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Newsletter

Daily Newsletter, Saturday, 1/9/2010

Table of Contents

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

Market Wrap

2010 Surges Off the Starting Line

by Jim Brown

Click here to email Jim Brown
I am sure we all wish the rest of the year is as strong as the first week. The Dow gained +1.8% and it was the laggard of the group. The Nasdaq added +2.12% and S&P 2.68%. It was a perfect example of an index fund rally with the S&P leading the charge.

Market Statistics

Friday's Non-Farm Payroll report was not even close to what analysts expected and all the markets gapped sharply lower on the news. Fortunately the sell the news event was short lived and bulls raced into the gap to buy stocks and all the indexes finished in the green.

The economy lost 85,000 jobs in December and that was much larger than the final consensus estimate for a loss of -23,000 jobs. This was a major shock to analysts who were flirting with the possibility of job gains in December. The household employment survey found that jobs declined by 589,000 following a gain of +139,000 in November. The total labor force declined by 661,000 due to unemployed workers giving up on looking for work. This drop in the number of available workers kept the unemployment rate at 10.0% even though the number of workers with jobs declined. The labor force participation rate fell to 64.6% and a 25-year low.

When these workers decide to start looking for a job again it will boost the overall workforce numbers and send the unemployment rate much higher. This suggests we could see the employment rise to 10.2% or higher over the coming months. Now that the holidays are over those discouraged workers will have no excuse for not job-hunting again.

The broadest measure of unemployment called U6, rose to 17.3% unemployed. More than 7.5 million workers have lost their jobs since 2007 and there are more than 15.3 million total unemployed. Over 4.164 million jobs were lost in all of 2009. Nearly 40% of unemployed workers have been out of a job more than half a year. The average duration of unemployment has risen to 20.5 weeks and by far the highest on record. In the early 1980s recession it peaked at 12 weeks.

The jobs report had a sliver of good news although it was only technical and definitely not meaningful. Jobs were revised higher for November to show an actual GAIN of +4,000 jobs, up from a loss of -11,000. That was the first increase in jobs since December 2007. Offsetting that gain was a revision to October from -111,000 to -127,000 jobs.

The January report could be really ugly given the sharp decline in December. The January report will show the number of seasonal workers terminated after the holidays and given the pace of declines in manufacturing in December the January numbers could easily be back into triple digit job losses.

Non-Farm Payrolls Chart

Consumer Credit took an enormous hit in November as credit card companies continued to restrict the amount of credit available to customers and consumers fearful of a job loss continue to pay down debt. Consumer credit fell -$17.5 billion or an 8.5% annualized drop. It was the sharpest monthly percentage decline since 1980 and the largest dollar decline since they began keeping records in the 1940s. $13.7 billion, or 17% annualized, was credit card credit declines. The decline prompted a warning from regulators to banks that they should not be restricting consumer credit ahead of an expected rise in interest rates.

Interest rates on car loans have been rising but the average term (63.4 months) and the average amount financed ($30,506) both declined in November. Consumer credit has declined nearly $100 billon dollars in 2009 alone.

Consumer Credit Chart

For next week there is only one really important economic release. That is the Fed Beige Book on Wednesday. This is the survey of the economic conditions in all 12 Fed regions. Last month eight districts reported a pickup in the economy while four reported conditions were mixed or unchanged. The real news next week is not in the economic realm but in corporate earnings.

Economic Calendar

The biggest event of the week will be the Intel earnings on Thursday. This could be a late Christmas present for the markets. Intel has made positive comments multiple times in the past couple quarters and the holiday sales should have been good for them. Intel is expected to report profits of 30-cents per share on revenue of $10.2 billion. That would be a dramatic rebound over the same quarter in 2008 where they posted 4-cents and $8.2 billion in revenue. Gross margins are expected to be in the rage of 62%.

The Microsoft Windows 7 operating system has been received very well and computer sales are improving. Corporate upgrades are beginning to occur and should ramp up as 2010 progresses. Since Intel processor sales occur well before the retail sale they should be seeing the benefit of this ramp already. The new tablet computers should add to the new wave of computer gadgets in 2010 as well as the growing acceptance of the Netbook. As always Intel's guidance is going to be more critical than their actual earnings.

Microsoft's Steve Ballmer said at CES last week that PC sales for 2009 were expected to fall -2% but actually rose by +3% due to a late surge at year-end. That equates to 300 million new PCs sold in 2009. Gartner Group is now expecting PC sales in 2010 to exceed +12% in new sales. That would be well over one billion new PCs worldwide. Intel will be the processor powering 85% of those PCs and Microsoft will be the operating system of choice for more than 80%.

Intel announced new processors at CES in Las Vegas that are produced on their new 32-nanometer process technology. With the new line of Core chips the printed circuit lines are so small their average width is only 32 nanometers. How small is that? It is 32 billionths of a meter. If you are like me you can't conceive of a billion, much less 32 billion of anything, especially something as small as 1/32-billionth. Let me put that in perspective for you.

I am sure you have heard the old joke about how many angels can dance on the head of a pin. Since nobody knows how big an angel is the question was a brainteaser. Well, tease your brain with this. How may transistors 1/32 billionth of a meter wide can you place on the head of a pin? I don't care what you guessed I would bet the real answer will surprise you. Over 60 million would fit on the head of a single pin. That is going to make keeping up with Moore's law in 2012 and beyond a very tough proposition.

Intel co-founder Gordon E Moore introduced the concept in a paper in 1965. Moore's law states that processor capabilities through decreasing the size of the transistors will double every two years. He wrote in 1965 that by 1975 he expected as many as 65,000 transistors to be built into a single chip. I wonder how he feels today knowing that the new generation of processors Intel just announced will have over one-billion per chip? In 2005 he projected that future improvements would reach a fundamental limit within the next 10-20 years where chips could have one-billion transistors. In only five years that threshold was been reached. Intel predicts that the end will come between 2013-2018 with 16 nanometer processes. However, Intel has been predicting for the last 30 years that Moore's law would not survive another decade. I guess you can tell I am a geek at heart. I just wish their earnings would double every two years.

Their earnings could set the tone for the entire earnings cycle for techs. If they say business is improving significantly we could be off to the races.

Intel Chart

Earnings from JP Morgan on Friday could be a trouble spot. Citigroup analyst Keith Horowitz offered a bearish outlook for the major banks. Horowitz said fixed income trading revenues had ground to a halt in Q4. He downgraded estimates for Bank America, JP Morgan, Morgan Stanley and Goldman Sachs. He said there was a significant decline in Q4 and that decline in revenue could reach as high as 20% in 2010. Regulatory reform could knock off another 5-10%. He cut estimates on JP Morgan to 55-cents from 70-cents and chopped another 30-cents off the 2010 estimate of $3.20. He rates JPM as a hold. If JPM reports weaker than expected profits next Friday it could be bad for the entire banking sector.

JP Morgan Chart

He said Bank America could see fixed income revenues fall by 16% but he kept his profit estimate for 2010 intact at 84-cents. BAC reports on the 20th. He cut Goldman to $5.25 per share with consensus estimates at $5.39 but kept a buy rating. They report on Jan 21st. He cut Q4 estimates for Morgan Stanley nearly in half from 66-cents to 36-cents per share and he cut 2010 estimates by 50-cents. Analysts expect 49-cents for Q4.

This is a very skinny week for earnings and that makes Intel and JPM even more important because everyone will be watching.

Next week (Jan-18th) the pace will pickup with IBM, Citi, CSX, FRX, MMR and AMTD on Tuesday. On Wednesday (20th) we will get earnings from BAC, BK, EAT, EBAY, FFIV, STX, SLM, SBUX, STT, USB and WFC. On Thursday (21st) earnings are AXP, BNI, COF, CAL, FCX, GS, GOOG, MS, PCP, LUV, TCB, UNH and XRX. Friday will see GE, HOG, KMB, JCI, BBT, MCD and SLB. I will have a bigger list for you next weekend but these symbols should provide a starting point for some earnings play research.

Friday we saw strong December same store sales from Best Buy but traders were not happy. BBY reported a +8.2% rise in same store sales but they did not raise earnings estimates suggesting their margins had fallen even further. Domestic sales rose +9.3% and international sales +3.5%. BBY did not give Q4 guidance and instead gave full year 2010 guidance at $3.15 per share. If this is how all the Q4 earnings will go then we could be in big trouble but I really believe this is a BBY only problem.

Best Buy Chart

The UPS guidance on Friday is more of what I expect for Q4. UPS said earnings could be as high as 75-cents and that is a dime more than analysts expected. The rise in profits came from better than expected December shipments and further cost cutting. They are cutting another 1,800 management personnel. This is the double whammy for earnings. Better than expected shipments, business is picking up. That is what traders wanted to hear. To improve our profits we are cutting another 1,800 management personnel. That is also music to investor's ears because as business continues to improve so will profits without the additional overhead.

This is equivalent to walking a thin line with investors. UPS thought earnings were not improving fast enough so they dug a little deeper to find some more costs to cut. Hopefully future Q4 earnings reports will be heavier on the stronger business idea and lighter on the job losses.

If companies continue to cut workers as business improves then we could be in for a jobless recovery and that means a longer period before we are back to business as usual. The UPS CEO said he saw the economy gradually continuing to improve in 2010. It must be very gradual if he resorted to another 1,800 jobs cuts to please investors. If the recovery was really finding traction would he have still made the cuts? We will have to read between the lines on all the earnings reports to really understand what businesses are seeing.

UPS Chart

The upgraded UPS guidance also helped FDX and powered the transportation index to a new high. Before anyone becomes too excited about the transports as a long play we need to see what is going to happen to $83 oil. Oil refuses to decline despite a potential disaster in the week ahead. A major inventory gain on Wednesday could burst this bubble. If it does not burst then I would be wary of investing in transports because gasoline and diesel prices are going higher. At Friday's close the transports are up +98% from the March lows and a tad bit over extended.

A number of analysts have come out in the past week with fund flow statistics claiming the rise in crude prices was related to year-end retirement money going into commodity funds. Eventually this money will run out. Also, crude is holding these levels on very light volume. For the first time I can remember the volume in gold futures was higher than the volume in crude futures. This should not happen and suggests there is a volatility event in oil's future.

Transport Chart

Commodity Index Chart

Crude Oil Chart

Google probably wishes it had spent a few extra dollars in the Nexus announcement and a little less on their founder's fleet of jets. (1-767, 1-757, 2-Gulfstream V, 1-Dornier Alpha fighter jet) The Nexus announcement was botched if you compare it to the polished presentations from Steve Jobs. The poor presentation and less than incredible Nexus phone knocked Google's stock from just under $630 to just under $590 in only three days. Guys, take some lessons from Apple before you make your next presentation.

The Nexus phone may be decent but it is not an iPhone killer. The Motorola Droid is a better phone for most people than the Nexus according to reports. So, how do you recover from a public relations nightmare? Not the Tiger Woods kind but the kind where your new billion-dollar product is not jumping off the shelves and your stock is dropping. With so many prior Google announced products gathering dust on the "we will finish it when we get around to it" shelf they needed a quick plan to rescue their image.

Since there just happens to be the world's largest consumer electronics show underway in Vegas let's send our top engineer to CES with some announcement rumors. Sure enough Andy Rubin shows up at CES saying the next version of Nexus will be for "enterprise" users and "might" have a keyboard. Ah, yes, the "we are going to take on Blackberry" ploy. We missed on the iPhone killer play so let's abandon Nexus One and take on Blackberry instead. You know those people who would rather lose a hand than do without their Blackberry? I am sure they are going to run to a new videophone with a keyboard and toss their Blackberries in the trash on the way. Careful here guys, you are going to need a really strong phone and an even stronger presentation if you think you are going to have a chance in that market. Google has earnings on the 21st and they should be really interesting.

Google Chart

It is looking now like we are headed for scenario two. Several weeks ago I wrote that there were two scenarios for early 2010. The first involved a new false breakout in the first week of trading that would be followed by a sharp decline for 7-10 days before earnings. The second scenario suggested we could see funds keep the bullish pressure on until a couple weeks into the earnings cycle then a longer correction appear.

We got the breakout in the first week but there are no signs of a quick dip ahead of earnings and time is running out. I believe funds that are currently long will want to be long through the Intel earnings and probably the following week as well. Once all the majors report the market risk increases. Since Intel reports earnings next Thursday there is no time left for a meaningful dip per scenario one.

I have read/heard several analysts who have pointed out that year-end retirement fund inflows have been very strong not only into index funds and equities but also commodity funds. If you look at the two largest indexes with more than $4 trillion in index fund investments those two indexes led the markets higher. Of course I am talking about the Russell 2000 and the S&P-500. Those are the primary indexes for index fund investing. The Russell 2000 gained +3.07% and the S&P +2.68% compared to only +1.8% on the Dow and +2.12% on the Nasdaq.

Year-end retirement cash normally begins hitting the accounts of fund managers during Christmas week and tapers off around January 7th. If you look at the chart of the S&P the rally started on Monday of Christmas week and has not stopped except for the sell program on Dec-31st.

S&P Chart - 90 min

You can't tell me that every investor in the country suddenly decided to go long the S&P on Monday December 21st while the Dow only managed to add less than two hundred points over the same period. It probably would not have gained at all except that most of the Dow stocks are also in the S&P.

Dow Chart - 30 min

The volume was weaker than you would have expected for a melt-up of this size. That is another reason this rally lacks any dramatics. Friday's volume was the second lightest of the week. The only thing that really stands out in the internals table is the relatively level pace of advancers/decliners. There was very little selling. The volume all week was nicely bullish over the down volume but not specifically lopsided.

Market Internals

Personally I would be thrilled if the markets maintained this slow and steady pace all year but you know it won't last. Something is going to upset the applecart and knock us off this steady rate of climb.

For investors we actually have the best of all worlds right now. The jobs data was not a disaster despite it being worse than expected. The market recovered to close positive suggesting the bad news bulls are still lurking just under the surface and waiting for a dip to buy.

The job losses means the Fed will remain on hold for at least the next 3-6 months and some believe they will remain on hold all year. There is talk of a second stimulus package and of the Fed going back into the mortgage market to keep rates low.

Earnings for Q4 are expected to come in between +34% and +37% and most companies should give positive guidance for the rest of 2010. Obviously the strong earnings are due to a very bad comparison quarter in 2008 but they still count. Because so many companies have cut costs to the bone they should show increased profitability throughout 2010.

The second dip option for the recession has been taken off the table and some are actually calling it a V recovery. I am not in that camp but call it anything you want as long as it is not a VV recovery.

The retirement announcement by several high profile democrats suggests there will not be any major new programs passed in 2010 and the market likes a situation where major changes are not flowing through Congress.

The health care bill in its current form was not a poison pill for the private healthcare business so those companies are coming back from the dead.

2010 is going to be a blowout year for new PC sales, netbooks, tablets, superphones, etc so the tech sector led by the semiconductors should do well.

Solar and alternative energy companies just got a new multibillion tax credit so they should grow and prosper.

The remaining worries are the banks, oil prices, bonds and the dollar. The banks need to survive this earnings cycle without confessing to any of those potential earnings problems I wrote about earlier and guide higher for the rest of the year. If that happens financials plus tech, would put a solid floor under the market.

Oil prices need to weaken and move back under $75. Most economists believe that oil prices over $85 become a serious drag on the economy and much over $85 becomes recessionary. Demand has not returned, inventories are still plentiful, OPEC is pumping 2 mbpd under their maximum and there is no reason for the current price rally other than year-end cash moving into commodity funds. The current rally needs to end to allow the global economy to recover before the next round of high prices causes the next recession in 2012.

Bonds are going to struggle. With as much as $2.5 trillion in new U.S. debt to be auctioned in 2010 there is always the possibility of a failed auction. That would push interest rates significantly higher and the Fed would not be able to control the rate for home mortgages. With the interest rate spiking from a failed auction all future auctions would turn into a circus and the government and taxpayers would be forced to pay much higher rates on over $10 trillion in debt.

A failed auction would weigh on the dollar but higher interest rates would attract more buyers and support the dollar. I am not an economist but this contradiction of terms is confusing to me and probably to most investors. The Fed hiking rates to prevent inflation would come as the economy accelerated out of the recession. A Fed rate hike would produce a stronger dollar. An involuntary rate hike caused by a failed bond auction could have the reverse effect. If our ability to repay was called into question by a failed auction then rates would move higher from increased risk not stronger economy. That would cause the dollar to decline. Confused?

Hugo Chavez devalued the currency of Venezuela after the close on Friday. He established a two-tier system of rates. The dollar peg had been set at 2.15 bolivars to the dollar since 2005. After Friday the things he wants to pay for like food and medicine there is an exchange rate of 2.6 bolivars to the dollar. For those things he does not want to pay for the rate is 4.3 bolivars to the dollar. Items on that list include autos, computers, appliances, alcohol and tobacco. This will add 3-5% or more to the already high 25% inflation in Venezuela. In order to stifle dissent and save electricity he shortened the government workday to 8:am - 1:PM.

This is an example of where we don't want to go. The U.S. must retain its excellent credit rating and not be forced by circumstances into a hyperinflation environment of higher rates and weaker dollars. As long as the economy is growing we should not have to worry about countries buying our debt.

As for the markets I believe we are living on borrowed time. Since we made it through the first week of 2010 without a problem I feel the pressure for a correction has subsided for the next 2-3 weeks. Those long today believe earnings will be good and are likely to hold on at least until somewhere around the 22nd but after that day it could get dicey. There is a Fed meeting on the 26th and bullish earnings reports could push the Fed to change its plan on withdrawing stimulus. I don't believe it is going to happen but that fear should begin to creep into the market around Thursday the 21st.

The Dow struggled to break out of its six-week range and eased over resistance at 10600 only with the help of a late day buy program. The current support is 10500 and it appears pretty strong given the sharp rebound on Monday and the same strong rebound on Thursday. Dip buyers are alive and well.

Dow chart - 90 Min

The S&P appears to be leaving support at 1115 well behind as it surges higher on index fund buying. Eventually this breakout will pause even if only for a couple days. Note the declines in Aug, Sept, Oct. This is normal and we are overdue. The S&P has not posted a loss in 2010 but that is only 5 days.

S&P-500 Chart

Apple, Google, Qualcomm, Dell, Intel and Cisco all contributed to the Nasdaq rebound on Friday but Google was the biggest help with a +$8 rebound. The current rally looks unsupported and any real selling would find support at 2251. With Intel earnings expected to be strong the odds of any real selling this week are slim but Monday-Wednesday could see some profit taking.

Nasdaq Chart

The Russell shows the same pattern of year-end index buying from Dec-21st through Friday. The December 31st sell program is visible across all indexes. The Russell declined to support at 623 then exploded higher as index funds put year-end money to work. Next resistance is 660 but I would be really surprised to see that before enduring some profit taking.

Russell Chart

In summary I think we will finish next week higher unless Intel says something to roil the markets or JPM misses their earnings estimates. I would not be surprised to see some weakness on Monday/Tuesday from profit taking but I think we have dodged the correction bullet until after the first three weeks of earnings.

Jim Brown


Index Wrap

Continued Upside Progress

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

Most stocks and stock groups continued to advance this past week and all the major indexes (the Dow lagged a bit) saw further gains, including the NYSE Composite Index (NYA), which had a decisive breakout above its line of prior highs. Oil Stocks (OIX), the Gold & Silver Index (XAU) and the Semiconductors (SOX) saw good gains on the week.

The market is now registering overbought extremes on a 2-week basis, not as much as measured on an 8 and 13-week basis. Bullish sentiment also hit 'overbought' daily extremes on 4 of the last 5 trading sessions. So far, economic news that could have been construed bearishly has been taken in stride. However, we should anticipate that something may come along that could cause a sharp 1-2 day shakeout.

No doubt in last week's action we're seeing the January effect that I wrote about previously, as new or 'recycled' money is being put to work. I wrote last Saturday that: "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." There were two years that were exceptions. There are (almost) always exceptions!

How much higher from here? The most bullish case I see is that the major indexes again make it the upper end of their broad uptrend price channels. A further advance to as high as 1200 in the S&P 500 (SPX) and around 2000 in the Nasdaq 100 (NDX) are possible eventual price objectives.

I find it hard to believe that the S&P and Nasdaq are going to have such further advances in a straight line from here given the near-term overbought extremes in price and sentiment that I've noted. I believe we can also anticipate seeing continued support/buying interest on pullbacks, such as back to former resistance levels or, in some cases, back to the low end of the aforementioned uptrend channels which will be seen on the charts.

CHART OF THE WEEK:

When perusing the hourly index charts at the end of this past week, I was struck by how the sideways trading ranges, such as here seen with QQQQ, led to predictable technical outcomes once there was a decisive upside penetration of the upper end of the rectangle pattern highlighted below. A 'minimum' upside objective for such a breakout is for a further advance at least equal to the 'width' of the rectangle. A 'maximum' objective is equal to the length of the rectangle, equaling a move to above 50, but that's a much more speculative take on this pattern.

I would also note that typically each end of the trading range should have at least two 'touches' to the same area. The low end of the highlighted trading range had 3 moves to the same approximate area although the lowest low dipped the furthest. Nevertheless, the trading range or rectangular formation got defined pretty clearly.

In a bullish trend a 'length' setting of 21 (see above) on the hourly index charts has proved to be optimal in showing oversold extremes (the 35-40 zone or below) where rallies can be anticipated. The upper RSI extremes in a bull market don't as reliably predict where pullbacks will develop.

The reverse is the case in bear market trends as overbought extremes (around 65-70 or above) will tend to forecast corrections ahead more often than not.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The chart remains bullish in its pattern. My next S&P 500 (SPX) index price target to the 1150 area has nearly been achieved as the index pieced resistance at 1140-1142. SPX looks like it will continue higher. I've noted possible next resistance around 1160, with major resistance in the 1200 area, at the upper end of SPX's broad uptrend channel.

Pivotal support/buying interest should be found on pullbacks to around 1120, at the emerging recent uptrend line and in the area of the 'line' of prior resistance, which should now define a support point.

As noted in my initial overall market comments and as you can see on the chart below, the RSI is suggesting that SPX is at a near-term overbought extreme, although there's also nothing to say that we won't see still higher (RSI) readings ahead, such as was the case back in September.

SENTIMENT

Bullish sentiment readings for my CPRATIO model as I've circled on the chart above have reached what I consider to be extreme or 'overbought' levels. What does this mean in the near-term? Maybe nothing much in the near-term, but at least suggests a cautionary trading stance in taking on new positions.

We've seen slightly higher CPRATIO readings before and extremes in my indicator don't suggest much more than a possible correction 1 to 5 days out from this most recent extreme. The EXTENT of any correction isn't predicted from this or other type overbought indications.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) has achieved a decisive upside penetration of what had been a strong line of resistance at 520 a breakout move that continues OEX's bullish chart pattern of higher pullback lows with higher relative highs made on rallies.

What had been resistance at 520 should now represent a key near support. Failure to hold above 520 on balance would be a near-term bearish chart development. Even more pivotal support should be found at 505-500.

Potential technical resistance is a hard calculation to make. My estimate of next potential resistance comes in around 540. Major resistance is estimated to lie in the 550 area currently.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) Average remains bullish in its pattern but has also been lagging gains in the S&P recently. We're yet to see a decisive advance above near resistance in the 10600 area. Stay tuned on that. Tech stocks in general and some of the commodity related stocks not in the Dow have been garnering more attention and money recently.

INDU is not always the bellwether average that it has been in the past but it still is still important as a benchmark and can sometimes give us the best 'technical' read on the market. Maybe INDU is indicative now as upside momentum slows with the Dow stocks overall. Because the still mostly sideways trend continues with INDU, the Average is also not yet at any kind of 'overbought' extreme in terms of its Relative Strength Index. While the Dow managed a 100 point gain from late-December above 10500 resistance, this isn't much of a rally for INDU.

I've noted next resistance levels as 10700 and 10800. Major resistance begins around 1100.

Although I didn't mark it, very near technical support is at the higher up trendline seen below, currently intersecting at 10512. Main trendline support comes in around 10360, at the low end of the uptrend channel; support below this is suggested by the prior downswing lows at 10230.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) this past week mostly stayed above its line of prior highs (resistance) at 2295, maintaining a bullish chart. Since COMP has advanced above my previous price target at 2300, I continue to see a possible next upside objective and potential resistance, coming in around 2350. Major resistance begins at 2400, extending to around 2450 in my estimation.

Near support should be seen on pullbacks to the 2250-2258 area, with pivotal technical support at 2200, at the low end of COMP's uptrend channel.

Daily and 5-day bullish sentiment readings (above) have reached 'overbought' extremes as noted in my S&P commentary. These readings could climb still higher if COMP heads next to the 2350 area or above. Continued extreme bullish readings in my sentiment indicator is a reason to be watchful for what might kick off a larger correction then seen in recent weeks.

I'm reluctant to say exit long calls at current levels or some preset higher target as I continue to just keep a close eye on the market. Especially, to be alert to any dips below last week's lows as an advance warning regarding a decline in upside momentum.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) looks poised to test near overhead resistance around 1900 given its new high Close for the current move. If NDX clears 1900 on a closing basis, a support which then holds the following day, a next projected resistance is in the 1950 area.

Near support is noted in the 1850-1854 area, with pivotal chart support at the 'line' of prior intraday highs at 1815-1816. Next key support comes in at 1777, extending to 1759.

From the 'Santa Claus' rally into the prior first week of 2010, tech stocks have done a lot to lift the overall market. Some in this sector have slipped a bit recently. I'll be watching to see if INTC can climb above recent highs at 21, CSCO above 24.8 and AAPL above 215.6 to name a few of the tech leaders or bellwethers.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) is of course mirroring the Nas 100 index. With the stock we can get a related read on investor/trader interest with the QQQQ volume trends.

Daily trading activity was decent on Friday's rebound from the 46 area. The On Balance Volume (OBV) line turned up on Thursday's so-so day, which was a bullish omen ahead of Friday's rally. If the trend is our 'friend', then QQQQ continues to look like our bullish buddy.

Near technical support now is up to 45.5, with even more pivotal technical support at 44.5, at the low end of the Q's uptrend channel.

Key overhead resistance is suggested at and just over 47, at 47.3. Major resistance should be found on any eventual advance to the 49 area, with major resistance then extending to 50.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) continues on a bullish track, as the index cleared resistance at 640-642 on Friday. I project a next significant resistance as coming in around 660.

Key support is at the prior line of intraday highs at 625. That previous resistance, once pierced, had 'become' a new support, was evidenced in the recent (week ending 12/31) dip to 625 level followed by a strong rebound this past week. Next support is noted (by the green up arrow) at 615 or the low end of RUT's uptrend channel. Major support should be found in the 603 to 593 price zone.

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

Machinery, Drugs, & Retail

by James Brown

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NEW DIRECTIONAL CALL PLAYS

Caterpillar - CAT - close: 60.34 change: +0.67 stop: 57.49

Why We Like It:
Heavy equipment manufacturer CAT has broken out past short-term resistance near $59.00 and the $60.00 level. Technical picture is improving. If the stock can breakout past the $61.00 level it will produce a new quadruple top breakout buy signal on the Point & Figure chart.

I am suggesting small bullish positions now given the recent strength. There is additional resistance at $61.00 and more conservative traders will want to wait for CAT to rise past or close over $61 before initiating positions. Once CAT clears the 2009 highs we can think about adding to positions. Our first target is $64.75. Our time frame is short. Earnings are about two weeks away and we want to exit before CAT reports.

Suggested Options:
This is a two-week trade. I'm suggesting the February calls. My preference is for the $60 strike or the $62.50 strike.

BUY CALL FEB 60.00 CAT-BL open interest=17026 current ask $2.65
-or-
BUY CALL FEB 62.50 CAT-BU open interest=4173  current ask $1.54

Annotated Chart:

Entry  on   January 09 at $ 60.34 (small positions)     
Change since picked: + 0.00
Earnings Date 01/26/10 (confirmed)
Average Daily Volume = 4.8 million
Listed on January 09, 2010


Express Scripts - ESRX - close: 91.65 change: +2.98 stop: 87.45

Why We Like It:
ESRX is a pharmacy benefits manager throughout North America. Shares have spent the last several weeks consolidating sideways under resistance in the $89-90 zone. Friday finally saw a breakout past this resistance on above average volume. This move has produced a brand new triple-top breakout buy signal on the Point & Figure chart with a $108 target.

I'm suggesting we initiate small bullish positions now. If you're patient odds are pretty good that ESRX will dip back toward $90.00, which would be a better entry point. Our first target is $95.75. Our second target is $99.75. We do not want to hold over the February earnings report.

Suggested Options:
I am suggesting the February calls. My preference is the $95 strike.

BUY CALL FEB 95.00 XTQ-BS open interest=1332 current ask $1.80

Annotated Chart:

Entry  on   January 09 at $ 91.65 (small positions)     
Change since picked: + 0.00
Earnings Date 02/24/10 (unconfirmed)
Average Daily Volume = 2.6 million
Listed on January 09, 2010


NEW DIRECTIONAL PUT PLAYS

Sears Holding - SHLD - close: 99.17 change: -0.01 stop: 102.05

Why We Like It:
Last Thursday SHLD announced some great news! The company raised their guidance for the current quarter. The stock reacted with a huge gap higher toward round-number, psychological resistance near $100. My thought process is that all the good news is already in the stock, why buy it now? Odds are greater that SHLD will retrace and fill the gap with a decline toward $90.00.

I'm suggesting small bearish positions with a stop loss above last week's high. Our first target to exit is $95.25. Our second target to exit is $91.00.

Suggested Options:
I'm tempted to buy the March puts but stocks tend to move down faster than the move higher. We'll use the February puts. I'm suggesting the $95 strike.

This is the CBOE's new format:

Feb 95.00 KTQ1020N95 (put) open interest= 922 current ask $4.10

Annotated Chart:

Entry  on   January 09 at $ 99.17 
Change since picked:       + 0.00
Earnings Date            02/25/10 (unconfirmed)
Average Daily Volume =        2.0 million  
Listed on   January 09, 2010         



In Play Updates and Reviews

Looking Strong

by James Brown

Click here to email James Brown

Editor's Note:

Most of our trading candidates look strong as investors shrug off the disappointing jobs number. Don't get overconfident. Manage your risk and take some money off the table.


CALL Play Updates

FUQI Intl. - FUQI - close: 21.66 change: +0.97 stop: 18.99 *new*

The breakout rally in FUQI continues and shares out performed most of the market with a 4.6% gain on Friday. I am raising our stop loss to $18.99. More conservative traders may want to place their stops closer to $20.00. Currently our target to exit is $24.75 but we'll want to keep a wary eye on the 100-dma (currently near $23.70) as possible overhead resistance. This is an aggressive, higher-risk trade. FYI: FUQI is due to present at an analyst conference on Monday.

Suggested Options:
I am not suggesting new positions at this time. We already had our entry point on the breakout over the 50-dma and another entry on the dip near $20.

Annotated Chart:

Entry  on   January 06 at $ 20.51   (small positions 1/4)  
Change since picked: + 1.15
Earnings Date 03/31/10 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on January 04, 2010


Intl. Business Mach. - IBM - close: 130.85 change: +1.30 stop: 128.90

Traders bought the dip in IBM twice near the $129 level this past week. The bounce back over $130.00 looks like a new bullish entry point. However, I would keep your positions small. There are some technical indicators suggesting the market is getting overbought and due for a correction.

Our first target is $134.95. Our second target is $139.00. However, our original play had the January $135 calls so we'll exit before expiration. If you own February calls or later then plan to exit ahead of earnings.

Suggested Options:
This does look like a new entry point but keep your positions very small. I'd use the February calls but exit ahead of earnings.

Annotated Chart:

Entry  on  December 28 at $131.55      
Change since picked: - 0.70
Earnings Date 01/19/10 (unconfirmed)
Average Daily Volume = 5.8 million
Listed on December 26, 2009


J.P.Morgan Chase - JPM - close: 44.68 change: -0.11 stop: 41.90 *new*

Banking stocks produced a four-day rally this week and finally hit some profit taking on Friday. Yet profit taking was very mild. Shares of JPM only lost 11 cents today. The stock is short-term overbought. I am suggesting we sell half our position now! That will leave us with a very small position and if you want we can add to it on a bounce near $42.50-42.00. We'll make $46.90 our second and final target. Please note our new stop loss at $41.90.

Suggested Options:
No new positions at this time.

Annotated Chart:

Entry  on   January 04 at $ 42.85 (small positions 1/2)      
Change since picked: + 1.83
take profits on 01/09/10 @ 44.68 (+4.2%) Earnings Date 01/15/10 (confirmed)
Average Daily Volume = 31.6 million
Listed on January 04, 2010


L-3 Communications - LLL - close: 87.75 change: +0.15 stop: 86.90 *new*

LLL has continued to trade sideways in spite of the market's strength. This is a bearish development. More conservative traders may want to exit early now. LLL's trend is still higher so I'm willing to hold on but we'll raise our stop loss to $86.90. I am not suggesting new positions at this time.

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: + 0.95
Earnings Date 01/28/10 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on December 26, 2009


Precision Castparts - PCP - close: 117.26 change: +1.56 stop: 112.25 *new*

PCP continues to show relative strength and broke out to new 52-week highs with a 1.3% gain. I would suggest more conservative traders take profits now! I'm raising our stop loss to $112.25. Our second and final target to exit is $118.75.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on  December 01 at $107.35      
Change since picked: + 9.91
/1st target hit $112.45 (+4.7%)
Earnings Date 01/20/10 (unconfirmed)
Average Daily Volume = 817 thousand
Listed on November 28, 2009


TORO Co. - TTC - close: 43.16 change: +0.44 stop: 41.40 *new*

The bounce in TTC continues and the stock added 1% on below average volume. I would consider new positions on a dip near $42.50. Please note our new stop at $41.40. Our exit target is $45.90. We don't want to hold over the February earnings report. The plan calls for small positions to limit our risk.

Suggested Options:
If TTC provides a new entry point I would use the March $45 calls.

Annotated Chart:

Entry  on   January 07 at $ 42.60 (small positions)      
Change since picked: + 0.56
Earnings Date 02/18/10 (unconfirmed)
Average Daily Volume = 289 thousand
Listed on January 05, 2010


UnitedHealth Group - UNH - close: 32.70 change: -0.31 stop: 29.90 *new*

UNH suffered some minor profit taking after Thursday's big gain but traders were buying the dip intraday on Friday. The trend is up and technicals have turned positive. Traders may want to consider new positions on a dip near $32.00 but if you do I would suggest a relatively tight stop. Speaking of stops I'm moving our stop to $29.90.

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 consider March calls but raise your stop!

Annotated Chart:

Entry  on  December 10 at $ 30.31       
Change since picked: + 2.39
Earnings Date 01/21/10 (unconfirmed)
Average Daily Volume = 819 thousand
Listed on December 10, 2009


Whirlpool - WHR - close: 84.56 change: +1.76 stop: 79.90

WHR duplicated Thursday's big gain with a 2.1% rally on Friday. Shares are now challenging resistance near $85.00 again. I happened to be watching CNBC this afternoon and Cramer had a lot of positive comments on WHR. I'm not suggesting new positions at this time. Look for a dip back toward $82.00 as a possible entry point. If you open positions going forward I would use the February calls. Our original play suggested January calls so we'll need to exit before expiration.

WHR has already hit our first target at $84.75. Our second target is $89.00.

Suggested Options:
If WHR provides a new entry point use the February calls.

Annotated Chart:

Entry  on  December 19 at $ 80.76 /gap higher entry      
Change since picked: + 3.80
/1st target hit $84.75 (+4.9%)
Earnings Date 02/08/10 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on December 19, 2009


PUT Play Updates

Fedex Corp. - FDX - close: 84.99 change: +2.06 stop: 85.51

Rival UPS raised their Q4 guidance this morning and that gave FDX a bump. Shares are still trading sideways but the consolidation is starting to look a little bit more bullish. Readers may want to consider buying calls if FDX can breakout past resistance at $86.00 or resistance near $88.00. I'm still cautious here and will keep the bearish trigger to buy puts active at $81.90. If triggered our first target is $78.10. Our second target is $75.10.

Suggested Options:
If FDX hits our trigger to buy puts I would use the February puts with a preference for the $80 strike.

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


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: 60.17 change: +2.76 stop: n/a

UPS raised their Q4 earnings guidance this morning. The stock responded to the good news by gapping open higher at $59.77 and hitting $61.13 intraday. After watching the stock churn sideways for seven weeks I'm excited to see some movement. Readers have a choice now. Sell the calls for $0.75 and recoup some capital or hope the rally continues and just exit at breakeven (when the call hits $1.35). I am officially adjusting our exit price on the options to $1.35. If you have a significant position I would probably sell half now! We have five trading days left. 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 $1.35 or more.

Suggested Options:
No new positions.

Annotated Chart:

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.

Picked on  November 21 at $ 57.99 /gap open entry      
Change since picked: + 2.18
Earnings Date 02/02/10 (unconfirmed)
Average Daily Volume = 4.7 million
Listed on November 21, 2009