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Daily Newsletter, Saturday, 2/6/2010

Table of Contents

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

Market Wrap

When PIGS Fly

by Jim Brown

Click here to email Jim Brown

The markets shook off a major decline at the close as shorts raced to cover on rumors there would be an aid package for Greece announced over the weekend.

Market Statistics

The Dow declined -168 points intraday to touch 9835 before the rebound began. The markets and especially commodity stocks were crushed this week as the dollar rallied to new 6-month highs on fears that the Eurozone was going to collapse. Daily comments that no bailout was imminent by the ECB or the IMF failed to convince analysts as news of additional problems continued to suggest something would have to be done.

Late Friday there was a rumor the IMF might announce an aid package for Greece over the weekend and the reaction in the market was immediate. Even if the rumor was untrue those with heavy short positions could not afford to hold over the weekend. Should a deal be announced the markets would have exploded higher at the open on Monday and shorts would have been hurt very badly.

Once the rebound began on Friday it was a race to the exits as stops were hit and shorts watched in disbelief as the markets returned to positive territory.

The markets started off mixed after the Non-Farm payrolls came in weaker than expected with a loss of 20,000 jobs instead of the gain of +5,000 jobs analysts expected. The loss of jobs was not the only problem. With this report the Labor Department revised the job numbers for each month all the way back to January 2009. The net revision showed there were -637,000 more jobs lost than previously reported.

In the table below I have listed the revised job numbers on the first line and the numbers prior to the revision on the bottom line starting with Jan-2009 in the left column. Every month saw revisions to the downside except for November, which was revised higher to show a gain of 64,000 jobs. Note that December 2009 was revised sharply lower to a loss of 150,000 jobs.

The BLS announced in October they were going to revise jobs lower in February by -850,000 due to a major glitch in the birth-death model for new businesses. The B/D model always assumed that in the long run jobs are created not destroyed. The severe contraction from the credit crisis killed thousands of small businesses, which account for 65% of new jobs created.

The BLS also announced it will post another revision in February 2011 by an expected one million more jobs lost. By prorating and backdating these losses over two years they are trying to avoid the headline risk of admitting they under estimated jobs lost over the last few years by as much as two million jobs. (See Bloomberg slide show on revision)

Job Loss Revision Table (thousands)

The unemployment rate dropped to 9.7% from 10.0% in December, but only because 843,000 workers dropped off active job seeker rolls and into the discouraged worker category. That means they have given up actively looking for work. This reduction in the active workforce makes the unemployment calculation show a lower unemployment rate simply because there are fewer workers actively looking. These people did not get a job they just gave up looking. This is a bogus method for quoting unemployment.

The Labor Dept unemployment rate of 9.7% equates to 14,837,000 unemployed workers. However, the U6 unemployment, which includes those in the discouraged category and those who are working a part time job because they can't find full time work is now 16.5% or 25,238,195 people. This is why the economy is struggling to recover.

Analysts pointed to some technical factors such as rising hours in the average workweek to 33.3 and a +0.3% gain in average hourly earnings as signs of a rebounding job market. However, the number of people employed for more than six months increased to 41.2% of those unemployed. The longer a person is unemployed the harder it is to get a job.

There were some positive signs. The household survey showed total household employment rose by 784,000 in January. This was a huge increase and assuming it does not get revised lower in future months it is very positive for the economic outlook.

The establishment employment report had some challenges. There was a reported gain of +42,000 workers in the retail sector. Since retailers don't hire in January but terminate people in January analysts expect this is the result of a seasonal adjustment. The Labor Department adjusts the numbers on a seasonal basis to account for such things as holiday hiring and firings. Since far fewer people were hired for the holidays the normal seasonal adjustment over compensated on the termination side and gave a false impression of a gain of 42,000 in January.

The government hired 33,000 workers in January of which 9,000 were census hires although I never heard anyone in the press mention anything about census hiring. I did hear a lot of comments from politicians bragging about the drop in the unemployment rate to 9.7%. Never let a good data point go to waste.

Here is my conclusion. The government hired 9,000 census workers and over compensated in the seasonal retail adjustment to show 42,000 fictitious jobs in retail. That totals 51,000 jobs and the headline number showed a loss of 20,000 jobs. If you remove the census jobs as only temporary it appears to me that the economy really lost 71,000 jobs in January. The next four months will show strong gains as the government adds another million temporary census workers and then a million worker loss when those workers are terminated in July/August.

This suggests politicians will be fighting for the microphone for the next four months to brag about jobs gains and then be nowhere to be found when all those workers are sent home. Anyone brave enough to face questioners in July/August will say, "Those losses don't count, they were only temporary census workers." Funny, they counted on the way up, why not on the way down. Mark my words and I will bring you some specific quotes when it happens.

There are 129.5 million people employed in the U.S. today. That is exactly how many were employed in 1999 even though the working age population has increased by +29 million in the last 11 years. Regardless of how the government slices and dices the reports this means there are millions of additional workers competing for the same number of jobs and that is a major drag on wages and the economy. In 2009 the Fed had a zero interest rate policy, added over $2 trillion to their balance sheet in stimulus and the Federal government added over $1.4 trillion in stimulus of their own. Employment still fell by -4.8 million in 2009. The National Federation of Independent Business says 71% of small businesses do not plan to hire in 2010 due to extremely tight credit and lack of consumer spending.

Revised Non-Farm Payroll Chart

The Consumer Credit report for December was released on Friday and it showed consumer balances actually declined in December by another $1.7 billion. If consumers can't be counted on to bump spending during the holidays the odds are good they won't spend over the coming months. The $17.5 billion drop in November was revised even lower to a drop of $21.8 billion. The drop in November was mostly due to a drop in credit lines by lenders and the flushing of marginal customers ahead of the changes in the new CARD rules. Also impacting consumer balances are newly unemployed workers using their severance pay to pay down balances to lower payments while they search for a new job.

This is not an economically friendly report. Without consumers increasing their balances the economic recovery will continue to progress slowly. This report gives us a glimpse into the bigger problem rather than the entire picture but we can certainly put the pieces together ourselves. Until employment firms and we are adding 250,000 jobs per month the consumer is not going to be spending money. It is a classic chicken and egg story. Employers can't hire until consumer spending returns and spending won't return until workers are rehired.

Consumer Credit Chart

The economic calendar for next week is so lackluster there was nothing to highlight except for the Bernanke testimony on Wednesday. He is testifying to the House Financial Services committee on how he plans to end the Fed's current stimulus programs. This is another opportunity for 15 minutes of face time by every politician on the panel. Bernanke is not likely to give them anything meaningful since the Fed has already announced a timeline for ending most of the programs. They are not likely to get anything other than the "considerable period" language on interest rates. It is a dog and pony show to emphasize the importance of the politicians rather than a meat and potatoes session with Bernanke spelling out his plans.

This lull in economic reporting will end the following week with the next round of regional Fed surveys, FOMC minutes and the Consumer and Producer Prices Indexes.

Economic Calendar

I briefly scanned the earnings scheduled for next week and there were a few high profile names like Disney, Biogen and Agilent Technology but it is mostly a small cap week. It is also energy week with dozens of energy stocks reporting. The results for those in the energy sector have been mixed but most are reporting big declines from the comparison quarter due to the decline in activity in the sector.

Video game makers Electronic Arts and Activision will both report and ERTS has already warned. ATVI sales are expected to be flat despite the success of Call of Duty II. Further negativity out of either of these companies could depress market sentiment.

The big news will not be energy, earnings or economics but global debt issues. The failing economies of the Eurozone "PIGS" ("P"ortugal, "I"taly, "G"reece and "S"pain) are continuing to push the Euro lower on worries that the Eurozone coalition will fall apart.

On Wednesday Portugal had a failed bond auction, which could be the first of many to come. Granted Portugal with a GDP of $243 billion is smaller than Massachusetts, GDP of $312 billion, but it is a preview of things to come. Portugal tried to sell 500 million in bonds but received bids on only 300 million.

If any of the PIGS I mentioned earlier tried to sell a large amount of debt today the odds are good the auction would fail or be at an interest rate they could not pay. Dubai, Greece, Poland and Spain have already been forced to pay much higher interest on debt they sold recently.

The advent of the Euro and strict economic policies required in order to join the Eurozone gave lesser countries access to relatively cheap debt because the Euro was thought to be a sound currency. Essentially the Euro concept worked too well and allowed those without sound financial policies to hide under the Eurozone cloak and fuel their deficits with cheap debt denominated in Euros.

The problems in Greece are starting to be seen in other Eurozone countries now that investors have decided to look under the cloak. What they are finding is some serious sovereign risk for hundreds of billions in Euro debt.

Over the last couple years investors and consumers have begun to think that governments will always rush in and rescue or bailout any failing entity. Fast forward to today and governments in Europe have run out of ammunition and can no longer rescue themselves from the massive spending on stimulus. This is a two edged sword. They can't afford to withdraw the stimulus because their economies are still not self-sustaining. They can't afford to continue the stimulus because they are broke and can no longer sell debt. Lastly the remedy to the problem is to slash spending and raise taxes but to do that would be economic suicide.

Slashing spending in the Eurozone countries means slower growth or worse a return to recession. That slows down the global rebound because the Eurozone would no longer be consuming.

Too big to fail does not apply to countries. Greece as a member of the Eurozone is considered to be Europe's responsibility. Unfortunately there is no mechanism in place for the Eurozone countries to bail out another country. Membership in the zone meant you had to adhere to the strict financial rules that supposedly kept everyone out of trouble.

If anybody in the Eurozone is going to bail out Greece it would have to be Germany and that concept is not going to fly. Citizens of Germany will not want to bail out Greece. If they did then the rest of the PIGS would land on their doorstep looking for their own bailout. Citizens of Greece would not like the idea of having Germany tell them how to run their country. Germany's economic minister reminded reporters on Friday that the same rules that required less than 3% debt to GDP also banned bailouts of or by EU member countries.

The other option is a bailout by the IMF. The IMF is in business to bailout countries from unsound financial practices but may not be inclined to spend the tens of billions necessary to rescue Greece and then the rest of the PIGS from insolvency.

Greece promised this week to slash its debt to GDP from 12.9% to 3% by 2012. Unfortunately nobody believes them and it is theoretically impossible. Many analysts believe their debt is actually 15% but the government is hiding the debt. It was recently discovered that Greece falsified their economic statistics in 2009 and hid 40 billion in debt to make the deficit look smaller. With that kind of track record it will make borrowing new money rather difficult. The prime minister said this week the planned austerity cuts would be so drastic that they "would draw blood from us all."

Blood is what they are likely to get next week. Greek unions estimate that the announced budget cuts will lead to jobs losses of more than 100,000 and increase the unemployment rate by +5%. One of the major unions with membership of more than 300,000 has called a public strike for Monday. The government deployed 10,000 riot police in Athens in December for a far smaller strike. Another union with 500,000 workers has also called for a strike for February but has not yet announced a date. These strikes will likely turn hostile.

Greece and the Greek islands have a landmass about the size of Alabama with a population of roughly 10 million. Because of their history they have a deep distrust of government in any form. Greek citizens have developed tax evasion into an art because of the dislike of government in any form.

The problem was illustrated by reactions in Portugal to a new austerity plan proposed to keep Portugal from going the same way as Greece. Portugal is also watching deficits rise uncontrollably. Portugal's opposition parties defeated a government austerity plan Friday and passed their own bill allowing the country's autonomous regions to rack up even more debt. That raised new questions about European countries' ability to control their swollen budget deficits, which are undermining faith in the region's euro currency.

Greece owes 290 billion Euros in debt and most of it is to European banks that are already struggling to stay afloat after the financial crisis. That is twice the amount owed by Lehman Brothers when it went under. Greece will need to borrow another 54 billion euros to cover its budget gap in 2010. Investors are worried that any serious budget cuts by Greece would plunge them back into recession and eventually cause a devaluation of the Euro by default.

It is not going to be earnings driving our market next week but more in the continuing saga of the Greek debt crisis. The entire world appears to be rushing to short the Euro and buy dollars and that is killing stocks and commodities.

The Euro broke support at 138 on Thursday as the crisis intensified and some analysts are now claiming it could return to 125 and the level seen at the bottom of the financial crisis. The dollar has broken out to new six-month highs as it again becomes the safe haven currency for the world.

Euro Currency Chart

Dollar Index

Commodities were crushed on the spike in the dollar as well as the worries about the potential for another recession in Europe as a result of austerity programs. China started the commodity decline when they started putting on the brakes to lending in order to keep growth and inflation under control.

Copper has sold off nearly 20% since its high at 350 in early January. Worries that the global rebound was not as strong as had been expected have been weighing on the metal. I am thinking about starting a position in copper this weekend in the OilSlick.com newsletter.

Gold Chart

Copper Chart

Crude oil was under additional pressure from a rumor that the London based hedge fund BlueGold Capital was in trouble and was dumping positions. That rumor hit the wires at 11:00 causing crude to fall from $72.91 to $69.50 in 30 min. The hedge fund immediately responded to the news and told Reuters there was absolutely no truth to the rumor and trading had been no different than any other day in the last six months. BlueGold has been known for making big bets in the oil market.

BlueGold was started in 2008 and saw 210% returns in the first year. In 2009 they reported gains of 60+% but so far in 2010 they are down 11% suggesting they were betting the wrong way on the January spike. In 2006 Amaranth Advisors folded after losing $6 billion betting on natural gas futures. That high profile failure shows what can happen to hedge funds that bet the farm on the wrong commodity or in the wrong direction. Whenever these rumors appear the market reaction is instantaneous because nobody wants to be caught in traffic if a billion dollar fund has to liquidate positions.

Crude Oil Chart

The rebound on Friday may have pushed the indexes back into the green but the internals were still negative. Decliners (3409) still beat advancers (3105) but the volume was positive. Advancing volume was 7.2 billion shares compared to declining volume at 4.9 billion. It was a huge volume day overall with 12.3 billion shares total. This brought the total for Thr/Fri to 23.5 billion shares and a huge increase from early in the week.

We have seen a really interesting trend pop up. Look at the graphic below for the last three weeks. The volume on Thr/Fri has been huge compared to the rest of the week. Massive down volume and completely lopsided A/D numbers. This Friday was the ONLY high volume day that saw a reversal of the closing on the lows trend. Look at the volume for Thursday. That was the most heavily lopsided day and qualifies as a 90% reversal signal. Whenever you have a 90% day there is almost always a reversal. Friday's short covering spike may have come on an IMF bailout rumor but the markets were primed for a rebound after that 90% down day.

Internals Table

On Friday it appeared as though traders were remembering back to late 2008 when nobody wanted to hold a position over the weekend. There was too much news and too much uncertainty and gap opens were going in both directions. Shorts were afraid a bailout announcement would appear and the markets would gap up a couple hundred points.

Now we have to decide if the storm has passed or are we spending the weekend in the eye of the storm with more volatility again next week. I think it is entirely up to news out of Europe. A default by Greece would be very bad and although the markets are pricing in that potential we are not there yet.

The bigger problem is the Greek contagion spreading through southern Europe. Investors holding debt on a dozen different countries are scrambling to dump it, insure it or find some way to protect themselves. This is going to keep pressure on the Euro to the downside, the dollar to the upside and pressure foreign banks that may be holding some form of Euro debt. I don't think the storm is over but the final chapter may not be written for many months. This is just the opening plot setup and now we have to wait through endless news reports repeating the same tired story until something happens to either solve the problem or end it with a default.

The markets may have rebounded but they did not do it from any material level. There was no touch of a critical support point where bulls could point and say the sell off is done. The rebound appeared to be completely rumor related and appeared to be powered by a big futures trade. At exactly 3:PM a massive load of S&P futures hit the tape and over 250,000 contracts traded in less than 15 minutes to push the S&P futures from 1047 to 1061. Any time a monster move begins exactly on the hour it is suspicious. The indexes traded sideways until they started to decline again at 3:45 and five minutes later another volume spike of 132,000 contracts hit the tape in only a 5 min period. That is five times the average volume for a 5 min period.

I thought maybe a fund was covering and I spent an hour reviewing the time and sales data from 2:45 until the close and while there were blocks of 100-500 contracts blowing through there were no real signs of a large fund covering. The graphic below is filtered time and sales for 3:01:45-3:02:45 and these were all the electronic trades for 100 contracts or more. In this same period there if it was were literally thousands of small lots from 1-20 contracts, which indicate small speculative investors either having their stops hit or racing to buy the bounce. I looked very hard and there were only 61 trades from 2:45 to 4:00 with 400 contracts or more. Granted those are large trades but given the speed the maket was moving you would have expected more fund related.

S&P Futures Time & Sales

After researching every potential angle I keep coming back to rumor generated short covering as the reason for the bounce. Every day trader worth his salt has had a short bias for the last couple days because the market technicals were decidedly bearish. When the rumor broke the squeeze began. Most futures traders are momentum traders and once momentum changed they switch from short to long in a single click of the mouse and that helps power the rebound.

The Dow hit 9835 on the dip and -167 points down. The rebound brought it back over 10,000 with only a -55 point loss for the week. Neither the closing level of 10012 or the intraday low of 9835 are particularly important. There is no relative strength at either location other than the round number sentiment at Dow 10K.

Dow 9650 is the 10% correction level if that is where we are going. Resistance is 10,300 and the Friday close is right in the middle. You could make a case for either direction but I still believe the path of least resistance is down UNLESS somebody bails out Greece. We are still too early in the news cycle on Greece for it to just go away.

Dow Chart

The S&P, like the Dow above, declined to a level that was not specific support and then rebounded to close at a point that had no relevance. There was no reason for it to close at 1066 other than once back to positive territory the clock expired on those traders buying the dip. For the S&P to reach a 10% correction level it would have to drop to 1035, which also happens to be decent support. I still believe we will test that level. Resistance is well above at 1100.

S&P-500 Chart

The Nasdaq has fallen the hardest of the big cap indexes and came within 12 points of a 10% correction at 2088. The rebound could have been driven in part from the touch of 2100 but I am not convinced. Resistance is 2140 and that is exactly where it stopped at the close. If tech bulls were powering the recovery then why did all the indexes exhibit the exact same characteristics? We have seen many times where the Nasdaq was strongly positive and the other indexes remained down. Friday's rebound was lock step with the rest of the stock universe. The NDX actually closed positive for the week but the position on the chart was exactly the same as the Composite. Resistance on the NDX is 1745 and that is exactly where it closed.

Nasdaq Chart

The Russell did reach that mythical 10% correction level when it passed 584 on the intraday dip. The Russell closed at 649 on Jan-14th and a 10% correction from there would be 584. The Russell fell to 580 intraday on Friday. Unfortunately unlike its bigger brothers it did not recover to the prior intraday resistance of 595 suggesting the touch of 585 had no magical recuperative powers. I tried looking at the Russell from all angles on various charts and could not find any reason to believe it won't retest 575 before this correction is over, possibly even 555.

Russell 2000 Chart

I believe we are in the eye of the storm. If nothing happens over the weekend I think the negativity will return again on Monday. There are a couple events next week including the Monday strike that could accelerate the situation and make it worse.

I know it is ridiculous to think our equity markets are being held hostage by Greek debt but it is not just Greece. It is the entire Euro coalition and the potential for it to fracture. How that would impact global economics is unknown but a Euro plunge to 125 or lower would be a disaster for those holding Euro denominated debt.

In late news Saturday evening the G7 meeting in Canada produced a statement that should rile the markets on Monday. The G7 agreed to tax banks for the government bailouts of the global financial system. Any kind of massive global tax on banks to repay bailout funds is not going to be met with cheers by the market.

Secondly the G7 was assured by ECB president Jean-Claude Trichet that Greece would meet tough new targets to reduce its deficit by 2012. Obviously basic math is a challenge for Trichet. French Finance Minister Christine Lagarde said the EU would monitor the debt reduction plan and said Greece would not receive money from the IMF. Since the short covering on Friday was on expectations for an IMF bailout announcement this weekend it appears traders could reverse course next week since according to the G7 members, there won't be a bailout.

Our markets may be held hostage until "PIGS" fly or at least find a bailout partner.

Jim Brown

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Index Wrap

Downside objectives: fulfilled or not?

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

You don't always have two for two. I suggested last week good potential for a short-term rebound, to be FOLLOWED by another substantial downswing, with the second decline slicing through the prior low. I wasn't so prescient as to figure that both events would happen in the SAME week!

While recent lows in the major indexes may still get pierced, even substantially, there are also some reasons to think that this second and most recent decline may have established lows for the overall correction dating from the fall from mid-January highs. This is not to say that there will be an immediate and sustained rally, but that lows for this correction may be in place or mostly so. A choppy most sideways period may be next.

There are more technical reasons to figure that this correction has run its course than not. Such as in terms of how close the S&P got to fulfilling a key downside objective. Most telling is that the S&P 100 (OEX), at its Friday low, was just 3 points away from my 'maximum' downside objective; i.e., a return to the very bottom of the bearish Wedge that began forming mid-October to early-November. Moreover, the Nasdaq held prior support, except for a relatively brief intraday panic and stop-loss selling period which ran its course by the Friday Close.

I also suggested last time that it could be time to "cover short positions and puts", as the market seemed poised for a short-term rally. It was SHORT lived for sure! It doesn't always pay to trade out of puts if you think the ultimate lows haven't been reached! Not all are such nimble traders or can watch the market all day to take advantage of what turned out to be only the 'minimal' type (38%) upside retracement that I guessed at.

About my take that it might be near time to take a flyer on the long side? The one suggested as "a short-term trade only"; it was pretty short! On a longer-term basis, call buyers may have a good position going if they bought the Nas 100 Index (NDX) when it again dipped (briefly) under its prior 1734 low. The NDX 1734 area was support suggested by it being a 66% retracement (of the early-Nov to mid-Jan rally) and where an earlier upside chart gap got 'filled in'. All in all, decent Nasdaq performance in terms of suggesting a possible intermediate-term bottom.

Also noted last time in this space, a possible harbinger of technical support was (and is) highlighted in the S&P 500 weekly chart below. I suggested then that 1065, at this trendline intersection, might prove a key support. The theory here being: a line of resistance (the down trendline), once pierced, 'becoming' an area of support on pullbacks later on.

The theory about weekly trendline support may be proven out over time; right now, it is 'so far'. The rebound from the SPX weekly (1044) low that was under that trendline intraday Friday, but with a Close above it, is bullish and suggests that dips to and under 1060 (this coming week's trendline intersection) may be well supported.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart pattern remains overall bearish, with some signs of bottoming action. Friday's rebound, while not a 1-day key reversal, had action characteristic of bottoming type periods as seen by, among other things, the wide spread between Friday's intraday low and the close. Coupled with the drop in bullish sentiment that I was looking for and the oversold condition suggested by the RSI, I see more upside potential over time, than further downside risk below recent lows.

The pattern I was looking for, the down-up-down or "a-b-c" 3-segmented bearish correction, albeit in a larger bullish trend, has occurred. It wouldn't be 'surprising' for the second down leg 'c' to extend further than it has already. However, going with other key chart considerations, I'd say that lows for this move may already be in place. It depends on whether things slow down, which should happen now that sellers have found buyers. The ability for the market to come out of 'free fall' so to speak is dependent on buying showing up at some level where value is perceived.

Near support is at 1030-1040. Key resistance is still in the 1100 area.

Bullish sentiment has fallen and a very key indicator it is. I was looking for bullish sentiment to fall as a prerequisite to a next rally setting up; OR, at least a period of price stabilization. This, as fear first returned, then abated some, about the downsides that remain in this economy. The Relative Strength Index (RSI) is exhibiting a bottoming type pattern.

S&P 100 (OEX) INDEX; DAILY CHART

A key aspect to technical action in the S&P 100 (OEX) was how the Index fell all the way back basically to the start of the bearish Wedge pattern highlighted and notated on the chart. From this area then, the index rebounded significantly as significant buying started coming in. All of which would be predicted by the rising Wedge pattern when seen in stock charts and by extrapolation, to the stock indexes. Nervous short-covering ahead of the week end was another factor.

In terms of how the second decline unfolded, it now has the structure of the 3-segmented 'typical' bearish correction within an overall uptrend, with the last decline now a clearly delineated second downswing. This second decline tends to bring to a close the a-b-c correction pattern and allow a period of at least sideways movement and price stability if not a definite rally phase.

As well as fulfilling pattern considerations, there is also a factor regarding the length of the two down legs relative to each other. The second down swing is often a greater 'length' than the first; e.g., the second decline is 1.5-1.6 times greater than the first. The second decline is more 'scary' than the first is another observation here. This ring a bell?!

The OEX's recent rally 'failed' at key (507) resistance estimated last week and based on 507 being a 'minimal' retracement distance of 38% that we could expect in a weak recovery rally.

Key downside support noted last week also held up, for the 485 area. I'd peg the only really pivotal support and resistance levels the same as last time with the low-500 area key resistance and the 485-480 zone as key support.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow (INDU) Average chart pattern is bearish, but signs of buying interest/support are also suggested by Friday's intraday rebound.

Thursday's close at 10000 and with its sharp intraday drop under that on Friday, got a lot of media coverage as predicted. Friday's intraday low (at 9835) got quite close to key support at 9800. Not surprisingly, especially in an emotional market with waves of panic type selling and ahead of a weekend, the buying that surfaced on the final dip under 9900 and rapid short-covering was enough to bring INDU back above 10000. Fairly bullish action, at least suggesting the end of the freefall as occurred Thurs-Friday.

While its possible that INDU might, in some further weakness, test support in the 9700-9680 area, doing so runs counter to some encouragingly bullish signs; e.g., with the long-term S&P chart already described and with Nasdaq 'holding' a 66% retracement.

I would continue to peg Dow support as the low-9800 area, with major support around 9700. Resistance is initially the 10043, which is a move back to the prior low and (now) a possible supply overhang. Pivotal resistance continues to be the 10300 area. We should see a period of lower volatility ahead and could also witness a range-bound trade for awhile between a high end around 10200-10220 and low end around 9900.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

I envisioned a Nasdaq Composite (COMP) chart pattern where this most recent sell off, while no surprise to my thinking, didn't carry as far lower as I thought it might. Of course, even with the snappy comeback rally (after the brief dip to below COMP support around 2112) on Friday, the jury is out as whether we've seen the lows for this move.

I am more than encouraged however, by the fact that COMP on a closing basis, has held the key 66% retracement test; i.e., a decline of MORE than 2/3rds of a prior move, risks becoming a 100% retracement (to 2024 again).

It shouldn't be a surprise that stocks reached a point where the tech sectors, the great hope of the recovery and with a retracement (at recent peak) of a full 66% of the major 2007-2009 decline, should also find support at a 66% pullback of the strong up leg from early November into mid-January.

The Composite found support at the prior low in the 2113 area and at 2100 even. 2100 may mark the lows and completion of, the a-b-c correction. That second down leg often falls further, from peak to trough, than the first and we can't rule out a decline back to the beginning of the bearish rising Wedge around 2024, but that pattern has already been 'done' so to speak, given S&P 100 chart action.

Support looks solid at 2100 for now, with major support in the low-2000 area. The key overhead resistance remains 2200.

I wrote last week, regarding the RSI indicator, that "I'm looking for a bounce as the Index nears an oversold level. A bit lower from here may set that up." I don't know if we can count a move to 2100 as a 'bit' lower than the prior week's 2147 close. I suppose we could say it was a bit lower in point terms, but it didn't seem just a 'bit' lower on Friday afternoon around 2pm at the NYSE; not after coming down from near 2200 on Wednesday.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX), on a second and expected sell off, held up quite well on the dip below 1740 support on Friday with an intraday low at 1712. Some buying was related to short-covering ahead of a weekend. Prior lows around 1774 held for the most part, except for the brief culmination of a final selling wave. With a weekend at hand, short-covering buying came in fast and furiously after 1pm and after the 1712 low for the day had been seen with no further big bouts of selling coming in as the index neared 1700. All quiet was sounded on the western front.

I wrote last time that "there's some likelihood of a rally attempt and I've started to put some money to work based on this speculative assumption." Well, it was 'Jack be Nimble, Jack be Quick', to realize the profits from that short-lived shot up to the 1788 area, before it all came apart with a major Thursday sell off.

Unlike the S&P, the rebound to the 1788 area didn't even make back 38% of the prior decline. Prices just stalled out Wednesday and then broke sharply on Thursday. The second down leg (and often sharply lower) was quite predictable, harder is to predict how far an expected weak recovery bounce will carry.

I did write on my last Saturday, that "...of course there may be a further dip to expected support around 1700 or even back to the 1650 area" ...and if so "I would be a further buyer on a successful retest of the prior 1652 low." Well, another print at 1652 or close by might have been the IDEAL buy point, but near-1700 was close enough!

Near resistance is at 1775-1785, with pivotal resistance at 1820-1825. Very near support is at 1739-1740, with increasing buying interest down toward 1700. Major support is in the 1650 region.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ), while overall bearish in its price, but not volume, pattern has the same signs as NDX regarding a short-term bottom. A key Volume consideration, evident with the On Balance Volume (OBV) indicator, is suggesting upside accumulation on balance currently.

I don't think I made heaviest emphasis last time on support in the 42.6 area, the prior low and a representing a pivotal 66% retracement. My bad! I'm impressed with the action with the stock holding mostly at its prior lows and key retracement and anticipate some further upside ahead.

Resistance is at 44 even, extending up to around 44.9.

RUSSELL 2000 (RUT) DAILY CHART:

I noted last time how the Russell 2000 (RUT) Index had fallen less far than the major Nasdaq and S&P indices. I also thought there would be stronger support in the 600 area, but when RUT sliced through 600, it was a mini-waterfall decline to near 580.

My key take on the charts is notice that RUT has held the key 66% retracement level. Friday's intraday rebound was pretty robust also and RUT's current short-term momentum could easily carry the index to the 600 level and recent 'break-down' point and a key resistance. Next resistance is 611-615, then 620.

I was looking for support (last week) in RUT in the 585 area and the 66% retracement support point. It looked favorable to be buying the dip under 585, with the Friday close near 593. I find it a good omen to be above break-even at the end of the day of a trade.

I also wrote last time that "The Index is now about as oversold at it tends to get without at least a minor bounce happening." We got it (the bounce), but with a sharp break after. I look for more upside attempts in RUT than further breaks, from here forward. To see a less choppy but basically sideways trend ahead near-term, with lowered volatility, would be consistent with a bottom that's probably at least temporarily in place but not yet with more full-blown buying interest. That's the meaning of waiting to buy ahead of seeing a 'basing' pattern on the charts.

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

Be Prepared

by James Brown

Click here to email James Brown

Editor's Note:

My market bias is still bearish. Until we see the S&P 500 close above 1100 or the 1120 level I suspect the path of least resistance is going to be down. However, on a very short-term basis the market bounce on Friday looks like a bullish reversal pattern. Now technically this pattern needs to see confirmation first before it's a buy signal. I believe stocks will confirm the reversal but I'm only expecting a bounce toward 1100 and maybe the 50-dma (1111 on the S&P 500). As we near the 1100 area we'll start looking for possible shorts again. Of course everything could change if there is no bounce on Monday.

We are going to try and scalp some points on the bounce with some aggressive calls plays. You'll want to use a tight stop loss and be prepared to exit quickly!


NEW DIRECTIONAL CALL PLAYS

Freeport McMoran - FCX - close: 70.23 change: +3.49 stop: 65.85

Why We Like It:
Metal and mining stocks have been getting crushed. The debt woes in Europe have been pushing the euro lower and that's powered a big rally in the dollar. This dollar strength is killing the commodities. Copper has lost more than 18% from its recent highs. Shares of FCX, a huge copper mining company, has seen its stock plummet from $90 to $66.

It looks like the rally in the dollar and the sell-off is commodities is getting tired and ready to reverse. While this is probably a temporary move we want to try and grab a few points as FCX bounces. The stock has formed a short-term bullish double bottom near technical support at the 200-dma. This is an aggressive trade. We want to use small positions. Out first target to take profits is at $74.75. Our second target is the 100-dma near $77.50.

Suggested Options:
This should be a very short-term move. I'm suggesting the February calls, which expire in two weeks. I'm listing March calls as well for the less aggressive traders.

BUY CALL FEB 70.00 FHZ1020B70 open interest=19,634 current ask $2.99
-or-
BUY CALL MAR 75.00 FHZ1020C75 open interest=25,001 current ask $2.73

Annotated Chart:

Entry  on  February 06 at $ 70.23 
Change since picked:       + 0.00
Earnings Date            04/22/10 (unconfirmed)
Average Daily Volume =       20.6 million  
Listed on  February 06, 2010         


Intl Bus. Mach. - IBM - close: 123.52 change: +0.52 stop: 121.49

Why We Like It:
IBM is one of the premier technology and IT companies in the world. We have stock already listed on the newsletter as a put candidate but our trigger to buy puts is at $127.75. Instead of just waiting for IBM to bounce to our put entry point I'm suggesting we try and capture part of the move with some very aggressive, short-term calls. Buy calls now with a stop loss under Friday's low. Our target to exit will be $127.75. We can sell the calls and buy puts.

Suggested Options:
This should be a very short-term trade. I'm suggesting the February $125 calls. February options expire in two weeks.

BUY CALL FEB 125 IBM1020B125 open interest=9335 current ask $1.16

Annotated Chart:

Entry  on  February 06 at $123.52 
Change since picked:       + 0.00
Earnings Date            04/20/10 (unconfirmed)
Average Daily Volume =        8.3 million  
Listed on  February 06, 2010         


U.S.Steel - X - close: 44.78 change: +0.71 stop: 42.25

Why We Like It:
Steel stocks have gotten crushed and the correction in X seen a drop from $65 to $42 (-35%). Traders bought the dip near the 200-dma on Friday. While the trend is clearly bearish I think the combination of the market bounce and X's rebound near the 200-dma looks like an opportunity to catch an oversold bounce. Buy calls now with a stop under Friday's low. Our first target to take profits is at $49.25. Our second target is $51.75 near the 50-dma. This is an aggressive trader. Use small positions.

Suggested Options:
This should be a very short-term bounce. Buy the February $45 calls. February options expire in two weeks.

BUY CALL FEB 45.00 FBJ1020B45 open interest=4207 current ask $1.93

Annotated Chart:

Entry  on  February 06 at $ 44.78 (small positions)
Change since picked:       + 0.00
Earnings Date            04/27/10 (unconfirmed)
Average Daily Volume =       22.4 million  
Listed on  February 06, 2010         



In Play Updates and Reviews

Rebound On Schedule

by James Brown

Click here to email James Brown

The S&P 500 bounced exactly where we thought it would. The oversold bounce could last a few days.


CALL Play Updates

Teva Pharmaceutical - TEVA - close: 56.76 change: -1.16 stop: 54.95

Traders bought the dip in TEVA near short-term support at $56.00 and the rising 50-dma. This late day bounce looks like a new bullish entry point to buy calls. Of course it would really help if the market would see some follow through on its late-day Friday bounce. More conservative traders may want to up their stops toward Friday's low (near $55.91). This should be a short-term trade. TEVA reports earnings on Feb. 16th and we do not want to hold over the announcement. Our short-term target to take profits is at $59.50. Our second target is $61.50.

Suggested Options:
I am suggesting the February $57.50 calls.

Annotated Chart:

Entry  on  February 02 at $ 57.58 
Change since picked:       - 0.82
Earnings Date            02/16/10 (confirmed)
Average Daily Volume =        6.0 million  
Listed on  February 02, 2010         


PUT Play Updates

Apple Inc. - AAPL - close: 195.46 change: +3.14 stop: 210.51

Traders bought the dip in AAPL near $190 again. I'm a little surprised that the rebound in AAPL wasn't stronger given the huge bounce in the major indices. We can expect shares of AAPL to bounce back to $200 and possibly toward $205-210. The $200 level is a 38.2% Fib retracement of the January decline. The $206 level is a 61.8% Fibonacci retracement. More conservative traders may want to lower their stops closer to $206.

I am suggesting readers wait for the coming bounce to stall or roll over again before initiating new put positions. Our first target to take profits is at $182.50. Our second target is $165.00 although we might exit at the 200-dma. This is an aggressive trade and I'm suggesting small positions.

Suggested Options:
If AAPL provides a new entry point I would buy the March puts.

Annotated Chart:

Entry  on   January 28 at $201.08 (small positions)/gap open entry
Change since picked:       - 5.62
Earnings Date            01/25/10 (confirmed)
Average Daily Volume =         26 million  
Listed on   January 28, 2010         


Franklen Resources Inc. - BEN - close: 98.00 change: -0.28 stop: 106.80

It looks like BEN is about to bounce. Shares followed the market lower and higher as stocks rebounded from their Friday lows. BEN dipped under $95 and its exponential 200-dma before bouncing. The low was $94.43. In retrospect the $95 level was probably a good spot to take some money off the table. Now we're faced with the prospect of BEN bouncing back toward its 50-dma near $106.00. If we're lucky shares will stall near $100 or $103. I am not suggesting new bearish positions at this time. Wait for any rebound to stall or reverse. More conservative traders will want to consider an early exit now. I am adjusting our exit target from $91.50 to $92.50.

Suggested Options:
No new positions at this time.

Annotated Chart:

Entry  on   January 30 at $ 99.59 /gap higher entry point (small positions)
Change since picked:       - 1.59
Earnings Date            01/28/10 (confirmed)
Average Daily Volume =        1.2 million  
Listed on   January 30, 2010         


Gymboree - GYMB - close: 40.66 change: -0.16 stop: 42.75

The bounce in GYMB has started to stall as shares churn between their 200-dma and 50-dma. If the market continues to rebound we can expect GYMB to challenge the $42.00 level. I am inching our stop down to $42.26. Wait for a failed rally near $42.00 before launching new positions. Our first target is $35.50. Our second, longer-term target is $32.00. Consider using small positions to limit your risk.

Suggested Options:
If GYMB provides a new entry point we would use the March puts.

Annotated Chart:

Entry  on   January 23 at $ 39.74 
Change since picked:       + 0.92
Earnings Date            03/04/10 (unconfirmed)
Average Daily Volume =        513 thousand 
Listed on   January 23, 2010         


Intl. Bus. Mach. - IBM - close: 123.52 change: +0.52 stop: 131.55

IBM spiked under last week's low only to rebound sharply on Friday afternoon. The move looks like a short-term double bottom. Given the bounce I'm adding IBM as a very short-term call play in the calls section tonight. However, we will plan to exit the call play at $127.50 and switch to puts. Our new trigger to buy puts is at $127.75. Our new stop loss on this put play is $131.55. If triggered at $127.75 our first target is $122.00. Our second target is the 200-dma.

Suggested Options:
I am suggesting the March $125.00 puts (IBM1020o125), trigger @ 127.75.

Annotated Chart:

Entry  on  February xx at $ xx.xx <-- TRIGGER @ 127.75
Change since picked:       + 0.00
Earnings Date            04/20/10 (unconfirmed)
Average Daily Volume =        8.2 million  
Listed on  February 03, 2010         


Infosys Tech. - INFY - close: 50.93 change: +0.24 stop: 55.15

Target achieved. INFY hit our first target at $50.15 on Friday. Shares dipped to an intraday low of $49.55 before bouncing. The stock is oversold and due for a bounce. I believe shares could rally back to the $54 level before rolling over again. Our second target remains $46.50.

TRADING NOTE: Our original trade suggested the Feb. $50 puts. February options expire in two weeks. I am suggesting readers exit any February positions right now. The Feb. 50 put closed at $0.90. We can re-open positions on a failed rally under $55.00. We'll list a new trigger to buy March puts at $54.50 with a new stop at $55.15.

Suggested Options:
No new positions at this time. Wait for INFY to hit our new trigger at $54.50. Buy the March $50 puts (IUN1020O50).

Annotated Chart:

-2nd Entry-
Entry  on  February 00 at $ 00.00 <-- trigger @ 54.50
Change since picked:       - 0.00

-1st Entry Closed-
Entry  on   January 28 at $ 53.40
Change since picked:       - 2.47 <-- early exit @ 50.93 (-4.6%)
                            /1st target hit @ 50.15 (-6.0%)
Earnings Date            04/15/10 (unconfirmed)
Average Daily Volume =        1.5 million  
Listed on   January 25, 2010         


JPMorgan Chase - JPM - close: 38.30 change: -0.05 stop: 41.65

JPM was sinking to new six-month lows on Friday and hit $37.02 before bouncing. We can expect the oversold bounce to lift JPM back toward resistance at $40.00. Conservative traders may want to lower their stops closer to $40.00. The 50-dma, which should be overhead resistance is currently at $41.60 so I'm leaving the stop at $41.65. Wait for this bounce to stall or reverse before considering new put positions. Our first target to take profits is at $35.25. Our second target is $32.00.

Suggested Options:
No new positions at this time but if JPM does provide a new entry point we want to buy the March puts.

Annotated Chart:

Entry  on   January 26 at $ 38.44 
Change since picked:       - 0.14
Earnings Date            04/15/10 (unconfirmed)
Average Daily Volume =         46 million  
Listed on   January 26, 2010         


Mckesson Corp. - MCK - close: 58.28 change: -0.32 stop: 62.51

MCK sank to $57.23 before traders bought the dip. We can expect shares to bounce back toward potential resistance near $60 or resistance near $62 and its 50-dma. Wait for this bounce to stall or reverse before launching new positions. Our first target to take profits will be $54.00.

Suggested Options:
If MCK provides a new entry point we want to use the March puts.

Annotated Chart:

Entry  on   January 30 at $ 58.82 
Change since picked:       - 0.54
Earnings Date            01/26/10 (confirmed)
Average Daily Volume =        2.8 million  
Listed on   January 30, 2010         


Retail Holders - RTH - close: 90.56 change: +0.24 stop: 94.10 *new*

Traders bought the dip in the retailers late Friday afternoon. Look for a bounce in the RTH to carry this ETF up toward potential resistance in the $92-93 zone. Wait for the bounce to stall or reverse before launching new positions. I am lowering our stop loss down to $94.10. Our first target is the $87.00 level. The 200-dma will probably be support. The RTH moves kind of slow so make sure you use an option that gives you enough time.

Suggested Options:
If RTH provides a new entry point we want to use the March puts.

Annotated Chart:

Entry  on   January 23 at $ 91.42 
Change since picked:       - 0.86
Earnings Date            --/--/--
Average Daily Volume =        1.7 million  
Listed on   January 23, 2010         


SIEMENS - SI - close: 85.47 change: -0.82 stop: 94.05 *new*

Big declines in Europe led shares of SI to gap open lower on Friday. The stock fell to $82.88 before bouncing back to close just above its 200-dma. SI is very short-term oversold and due for a bounce. I would expect shares to rebound toward the $90-92.50 zone. More conservative traders may want to use a tighter stop. Actually more conservative traders may want to close positions right here. The March $90 puts closed at $6.60. Our entry point was $2.85. You could jump back in as the bounce fails.

Wait for the bounce to stall or reverse before launching new positions. Our second and final target is $81.00. More aggressive traders may want to aim lower.

Suggested Options:
No new positions at this time.

Annotated Chart:

Entry  on   January 26 at $ 94.34 /gap higher entry
Change since picked:       - 8.87
                            /1st target hit @ 87.55 (-7.1%)
Earnings Date            01/26/10 (confirmed)
Average Daily Volume =        368 thousand 
Listed on   January 26, 2010         


United Technology - UTX - close: 66.50 change: +0.12 stop: 69.05

There was no gap down for UTX so the play opened normally. Shares slipped to $65.05 before bouncing. If the market sees any follow through on Friday's bounce then we can expect UTX to bounce back toward short-term resistance near $68.00-68.50. Wait for the bounce to stall or reverse before initiating new positions. Our target to take profits is $61.00, just above the simple 200-dma. Our time frame is just two or three weeks.

Suggested Options:
Wait for the bounce to stall. I'm suggesting the March $65 puts.

Annotated Chart:

Entry  on  February 04 at $ 66.38 
Change since picked:       + 0.12
Earnings Date            04/21/10 (unconfirmed)
Average Daily Volume =        5.1 million  
Listed on  February 04, 2010         


CLOSED BULLISH PLAYS

Volatility Index - VIX - close: 26.11 change: +0.03 stop: 19.90

The market was in freefall earlier today and that sent the VIX spiking higher. The volatility index hit an intraday high of 29.22, not quite enough to hit our first target at 29.50. Unfortunate the VIX reversed as traders bought the dip in stocks. The low in the S&P 500 on Friday was 1044.50. I have been suggesting that the S&P would find a bottom in the 1050-1035 zone so the bounce was right on schedule. The market's rebound definitely looks like a bullish reversal but this pattern needs to see confirmation. I suspect that the market will bounce.

Traders have to ask themselves how much volatility they are willing to endure. I think we could easily see the S&P 500 bounce back toward the 1090-1100 zone before it rolls over again. Do you want to hold your March calls on the VIX while we watch stocks bounce (and watch your calls decay in value)? Or do you want to exit right here for breakeven and then re-enter as the market nears resistance. The high for the March 30 calls today was $2.25 but they reversed back to $1.65 by the close. Our estimated entry was $1.60.

More aggressive traders can hold on. I'm going to suggest we go ahead and exit the VIX trade now and we'll re-enter when the bounce begins to roll over again. Keep the VIX on your watch list. We'll be looking for another entry point.

Chart:

Entry  on   January 28 at $ 23.73 
Change since picked:       + 2.35 <-- exit early @ 26.11
Earnings Date            --/--/--
Average Daily Volume =          x million  
Listed on   January 28, 2010