Option Investor
Newsletter

Daily Newsletter, Saturday, 1/16/2010

Table of Contents

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

Market Wrap

Bump In The Road

by Jim Brown

Click here to email Jim Brown

A classic sell the news event knocked all the indexes into the loss column for the week. Intel may have knocked the cover off the ball but the chip sector was penalized for running up ahead of the report.

Market Statistics

It was not a fun day for the bulls as fund managers took advantage of the Intel earnings and option expiration volume to unload some of their positions that had rallied since year-end. This was not a statement about the condition of the market but simply profit taking on good news. Having the JP Morgan loan loss news and weak guidance was an accelerant to the selling but not the cause. The futures were already down well before JPM reported.

The leading tech stock reported blowout earnings by any metric you care to use but ends up losing 3% on the news. Intel posted earnings of 55-cents per share compared to already bullish analyst estimates of 30-cents. Intel posted record gross margins of 64.7% and provided strong guidance for 2010. Conventional wisdom suggests we should have been up triple digits rather down triple digits.

Actually if you watched the futures late Thursday the selling started almost immediately after the Intel spike faded in the after hours session. It was clearly a sell the news event and probably increased by the option expiration. Traders who were long options going into the Intel earnings only had one day to take profits and square up positions.

There were also some cautious comments about Intel. Some analysts believe that the 64.7% gross margins represents a peak in earnings potential because Intel said those margins would decline through Q4-2010. Those analysts are seeing the glass half empty. Intel is firing on all cylinders, has product shortages in many areas and is facing the biggest PC upgrade cycle since Y2K. So what if the margins decline a point or two? Revenue is likely to expand so rapidly that net profits are still going to explode.

A Deutsche Bank analyst laughed at the peaking talk saying Intel's Q1 guidance was conservative, chip inventories were lean and demand was improving. Alex Gauna of JMP Securities said the guidance was "nonsensically conservative", which should mean Intel will be able to continue pushing estimates higher throughout the year. Several analysts pointed out that Q1 is normally a period where reality returns from the rapid pace of holiday sales.

I don't buy the "Intel is peaking" concept making the rounds on Friday and I don't believe it had any significant impact on the Friday selling. Intel peaking does not cause 4% losses in the materials sector. A peaking Intel does not cause the Dow transports to lose 50 points when oil and gasoline prices are crashing. This was purely a sell the news event that was long overdue.

Intel Chart

The JP Morgan earnings were more problematic given the concern over potential bank losses on weak consumer and commercial loans. The banking sector had been trending down for about two months since the October highs due to loan concerns and dilution issues. On January 4th the sector exploded as new money came into the market and the Banking Index added about 15% in a little over a week. With JPM the first big bank to report the pressure was on to post strong earnings and good guidance.

JP Morgan is seen as a very well managed company and a strong bank. They said all along they did not need the TARP money and lobbied to give it back at the earliest possible moment. JPM posted earnings of $3.3 billion in Q4 and $11.7 billion for the full year. When you think back at what has happened to the banking sector in the last 15 months I think this is amazing and shows what a strong bank it is. However, even strong banks making good loans are at the mercy of the economy.

Chase Card Services lost $2.33 billion for all of 2009 and is unlikely to turn a profit this year. Chase retail services made only $97 million for 2009 after posting a $399 million loss in Q4. Chase agreed to temporarily modify about 600,000 mortgages and 89,000 have been made permanent. Still, the bank made $3.3 billion for the quarter.

What roiled the markets was a warning from CEO Jamie Diamon that he remained cautious about 2010 considering the job and housing markets continued to be weak. "We don't have much visibility beyond the middle of this year and much will depend on how the economy behaves." He also said the economy was still too fragile to declare the worst was over, though he hoped conditions would stabilize by midyear.

JPM set aside another $1.9 billion for consumer loan loss reserves but that was less than in prior quarters. JPM now has more than $32.5 billion in loan loss reserves and more than adequate for anything short of a global meltdown.

JPM Chart

The JP Morgan news riled the markets because they wanted to hear that the worst was over and crown Jamie Diamon as king of the recovery. To find out that the king of banking has no clue to the economy and the fate of the financial sector was an unthinkable course of events. If our hero Jamie doesn't know then lesser banks could still be in trouble. It was a depressing letdown for those in the financial sector. On a side note the FDIC closed three more banks on Friday.

Jamie Diamon was the only major bank CEO to speak out against President Obama's new $120 billion tax on banks. He was openly hostile that the successful banks that weathered the storm be taxed to pay back sums for other companies like AIG and GM that remain on government support. JPM would end up paying about $2 billion a year in TARP taxes as would Bank America and Citigroup. Goldman Sachs would get off light at $1.18 billion a year and Morgan Stanley $1 billion.

Bank analyst Richard Bove wrote in a note to investors on Friday "In the tradition of Hugo Chavez, the Obama administration wants to tax the rich and dishonest bankers to pay for the problems throughout the American economy, notably the losses in the automobile industry. Even though the auto companies might have been accused of being greater offenders in creating the financial crisis than the banks, the banks are labeled the villains and must be taxed to pay the funds used to bail out their competitors. This is pure Chavez reasoning."

Since GM, FNM and FRE are exempt from the tax the administration is basically rewarding the losers and penalizing the winners. The timing of the bank tax announcement was perfect. It was announced only a couple days before the big banks announced their bonus payments. Perfect timing to garner support from Main Street America and people who don't understand why the average JPM manager makes $378,599 a year. This was an excellent political move ahead of the 2010 elections. It may also explain the very cautious comments by Jamie Diamon about his outlook. Not a good week to be pounding your chest and shouting about how much money your bank made last quarter. Maybe Jamie was smart like a fox to downplay his results and caution that the worst may not be over.

The JPM results on Friday sent up warning flags for next week because next week is bank week in the earnings parade. We get earnings from Citi, MS, WFC, BAC, GS, FITB, BBT and KEY. If JPM is taking such big hits from loan losses then what about the other banks next week. This worry sent the financial sector into a dive and it will probably take some good news from more than one bank to revive interest. That 15% rally in financials since Jan 4th is going to be weighing heavily on the market next week.

On the economic front the Consumer Price Index for December rose +0.1% and less than analysts expected. Inflation is not only low but it is falling and definitely not a risk for the Fed. The core-CPI was also +0.1% for the month and only +1.8% for the entire year. The CPI numbers were distorted by the low prices for gasoline in December. That was before crude rallied from $68 to nearly $84 last week. Energy prices at the retail level fell -4.8% in December.

If there is a risk at present it is the possibility of a deflationary trend with the monthly inflation numbers hovering around zero. The high unemployment and the lack of cash available from home equities is preventing resumption of any demand for products. This was a positive report because it did not give the Fed any reason to consider raising rates.

Consumer Sentiment for January rose slightly to 72.8 from 72.5 in December. Yawn. That is the highest level since September and only a fraction below that 73.5 rebound high. The gains came from the current conditions component (81 from 78) rather than the expectations component as we have seen in the past. Analysts claim sentiment is still being constrained by the lack of jobs and weak housing market. Check back next month and this spike in gasoline prices today will be a factor. I believe we are going to be stuck in this range for several months unless the equity market suddenly breaks out and starts making new highs for several weeks.

Consumer Sentiment Chart

The NY Empire State Manufacturing Index spiked +11 points from to 15.9 in January. The headline number was only one of the major gains. The New Orders component exploded to 20.5 from 2.8 in December. Also note the continued drop in the inventory component. We are still burning though the existing inventory leftover from 2007-2008 and at the rate it is declining there should be a monster rebuild cycle once the economy finds some traction.

Empire Table

Industrial production rose +0.6% in December but it was heavily influenced by a +5.9% rise in utility output due to the cold weather. I think that negates the value of this report for December.

The economic calendar for next week is very slim with only the Producer Price Index and the Philly Fed Survey of real interest to the markets. The housing index on Tuesday may also get some airtime.

Economic Calendar

The key to next week is obviously the bank earnings but there are also a handful of tech stocks to keep traders interested. IBM on Tuesday is expected to produce strong earnings and could revive faith in tech stocks. Ebay and Google report on Wed/Thr and will be heavily watched.

As for banks the Citigroup earnings on Tuesday will probably be ignored. They are expected to do badly so any positive surprise could help. The two most watched will be the BAC earnings on Wednesday and GS on Thursday. BAC is expected to earn $3 in 2011 and a PE of only 10 equates to a $30 stock price. I would be a buyer of BAC on a dip to $15. Goldman is expected to beat the street and nobody is worried about them missing or guiding lower. The guesswork on Goldman is how much better will their earnings be?

The earnings calendar is also skinny with the tidal wave of reports coming the following with companies like Apple and Microsoft.

Earnings Calendar

Despite the credit card losses at JP Morgan, four out of six companies reporting card activity for December said charge-offs declined. JP Morgan, the largest issuer of Visa branded cards, said charge-offs fell to 7.11% from 8.81% in November. Citi, the largest Mastercard issuer, said charge-offs dropped to 9.56% from 10.29%. American Express, the largest card issuer by purchase volume, said charge-offs fell for the seventh straight month to 7.1% from 7.6%. Discover fell to 8.68% from 8.98% while Capital One saw charge-offs that rose to 10.14% from 9.6%.

Bank America was the black sheep posting rising charge-off rates of 13.53%, up from 13.0% in November. Bank America inherited quite a few of its bad loan problems from the flurry of acquisitions of failing subprime lenders over the last two years. However, they are on the right track because delinquency rates fell to 7.44% from 7.69%. Capital One delinquency rates fell to 7.44% from 7.69% but American Express was the clear winner with only 3.7% delinquencies, down from 3.9%. Obviously being more selective about how you issue cards and keeping those cardholders on a short 30-day leash has its benefits.

In the fertilizer sector CF Industries (CF) pulled its offer off the table for Terra Industries (TRA). CF said the deal no longer made sense due to the rise in valuations in the sector. Now CF is in the hot seat because Agrium (AGU) has a long standing hostile offer outstanding for CF at roughly $110 per share. CF closed at $95.43 on Friday. CF made the bid for TRA in defense of the bid on CF by AGU. Now that CF no longer has an outstanding offer confusing their value it is Agrium's turn to make a play. Do they raise the offer on CF in hopes of getting frustrated shareholders to dump the CF shares? Do they go after TRA themselves as a consolation prize? It should be interesting to see who blinks first. Agrium shares fell on the news because investors are worried they will do something stupid to force the hostile CF bid.

Barclays upgraded the sector on Thursday and RBC raised POT to a buy on Friday.

The chip stocks looked more like crumbs at the bottom of a party bowl on Friday than a robust sector leading techs out of the winter darkness. Declines of -4% or more were common as funds took profits from the +26% rally since November 1st. For example AMAT -4.3%, KLAC -4.7%, SNDK -5.4%. The SOX has support at 335 so there could still be some downside on Tuesday. A break of support at 335 targets next support at 305. That would be a buying opportunity for me. The chip sector is on a roll and a real correction in prices to anything under 320 would be a bullish opportunity.

Semiconductor Index Chart

The next biggest earnings report could be Microsoft due to the successful ramp of the Windows 7 operating system. Netbooks and cheap laptops are flying off dealer shelves and the corporate upgrade cycle has finally kicked into gear. I could see Microsoft posting some really good numbers and raising guidance. They will try to downplay guidance simply because that is what companies do when they try to under promise and over deliver.

Microsoft is struggling with resistance at $31 but was only down a dime on Friday. That suggests there are quite a few people who expect Microsoft to do well. I just hope the bank earnings next week are good enough to keep traders bullish about the market in general so that Microsoft is not fighting a negative tape when they report on Thursday the 28th. Their earnings will signal the end of the major reports and could be the next turning point in the market.

Microsoft Chart

Oil prices fell to close at $78 after trading at $83.95 earlier in the week. We closed the first trade in the OilSlick.com newsletter for a $1,250 profit when oil hit that $78 level. Subscribers already covered their subscription price for the entire year and made nearly $1,000 to boot.

Crude prices were driven lower by the warmer weather, falling demand, rising dollar and rising inventory levels ahead of futures expiration next Wednesday. If the historical cycles persist we could see oil lower next week and make a great entry point for our next plays.

Crude Oil Chart

Friday was option expiration and a major once a year event. This was LEAP expiration Friday. Options that have been in force for up to two years needed to be squared away. This causes a strong bout of extra volatility. This is especially true then there has been a major move in the markets. Every call leap written since March was probably deeply in the money and this caused a bigger than usual bout of volatility that will likely carry over into Tuesday as stock from those in the money calls moves into investor accounts.

If you bought a $60 leap call on Goldman Sachs back during the crash then you had to decide last week if you wanted to sell the leap or exercise it and own GS ($165) for $60 plus your $5 leap cost. If you think Goldman is going higher then you exercised the leap. Otherwise you sold the leap and pocketed your profits.

If you wrote the leap as a covered call a year ago then you had to decide to either let your GS stock be called away or buy back the leap for $100 and keep the stock. Either way the uncertainty going into Friday was strong and there was lots of activity.

Over 9 billion shares traded on Friday with 7.3 million in down volume. It was the heaviest volume day since December 18th.

The Dow dropped nearly 150 points at the open and exactly to support. After holding there for several hours we saw a rebound at the close to end down -101 points. The intraday high on Thursday was 10,723 and the close at 10,710. This is exactly the resistance from June/July 2006. I know that is a long time ago but old support/resistance levels never die. They fade out of recent memory but they are still there. I rarely remove support/resistance lines from my personal charts and I am always amazed when a stock or index returns to honor those levels sometimes years later.

The Dow has two patterns today. One is a megaphone pattern and the other a telescope pattern. I did not make these up, they are real patterns or basically different types of bearish wedges. In the first chart the time frame is weekly and shows the ascending wedge dating back to the March lows. The range is becoming progressively smaller and the Dow developed a new complication when it hit the 2006 resistance this week. The path of least resistance is sideways with a break out of the pattern.

We have see breaks of the bottom line more than once on the S&P on the way to where it is today. The Dow has remained in the wedge. In the second chart is the megaphone pattern, which according to Colin Twiggs, is more reliable than the telescoping wedge.

If we believe that then a break to the downside in the first chart (dash line in second chart) is not a cause for alarm. That would setup a potential bullish retest of 10,250. A failure there would take the Dow below the bottom support line on the second chart. That would be exceedingly bearish and according to Colin would target Dow 9,000.

This is where Colin and I part ways. I could easily see the Dow move sideways to down from here but support at 10,250 should hold UNLESS we are heading into a real correction. A dip to 10,250 is just profit taking and portfolio reshuffling. A dip below 10,250 is something entirely different and would be a major change in market sentiment.

Dow Ascending Wedge (Telescope)

Dow Ascending Wedge (Megaphone)

I was looking for a short-term correction a week ago that never appeared. I think Friday's dip was a combination of profit taking, portfolio reshuffling and option expiration. Is it the start of a correction? You can't really determine much from a one-day move that stops on support. If you look at all the red candles on the chart above you see that 100-point dips are pretty common and since November 1st they have been mostly one-day events. Eventually that will change but we still have two weeks of important earnings to keep some excitement in the market. After the Fed meeting on the 26/27th and Microsoft earnings on the 28th then all bets are off.

The S&P is also respecting the uptrend support but is over extended even after the Friday selling. The 6-week sideways consolidation provided a good base for the new-year rally but the index funds are no longer buying because the year-end retirement cash has dried up.

If we have another day or two of selling we could retest 1115 and that is strong support, which should hold unless we are entering a real correction. Support at 1085 would be the fallback position and the bottom of the rising megaphone wedge. A break under 1085 would likely mean we are going significantly lower. I am not expecting this kind of selling pressure until after the 28th. It can still appear but the 28th is the logical date for the earnings excitement to begin fading.

SPX Chart

The Nasdaq broke out of a bearish ascending wedge in late December and ran for +120 points in about eight days. It is very over extended but is consolidating at the highs and showing no indications of weakness despite the -28 point decline on Friday. Resistance appears to be 2320 and initial support 2280. With most of the major tech stocks, including IBM, reporting over the next two weeks I would be very surprised to see a continued decline.

The Nasdaq can remain in a sideways consolidation for several more days before breaking the pattern and 2250 should be interim support. I do believe the pattern will be broken on the Nasdaq but I also believe we are not facing a period of continued selling just yet. I think the consolidation will continue as we await the earnings from the major techs. However, if Friday was the beginning of a new correction then no pattern will be relative here.

Nasdaq Chart

Nasdaq 100 Chart

The Russell fell out of its initial uptrend wedge back in October and reformed once support appeared. After consolidating higher in November a new rally began in late December. That rally initially failed at the downtrend resistance from 2008 then once through that resistance it has been using it as support. The downtrend support, uptrend support and horizontal support from October is converging at 623-625 and should provide a strong rebound point from limited selling over the next couple days. If 623 breaks I believe we could test 570 although 600 is also a decent resting place. A break below 570 would be a change in trend but a hold over 600 would retain the bullish bias.

Russell chart

Morgan Stanley Commodity Index

I am pretty sure you understand my outlook by now. I believe Friday's dip was profit taking accelerated by option expiration and the negative comments from Jamie Diamon. I don't think it will last BUT we are overdue for a decent correction. Logically that selling should wait until after the major earnings reports between now and January 28th. After the 28th the path of least resistance may be down. I believe that will be temporary but it depends on the news between now and then.

If the earnings continue to exceed estimates and the Fed does nothing on the 27th then the rally could continue but probably not in a straight line. I think we are entering a period where the bulls will need to be cautious and where we should begin expecting more than a 3-5% dip. This is normal and not a statement on the economy. If the economic news turns bad then it may hasten the decline. If the economic news begins to improve then the decline should be limited to basic profit taking. This is more random musings than a hard prediction but even in a raging bull market we always need to be aware that a correction could appear at any moment. I just believe we are moving closer to that moment every day. I will welcome it as a buying opportunity.

Jim Brown


Index Wrap

A Bearish 'Rising Wedge' pattern

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

I've become bearish on the short to intermediate-term (2-3 weeks) outlook and it's not just due to Friday's sell off, although Friday was predicting that the market is running into increasing resistance and less willingness to keep buying the dips.

The chart pattern in the major indexes that has formed since September, that of a rising wedge and that I'm now focused on (rather than the bullish major uptrend) is typically a 'reversal' type formation. It is not typically a major trend changer, rather short to intermediate-term.

In recent weeks I have been mostly focused on the long-term up trend, as seen with the long-term uptrend channel I've highlighted on my charts in past weeks. Mostly, being on the long side of stocks and long calls has of course paid off. That view now has to matched to the danger of a good-sized correction or pullback.

In my Thursday Trader's Corner article, which got e-mailed well after the OIN market letter due to a long look at some new things I was seeing technically, I wrote about how I suddenly realized that the steeper up trend (steep rate of price ascent) was matched by a rising line of resistance, with those two trendlines now converging toward the apex of a triangle. This type triangle is called a wedge pattern. Rather than go through what I wrote Thursday afternoon/evening (before Friday's sharp break), if you didn't see that article you can click to it HERE

A RISING WEDGE PATTERN:

You'll also SEE this pattern outlined not only in the aforementioned article (with general measuring implications for a pullback target) but also with my first chart below, that of the S&P 500 (SPX).

You might think that the rising wedge pattern seen on a stock or index chart, with its lower up trendline rising strongly UP, should be even more bullish than when prices are only in a gradual rise. But this is not usually the case. In a 'rising wedge' there is no evident barrier of supply to be vaulted but rather a gradual petering out of investment interest. This was first pointed out by Edwards and Magee, in their seminal Technical Analysis of Stock Trends. Their book is often called the 'bible' of Technical Analysis. While their examples are always of individual stock patterns, almost all of those (patterns) also are relevant to the indices based on own experience in 3+ decades as a market professional.

In the Rising Wedge, prices advance but each new up wave is feebler than the last. Finally, demand fails significantly and the intermediate-term trend reverses. The major trend does not usually reverse, but in trading index options we're not focused on the MAJOR trend normally.

The rising wedge pattern, when traced out in stock or the major indexes, typifies a situation which is growing progressive weaker in a technical sense. In a general sense, any sort of rise tends to increase the supply of stock and diminish demand. That would be the case IF it wasn't for the fact that rising prices actually ATTRACT, rather than discourage, public buying; this includes public fund managers who must keep performance in line with the rise in the major market indexes, especially SPX.

The difference between a Rising Wedge and a 'normal' Uptrend Channel, is that the Wedge sets a sort of limit on the advance. Its converging boundary lines focus on a point (the 'apex', where the two trendlines converge) at or near where the advance will halt and a reaction set in. Many if not most of the times I overstayed in a position OR got out to soon for that matter, stemmed mostly from maintaining a fixed point of view and not looking at other chart and indicator aspects that would have guided me correctly. This looks like one of those times.

I tend to focus on the intermediate (typically, the 2-3 week outlook) trend and a bearish point of view here doesn't imply that I anticipate the major trend will reverse; i.e., as in heading into a major bear market. Rather, I think we're may be about to go into a period where prices have more two-way price swings. Stay tuned on that!

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

Based on my revised interpretation of the daily chart, as described in my initial ('bottom line') comments, I now see the S&P 500 (SPX) as bearish in its pattern. A 'maximum' downside risk for the bulls could be for a pullback to the 1030 area. For now, I won't focus on such far away price targets, but rather on where prices would start to 'break down' technically and give a clearer picture of an anticipated intermediate downside trend reversal.

The key support area is around 1134, at the lower trendline of the wedge pattern and near Friday's low. The next pivotal support (not noted on the chart) is in the 1100-1094 zone. Major support begins around 1080.

Pivotal near resistance is at 1155, not far above the highs of this past week. Above this area, next resistance is suggested at 1180. A decisive upside penetration of 1155 would also suggest that the bearish chart interpretation is not working out so to speak. It would be a type of negation of the Rising Wedge and what has frequently been a bearish chart formation.

Recent peak highs in both the RSI and my sentiment indicator suggest that the market may retreat further as is so often the case AFTER such extremes are seen.

S&P 100 (OEX) INDEX; DAILY CHART

I described the S&P 100 (OEX) last week as having a continued bullish chart pattern; one of higher pullback lows with higher relative highs made on rallies. I now see the chart as bearish for the upcoming period. How deep of a correction may develop is hard to say yet, but I see definite downside risk in holding bullish positions.

Key resistance is at the upper trendline of the wedge (triangle) pattern intersecting currently around 530-531 or at last week's high. In the event of a bullish 'breakout' move, next resistance is projected for the 540 area in OEX.

Technical support should be found at the lower trendline around 522-523, not far above Friday's high. Next support is just under this, at 520. Support below 520 (not noted on chart) comes in around 513. Major support, at the low end of the broad longer term uptrend price channel, begins in the 505 area, extending to around 500.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) Average has turned bearish in its pattern as Friday's sell off reinforces the idea of an increasingly narrow trading range, as would be true in the narrowing pattern of the converging trendlines (of a rising wedge pattern).

Key near resistance comes in around 10730, with next higher resistance at 10900 with such a move suggesting continued upside progress and tending to negate the bearish chart interpretation I'm offering here.

Pivotal near support is at 10595, extending to Friday's low at 10561. Next technical support is at 10400, with major support/buying interest anticipated in the 10230-10200 area.

I anticipate lower prices ahead, perhaps after a short-term rally attempt, into say Tuesday.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

All the major indexes are highlighted, and have, the same Rising Wedge formation, which is a pattern that suggests that previously strong buying power is not going to rule a lot longer. The Nasdaq Composite (COMP) looks bearish by the lights of this revised chart interpretation. The key will be whether, or when, the well-defined lower up trendline is pierced. If pierced, look for this line of support to then offer resistance on subsequent rallies. I also anticipate the potential for a short-term rally immediately ahead; e.g., such as developing Monday and extending into Tuesday.

Near resistance is projected for the 2336 the current intersection of the upper line of the highlighted triangular shaped 'wedge' pattern. If COMP were to achieve a decisive upside penetration of 2336, or 2350 by the end of next week, this would suggest potential for a further run in COMP to the 2400 area.

Key near support is the lower trendline, currently intersecting around 2285, but I should include last week's lows as near support also, at 2279-2274. Next support is noted in the low-2200 area, specifically and currently at 2216-2213. The current 50-day moving average stands at 2213 and will be perceived as a pivotal support area.

As noted with the S&P 500, along with a bearish looking COMP chart, the recent RSI and bullish sentiment extremes seen above also suggest that the market may now have entered a corrective phase. Once daily sentiment readings in my 'CPRATIO' indicator start dipping below 1.6 (daily CBOE equities call volume falls to LESS than 1.6 times daily put volume) it would suggest the start of a decline in an over-done bullishness that has been pervasive.

NASDAQ 100 (NDX) DAILY CHART:

I anticipate a pullback in the big tech stocks beyond the recent correction. Recent lows in the Nasdaq 100 (NDX) at 2274-2279 will be a key area to watch near-term.

Below the NDX's recent lows, there was some prior support around 1850, but more pivotal support comes in at the 1810 to 1790 zone. If the index was to start closing below 1800, we would start looking at the prior downswing lows as key levels; i.e., at 1777, then 1759.

Key near-term resistance is noted (at the red down arrow) in the 1905 area. If there's a strong move above 1905-1910, a next target and potential resistance, comes at 1950. Such a move would be a bullish breakout of the bearish wedge pattern and suggest renewed upside momentum. I don't expect it, but knowing where current chart interpretations would change is always a good idea.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ), of course mirroring the Nas 100 index, has the same rising wedge pattern that I seem to have discussed endlessly, reflecting that it's the key pattern on all the major index charts currently.

Near technical support begins at 45.8 and extends to around 45.5. I've highlighted next support at 44.5, the top end of the upside price gap from 12/18-12/21. A close below 44.0 would confirm a bearish trend that was more than a short-term one.

Key overhead resistance still comes at 47. A decisive upside penetration of 47 even could suggest upside potential to 48.

The rising daily volume trend that I've highlighted by a rising trendline below, as prices have moved basically sideways, I also interpret bearishly. This volume pattern may represents distribution; i.e., sellers 'distribute' stock to willing buyers. This rising volume trend, at least prior to Friday's sell off, probably also reflects increased shorting, an effective way to hedge at least a portion(s) of tech portfolios.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) up trend seems to running out of stream and I look for an eventual move below support. The chart pattern as well as 'confirming' momentum indicators like the Relative Strength Index (RSI) suggest it.

The key zone of support begins at 630 and extends to 625. 625 is an important area as suggested by the line of prior highs. Once highs like this are pierced, the chart maintains a bullish picture if prior highs 'become' support on subsequent pullbacks. I doubt that you have heard this from me before! Kidding. Major support begins at 600, extending to 588.

Key near resistance is at 648 currently. A bullish breakout above 648-650 would however suggest upside potential to around 680.

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

One Call, One Put, Both Energy

by Jim Brown

Click here to email Jim Brown


NEW DIRECTIONAL CALL PLAYS

Yanzhou Coal Mining. - YZC - close: 23.93 change: +.51 stop: 22.50

Why We Like It:
Everybody knows coal is the preferred fuel for electric generation in China. They are building new coal fired plants at the rate of 10 per month and they still do not have enough electricity. In the recent cold spell they had to limit power to much of the country because they did not have enough coal. China was previously a coal exporter but that is rapidly changing. Very shortly they will be a net importer.

Yanzhou just acquired Australian coal miner Felix Resources for $2.9 billion. In addition to the addition of Felix's thermal and coking coal assets in eastern Australia they received a 15.4% stake in one of the world's largest coal export terminals at the Port of Newcastle. This was called nothing less than a strategic development both for Yanzhou and for China. This positions Yanzhou as a supplier not only to China but to the other pan-Asian coal markets and moves them up into the competitive space held by Peabody (BTU) and Rio Tinto (RTP).

Suggested Options:
I'm suggesting the April $25 calls.

BUY CALL APR 25 YZC-DE open interest=1,078 current ask $1.80

Annotated Chart:

Entry  on   January 19 at $23.93
Change since picked:       + 0.00
Earnings Date            (Unknown)
Average Daily Volume =       444,000  
Listed on   January 17, 2010         


NEW DIRECTIONAL PUT PLAYS

Interoil Corp. - IOC - close: 74.67 change: -1.46 Stop: 76.50

Why We Like It:
This is an oil company in Papua New Guinea that has gained over 200% since September. The big ramp in price was reportedly on buying by George Soros hedge fund. Rumors now suggest he might be trying to ease out of the position and take profits. The stock is very over extended and volatility has been increasing as is normally the case when a top is forming.

I am not recommending a trigger because I expect oil prices to decline the next couple days and take IOC down with them. Futures expire on Wednesday and inventories are expected to rise. I would like to be in a profitable position with a tight stop by Thursday. This will start out as a quick play with the potential to go longer if it moves in our direction.

Suggested Options:
I'm suggesting the February $70 Puts. The ideal target would be $67

BUY PUT FEB 70 IOC-NN open interest=2,982 current ask $4.20

Annotated Chart:

Entry  on   January 19 at $74.67
Change since picked:       + 0.00
Earnings Date            (Unknown)
Average Daily Volume =       1.1 million  
Listed on   January 17, 2010         


In Play Updates and Reviews

Banks Underperform, Goldman Sinks

by James Brown

Click here to email James Brown


CALL Play Updates

Apple Inc. - AAPL - close: 205.93 change: -3.50 stop: 203.99

Positive analyst comments and a strong launch for the iPhone in Britain could not lift shares of AAPL today. The company had its earnings estimates raised that may have accounted for the brief morning spike higher. Meanwhile Vodaphone began selling the iPhone and sold a whopping 50,000 in one day. While the news is good the stock isn't reacting.

On a short-term basis the bounce from this past week is failing. More conservative traders might do well to exit early right here. I am not suggesting new bullish positions. We have five trading days left before AAPL reports earnings on January 25th and we do not want to hold over the announcement.

This was an aggressive bullish trade and the plan was to use small positions (1/4 to 1/2 your normal trade size). Our first target to exit is $219.50. Our second target is $224.50.

Suggested Options:
No new positions at this time.

Annotated Chart:

Entry  on   January 13 at $210.65 
Change since picked:       - 4.72
Earnings Date            01/25/10 (confirmed)
Average Daily Volume =       17.1 million  
Listed on   January 13, 2010         


AvalonBay Commty. - AVB - close: 79.43 change: -0.10 stop: 77.90

Shares of AVB continue to ignore the wider market's moves. The stock's sideways consolidation has narrowed and shares continue to hover near the $79.50-80.00 zone. There is no change from my previous comments. I'm suggesting we wait for the move over $82. Our plan is to buy calls at $82.05. If triggered our first target is $87.50. We will plan to exit ahead of the early February earnings report.

Suggested Options:
If AVB hits our trigger at $82.05 I'm suggesting the February calls. My preference is for the $85 strike price (AVB-BQ).

Annotated Chart:

Entry  on   January xx at $ xx.xx <-- TRIGGER @ 82.05  
Change since picked:       + 0.00   
Earnings Date            02/03/10 (confirmed)
Average Daily Volume =        1.4 million    
Listed on   January 09, 2010         


Caterpillar - CAT - close: 60.12 change: -1.44 stop: 59.45

It was not a good day for CAT. After consolidating sideways for three sessions the stock collapsed as traders took profits ahead of the long weekend. CAT dipped toward round-number support near $60.00. While the short-term breakdown is bearish this should be a new bullish entry point near support, although I'd probably wait for a bounce first before launching new positions. Our second and final target is $67.00. Earnings are coming up quick and we plan to exit ahead of the report on January 26th.

Suggested Options:
This dip to $60 should be a new entry point. I'm suggesting the February calls. My preference is the $60 or $62.50 strikes.

Annotated Chart:

Entry  on   January 09 at $ 60.95 /gap higher entry (small positions)
Change since picked:       - 0.83     
                         /take profits early $ 64.13 (+5.2%)
Earnings Date            01/26/10 (confirmed)
Average Daily Volume =        4.8 million    
Listed on   January 09, 2010         


Express Scripts - ESRX - close: 90.04 change: -0.91 stop: 87.45

It was a bleak morning for ESRX with the stock erasing two days of gains but traders bought the dip Friday afternoon. There is no change from my prior comments. The larger trend for ESRX is still positive. I would still consider new bullish positions over $90.00. More conservative traders might consider inching up their stops toward this past week's low (near $88.50). 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 for the $95 strike (XTQ-BS).

Annotated Chart:

Entry  on   January 09 at $ 91.65 (small positions)    
Change since picked:       - 1.61     
Earnings Date            02/24/10 (unconfirmed)
Average Daily Volume =        2.6 million      
Listed on   January 09, 2010         


FUQI Intl. - FUQI - close: 20.73 change: -0.53 stop: 18.99

Selling pressure in FUQI leveled off by lunch time and shares began to drift sideways. I've been warning readers to look for a dip toward $20.00. I would still wait for a dip closer to $20.00 before considering new bullish entries. This was a very aggressive trade and I suggested very small positions. Our target to exit is $24.75 but more conservative traders may want to start taking profits early anywhere above $22.50.

Suggested Options:
If FUQI provides a new entry point I would use the February calls. My preference is for the $22.50 strike.

Annotated Chart:

Entry  on   January 06 at $ 20.51   (small positions 1/4) 
Change since picked:       + 0.22       
Earnings Date            03/31/10 (unconfirmed)
Average Daily Volume =        1.0 million      
Listed on   January 04, 2010         


L-3 Communications - LLL - close: 89.45 change: -0.62 stop: 87.85 *new*

LLL is holding up reasonably well after spiking to new highs on Thursday. Shares spent a good portion of Friday's session bouncing around the $89.00-89.50 zone. I am raising our stop loss to $87.85. If LLL breaks down under its trend of higher lows we want to exit quickly. I am not suggesting new bullish positions at this time.

Our play with the January calls is over and our plan was to exit at the closing bell if you didn't exit at our target on Thursday. We still have the February $90 calls.

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:       + 2.65
                            /1st target hit @ 89.95 (+3.6%)
Earnings Date            01/28/10 (unconfirmed)
Average Daily Volume =        1.0 million      
Listed on  December 26, 2009         


TORO Co. - TTC - close: 42.86 change: -0.22 stop: 41.40

TTC spent most of Friday consolidating sideways but started to weaken toward the closing bell. I would expect a dip toward $42.00 and/or its 50-dma approaching $41.50. Wait for the dip or signs of a bounce before launching new bullish positions. 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 we want to use the March calls. My preference was the $45 strike.

Annotated Chart:

Entry  on   January 07 at $ 42.60 (small positions)
Change since picked:       + 0.26      
Earnings Date            02/18/10 (unconfirmed)
Average Daily Volume =        289 thousand     
Listed on   January 05, 2010         


UnitedHealth Group - UNH - close: 33.75 change: +0.43 stop: 31.40 *new*

UNH displayed relative strength with a breakout to new 52-week highs. Shares hit $33.99 early Friday morning and our first target to take profits is at $34.00. I am suggesting we go ahead and take profits now.

If you are holding the January calls our plan was to exit on Friday at the closing bell. If you're holding March calls we still have some time. Readers need to decide if they're willing to hold over the earnings report on January 21st. I billed this play as a "lottery ticket" play so we're going to take a risk and hold over the earnings report next week. However, I'm going to suggest we take some money off the table ahead of the earnings announcement on January 21st. Please note our new stop loss at $31.40. Our second and final target is $36.00.

Suggested Options:
No new positions at this time.

Annotated Chart:

Entry  on  December 10 at $ 30.31    
Change since picked:       + 3.44    
Earnings Date            01/21/10 (unconfirmed) 
Average Daily Volume =        819 thousand      
Listed on  December 10, 2009         


Union Pacific - UNP - close: 65.57 change: -0.81 stop: 64.90

Unfortunately the railroads continue to correct lower. Shares of UNP have pulled back toward round-number support near $65.00. If the stock slips any lower the early January breakout is going to look like a bull-trap pattern. I am suggesting we use this dip to support as a new bullish entry point but I strongly encourage more conservative traders to wait for a bounce first before initiating positions.

I am consolidating our two targets to just one. We'll plan to exit at $69.95 or ahead of the earnings report on January 21st, whichever comes first.

Suggested Options:
At this point UNP has become a very short-term trade. If you choose to enter here I'm suggesting the February calls but consider the Feb. $65s instead of 70s.

Annotated Chart:

Entry  on   January 12 at $ 67.39 
Change since picked:       - 1.82 
Earnings Date            01/21/10 (confirmed)
Average Daily Volume =        2.5 million    
Listed on   January 12, 2010         


PUT Play Updates

*Currently we do not have any put play updates*


CLOSED BULLISH PLAYS

Goldman Sachs - GS - close: 165.21 change: -3.32 stop: 164.95

Financial stocks were under performers on Friday. Investors were disappointed with JPM's earnings report due to rising loan loss reserves and the whole sector spiked lower. GS is not really a bank but the stock fell anyway. Shares of GS gapped open lower at $167.60 and quickly hit our stop loss at $164.95 closing this trade.

Chart:

Entry  on   January 13 at $168.00 /gap down entry
Change since picked:       + 3.05 <-- stopped @ 164.95 (-1.8%)
Earnings Date            01/21/10 (unconfirmed) 
Average Daily Volume =        7.1 million  
Listed on   January 13, 2010         


Precision Castparts - PCP - close: 113.75 change: -1.59 stop: 112.99

Time has expired for our PCP play. The plan was to exit at the closing bell on Friday. PCP had hit our first target several days ago and came very close to our final target at $118.75 on Monday.

Chart:

Picked on  December 01 at $107.35    
Change since picked:       + 6.40 closed @ 113.75 (+5.9%)
                            /1st target hit $112.45 (+4.7%)
Earnings Date            01/20/10 (unconfirmed)  
Average Daily Volume =        817 thousand      
Listed on  November 28, 2009         


Whirlpool - WHR - close: 82.30 change: -0.87 stop: 79.90

We have run out of time on our WHR play. The original play description listed January calls and January options just expired. WHR did hit our first target at $84.75 bur struggled to make any further progress.

Chart:

Entry  on  December 19 at $ 80.76 /gap higher entry  
Change since picked:       + 1.54  closed @ 82.30 (+1.9%)
                             /1st target hit $84.75 (+4.9%)
Earnings Date            02/08/10 (unconfirmed)     
Average Daily Volume =        1.6 million       
Listed on  December 19, 2009