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Newsletter

Daily Newsletter, Saturday, 2/20/2010

Table of Contents

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

Market Wrap

Game Changer?

by Jim Brown

Click here to email Jim Brown

The Fed's decision to start raising rates created some serious confusion in the markets. Is it really a game changer?

Market Statistics

The Fed's late Thursday evening announcement they were raising the discount rate to .75% from .50% caused some severe reactions in the currency and futures markets. The S&P futures dropped -12 points Thursday night and knocked the markets for a loss at Friday's open. The Dollar shot up to new highs and the Euro and pound both crashed.

The equity markets recovered quickly after the economic reports hit the wires. The headline number on the Consumer Price Index for January increased by +0.2%. Seasonally adjusted the 12-month inflation rate is now +2.7%. The core rate actually fell by -0.1% in January and the 12 month core rate is only 1.5%.

Food prices have declined for the last five months while energy has risen sharply since October with a +2.8% gain in January. The drop in the core CPI by -0.1% was the first time the core rate has fallen since 1982. There is still ample evidence that the deflation risk has not gone away. Consumer demand is so weak that retailers have no pricing power. It is a battle to retain market share in a declining economy and the only way to do that is with lower prices.

Rents fell as did airline fares and the service CPI would have been much lower were it not for a spike in medical care rates. If it were not for the rise in energy prices at all levels we would be seeing deflationary numbers in the CPI. That is a double-edged sword. As energy prices rise, primarily gasoline and diesel prices, the amount of available cash left for consumers to spend on other items will decline. This makes it even harder for the U.S. to pull out of the recession. The 25 million unemployed workers also have a shortage of cash for discretionary purchases. This lack of spending power is preventing inflation from rising and should keep the Fed on the sidelines for several more months.

Consumer Price Index Chart

Another bullish economic report was the mortgage delinquency rate for Q4. Mortgage delinquencies fell for the first time in nearly three years, falling by 17 basis points to 9.47% in Q4. That is still +159 basis point higher than Q4-2008 and 340 points above the peak in the early 1980s housing recession.

Delinquencies on prime adjustable rate mortgages fell by 27 basis points to 12.1% and subprime adjustable rate delinquencies fell by 154 points to 26.69%. Those are still horrendous numbers by any measure but still a step in the right direction.

The number of prime mortgages entering foreclosure fell to 0.86% with new subprime foreclosures falling from 3.76% to 3.66% of all loans. With job losses slowing, the rate of new delinquencies should continue to decline. Unfortunately lots of those delinquent loans are still going to foreclosure. The percentage of loans 90-days delinquent rose in Q4 as banks tried to modify more loans rather than post them for foreclosure. Also, as I have reported before, banks will delay taking foreclosure action during the winter in order to leave people in the homes with the heat on rather than have a vacant house with frozen pipes. This causes thousand of dollars in damage when they thaw out and flood the houses.

Mortgage Delinquency Rate Chart

The big news of course was the Fed's decision to raise the discount rate to .75% from .50% and announce it after the market closed on Thursday. The timing was interesting since they could have done it at any time but chose to announce it after a market close rather than before the open or at the FOMC meeting where they normally announce these changes.

Analysts should have expected a move from the Fed because Bernanke said it was coming in his testimony last week. He did not exactly spell it out but said changes were coming "soon." Apparently analysts thought soon meant over several months instead of now.

Friday's volatility was way over done because the change only impacts those banks that are using the Fed's discount window for emergency overnight loans. Those types of loans peaked at $110 billion a day during the financial crisis and have fallen to an average of $14 billion today. Banks that have to borrow at the discount window have much bigger problems than the quarter point hike.

The Fed was clear in their announcement that nothing else had changed. "The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period." Clearly the Fed reemphasized the "extended period" clause.

Atlanta Federal Reserve president Dennis Lockhart reiterated that position. "I would not interpret this action as a tightening of monetary policy or even a sign that a tightening is imminent," Lockhart said in a speech. "Rather, this action should be viewed as a normalization step."

New York Fed President, William Dudley, said the Fed's pledge to keep benchmark rates low for an extended period of time "is still very much in place." He said the change in the discount rate was a technical change only and did not carry any significance regarding the U.S. monetary policy.

The problem with the discount hike is simply that it is the first step in a very long journey. As long as the Fed was sitting quietly on the sidelines with their "extended period" language they were not a threat to anyone. The discount rate hike was the first sign of the coming changes. It was like the first raindrop or first crack of thunder on a summer day. Neither is an immediate problem but they signal an approaching storm and time to start thinking about taking cover. The Fed funds futures are only pricing in the potential for a quarter point hike in November so definitely no worry about a surprise rate hike.

Former Fed governor Lyle Gramley said he expected the discount rate to be hiked again before the first Fed rate hike, which he does not expect until early 2011. Mohamed el-Erian, Pimco co-CEO, also said they don't expect a rate hike until 2011. Bill Gross said the discount rate hike was the Fed's version of Groundhog Day. The Fed saw its shadow and raised the discount rate. Now there will be six more months of zero-degree interest rates before they act again.

A couple Morgan Stanley analysts said their concerns were for a policy induced double dip. The recovery in the late 1930s and in Japan in the 1990s were both killed by regulators trying to remove the stimulus too quickly and raise taxes to pay for the stimulus.

Since Bernanke is a student of the great depression I seriously doubt he is going to make that mistake but the Fed in general has a really bad track record for removing stimulus. They almost always act too soon or remove the stimulus too quickly and it stunts the recovery progress. With 25 million people out of work we can't afford for the Fed to make a mistake this time around.

Commercial banks are currently sitting on $1.3 trillion in cash because they are worried about a second dip and they are worried about the growing commercial real estate loan problem. The extend and pretend scenario for commercial real estate loans has just about run its course and 50% of properties are now underwater. By stockpiling cash these banks protect themselves against future loan defaults and it puts them into a position to acquire other banks that were not so prudent. The FDIC said there could be as many as 1,000 banks closed over the next two years and healthy banks are hoarding cash so they can make a bid when the FDIC calls with an offer. The easiest way for a bank to grow is by taking over the assets and customers of a failed bank in an FDIC auction.

The FDIC announced the closing of four more banks on Friday bringing the total for 2010 to 20 banks. La Jolla Bank in San Diego, George Washington Savings Bank of Oakland Park Illinois, La Coste National Bank of La Coste Texas and Marco Community Bank of Marco Island Florida were all closed. La Jolla was the largest with $3.6 billion in total assets. All four banks were sold to other banks so there is a good reason to keep cash on hand.

I am not worried about the discount rate increase. I am more interested in the potential for a sovereign debt default or a failed bond auction. Next week the U.S. is going to auction roughly $185 billion in debt. That is 75% of the $245 billion total debt owed by Greece. We are basically selling the equivalent debt of a small country every other week. You may remember last week I wrote that the number of bidders was shrinking and with the billions being offered each month we are eventually going to run out of bidders. This is what I worry about and it would be a death knell to the stock market if it occurs.

As long as the inflation rate and the non-farm payrolls remain flat the Fed is not going to raise rates. Of course we have the artificial improvement to jobs of more than one million over the next three months for census hires. Surely the Fed is smart enough to see the bump in jobs is only temporary and not do something stupid.

Next week we will get another look into Bernanke's head when he testifies to the House Financial Services committee on Wednesday and the Senate Banking committee on Thursday. This is his semi annual testimony and you can bet the interrogators will be ready with plenty of pointed questions. He also speaks on Monday on the need for more stimulus.

The SEC announced it would consider new regulations on short selling when it meets next week. Some traders had been pressing the SEC to reinstate the uptick rule, which dated back to the depression. The uptick rule would only allow a short sale at a higher price than the last sale. There had to be an up-tick in price before the sale was allowed. In theory this prevented thousands of sellers from placing sell orders at the same time and flushing a stock without a chance for reprieve. That uptick may have slowed declines in the fractional market when trades moved in eights or quarters and traded through a market maker but in today's electronic penny market it had little impact. The SEC abolished the rule in 2007 saying it was useless in today's modern markets.

Some proposals being considered include a circuit breaker that would trigger a "passive bid test" which would only allow short selling above a national best bid. They are also considering a circuit breaker that would kick in if a stock's price fell by more than a certain percent such as 10 percent.

Shares of Dell Computer (DELL) fell nearly -7% on Friday after posting earnings that were better than expected and a revenue surprise of roughly $1 billion more than estimates. The problem was a continued drop in profit margins to 17.4% from 18.2% in the comparison quarter. Dell said margins were hurt by a larger mix of low cost PCs and some higher component costs. This compares to the 22% margins reported by Hewlett Packard. Analysts were surprised the extra $1 billion in revenue did not help puff up the margins. Dell is now the number three computer maker after being passed by Acer.

Dell Chart

First Solar (FSLR) lost $10.29 after it warned that profits in the second half of 2010 could be clouded by reductions in European subsidies. FSLR posted earnings of $1.65 and beat estimates of $1.52 but was crushed by the uncertainty. Solar stocks in general have had a rough road lately as governments hurt by the recession are cutting the tax credits and subsidies for installing alternative energy products. Germany is the largest solar market and they have proposed a 15% reduction in subsidies and may cut credits even further. FSLR is known for giving cautious guidance so this may be a bit of "under promise" in action.

First Solar Chart

Honeywell (HON) rallied on Friday with a fourth day of gains. Friday's rally was due to upgraded guidance from the company. Honeywell raised its guidance to 40-45 cents from 35-40 cents. The gains capped off a nice week for the manufacturer.

Honeywell Chart

Intuit (INTU) rallied nearly 8% after it posted strong earnings of 35-cents and raised guidance. This compares to earnings of 26-cents in the year ago quarter. Revenue was up +15%. Seems the advertisement by Tim Geithner must have helped send buyers into stores looking for Turbo Tax software. If it is good enough for the Treasury Secretary it must be good enough for consumers.

Intuit Chart

Juniper (JNPR) rallied +6% on Friday on no news. Call volume for the week was roughly three times normal and Friday's spike was way out of character. Since there was no news it suggests there may be a takeover offer in the works and the news leaked to a privileged few. Several companies have always been rumored to be interested in Juniper but the rumors never come true. They build great gear but are continually overshadowed by Cisco. If you know why Juniper exploded on Friday let me know.

Juniper Chart

The currency markets made once a year moves after the Fed announcement. The dollar soared to resistance at 81 on the dollar index before profit taking pushed it lower. The Euro fell to a new nine month low at 134.57 and the outlook is not good. The EU is under pressure and every day brings another analyst out into the light of day to proclaim the eventual breakup of the EU.

Chart of the Euro

Chart of the dollar index

The British Pound is going into free fall on worries that the Bank of England will have to enact further quantitive easing in order to keep the economy from falling back into a deeper recession. BOE board member, Kate Barker, gave a cautious statement during an interview saying she expects the recovery to be quite hesitant this year and at risk for another quarter of negative growth. A separate report from the BOE showed mortgage approvals fell to 49,000 in January from 60,000 in December. Government borrowing increased 4.3 billion GBP in January to mark the first budget deficit since 1993.

Pound Sterling Chart

On the positive side market sentiment appears to be improving. Insider selling has slowed and the pace of insider buying has increased. Since insiders theoretically have knowledge that investors don't have it pays to watch the pace of buying and selling as a market indicator. Insiders have to report to the SEC when they buy or sell shares so that gives investors a window into the current trends.

Argus Research reported that insider selling for the week of January 15th, the market top, reached 5.15-to-1. That means 5.15 shares were sold for every share bought by insiders. For the week of February 12th that ratio decreased to 2.42-to-1 and a decline by more than half. That may still sound negative but in the new normal employees have been getting much more of their compensation in stock and that means they have to sell to the stock to pay bills. Jonathan Moreland, another insider trading tracker, said he has been convinced to buy the dip. Orbitz (OWW) was one company with large insider buying.

Greece has not gone away. In fact they may be back even bigger than ever next week. Greece announced this week they are going to try and sell €5 billion ($6.8B) in 10-year bonds next week. No date has been set. They are going to test the markets with a token debt offering and the results of that sale could be catastrophic. If the sale is successful the pressure on the EU and the Euro would diminish.

If the sale fails the EU leaders would have to decide ASAP on how they were going to construct a bailout. Without an immediate bailout Greece would default on roughly €28 billion in debt redemptions due by April. Greece has already been given a deadline of March 16th to prove it is serious about cutting costs.

The bond sale is as much a referendum on the EU as it is on Greece. The confusion in the EU in recent weeks has weakened the stature of the EU and the Euro.

In the January auction Greece sold €8 billion in five-year bonds. With 600+ bidders the auction was originally called a success but within two days the value of the bonds fell -3.5%. That is an unheard of drop in government securities. Credit default swaps on Greek debt are now at record highs. If Greece follows through with this sale and it fails it will have big repercussions on the financial markets.

The economic calendar is littered with potholes next week. Bernanke speaks three times and Monday's speech is "Do we need more stimulus?" That should be a guarantee of volatility. There is also $180 billion in debt auctions and that should scare everyone.

Bernanke will speak again on Wednesday and Thursday in his twice a year testimony to the House and Senate. After Monday's speech I doubt we will get a different version later in the week but lawmakers will be asking the questions.

On Thursday the president's televised show at the White House over health care reform is sure to be boring to watch and I am sure the networks will cover it even though we already know the outcome.

The GDP revision on Friday is expected to be revised higher on changes to the inventory numbers. This is not real growth but more voodoo economics at work. The Chicago ISM on Friday is expected to decline. These are the activity numbers for February and by all accounts the economy may not be slipping but it is definitely not growing.

Economic Calendar

To get to this point you have suffered through about 3,200 words. If I thought I could keep writing and not have to pick a market direction for next week I would keep on writing. Unfortunately it does not work that way and I have to pull a direction off the charts.

The indicators this week are so confusing it looks like they were put in a blender for five minutes on chop. Some indexes are stuck under resistance and some are in breakout mode. With the exception of Christmas the volume last week was the lowest in the last three months. We averaged only 7.4 billion shares per day and this was an option expiration week.

Internals were positive every day and all the indexes posted gains around +3%. Given the conflicting economics, conflicting earnings guidance, geopolitical problems and the Fed discount rate hike it was amazing we posted any gains. I guess that is what tipped the scales into the bullish column for me for next week. Lots of bad news was ignored and the markets moved higher.

The problem for next week is the lack of a breakout on a couple key indexes. The NYSE composite is a mixture of very large and very small stocks and everything in between. It is all the stocks on the NYSE. The index came to a dead stop on the 100-day average and is showing no indication of a pending breakout.

NYSE Composite Chart

The Dow transports came to a dead stop on resistance and is showing no indications of a breakout despite a week of strong gains. The transports should rally in advance of a recovery and assist in leading the Dow higher. This stop on resistance is troubling.

Dow Transports Chart

The Dow rallied over resistance at 10300 but came to rest right on uptrend resistance that was prior support. The 50-day average also came back into play. If the uptrend resistance at 10400 can be broken there is another battle at 10500. The Dow is fairly extended after four days of gains and may need to rest for a day or two. A move over 10500 should also break 10750 and move to a new high. A failure at 10500 could retest the lows.

Dow Chart

The S&P-500 broke over 1100-1105 and promptly ran into the 50% Fib retracement level at 1116. This was serious resistance the last time it was tested in Nov/Dec and should remain resistance. If the S&P can move over this level the next resistance at 1150 should also break. A move over 1116 would be strongly bullish.

S&P-500 Chart

The Nasdaq moved over round number resistance at 2200 and pushed though the 50-day average. Now it is facing the Fib retracement level at 2250. The Nasdaq did not respect that resistance the first time through in December and I don't expect it to exert much pressure this time around. The next real resistance is 2320 and the January highs. If this is a real rally and techs are going to lead all the indexes higher then the Nasdaq must break over 2320 to a new high and do it on strong volume.

Nasdaq Chart

The Russell was in the top five strongest indexes again last week with a +3.42% gain. This is the second week that the Russell outperformed and it did so with the Transports, Semiconductors, Biotech, Energy and Banking. Those are the sectors you would want to see outperforming in a real rally. Those are the leadership sectors and they are all leading.

I pointed out this fact last Sunday and suggested a breakout was imminent. I still believe these indexes should be our guide in the coming week. As long as the Russell and its friends are in rally mode the rest of the market will eventually come along.

Russell 2000 Chart

The broadest index of them all is the Wilshire 5000 and it broke over uptrend resistance (dash) and resistance at 11400 to breakout on Friday. This index is not moved by individual stocks and represents a truer picture of the market than the Dow or S&P. It appears to be in breakout mode but we really need to see another day of gains to confirm.

Wilshire 5000 Chart

Despite the gains last week the markets moved up on very low volume. We have the equivalent of a stealth rally even though the Dow gained +300 points. Bears are obviously waiting for a pause point to initiate new positions and bulls are waiting for a clear sign to enter new positions. With both sides waiting for an entry point the path of least resistance is now up.

In a stealth rally those investors on the sidelines will eventually get tired of watching the markets move higher without them and start to abandon caution and dive in. This is when the markets should pickup speed as volume increases.

However, we still have some resistance to work through and probably some profit taking to endure. I am cautiously bullish because the Russell, Dow Transports and Semiconductors are leading the charge. Until proven wrong I think we need to follow the trend.

Jim Brown

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Index Wrap

Strong Upside Follow Through

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

I didn't anticipate quite such a strong week as we just had but it was consistent with my expectation that the market had likely made a correction low on 2/5. That day had the kind of reversal pattern often seen at oversold bottoms, with a sharply lower new intraday low, followed by a strong rebound and a close near intraday highs.

Also relevant technically as to technical support was the S&P 500 (SPX) rebound from its weekly trendline I highlighted previously (and will update today), the rally in the Nasdaq 100 (NDX) after completion of a 66% retracement of the prior advance, and the fact that the S&P 100 retreated back to the beginning of the bearish rising Wedge pattern that starting forming in October; a common downside objective after the sharp sell off that typically ends the bearish rising Wedge formation.

CHART OF THE WEEK:

Upside penetration of an important resistance trendline often sees a subsequent pullback to an extension of that trendline. Prior resistance often 'becomes' subsequent support and that's true of trendlines as well. If there had been a weekly close below the S&P 500 weekly down trendline seen below, I would have been significantly more doubtful that a low was in progress and with a greater expectation that there was going to be one more downswing (making for an 'irregular' corrective pattern) in the major indexes. Instead there was the far more common down-up-down or a-b-c pattern; all nested within a V-bottom formation.

OK, for where we've BEEN, where do we go from here? Assuming that the retracement of the prior decline carries beyond a 2/3rds retracement of the prior decline, it's a good bet that the prior highs will be re-tested; and probably exceeded.

The major index that can be most easily analyzed by studying ALL the individual stocks is the Dow (INDU) and I keep chart groupings for all 30 stocks. In this 'bottoms up' approach and especially given that INDU stocks are NOT capitalization weighted (making it more complex to assess one stock versus the others), I made an analysis of the upside potential of the Dow in my recent (2/18) Trader's Corner article which can be seen HERE.

Based on the 15 INDU stocks in strong uptrends, 8 that are 'following' along to the upside (and still rated 'neutral') and with just 7 on their own bearish path, it's easy to see that the Dow is poised to go higher, although with market leadership still with the Nasdaq which should continue to outperform the S&P.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart has completed formation of a V-shaped bottom, which is the most common index chart pattern suggesting an end to a downside move. Per my suggestion of last week, the recovery to above 1100 suggests that SPX is back on a bullish track. I've highlighted on the daily chart below the Fibonacci 61.8% (62) and 66% retracement lines. As always, a recovery move beyond 2/3rds of the prior price swing provides a strong case that the previous top will at least be re-tested, if not exceeded.

In terms of the 13-day Relative Strength Index (RSI), the Index is no longer oversold and if looking at the 21-hour RSI (not shown), SPX is now overbought on a short-term (2-3 days) basis. Because of this I would not be surprised to see a pullback near term, considering possible initial resistance in the 62-66 per cent retracement zone and as suggested at the 50-day moving average. Stay tuned on that.

Near support is 1080, then around 1060. Near resistance, besides at 1115 at the 66% mark, is estimated at 1130. Pivotal resistance then comes in at the prior 1150 intraday high.

Bullish sentiment as seen above in my indicator has shown a fairly moderate recovery, suggesting that traders are being cautious in going into calls on individual equities. If the CPRATIO line had shot back up this past week, I would not consider the further bullish prospects as good as they otherwise look to be.

S&P 100 (OEX) INDEX; DAILY CHART

We got the rebound in the S&P 100 (OEX) above 505 that I thought last week would "suggest renewed upside momentum on an intermediate-term basis and consistent with the still long-term uptrend in the Market." I found it telling that OEX at its recent low, alone of the major indexes, reached a 'minimal' 25% retracement of its March-January advance before rebounding. 25 per cent represents a very 'light' retracement. This market doesn't appear to want to go down much!

I've noted (at the first red down arrow) possible resistance at the 50-day moving average. I did not do the same marking in the 514.4 area, at the 2/3rds retracement, but this is a benchmark level to watch also. From around 514-515, potential resistance extends to 520. 531 of course is the key prior top.

Very near support is in the 505 area and next at 495-496. A daily close below 490 would be bearish price action, especially if this lasted into the following trading session.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow (INDU) Average cleared resistance in the 10200 area and kept going to not only take out its prior 10315 upswing high but to close above its 50-day moving average, all part of its bullish action of this past week.

There is possible resistance at the Friday high, which hits the 66% retracement point. A minor pullback would not be surprising early in the coming week given how far INDU has come off its recent bottom, as well as reflecting a near-term overbought situation. Next resistance comes in at 10600, with the most pivotal resistance at the prior (10730) intraday high.

Near support looks to come in around 10280; then at 10160 and next in the 10000 area. I had been downplaying the importance of the 10000 earlier this month, but good support/buying interest was seen on dips to this area on Tuesday into Friday of the week before last which formed a good support base for the most recent advance.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) only has to pierce 2250 in my estimation, at the 66% retracement, to suggest fairly clear sailing toward a retest of the prior top. I've noted possible next resistance at 2275. The chart is bullish in its pattern again given the strong V-bottom formation. That said, there will likely still be some downs along with the ups, especially given a near-term overbought condition.

Near support in COMP begins in the 2200 area, extending to 2185, with expected major support at the prior 2100 intraday low.

As I noted in regards to the S&P, sentiment readings have not shot back up to a bullish extreme, suggesting there's good further upside potential. The 13-day RSI is not only showing upside momentum of course, but has not gotten back up into 'overbought' territory.

NASDAQ 100 (NDX) DAILY CHART:

Consistent with the bullish bottoming action I discussed last week, the Nasdaq 100 (NDX) saw good further gains. More than I anticipated but I love profitable surprises! If you were following the hourly or other intraday charts, you may have noted the hourly Head & Shoulder's bottom that formed over 1/29 to 2/11. Once that second shoulder forms, even before there is an upside 'breakout', it is usually relatively low risk to go into calls or other bullish strategies; 'low risk', assuming adherence to a close protective stop/exit point.

Near support is at 1800, then at 1780. A close below 1780, not reversed (back to the upside) the following day would be bearish.

Key resistance is at 1826 to 1835, at the prior (up) swing high and the 66% retracement level, respectively. Next resistance then comes at the 1860 area. The most pivotal resistance then comes in at the cluster of prior intraday highs around 1895-1897.

Last week I suggested bullishness in an NDX close above its 50-day average, which was forecasted by similar breakout action in Intel (INTC) and Cisco Systems (CSCO) that preceded the Index. The value of bellwether stocks like these are that they can be leading 'indicators' so to speak.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

You may recall that I wrote last week that the "Nasdaq 100 tracking stock (QQQQ) looks to have formed a V-bottom, with a next key test of this bullish pattern coming in at 44.0 resistance." The strong move above 44 has given further 'definition' to the V-shaped bottom. A key bullish test now becomes the ability to continue on above the prior 44.8 swing high. I've noted immediate overhead resistance at 45, with next resistance anticipated around 46.

As with NDX, QQQQ is now overbought on a short-term basis, as best seen on an hourly chart using the RSI indicator with length (i.e., number of periods calculated in the formula) setting at a Fibonacci '21'. Some price dip(s) in the early part of the coming week should not be surprising, but I anticipate further upside ahead. Not only further upside, but assuming this rally doesn't stop at 45-45.1 (a key retracement), a move back to re-test the prior high.

Near support has now risen to the 44 area; next lower support comes in around 42.7.

The rally of this past week was a low volume one. QQQQ volume often does NOT expand in the direction of the trend. This often seems puzzling when compared to a regular stock (of a company). For this reason, I tend to rely most on the On Balance Volume (OBV) indicator; e.g., the slant of the OBV line should point in the direction of the trend at least on any Close that's in the direction of the most recent trend.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) Index continues in its strong recovery rally and could next reach what may be strong resistance at its previously broken up trendline. Near resistance is just overhead, at 633, then at the prior high in the 649 area.

Near support is at 610, then at 585, extending to the prior 580 low.

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

Relative Strength In Biotech

by James Brown

Click here to email James Brown

Editor's Note:

Traders should be cautious when it comes to launching new positions. The market's two-week bounce could just be an exaggerated oversold bounce that soon rolls over again. Economic data was generally positive last week but it's still marked by the occasional disappointment. U.S. markets could be heavily influenced by what happens in China and Europe. The Chinese Shanghai will open after a weeklong holiday and many expect it will fall in reaction to the new rules for bank reserve requirements. Meanwhile Greece is going to try and auction off five billion euros worth of ten-year bonds in the near future (date unknown). If that bond auction fails the EU-implosion worry is back on the table. There seem to be a lot of potential land mines that can derail this rebound in stocks but then bulls usually need a wall of worry to climb.

A few additional stocks I would keep my eye on as potential candidates are: BA, COST, GD, MICC, and RIMM.



NEW DIRECTIONAL CALL PLAYS

Celgene Corp. - CELG - close: 60.04 change: +0.15 stop: 54.75

Why We Like It:
Biotechnology stocks have been some of the markets best performers, just look at the BTK biotech index. Helping fuel that move is strength in shares of CELG. This stock has been consolidating sideways under resistance in the $59-60 zone for months. It looks like shares are finally starting to breakout. More aggressive traders may want to go ahead and buy calls now with Friday's close over $60.00. I feel that the major indices and CELG look a little bit overbought and need to dip first before moving higher. Therefore I'm suggesting we buy calls at $58.00 with a stop loss at $54.75.

If triggered at $58.00 our first target is $64.50. Our second, longer-term multi-week target is $69.00.

Suggested Options:

BUY CALL MAR 60.00 (DXQ1020C60) open interest=2910 current ask $1.80
-or-
BUY CALL APR 60.00 (DXQ1017D60) open interest=3058 current ask $2.70

Annotated Chart:

Entry  on  February xx at $ xx.xx <-- TRIGGER @ 58.00
Change since picked:       + 0.00
Earnings Date            04/29/10 (unconfirmed)
Average Daily Volume =        3.6 million  
Listed on  February 20, 2010         


Colgate Palmolive - CL - close: 81.75 change: -0.69 stop: 78.85

Why We Like It:
Shares of this personal products giant are breaking out! Even in a bad economy consumers are still buying toothpaste, shampoo, and hand soaps. Shares of CL were consolidating sideways in the $78.00-82.00 zone for about six weeks until the stock broke out on Thursday. Short-term technicals are turning positive again. I think CL can challenge its highs. I'm suggesting bullish positions now. More conservative traders may want to wait for CL to trade above $82.75 before initiating positions. Our target to exit is $86.00.

Suggested Options:
CL does not normally move that fast. I am suggesting May options instead of March (I don't see any Aprils available yet).

BUY CALL MAY 85.00 (CL1022E85) open interest=3838rrent ask $1.90

Annotated Chart:

Entry  on  February 20 at $ 81.75 
Change since picked:       + 0.00
Earnings Date            04/29/10 (unconfirmed)
Average Daily Volume =        2.8 million  
Listed on  February 20, 2010         


TEVA Pharmaceuticals - TEVA - close: 58.74 change: +1.55 stop: 56.40

Why We Like It:
Based in Israel, TEVA produces both generic and brand name drugs. The stock never broke its bullish trend and traders are back to buying the dips. There is short-term resistance at $59.00 so launching positions now is somewhat aggressive. More conservative traders may want to wait for a new relative high or a move over $60.00 before initiating positions. I'm suggesting a stop loss under the 50-dma. Our first target is $64.00.

Suggested Options:
Keep positions small to limit risk. I'm suggesting the March $60s. Just because they "look" cheap don't go overboard.

BUY CALL MAR 60.00 (TVQ1020C60) open interest=9211 current ask $0.70

Annotated Chart:

Entry  on  February 20 at $ 58.74 
Change since picked:       + 0.00
Earnings Date            05/05/10 (unconfirmed)
Average Daily Volume =        5.1 million  
Listed on  February 20, 2010         



In Play Updates and Reviews

FCX Tags Our Target

by James Brown

Click here to email James Brown

The market's oversold bounce continues. We're starting to see stocks challenge and break support. We're updating several stop losses this weekend.


CALL Play Updates

Autozone Inc - AZO - close: 163.67 change: +0.48 stop: 157.90 *new*

AZO is hanging in there. While there wasn't much follow through on Thursday's intraday bounce the stock is still poised to move higher. We have just over a week before AZO reports earnings around March 2nd. Keep that in mind if you're thinking about launching new positions. I am raising our stop loss to $157.90. More conservative traders may want to consider a stop loss even closer to $160.00, which has proven to be short-term support.

Our first target to take profits is at $167.50. Our second, more aggressive target is $174.00 but that will require AZO to break through resistance in the $170 region.

Suggested Options:
I am suggesting the March $165 calls (AZO1020c165).

Annotated Chart:

Entry  on  February 16 at $161.75 (small positions)
Change since picked:       + 1.92
Earnings Date            03/02/10 (unconfirmed)
Average Daily Volume =        538 thousand 
Listed on  February 13, 2010         


Sears Holding - SHLD - close: 95.04 change: +0.64 stop: 91.75 *new*

SHLD bounced again with a 0.6% gain on Friday. I would like to suggest a new entry point on a dip but we're almost out of time. SHLD is due to report earnings on Feb. 23rd before the market opens. Since we don't want to hold over the report we have to exit on Monday at the closing bell. Due to our lack of time I am raising our stop loss to $91.75. If we're lucky SHLD will hit our target to exit a $97.45.

Suggested Options:
No new positions at this time.

Annotated Chart:

Entry  on  February 16 at $ 93.07 (small positions) /gap open entry
Change since picked:       + 1.97
Earnings Date            02/23/10 (unconfirmed)
Average Daily Volume =        1.7 million  
Listed on  February 16, 2010         


Sina Corp. - SINA - close: 37.80 change: -0.25 stop: 34.95

I am very surprised that shares of SINA did not show more weakness on Friday. The Hong Kong and Japanese markets plunged on Friday both falling more than 2%. Many expect the Chinese Shanghai market to trade down on Monday after a week long holiday since Chinese investors have not had a chance to react yet to the government's new rules on higher bank reserve requirements. If the Shanghai does decline I'm expecting SINA to dip toward support near $36.00 and its rising 200-dma. Our plan is to buy calls at $36.50. We'll use a stop at $34.95. If triggered our first target to take profits is at $39.95.

FYI: If SINA gaps open under $35.00 we will not open positions.

Suggested Options:
I am suggesting the March $37.50 or $40 calls.

BUY CALL MAR 37.50 (NOQ1020C37.5) open interest=1143 current ask $2.00
-or-
BUY CALL MAR 40.00 (NOQ1020C40) open interest=3927 current ask $0.95

Annotated Chart:

Entry  on  February xx at $ xx.xx <-- TRIGGER @ 36.50
Change since picked:       + 0.00
Earnings Date            03/15/10 (unconfirmed)
Average Daily Volume =        1.4 million  
Listed on  February 18, 2010         


United States Steel - X - close: 53.29 change: +2.33 stop: 48.95 *new*

Friday turned out to be a strong day for X with a 4.5% gain and a breakout past its 50-dma. The high was $53.58. Our second and final target is $54.00. More aggressive traders may want to aim higher! I am raising our stop loss to $48.95. I am not suggesting new positions at this time. Odds are decent that X will hit our final target on Monday.

Suggested Options:
No new positions at this time.

Annotated Chart:

Entry  on  February 13 at $ 49.23 (small positions)/gap higher entry
Change since picked:       + 4.06
                           /1st target hit @ 51.86 (gap open exit, +5.3%)
Earnings Date            04/27/10 (unconfirmed)
Average Daily Volume =       23.3 million  
Listed on  February 13, 2010         


PUT Play Updates

Apple Inc. - AAPL - close: 201.67 change: -1.26 stop: 206.26 *new*

I find it very interesting that AAPL under performed the market on Friday with a 0.6% decline. If stocks are so strong why is AAPL churning sideways the last three days? The $200.00 level is new short-term support again so I wouldn't consider new bearish positions until AAPL traded under $198.50. The 100-dma is at $199.00. Last week's high was about $204.40. I am lowering our stop loss down to $206.26. If we get stopped out more nimble traders may want to buy calls an aim for the highs near $215.

Our first target to take profits is at $182.50. Our second target is $165.00 although we might exit at the 200-dma. The plan was to use small positions to limit our risk.

Suggested Options:
No new positions at this time.

Annotated Chart:

Entry  on   January 28 at $201.08 (small positions)/gap open entry
Change since picked:       + 0.59
Earnings Date            01/25/10 (confirmed)
Average Daily Volume =         26 million  
Listed on   January 28, 2010         


Abbott Labs - ABT - close: 54.38 change: -0.59 stop: 55.05

I am very surprised we were not stopped out on Friday. Shares have been coiling under resistance at $55.00 but couldn't quite breakout. Then on Friday ABT raised their quarterly dividend by 10%. You'd think that would have sparked some buying interest. Instead the stock retreated. I am not suggesting new bearish positions at this time. Shares have very minor support at $54.00 and then again at the rising 100-dma. The BTK biotech index remains one of the strongest looking sectors even if it does look a little overbought and due for a dip.

Our first target was $50.15. More aggressive traders can target the 200-dma or support near $48.00.

Suggested Options:
No new bearish positions at this time.

Annotated Chart:

Entry  on  February 10 at $ 52.80
Change since picked:       + 1.58
Earnings Date            04/21/10 (unconfirmed)
Average Daily Volume =        7.5 million  
Listed on  February 09, 2010         


Franklen Resources Inc. - BEN - close: 101.61 change: +0.20 stop: 105.26

The oversold bounce in BEN continues but the trend is still down. I'm expecting shares to roll over under their descending 50-dma currently near 104.40. Wait for a failed rally before considering new bearish positions. The 200-dma has risen to $93.40 so I'm raising our target to exit to $95.00.

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:       + 2.02 
Earnings Date            01/28/10 (confirmed)
Average Daily Volume =        1.2 million  
Listed on   January 30, 2010         


Goldman Sachs - GS - close: 156.18 change: +0.45 stop: 156.05

Hmm... if you were the optimistic sort you could also claim that GS is forming a small bull-flag pattern this past week. Shares are still trading sideways inside the $150-160 zone. Right now we have a trigger to buy puts at $147.45. However, GS could really go either way (see our extra trigger below). If GS hits our trigger to buy puts at $147.45 we'll use a stop at $156.05 and our first target will be $138.00. FYI: Technical traders will note that the 50-dma has crossed under the 200-dma, which is normally a very bearish signal.

It looks like the path of least resistance is down but if GS does breakout over resistance the move higher could be sharp! We want to jump on board if it does. I'm suggesting another trigger to buy calls. If GS hits $163.00 we want to buy small call positions with a stop loss at $155.75. Our target will be $177.50. We'll use the March $170 calls.

Suggested Options:
If GS hits our trigger at $147.50 we want to use the March $140 puts.

Annotated Chart:

Entry  on  February xx at $ xx.xx <-- TRIGGER @ 147.45
Change since picked:       + 0.00
Earnings Date            04/13/10 (unconfirmed)
Average Daily Volume =         17 million  
Listed on  February 00, 2010         


Intl. Bus. Mach. - IBM - close: 127.19 change: -0.62 stop: 130.51

So far so good. IBM rallied toward resistance at its 50-dma just like we planned. Readers can still open put positions at current levels. I am suggesting a stop loss at $130.51. More conservative traders may want to use a tighter stop closer to $128.00 instead. Our first target is $122.00. Our second target is the 200-dma.

Suggested Options:
I am suggesting the March $125 puts.

Annotated Chart:

Entry  on  February 18 at $127.00
Change since picked:       + 0.19
Earnings Date            04/20/10 (unconfirmed)
Average Daily Volume =        8.2 million  
Listed on  February 03, 2010         


JPMorgan Chase - JPM - close: 40.03 change: -0.38 stop: 41.65

The bounce in JPM is still struggling near the $40 level and its 200-dma. The stock made it to $40.70 on Friday morning before rolling over near its 30-dma. On a very short-term basis the trend is up but you can still argue it's just an oversold bounce. I am suggesting readers wait for a new move under $39.50 before considering new bearish positions. Our first target to take profits is at $35.25. Our second target is $32.00.

Suggested Options:
If JPM provides a new entry point I would use the March $35 puts.

Annotated Chart:

Entry  on   January 26 at $ 38.44 
Change since picked:       + 1.59
Earnings Date            04/15/10 (unconfirmed)
Average Daily Volume =         46 million  
Listed on   January 26, 2010         


Mckesson Corp. - MCK - close: 60.75 change: +0.04 stop: 62.05 *new*

Traders bought the dip near $60.00 on Friday morning keeping the oversold bounce alive. I am cautious on MCK since the $60 level and the $60.50 region should have been stronger resistance. The last few updates I've been suggesting readers look for a failed rally near the 50-dma currently around $61.40. Please note that I am lowering our stop loss to $62.05. More conservative traders may want to lower their stop closer to the 50-dma. Our first target to take profits will be $54.00.

Suggested Options:
Wait for a failed rally or a new decline under $59.50 before launching positions. I'm suggesting the March $55 puts.

Annotated Chart:

Entry  on   January 30 at $ 58.82 
Change since picked:       + 1.93
Earnings Date            01/26/10 (confirmed)
Average Daily Volume =        2.8 million  
Listed on   January 30, 2010         


SIEMENS - SI - close: 88.23 change: -1.28 stop: 92.05

SI's relative weakness on Friday is encouraging. Most of the European markets were higher on Friday so it's nice to see SI underperforming. I am not suggesting new bearish positions at current levels although more aggressive traders might want to consider buying puts again and just use a stop loss closer to $90.00. SI has already hit our first target at $87.55. Our second and final target is $81.00.

Suggested Options:
No new positions at this time.

Annotated Chart:

Entry  on   January 26 at $ 94.34 /gap higher entry
Change since picked:       - 6.11
                            /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: 68.52 change: +0.41 stop: 69.26 *new*

We've been expecting UTX to bounce back toward $68.50 and/or its 50-dma. Currently the 50-dma is at $69.14. Thus we need to adjust our stop loss just a little but and move it higher. I'm placing the stop at $69.26. More aggressive traders may want to place their stop just above $70.00 instead. Look for this oversold bounce to reverse before launching new positions. Our target to take profits is $61.00 near the rising 200-dma.

Suggested Options:
Wait for a new entry point. Use the March $65 puts.

Annotated Chart:

Entry  on  February 04 at $ 66.38 
Change since picked:       + 1.73
Earnings Date            04/21/10 (unconfirmed)
Average Daily Volume =        5.1 million  
Listed on  February 04, 2010         


CLOSED BULLISH PLAYS

Freeport McMoran - FCX - close: 77.16 change: +0.56 stop: 71.95

Target achieved. FCX rallied to $77.88 and tagged resistance at its 50-dma like we expected. Our second and final target to take profits was at $77.25. I would keep FCX on your watch list. We might get another opportunity to trade is soon. Look for support near $70 and its 200-dma and resistance in the $78-80 zone.

Chart:

Entry  on  February 06 at $ 70.23 
Change since picked:       + 7.02 <- 2nd target hit @ 77.25 (+9.9%)
                                /take profits now @ 74.17 (+5.6%)
Earnings Date            04/22/10 (unconfirmed)
Average Daily Volume =       20.6 million  
Listed on  February 06, 2010