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Daily Newsletter, Saturday, 1/23/2010

Table of Contents

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

Market Wrap

Populist Politics

by Jim Brown

Click here to email Jim Brown

The market crashed on Friday not because of an earnings disaster or a warning from a high profile company. The market extended its decline to three days because politicians are trying to distract you.

Market Statistics

This is going to be a tough market commentary to write. Some of our readers don't want politics mentioned when discussing the market. Unfortunately this week politics crashed the market and I can't in good conscience write a puff piece and avoid the hardball facts. I will try and make it brief and you are more than welcome to skip the next few paragraphs if this topic offends you.

On Tuesday republican Scott Brown did the unthinkable and won the Massachusetts Senate seat held by the Kennedy's since the 1960s and did so with anti Obama campaign pledges. One of the most liberal states in the country where democrats outnumber republicans by more than 3:1 voted for a republican and for a change to the current administration's policies. It was the shot heard round the world and meant that no democrat seat in the country was safe in 2010.

The democrats immediately went into reaction mode and returned to populist politics that have worked so well for them in the past. By immediately blasting the "fat cat bankers" and calling for more regulation on major financial institutions they created a firestorm of controversy and succeeded in refocusing American attention on them instead of the voter revolt. This is not a new tactic. It has been used since the time of Aristotle to distract attention when current events turned against those in power. It is NOT a purely democratic ploy and has been used by both sides many times. It is called populist politics.

According to the dictionary populist politics is a political tactic that creates conflict between "the people" and "the elite" and urges social and political system changes. It is normally deployed by members of political or social movements. The Cambridge dictionary defines it as "political ideas and activities that are intended to represent ordinary people's needs and wishes."

Populists use derogatory terms like fat cat bankers, Hollywood elite, big oil, etc. Whenever politicians need a scapegoat they demonize whatever elite may be appropriate in order to become a hero to the masses. This week it was fat cat bankers and next week it may be big oil and so on depending on how their opinion polls are improving.

What I am trying to get across here is that this is business as usual. It is a common political trick to distract you from other events that were in the spotlight. I believe what the administration is proposing has little or no chance of becoming law but that does not matter. What matters is the distraction factor to take voters minds off the now dead health care bill and the potential to lose another 10-12 Senate seats in the fall. Banking analyst Meredith Whitney does believe it will become law and that is why the severe market reaction.

How many readers on Friday actually heard the comment from the president that lawmakers should table the health care bill until later in the year and then start over? This is the same president that was trying to force it through a week before the Massachusetts elections by calling all the holdouts and trying to cut additional deals. His comments on Friday came after Nancy Pelosi said they no longer have the votes in the House to get it passed but of course it was spun in the media as his idea.

Unfortunately for those of us in the market these political games impact the lives of real people. Every investor in the U.S., about 90 million people, lost money this week because of populist politics. Unfortunately probably 89 million don't understand the problem and actually believe fat cat bankers are at fault because of the media spin on the new banking rules the president is proposing. The S&P-500 lost more than $400 billion in market cap for the week according to Rich Peterson at S&P. There are real consequences to class warfare.

There are growing rumors that Treasury Secretary Tim Geithner is about to be fired as part of the populist shakeup. Geithner is seen by the masses as being favorable to Wall Street and his bank bailout plan has failed. Banks are not lending again even though they paid back the TARP. Geithner has been tied to some cover-up scenarios at AIG and that is linking AIG to the current administration. His too big to fail policy is linked to the current Wall Street bonus outrage. Analysts think he is the next scapegoat for the administration and suggest president Obama floated a trial balloon for his replacement last week.

In president Obama's opening paragraph in the new bank rules speech hs said: "Good morning, everybody, I just had a very productive meeting with two members of my Economic Recovery Advisory Board: Paul Volcker, who is the former chair of the Federal Reserve Board, and Bill Donaldson, previously the head of the SEC, and I deeply appreciate the counsel of these two leaders and the board, that they’ve offered as we have dealt with a broad array of very difficult economic challenges." Geithner was on the podium with the group but he was not mentioned and spent most of the speech looking at his shoes.

Basically president Obama said I just had a meeting with two new advisors and based on what they said, I am launching a new policy I am calling the Volcker Rule. Note that Volcker is just an advisor and Geithner is Treasury Secretary. So it appears Turbo Tax Tim may be next up on the sacrificial list as the administration tries to project a new get tough on Wall Street fat cats image.

Every single analyst I heard or read over the last week is dumbfounded that the administration is suggesting these changes because the changes they are suggesting have nothing to do with what caused the financial collapse. They are pure knee jerk populist politics used to inflame the public. For someone who ran on the platform of uniting America he has done more to divide it. I am sure the State of the Union speech on Wednesday evening will contain more populist remarks to further endear the masses. I am hostile this weekend and I hope every investor in the U.S. is also hostile.

The new political news on Friday was a canceled vote on confirming Ben Bernanke for another term as Fed Chairman. This is pure political theatre to distract from the other events. Senators Boxer and Finegold, both up for reelection this year and suddenly vulnerable, spearheaded this effort. By all accounts from economists, analysts, bankers and anyone who really understands how close we came to a complete meltdown they all say Chairman Bernanke should be confirmed by unanimous acclamation. Some claim there should be a statue of him on Wall Street as testament to his efforts to bring us back from the brink. Nobody claims he is perfect and there were mistakes but these were extraordinary times that required extraordinary measures in a very short time frame.

Several analysts thought there could easily be a 10% sell off if Bernanke is not confirmed. There is only a week left in his term and should he not be confirmed for a second term Donald Kohn, a Fed banker since the 1970s, would temporarily fill his seat until a successor could be named and confirmed. Analysts claim this sudden rousting of Bernanke is meant to show that our lawmakers are taking action on the banking crisis by throwing out the old guard.

The Bernanke problem is not going to simply disappear. There is a Fed meeting on Tue/Wed and his confirmation problems will be on every news channel and every newspaper. This will be the big story next week with the term countdown clock going to zero at month end.

I heard late Saturday that President Obama called several key senators from the White House in an effort to support Bernanke. He said later aboard Air Force One that he has "a great deal of confidence" in Bernanke. An Obama spokesman followed up with "The president has a great deal of confidence in what chairman Bernanke did to bring our economy back from the brink. The president thinks he is the right person for the job and believes he will be confirmed." Obviously the possibility Bernanke would not be confirmed and the potential for a market meltdown suddenly became a top priority for the president and he made the right call in moving to assure the confirmation. Let's hope his actions were enough to insure the confirmation.

For the next ten months there will be no status quo. Every topic touched on by politicians will have only one goal and that is avoiding a repeat of the Scott Brown revolution in their own states. Republicans are not safe either. The mandate from Massachusetts was smaller government and lower taxes and those republicans who have voted to tax and spend are also in trouble. They need their own distraction points to refocus voter attention towards them in a positive light.

On the economic front there was nothing of note on Friday and had there been it would have been ignored. Next week has several events that will be of importance even if the demonizing of banks and banking officials has not gone away. The most important is the FOMC announcement on Wednesday. No changes are expected but we are hoping not to hear that conditions have weakened since December. Several economic reports have softened and you heard from two banks last week that the worst may not be over. I doubt the Fed is going to want to spread doubt so even if there have been signs of weakening they will probably phrase the statement to avoid any negativity.

The second biggest event is the Q4 GDP on Friday. GDP is expected to have risen by +4.4% in Q4. Yes, you read that correctly, +4.4%. It is a technical bounce only that has to do with inventory depletion and is not a clear indication of a surge in economic activity. However, I am sure the less intelligent talking heads in the media will be bubbling over with excitement as they report the numbers. Don't be fooled. The Fed is only expecting the GDP for all of 2010 to be in the range of 2.4% to 2.7%. Friday's number is a statistical anomaly to be ignored. If by chance the number comes in dramatically lower we could see a strongly negative reaction since 4.4% is already baked in the cake.

There is also a flurry of Fed surveys, Richmond, Kansas and Chicago as well as the NY and Chicago ISM reports. These are all preludes to the Non-Farm payrolls on Friday of next week. This week has a busy calendar but the Bernanke confirmation will be the overhanging cloud.

Economic Calendar

This is the last week for material earnings reports. The cycle will drag on for several more weeks but after this week the majority of the big names will have reported. The following week is when I expected a sell off on profit taking but given our -4% drop already and the negative tone in the market I am not sure investors are going to wait another week.

Headlining the earnings next week are Apple, Amazon, Yahoo, CAT, MMM and UTX. Apple reports earnings on Monday and hosts its unveiling of what is expected to be a tablet PC on Wednesday. Bernstein Research warned on Friday that expectations for Apple's iPhone sales could be too high. Bernstein expects Apple to announce sales of roughly 8.5 million phones compared to the 10-million consensus estimate. Apple earnings are expected to be $2.07 per share and a miss there could be partially offset by the impending tablet announcement. The Bernstein warning helped knock $10 off Apple on Friday

Apple Chart

So far this quarter 92 of the S&P-500 companies have reported and earnings are up +193% over nearly zero earnings of Q4-2008. However, if you take out the financials that drops to only a +7% gain. 78% of companies beat by an average of +21%. Only 17% missed earnings but more than 50% struggled with their guidance. S&P says the bottom line earnings are still improving due to continued cost cutting but the top line growth has been minimal. Next week there are 12 Dow components and 130 S&P stocks reporting.

Earnings Calendar

Not on the economic calendar but definitely a scary sequence of events is a massive debt auction of roughly $178 billion. On Monday $48 billion in T-Bills, Tuesday $12 billion in monthly notes plus $44 billion in 2-years. Wednesday has $42 billion in 5-year paper and another $32 billion in 7-year paper on Thursday. The rate at which we are adding debt is nothing short of phenomenal. The current administration is on track to add more debt in the first 20 months of this term than George Bush did in his entire 8-year term. By 2013 the interest on the debt will be the largest single item in the Federal budget.

The problem with constantly adding debt is that we can't repay the debt that we already have. There is a new book by Carmen Reinhart and Kenneth Rogoff called "This Time is Different." They researched over 250 financial crises in 66 countries over 800 years and analyzed them for differences and similarities. They found that debt kills countries and excessive debt kills them quickly regardless of the reason for the debt.

Quote from the book: "As for financial markets, we have come full circle to the concept of financial fragility in economies with massive indebtedness. All too often, periods of heavy borrowing can take place in a bubble and last for a surprisingly long time. But highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked."

Debt to GDP Chart

Borrowing $178 billion in short term paper next week is a pure example of being forced to refinance short term because long-term confidence is weak. As I have said many times before we are eventually going to see one of these debt auctions fail and all hell will break loose.

We are seeing a higher demand for our debt since the Dubai debt warning. Add the current problems in Greece, Spain, Portugal and Italy and the potential for a Euro implosion if something does not change and the U.S. still looks like a safe place to park money in short term debt. We are still the highest rated paper although that could also change soon. As long as we can keep running debt auctions to pay the interest on existing debt the house of cards should not fall.

That is like getting a cash advance on one credit card to pay the monthly payment on another. Eventually your available credit lines run out and you are left with a mountain of debt you can't pay and no credit. When an auction fails it will be the equivalent of running out of available credit on that last credit card.

Speaking of credit cards American Express got a haircut of nearly 9% on Friday after FBR Capital Markets cut estimates for credit card companies due to the new Credit CARD Act, which goes into effect on Feb-22nd. After that date companies will no longer be able to change rates and fees on a whim. There are rules they will have to follow and it has resulted in the cancellation of hundreds of billions of dollars of credit to consumers.

American Express (AXP) lost $3.50 or -8.46% on Friday after the CFO said yields on credit cards could drop to 9.7%. Capital One (COF) was also cut by FRB and their yields are expected to drop to 15.5%. COF is expected to undergo the most pain since they have a large number of subprime cardholders. AXP said they lowered their provision for loan losses by -47% to $748 million for the current quarter. COF posted an even bigger drop to $843 million from $2.1 billion. This is a clear sign that the banks have cleaned up their books and are working to prune off less than desirable clients. Meanwhile Fitch Ratings warned that charge offs of consumer loans could become more widespread in coming months as higher interest rates and unemployment push more consumers into trouble.

AXP Chart

Capital One Chart

Oilfield services giant Schlumberger (SLB) reported earnings on Friday and promptly lost -4.5% in its share price. SLB posted better than expected profits but lower margins since the company had cut rates to remain competitive. SLB CEO Andrew Gould said international margins should bottom out in the middle of 2010 but warned that natural gas production presented few growth opportunities outside the U.S. over the next few years.

The CEO said the amount of activity scheduled in Iraq over the next three years was huge but it required a new election and passage of a new oil law. He said the ramp up could begin late in 2010.

SLB Chart

AMD posted better than expected earnings but lost -12% anyway. Most of the profit came from the end of the dispute with Intel. AMD had no real impact on the sector but a downgrade on chip stocks by Citi sent them all sharply lower. The downgrade by Citi analyst Timothy Arcuri was on chip equipment makers to sell from hold. Companies cut were KLAC, ATMI, BRKS and ENTG. He kept a sell rating on ASML and LRCX. He also cut NVLS to hold from buy and removed AMAT from the "top picks" list. Arcuri did keep a buy on FORM. He said he saw the potential for chip stocks to fall -30% over the next 3-6 months. The SOX lost -5% on the downgrades.

AMD Chart

Semiconductor Index Chart

Google reported earnings on Thursday that beat the street but failed to beat the whisper number. Paid clicks did not accelerate as hoped and the growth plan seemed a little fuzzy. Investors are beginning to worry that the easy money has been made in Google and now it has evolved into just another tech company where product penetration has peaked. Google lost -$32 on Friday.

Google also reported that founders Larry Page and Sergey Brin plan to sell about 10 million shares over the next five years. This will reduce their holdings to less than 50% and technically they will be giving up control. In reality nobody else can even come close to amassing a block big enough to have control so despite their less than 50% ownership they will still be making decisions and wielding absolute power. After the sale the pair will still own 47.7 million shares, only around 15% of the outstanding, but they will have voting rights on 48% of the stock. Currently they have voting rights on 59% of the stock.

Google Chart

Oil prices imploded over the last week as the year-end commodity fund rally fizzled. Comments from China about slowing growth by halting lending suggested oil demand growth might also slow. Gasoline inventories in the U.S. rose by 11.5 million barrels over the last three weeks and refinery utilization fell to 78.4% from 81.3% the prior week. Crude prices fell from $84.22 on the March contract to close at $74.09 on Friday. That is a $10 drop in two weeks. All things being equal this is support for crude but we have to get past the weakness in equities and worries about a double dip before we can expect a return to that $84 level.

Crude Oil Chart

Next week is going to be difficult. Earnings are peaking and after the week is over there will be little left to provide lift for the markets. The political process is running amok and there is a big list of events next week that could be impacted by a continued attack on capitalism and Bernanke's confirmation vote.

We got word after the close that the UK just raised their terror alert status to "severe" on worries about attacks from terrorists in Yemen. This is equivalent to the current U.S. status of "high" for domestic and international flights. We have heard for the last couple weeks that information from the Christmas bomber has led investigators to uncover evidence of other plots in progress from Yemen.

The Dow lost -4.12% for the week and closed below support that had held since early November. Closing at the lows on Friday is never a good sign and closing below support is even worse. Without a cessation of the political attacks I believe the Dow could easily test 9500 over the next month. Dow 9650 would be a 10% correction but given the fragility of the current market we could slide all the way to 9500. I know this sounds drastic but the Dow has fallen -562 points in just the last three sessions. The markets are in rout mode from their own version of a terrorist attack.

The next Dow support level is 10,100 but we could easily overshoot that if nothing changes in the news over the weekend. Volume is off the charts with 12.2 billion on Thursday and 11.5 billion on Friday. This is the equivalent of screaming fire in a crowded theater. Somebody better turn on the lights and give the all clear signal soon or it is really going to get ugly.

Dow Chart

The S&P-500 is our hope for a halt to the market drop next week. The 1085 level has been strong support since early November. It will probably be tested on Monday and should it hold it might give the bulls some incentive to buy the dip at least temporarily.

A 10% correction would be a drop to 1035 and that would be a logical stopping point according to the chart. The ascending megaphone wedge crosses exactly at that 1035 level. This will be a make or break point for the markets. Over 1.5 million SPY puts traded on Friday.

S&P_500 Chart

The Nasdaq ended a month of consolidation around 2300 and collapsed with a 3.6% drop to 2205. This support must hold or the S&P may not be able to support the markets at 1085. With Apple on Monday there could be a serious challenge if Apple disappoints. A break of 2200 could target support at 2040.

Nasdaq Chart

The problems facing the market are policy issues not fundamental issues. The earnings have not been great despite the +193% record so far. There were no earnings in Q4-2008 so any earnings are an improvement. Earnings were not weak enough to cause this kind of selling. This is news driven panic and not related to equity valuations.

The qualification is that most analysts expected a decline in February so the stop losses were in place. When the downdraft began those stops began to get hit and the sell off became self-perpetuating. Stocks go down faster than they go up because traders are rushing to capture remaining profits rather than patiently wait for stocks to move higher.

The market closed with a strongly negative bias on Friday. If the right people say the right things over the weekend the policy problem could fade by Monday. I am not expecting that because the politicians have us exactly where they want us, focused on them rather than on their election problems. We are at their mercy if they want to keep feeding these flames. President Obama's Saturday comments expressing confidence in Bernanke is a major plus. He is doing the right thing and it may calm tensions before Monday's open.

Fortunately time heals all wounds. Several days from now the market will lose interest in the current problems and hopefully will be focused on GDP and ISM and Microsoft earnings. The president's support of Bernanke on Saturday was a good first step. If he can give a calming speech on Wednesday and avoid using the term fat cat bankers again then the worst may be over. You can bet he is taking heat from his advisors about crashing the market and would like to avoid being blamed for a full correction.

However, now that this sell off is up to speed it may continue to be self perpetuating until the sellers run out of stock. I doubt many investors are sticking their hands out to catch these falling knives. They will want to see them hit the floor first before they start picking them up.

I would be patient about going long next week. There may be a rebound day where all the shorts get squeezed again but I would wait until sentiment improves before picking up some bargains.

Jim Brown


Index Wrap

And, Away It Went!

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The bearish rising wedge chart pattern in the major indexes that was traced out from October/early-November into the beginning of last week, most often forms ahead of a sharp trend reversal. I'd say that last week's decline definitely qualifies as 'sharp' (and scary)!

I think I was clear last Saturday: that I was bearish and expected a substantial sell off starting soon, probably after an early week rally. I forgot that Monday (MLK Day) was an Exchange Holiday, so wrote that I anticipated a short-term rebound possibly INTO Tuesday. A good-sized rally did occur on the FIRST trading day of the week but that happened to be ON Tuesday. There were triple tops (a double top in the case of the Dow) made on the hourly charts of the major indexes by the end of Tuesday, another bearish type 'signal'.

The dominant daily chart pattern that suggested buying was seriously running out of steam was that of the bearish rising wedge patterns that formed from the early-November lows until recently with all the major indexes. You know it's the 'end' point of this pattern by when the two slanting trendlines get close to converging (or actually do converge).

In my Thursday Trader's Corner article, I laid out in detail the fundamental and technical meaning of the wedge pattern of the bullish RISING variety. There is a bullish FALLING wedge also.

I hope you saw that e-mail. I do recommend checking it out if you haven't. A key point of pattern recognition is that we understand what a chart pattern relates to in terms of the underlying fundamentals (e.g., stock distribution, less and less buying coming in, etc.), in terms of potential price targets implied by the chart formation and so on. This, so that when we see this pattern again, we are forearmed about any trend reversal implications.

You can click to this Trader's Corner article HERE

I'll just repeat from this column what the general characteristics of a Wedge pattern are in terms of it formation, duration and outcome.

ESSENTIAL CHARACTERISTICS: RISING WEDGE PATTERNS

1. The Wedge can develop either as a type of 'topping out' pattern to a previously existing uptrend, or start to form at the bottom of previous downtrend.

2. The Wedge normally takes more than 3 weeks to complete.

3. Prices almost always fluctuate within the Wedge's confines (between the two rising up trendlines) for at least two-thirds of the distance from the base (beginning of convergence) to the 'apex'. In some cases, prices go a short distance beyond the apex, pushing out a top in last gasp rally attempt before collapsing.

4. Once prices break out below the lower trendline, they waste little time typically before a sharp decline.

5. The ensuing drop often or 'ordinarily' covers all of the ground gained within the Wedge itself, and sometimes more.

The aforementioned ultimate price objective is one that's seen more commonly in individual stocks than in the broad indices like the S&P 500 and the Nasdaq Composite, but this target does constitute a sort of 'maximum' objective that I wouldn't rule out; but not necessarily in s straight shot. Keep in mind that the usual pattern of a full-blown correction is a downswing, a recovering rally, followed by another decline that often carries farther than the first decline. There are usually 3 legs or segments to a significant bull market correction.

The rising wedge pattern only rarely suggests more than an intermediate correction, within a still major or primary uptrend.

CHART OF THE WEEK:

A key support in the S&P 500 (SPX) is suggested by an SPX pull back to the major down trendline that the S&P previously broke out above; that level (1070) is noted on the SPX weekly chart below. It's also not unusual to see a set back after prices of a stock or index have retraced around half of a prior decline which is the case with SPX. In a very strong stock or index recovery rally, the key retracement levels that suggest (when achieved) at least a pause, is in the 62 to 66 percent zone. The Nasdaq Composite got to the 66% retracement area for 3 weeks running, counting the high of this past week.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) has confirmed the bearishness of the Rising Wedge pattern discussed last week and the sharp pullback has now even pierced its broad uptrend channel on the downside. I noted last week that a 'maximum' downside target could be to as low as to the 1030 area but as noted in my initial 'bottom line' comments, I wouldn't expect a free fall here. More likely is that prices stabilize at or not far under recent lows and a rally follows.

To think that there won't be another significant decline after a rally attempt ahead is probably wishful thinking for the bulls. The market may finally undergo a significant correction, which would be quite 'normal' after a multimonth advance with only shallow and short-lived pullbacks.

I've noted near support area as 1080, then 1070, which would retrace around 2/3rds of the rally that began in early-November; with major support probably beginning in the 1040 area.

Near resistance is noted at 1115, with pivotal resistance at the broken lower trendline of the wedge pattern, as noted on the chart; the current intersection of this trendline is around 1140-1141.

As so often happens, the SPX top formed after BOTH the (13-day) RSI AND my sentiment indicator (see above graphs) got to overbought extremes. It will be interesting to see if and when my sentiment model falls to an oversold extreme. I think it may, but seems more likely in a second down leg. Bullishness dies slowly when so many prior corrections were short-lived.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) has turned decidedly bearish in its pattern. The outlook last week was potentially bearish; a strong potential no doubt but up trendlines were intact, etc.

Near-term resistance is noted at 504, then around 507-508, at the previously broken lower trendline of what had been OEX's uptrend price channel. For a more pivotal resistance, I'm keeping tabs on what happens on any rebound back to the area of the widely followed 50-day moving average, currently intersecting at 516. Major resistance is probable beginning around 525, at the previously pierced trendline.

The next lower technical support should be found around 500, extending to 496. Major support is anticipated in the 480 area.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow (INDU) Average fell like a stone, which isn't surprising since this group of just 30 big cap stocks was lagging on the last rally. INDU had been going more sideways to just slightly higher, in terms of the highs being made, for some weeks coming into this recent break. Nevertheless, the various reaction lows had been marching steadily higher; the fact that each succeeding rally was short-lived and didn't carry far is characteristic of the wedge pattern and others, which suggest that buyers were thinning out.

Key near resistance on a bounce back is at 10300, then at 10400. Major resistance is up around 10615 currently. The Dow, haven't fallen the furthest and fastest, is the first to register oversold on the RSI.

Based on where the 62 to 66% retracements come in, I've noted a 10080-10035 support zone on the daily INDU chart. Major support is implied if there is a return all the way back to the low end of the rising wedge pattern in the 9700 area.

I wrote last week that "I anticipate lower prices ahead, perhaps after a short-term rally attempt, into say Tuesday." This predicted short-term rally (only) was ON Tuesday, the first trading day of week, which I forgot was Tuesday, not the usual Monday.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

You'll see again with the Nasdaq Composite (COMP) chart, the same Rising Wedge formation. There are some divergences yes, between the indexes, but they all tend to form the similar major chart patterns.

Near support is suggested or estimated for the 2175 area, then 50 points lower, at 2125. Major support is projected at 2050, extending to around 2025.

I've noted resistance at 2237, then up around 2300, which I see as the start of major resistance for awhile.

Bullish sentiment is falling as put volume has jumped. At some point I anticipate that there would a daily reading or two that would put my indicator at or near the 'oversold' high bearishness zone. In the topsy turvy world of contrary opinion, extreme bearishness suggests that the market could turn back up

NASDAQ 100 (NDX) DAILY CHART:

MEA CULPA: I noted price levels last time for the Nasdaq 100 (NDX) index that were appropriate for the Nasdaq Composite only so forget about watching "2274-2279" as an important chart support for NDX. Well, like I've said, all the charts look the 'same' sometimes; only price levels are different!

I've noted next potential technical support for NDX at 1760, extending to the 1730 area. Based on a short-term oversold condition, we could see the index rally early in the coming week.

Initial technical resistance will come in around 1840 in my estimation, then at the previously broken up trendline, which intersects currently around 1873.

I'm going to take any rallies in the near-term skeptically in terms of the big Nasdaq stocks immediately resuming prior strong uptrends. While what is feared the most, probably China throwing up higher interest rates, may not occur, there are other concerns that finally add up such that it occurs to the bulls that stocks are priced mostly 'fairly' for now.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) mirrors the bearish price pattern of the underlying Nas 100 index per usual (having traced out the same bearish rising wedge pattern and having had the same sharp sell off) but with the Q's we can also better assess daily volume patterns. I didn't bother to draw a sharply rising trendline touching the tops of the daily volume bars of early-January through this past week; you can easily eyeball such a line.

My take on this rising volume trend (as noted last week), while prices went sideways (until Wednesday), was as rising long liquidation and (especially) increased shorting. Also, volume should expand in the direction of the (price) trend and the big volume jump was on the downside, suggesting a new intermediate-term (down) trend.

Near support is noted at 43.3, then 42.6. Major support is in the 41 to 40.6 area.

Near resistance now is down to 45.5, with pivotal resistance at the previously broken up trendline, currently intersecting at 46.2.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) Index is bearish in its chart, now 'confirmed' by the decisive downside penetration of the long-standing up trendline, rather than simply implied (last week) by its bearish rising wedge pattern. While small cap stocks may have a good seasonal tendency to rally early in Q1, no group of stocks will continue to rise if the economy is going nowhere.

Key resistance is suggested in the 625-630 price zone. A close above 630, at the previously broken up trendline and that wasn't reversed the next day, would suggest that RUT had recovered upside momentum. This doesn't look likely but that's a 'reversal' point for the current bearish chart.

Key support is in the 600 area, extending to 590. Major support is expected in the 553-557 area.

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

Changing Directions

by James Brown

Click here to email James Brown

Stocks have broken several layers of support and the correction is upon us.

Editor's Note:

There were plenty of stocks that looked like bearish candidates. Just a few more that caught my eye were FISV, MCK, HRS, and AZO.


NEW DIRECTIONAL CALL PLAYS

Deckers Outdoor - DECK - close: 100.68 change: -2.83 stop: 99.75

Why We Like It:
The stock market is very short-term oversold and I think we could see a bounce before the market continues lower. Let's try and catch that bounce with a play on DECK. The stock has retreated to what should be significant support at $100.00. We can use a tight stop to limit our risk and if DECK bounces we're in and out in a couple of days.

Buy calls now (in the 100-101.50 zone) and target an exit at $104.95.

Suggested Options:
I am suggesting the February calls. My preference is the $105 strike.

BUY CALL FEB 105 QUK-BA open interest=348  current ask $2.65

Annotated Chart:

Entry  on   January 23 at $100.68 
Change since picked:       + 0.00
Earnings Date            02/25/10 (unconfirmed)
Average Daily Volume =        549 thousand 
Listed on   January 23, 2010         


NEW DIRECTIONAL PUT PLAYS

FEDEX Corp. - FDX - close: 80.29 change: -1.31 stop: varies

Why We Like It:
FDX is at risk of breaking its long-term up trend. You could say it's already broken but FDX found support at $80.00 and its 100-dma on Friday. I think it continues lower but shares might see an oversold bounce first. I'm suggesting two different entry points.

Entry point #1: If FDX keeps falling we want to buy puts with a trigger at $79.45 and use a stop loss at $82.55.

Entry point #2: If FDX bounces we want to buy puts with a trigger at $81.75 with a stop loss at $86.05.

Our first target is $75.25.

Suggested Options:
I am suggesting the March puts although February would probably work just fine. My preference is the $80 put for either entry point.

BUY PUT MAR 80.00 FDX-OP open interest=531  current ask $4.00

Annotated Chart:

Entry  on   January xx at $ xx.xx <-- two triggers
Change since picked:       + 0.00
Earnings Date            03/18/10 (unconfirmed)
Average Daily Volume =        3.0 million  
Listed on   January 23, 2010         


Gymboree - GYMB - close: 39.74 change: -1.11 stop: 42.75

Why We Like It:
Retail stocks are rolling over and GYMB has a head start on its peers. Shares just broke round-number support at $40.00 and technical support at the 200-dma. I'm suggesting put positions now. Our first target is $35.50. Our second, longer-term target is $32.00. We are going to use a slightly wider, more aggressive stop loss in case GYMB sees an oversold bounce. Consider using small positions to limit your risk.

Suggested Options:
I am suggesting the February puts. My preference is the $40 strike.

BUY PUT FEB 00.00 GQU-NH open interest=1413 current ask $1.75

Annotated Chart:

Entry  on   January 23 at $ 39.74 
Change since picked:       + 0.00
Earnings Date            03/04/10 (unconfirmed)
Average Daily Volume =        513 thousand 
Listed on   January 23, 2010         


Retail Holders - RTH - close: 91.42 change: -1.11 stop: 95.05

Why We Like It:
If you want to play the retailers but don't want to play an individual stock you could buy puts on the RTH. The sector has clearly rolled over and this ETF just broke down under its 100-dma. I'm suggesting small positions now. We can double down if we see another failed rally in the $93-94 region. Our first target is the $87.00 level. The 200-dma will probably be support. The RTH moves kind of slow.

Suggested Options:

This is the new CBOE format:

BUY PUT 2010 MAR 90.00 RTH1020O90 open interest=391  ask $2.45

Annotated Chart:

Entry  on   January 23 at $ 91.42 
Change since picked:       + 0.00
Earnings Date            --/--/--
Average Daily Volume =        1.7 million  
Listed on   January 23, 2010         



In Play Updates and Reviews

Bears Take Control

by James Brown

Click here to email James Brown


CALL Play Updates

Joyg Global - JOYG - close: 49.63 change: -4.42 stop: 48.90

The sell-off in materials and mining stocks accelerated on Friday. Shares of JOYG gapped open lower at $52.10 and plunged through its 100-dma. There was an intraday bounce but that failed near the open and JOYG traded under its trendline of support and the $50.00 level. The low was $49.14. Friday's close under $50.00 is certainly bearish and if there is any follow through on Monday we'll get stopped out at $48.90. However, JOYG is now short-term oversold with a 20% correction in just three days. There is a decent chance that JOYG bounces on Monday.

Our trade was opened when JOYG hit our trigger at $50.50. Our first target is $54.75. Our second target is $59.00. We do not want to hold over the early March earnings report.

Suggested Options:
At this time I would wait for a bounce over $51.00 before launching new positions. I'm suggesting the April $55 calls (JQY-DK).

Annotated Chart:

Entry  on   January 22 at $ 50.50 
Change since picked:       - 0.87
Earnings Date            03/03/10 (unconfirmed)
Average Daily Volume =        2.8 million  
Listed on   January 19, 2010         


PUT Play Updates

Mettler Toledo Intl. - MTD - close: 98.78 change: -1.39 stop: 102.25

Our new play on MTD has been opened. When the market began to accelerate lower into the closing bell MTD finally hit our trigger to buy puts at $99.40. Now that the play is open our first target is $95.25. Our second target is $90.50. Our time frame is a couple of weeks. We do not want to hold over the early February earnings report. I would still consider new positions here.

Suggested Options:
I am suggesting the February puts. My preference is the $95 strike (MTD-NS). The spreads are a little bit wide, which makes this a slightly more aggressive trade.

Annotated Chart:

Entry  on   January xx at $ xx.xx <-- TRIGGER @ 99.40
Change since picked:       + 0.00
Earnings Date            02/04/10 (unconfirmed)
Average Daily Volume =        134 thousand 
Listed on   January 21, 2010         


CLOSED BULLISH PLAYS

Apple Inc. - AAPL - close: 197.75 change: -10.32 stop: 203.99

It's getting pretty ugly out there and the prospect of AAPL's earnings report next week was not enough for investors to hold this stock. Shares gapped open lower at $206.78 and quickly fell through support at its 50-dma and then through round-number support at the $200.00 mark. Our stop loss was hit at $203.99 closing this play. This was an aggressive bullish trade and the plan was to use small positions (1/4 to 1/2 your normal trade size).

Chart:

Entry  on   January 13 at $210.65 
Change since picked:       - 6.66 <-- stopped out @ 203.99 (-3.1%)
Earnings Date            01/25/10 (confirmed)
Average Daily Volume =       17.1 million  
Listed on   January 13, 2010         


3M Co. - MMM - close: 81.48 change: -1.22 stop: 83.40

Our plan was to drop MMM as a bullish candidate if we didn't see a bounce on Friday. The stock has not yet hit our trigger to open positions.

Chart:

Entry  on   January xx at $ xx.xx <-- TRIGGER @ 85.25
Change since picked:       + 0.00          *never opened*
Earnings Date            01/28/10 (confirmed)
Average Daily Volume =        3.1 million  
Listed on   January 20, 2010         


TORO Co. - TTC - close: 40.53 change: -1.64 stop: 41.40

The market's widespread decline pushed TTC through significant support and shares closed with a 3.8% loss. Our stop loss was hit at $41.40 early in the session. TTC is now testing the next level of support near $40.00 and its 100-dma.

Chart:

Entry  on   January 07 at $ 42.60 (small positions)
Change since picked:       - 1.20 <-- stopped @ 41.40 (-2.8%)
Earnings Date            02/18/10 (unconfirmed)
Average Daily Volume =        289 thousand     
Listed on   January 05, 2010         


CLOSED BEARISH PLAYS

Green Mtn Coffee - GMCR - close: 81.16 change: +1.24 stop: 82.55

There is no explanation for GMCR's relative strength today. Shares broke down to new relative lows, hit our trigger to buy puts at $78.45, and then rallied. Not only did shares bounce but they hit our stop loss at $82.55. We knew GMCR was a volatile stock and that's why I labeled it an aggressive trade but this sort of bounce on Friday was very surprising.

Chart:

Entry  on   January 22 at $ 78.45
Change since picked:       + 4.10 <-- stopped @ 82.55 (+5.2%)
Earnings Date            01/28/10 (unconfirmed)
Average Daily Volume =        1.4 million  
Listed on   January 21, 2010