raise our stop loss to $53.85. We only have about ten days left since we plan to exit ahead of the January 12th earnings report. I am not suggesting new positions at this time. INFY has already hit our first target at $55.75. Our second and final target is $59.50.

Suggested Options:
No new positions at this time.

Annotated Chart:

Entry  on  December 05 at $ 51.88 /gap down entry point
                           /originally listed at $52.46
Change since picked:       + 3.39
                            /1st target hit @ 55.75 (+7.4%)
Earnings Date            01/12/10 (confirmed)
Average Daily Volume =        1.4 million  
Listed on  December 05, 2009         


L-3 Communications - LLL - close: 86.95 change: -1.55 stop: 84.90 *new*

LLL is correcting but broken resistance near $86.00 should offer some support. I'm going to adjust our stop loss to $84.90. More conservative traders may want to consider placing their stop closer to $86.00. I am not suggesting new positions at this time but a nice bounce from $86 might change my mind.

I did label this an aggressive, higher-risk trade. Our first target to take profits is at $89.95. Our second and final target is $94.00. We want to exit ahead of the late January earnings report. FYI: The Point & Figure chart is bullish with a $104 target.

Suggested Options:
No new positions at this time.

Annotated Chart:

Entry  on  December 28 at $ 86.80 
Change since picked:       + 0.15
Earnings Date            01/28/10 (unconfirmed)
Average Daily Volume =        1.0 million  
Listed on  December 26, 2009         


NUCOR Corp. - NUE - close: 46.65 change: -0.41 stop: 43.90

Metals stocks are seeing some profit taking but they are still one of the strongest groups in December. I suspect this could just be a short-term pull back. Look for a dip toward $45.00 before considering new bullish positions. More conservative traders might want to raise their stops toward $45.00. Our target is $49.50. We will plan to exit ahead of the late January earnings report.

Suggested Options:
If NUE provides a new entry point near $45 I would use the February calls.

Annotated Chart:

Entry  on  December 22 at $ 45.85 (1/2 position or less) /gap higher entry
Change since picked:       + 0.80
Earnings Date            01/28/10 (unconfirmed)
Average Daily Volume =        4.5 million  
Listed on  December 22, 2009         


Precision Castparts - PCP - close: 110.35 change: -1.40 stop: 109.45 *new*

Investors should be cautious here. While the larger trend is very bullish for PCP short-term many of the technicals have turned bearish. I've been warning readers to expect a pull back toward $110 and we've got it. Now I'm raising our stop loss to $109.45. I'm not suggesting new positions at this time. PCP has already hit our first target at $112.45. Our second target is $118.75. The Point & Figure chart is bullish with a $157 target (it was $131).

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on  December 01 at $107.35
Change since picked:       + 3.00
                            /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: 59.24 change: -0.09 stop: 56.45 *new*

SF has been one of the best performers the last three weeks. Shares set a string of new highs last week. If the stock corrects then broken resistance near $57.00 should offer some support. I am raising our stop loss to $56.45. I am not suggesting new bullish positions at this time. Our first target is $64.50, which may be a little optimistic since our time frame is January expiration. The P&F chart is bullish and points to a $70 target.

Suggested Options:
No new positions at this time.

Annotated Chart:

Entry  on  December 22 at $ 58.05
Change since picked:       + 1.19
Earnings Date            02/11/10 (unconfirmed)
Average Daily Volume =        207 thousand 
Listed on  December 16, 2009         


UnitedHealth Group - UNH - close: 30.48 change: -0.53 stop: 28.90

I'm not surprised to see UNH suffer more profit taking. I've been warning readers to expect a dip back toward $30.00. We can use a pull back near $30 as a new entry point although more conservative traders may want to wait for a bounce first before initiating positions.

This was a "lottery ticket" style of play. We knew it was risky given all the political ups and downs for the healthcare bill. Our time frame was several weeks and we listed January and March calls. At this time if you choose to open new positions I'd use March calls but that would require holding over the late January earnings report (to get the most out of your March calls). Our first target is $34.00. Our longer-term target is $36.00.

Suggested Options:
I would use the March calls. I prefer the $32, $33, or $34 strikes.

Annotated Chart:

Entry  on  December 10 at $ 30.31 
Change since picked:       + 0.17
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =        819 thousand 
Listed on  December 10, 2009         


Whirlpool - WHR - close: 80.65 change: -1.07 stop: 79.45 *new*

Traders immediately sold into the strength on Thursday morning. The lack of follow through from Wednesday's intraday bounce is short-term bearish. The question right now is will support at the $80.00 level hold. If you think $80 will hold then I suggest you up your stop loss. The newsletter is raising our stop to $79.45. If you don't think $80.00 will hold then it's time to exit early! I am not suggesting new positions at this time. WHR has already hit our first target at $84.75. Our second target is $89.00.

Suggested Options:
No new positions at this time.

Annotated Chart:

Entry  on  December 19 at $ 80.76 /gap higher entry
Change since picked:       - 0.11
                             /1st target hit $84.75 (+4.9%)
Earnings Date            02/08/10 (unconfirmed)
Average Daily Volume =        1.6 million  
Listed on  December 19, 2009         


Zebra Technologies - ZBRA - close: 28.35 change: -0.04 stop: 27.45

ZBRA was showing relative strength most of the day but succumbed to the market-wide sell-off late Thursday afternoon. I am very cautious given the market's weakness. I would consider buying calls on a bounce from $28.00 but I'm raising our stop loss to $27.70. Our first target is $30.00. Our second target is $32.00 but that looks pretty aggressive and we may end up exiting early if the market does correct.

Suggested Options:
Look for a bounce from $28.00 and consider the Feb 30 calls.

Annotated Chart:

Entry  on  December 30 at $ 28.39 
Change since picked:       - 0.04
Earnings Date            02/09/10 (unconfirmed)
Average Daily Volume =        166 thousand 
Listed on  December 30, 2009         


PUT Play Updates

*Currently we do not have any put play updates*


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.)

United Parcel Service - UPS - close: 57.37 change: -0.81 stop: n/a

UPS has been stuck trading sideways for more than six weeks now. At this point it looks like shares are going to break lower. With only two weeks left before options expire readers may want to adjust their exit price lower. I'm not suggesting new strangle positions.

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:       - 0.62 
Earnings Date            02/02/10 (unconfirmed)
Average Daily Volume =        4.7 million  
Listed on  November 21, 2009         


CLOSED BULLISH PLAYS

EQUINIX Inc. - EQIX - close: 106.15 change: -0.69 stop: 102.75

I am suggesting readers exit early EQIX and lock in a gain. Technicals have started to turn bearish. I'd rather exit now and watch it for a dip or bounce near $100 again where we might want to jump in again.

Chart:

Entry  on  December 09 at $103.02
Change since picked:       + 3.13 <-- exit early @ 106.15 (+3.03%)
Earnings Date            02/10/10 (unconfirmed)
Average Daily Volume =        501 thousand 
Listed on  December 09, 2009         


Mettler Toledo - MTD - close: 104.99 change: -0.98 stop: 99.45

More aggressive traders may want to keep MTD as a trade. It's true that shares did produce a bearish engulfing (reversal) candlestick on Thursday but the selling stalled near $105 and its 10-dma. If you can handle the volatility shares could easily dip toward $102 or even $100 and still maintain their bullish up trend. Unfortunately I'm concerned about the combination of MTD pulling back toward $100 and the potential for the market to see a deeper decline. Thus I'm suggesting an early exit now and we'll reconsider new positions on a dip near $100 and its rising 50-dma.

Chart:

Entry  on  December 19 at $102.66 (small positions) /gap down entry
Change since picked:       + 2.33 <-- early exit (+2.2%)
Earnings Date            02/04/10 (unconfirmed)
Average Daily Volume =        106 thousand
Listed on  December 19, 2009         


Norfolk Southern - NSC - close: 52.42 change: -0.82 stop: 50.95

The general trend for NSC may still be up but the momentum is just too slow. I'm suggesting an early exit.

Chart:

Picked on  November 21 at $ 51.84 (small positions)/gap higher entry
Change since picked:       + 0.58 <-- exit early (+1.1%)
Earnings Date            01/27/10 (unconfirmed)
Average Daily Volume =        5.4 million  
Listed on  November 21, 2009         


United Tech. - UTX - close: 69.41 change: -1.08 stop: 67.45

Technically UTX should still have support near its 30-dma and the bottom of its rising bullish channel. However, the action on Friday looks like a bearish reversal. I'm suggesting an early exit now to cut our losses. If shares rebound you could always jump back in over $71.00.

Chart:

Entry  on  December 15 at $ 70.25
Change since picked:       - 0.84 <-- early exit @ 69.41 (-1.1%)
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =        4.0 million  
Listed on  December 12, 2009         


Valmont Industries - VMI - close: 78.45 change: -1.38 stop: 78.45

There was no follow through on VMI's bounce from Wednesday's low. Instead shares reversed at $80 again and hit our stop loss at $78.45. The move makes VMI look like a bearish candidate.

Chart:

Entry  on  December 10 at $ 81.00
Change since picked:       - 2.55 <-- stopped @ 78.45 (-3.1%)
Earnings Date            02/10/10 (unconfirmed)
Average Daily Volume =        238 thousand 
Listed on  December 05, 2009         


Vertex Pharma - VRTX - close: 42.85 change: -0.70 stop: 41.85

I was concerned that Wednesday's move looked like a top. Thursday's decline only reinforced that view. I'm suggesting an early exit now. You can keep VRTX on your watch list should the stock find support near $38 or $40 again. The high on Wednesday was $44.04 and our target to exit was $44.25.

Chart:

Entry  on  December 03 at $ 40.25
Change since picked:       + 2.60 <-- early exit @ 42.85 (+6.4%)
Earnings Date            02/09/10 (unconfirmed)
Average Daily Volume =        3.2 million  
Listed on  November 23, 2009         


CLOSED STRANGLE & SPREAD PLAYS

Apple Inc. - AAPL - close: 210.73 change: -0.90 stop: n/a

AAPL is still flirting with new 2009 highs but eventually succumbed to minor profit taking. It's possible that shares might shrug off market weakness and continue to climb on expectations over AAPL's next product but at this point I wouldn't bet on it. Most of the gains in the last two weeks were due to excitement over AAPL revealing a new tablet PC in late January. Industry insiders expect the announcement on January 26th. Speculation about the new product has it looking like a big iPhone with a 10.1 inch screen and offer a competing platform for the e-readers out there like Amazon.com's Kindle.

More aggressive traders may want to let it ride since we have two weeks left before January options expire. I am suggesting an early exit now. We can sell the Jan. $220 call for $2.12 and the Jan. $180 put for $0.18 for a total of $2.30.

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

Chart:

Picked on  November 30 at $199.91
Change since picked:       +10.83
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =       15.1 million  
Listed on  November 30, 2009