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Daily Newsletter, Saturday, 2/27/2010

Table of Contents

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

Market Wrap

February Squeezes Out A Gain

by Jim Brown

Click here to email Jim Brown

February ended with a whimper with the markets barely positive on Friday but we saw decent gains for the month.

Market Statistics

February was a Jekyll and Hyde month. There were 19 trading days in February and 10 of those days saw triple digit ranges alternating between strongly positive and strongly negative days. The markets were battered by surprising economics, sovereign debt problems, Fed actions, earnings misses, warnings and new worries over a double dip recession but in the end the markets closed with a sizeable monthly gain. The Dow gained +2.5%, S&P +2.7%, Nasdaq +4.1% and Russell +4.5%. Commodities were the leaf in a storm with fluctuations in currencies causing extreme volatility. Like in the equity markets the majority ended the month with a gain. Oil gained +9.1%, gasoline +9.0%, copper +7% and gold +3.2%.

The economics were responsible for a large part of the volatility with the Fed giving an extra push more than once. Early in the month Bernanke submitted testimony to the House suggesting the Fed was getting closer to withdrawing some stimulus. That roiled the markets but they quickly got over it. A week later the Fed raised the discount rate in an unexpected announcement after the close and the markets were roiled once again but eventually recovered. With more than 50% of the trading days in February posting triple digit ranges it was a tough month to trade for anyone using stop losses.

On Friday the GDP for Q4 was revised higher to +5.9% from +5.7% and the markets celebrated with the muted enthusiasm of an office birthday party. The reaction was short but positive. The gain in the revision came from an increase in the inventory component and no real consumer growth. I guess we should be glad the country is finally replenishing inventories because it means the business community is positive about future sales.

The headline number of 5.9% was the strongest quarterly GDP in more than six years. It is too bad it is only a technical bounce and not real growth. For the full year of 2009 the GDP fell by -2.4% and the biggest drop since 1938. The core PCE price index, the Fed's preferred inflation indicator, was revised higher to 1.6% from 1.4% in the first Q4 release. That is still low by Fed standards and no reason to raise rates.

We can see from the internal data in the Q4-GDP that inventories will continue to boost growth in the first half of 2010 and but consumer spending is still soft. Consumers are still boosting savings and cutting credit in fear of future job losses. Business investment is improving but still sluggish. Businesses are waiting to see if the recovery has legs before taking their saved up capital and putting it to work.

Stimulus has added to activity in late 2009 but it will fade after the first half of 2010. State and local governments are still cutting back on spending due to budget shortfalls. Analysts expect GDP growth of 2.0-2.5% over the next few quarters. Job growth should turn positive in March-May with the help from census hiring and positive jobs numbers should help consumer confidence.

GDP Chart

The New York ISM rose sharply to 417.4 in February from 403.9 in January. That is the highest level since late 2006. However, the six-month outlook component fell to 81.1 from 97.0. That 97.0 reading was the highest in the history of the report. The current conditions component rose slightly to 77 from 72.6 and the employment component fell slightly to 53.4 from 54.2. A special question in the survey for February asked about capital spending plans for 2010 compared to 2009. 37% reported they were going to spend less in 2010 and 44% said they would hold spending steady in 2010.

ISM-NY Chart

The Chicago ISM, formerly Chicago PMI, rose to 62.6 in February. This is the fifth consecutive month of gains and the highest level since 2005. However, the internals were not exciting. Inventories declined from 48.7 to 42.4 and employment fell from 59.8 to 53.0. New orders fell by 4 points to 62.2 and the first decline since September. We need to remember that the Chicago numbers are impacted significantly by auto production.

Chicago ISM Chart

The second reading of Consumer Sentiment for February at 73.6 fell only fractionally from the 73.7 initial reading. Sentiment, not to be confused with the Consumer Confidence report, did not show the sharp decline in February that we saw in the confidence report. This leads me to believe that the confidence report did have some bad data but we won't know that for several weeks. The two reports survey different groups of people with an entirely different set of questions. The confidence survey was released back on Feb-23rd and fell to 46.0 from 55.9 for a major decline that shocked the market into a triple digit loss.

Consumer Sentiment Chart

Existing Home Sales for January fell sharply by -7% after a -16% decline in December. Annualized sales fell to 5.05 million units from the 6.49 million high in November. This is the slowest pace of sales since last June. First time homebuyers comprised only 40% of January sales. This is down from the 51% in November as the initial homebuyer tax credit expired. The February numbers should show improvement as buyers line up for the current tax credit program that ends April 30th.

I know in the Denver area sales are more than brisk. My daughter is trying to buy a house and has been looking at 8-10 houses a day. They qualify them ahead of the visit that there is no current offer and it is not a short sale. She has tried to buy four houses in the last week and wrote the contract the same day of the visit only to be told someone else beat her to it. She has even offered more than the asking price on one and somebody else had already offered even more. The realtors are so busy all their calls go to voicemail. These are bubble type statistics and of course they are powered by current buyer tax credit. This tells me that the housing market is going to fall off a cliff in May just like the December drop if the tax credit is not extended.

Existing Home Sales Chart

Next week is also going to be a tough week for economics. The national manufacturing ISM on Monday is expected to show a drop to 57.3 from 58.4 and most are blaming it on the weather. With three blizzards in the northeast in the month of February analysts are predicting declines in almost every indicator. For the ISM they claim factories were closed and workers were snowed in. The ISM Services on Wednesday will be the same story. Nobody serviced because they were snowed in.

On Tuesday the auto sales for February are expected to fall to an annualized rate of 10.3 million from 10.8 million in January. The sharp drop off is again blamed on the weather. This one I can believe because few people go car shopping when there are a couple feet of snow on the ground. The storms were responsible for removing ten selling days from the month of February.

The Fed Beige book on Wednesday should not have been impacted by the weather but you never know how the Fed is going to report the regional conditions. With the weather a catchall excuse for February they could blame declining economic conditions on the weather just to have an excuse.

Factory Orders on Thursday are expected to show an increase of +1.7% compared to +1.0% in the prior month. No weather excuse here because this is a January reporting period. Next month they can use the weather excuse. The increase in factory orders is mostly due to the inventory replenishment cycle currently pushing the GDP higher. It is not a sudden improvement in the economic conditions.

The 800-pound gorilla on the calendar is the Non-Farm Payrolls on Friday. Expectations are falling faster than temperatures in New England because of, drum roll please, the weather. This one I believe because job hunting is not a task that many people will undertake in blizzard conditions. Nobody wants to get dressed up, fight the elements and other drivers only to be told on your arrival for the interview that the office is closed or the executive elected to take the day off to play in the snow with his kids. The hiring cycle, like the auto sales report lost ten days to weather.

Another challenge to the payroll report is the weekly Jobless Claims. We saw claims spike last week to 496,000 and well over estimates of 450,000. The prior week rose to 473,000 with estimates at 415,000. The two-week spike in claims forced analysts to downgrade expectations for payrolls to a loss of 75,000 jobs instead of the gain of 20,000 jobs in prior estimates. I have heard nothing about census hiring this week so either analysts have forgotten about it and there will be an upside surprise or they are allowing for those hires and the employment outlook is actually weaker than it already appears.

Economic Calendar

About 1.1 million unemployed workers will see their unemployment benefits expire Sunday night. The House and Senate were working on a bill to extend the benefits another month until a longer-term solution can be enacted but the bill failed in the Senate on Friday. Other programs set to expire on Sunday are Federal flood insurance, Small Business Administration loans, changes to Medicare payments to doctors, COBRA insurance and some transportation funding.

The bill failed because the House version failed to say how the $10 billion cost would be paid and a fiscal conservative in the Senate blocked the bill without a method of payment. The Senate is expected to debate a longer-term fix next week with passage likely before next weekend. If the bill is not passed in some form most doctors will see a 21% cut in Medicare payments. Many doctors are already making plans to stop seeing Medicare patients if the payment cut goes through. Also, over one million rural TV viewers will not be able to watch local TV stations on their satellite systems without an extension of the copyright provisions expiring on Sunday.

There was a flurry of big stock moves on Friday that attracted trader's attention. Heading the list is Crocs (CROX) after they missed earnings, warned on the current quarter and the CEO quit unexpectedly. CEO John Duerdan announced his resignation on Thursday, saying he had accomplished all he had hoped in just one year as head of the floundering shoemaker and was ready to let somebody else lead Crocs into the next phase. Duerdan came to Crocs as a short-term turnaround specialist. Crocs was given up for dead a year ago but its auditors recently issued a statement saying the company was no longer at risk. CROX lost -10% on Friday.

On the other side of the shoe trade Deckers Outdoor (DECK) gained +13% to $120 after saying profits jumped 67% and raised guidance for 2010. Deckers posted Q4 profits of $5.22 compared to analyst estimates of $4.28 per share. The company doubled international sales of its UGG brand.

Chart of DECK

AthenaHealth (ATHN) was crushed for a 15% drop after they delayed their Q4 earnings report to review deferred revenue accounting. Athena recognizes its revenue over the life of its service contracts, which are normally one year in length. The company may change its revenue recognition rules and will have to restate past earnings if this happens. Whenever the terms "revenue recognition" and "restate earnings" appear in the same paragraph the reaction is never good. Athena has already announced two accounting revisions in the last month so credibility has been stretched to the breaking point.

AthenaHealth Chart

Palm is in trouble. They have developed a serious credibility problem and two of their major carriers have quit ordering phones. They also pre-announced their earnings and cut the revenue outlook for the current quarter and the full year. If that was not bad enough an internal memo was leaked suggesting that Verizon and Sprint were no longer ordering new phones. All of this news has PALM stock dropping like a rock.

On Feb-11th rumors began circulating that the Chinese manufacturer for Palm's smart phones have suspended production on the Pre and Pre-Plus. Palm tried to head off the rumor saying they had ramped up production ahead of the Chinese new year so the company could shutdown for the holidays and resume production afterwards. Ok, that makes sense but there was also a line in the release saying Palm was adjusting production to fit sales trends. Ok, no problem because they "ramped up" ahead of the New Year closure.

Now it appears Palm knew about the order halts before the previous disclosures and it appeared they were trying to disguise the truth while they worked on damage control. It turns out manufacturing was shutdown for an entire month not just for the New Year celebration week. Whenever a company is caught trying to hide or disguise the truth the stock is going to suffer. Add in the halt in orders from Verizon and Sprint and this could be terminal. Apparently their smart phones are not selling and investors are running for the exits.

Chart of PALM

NuVasive (NUVA) rallied +35% after announcing that Aetna and United Health had approved its new spinal surgery procedure for insurance coverage. The NuVasive procedure allows surgeons to operate on the spine through small slits on the side rather than big incisions in the back. This procedure does not impact the major muscles and allows for faster healing. The treatment had been labeled experimental and not accepted by insurance. The change by United Health and Aetna is a major step forward for NuVasive and should eventually allow many more of their innovative surgical procedures to be more readily accepted.

CKE Restaurants (CKR) gained +27% after announcing a buyout by Thomas H Lee Partners for $928 million. CKE operates Carl's Jr, Hardee's, Green Burrito and Red Burrito restaurants. Earlier in February CKE had said same store sales had declined -9% at Carl's as a result of the burger wars and the recession. The acquisition price represented a 25% premium to Thursday's close. The company can accept additional offers for the next 40 days and THL Partners can match the offers or bow out.

Chart of CKR

The oil market is troubling traders because there is no fundamental reason for the price of crude to be $80. Crude prices rallied +9% in February. Volatility has been extreme with a move from $74 to $85 in Dec/Jan and back to $70 in February and now back to $80. Inventories have risen for the last three weeks but so has prices. Crude normally moves inversely to the dollar but the dollar has been at 12-month highs for most of last week. Crude prices should have been down.

Major banks like UBS, Goldman Sachs and Morgan Stanley are telling investors to stay long oil with a price target of $100 later this year. This is completely contrary to the current fundamentals and suggests these advisors are betting on a geopolitical crisis like an attack or embargo on Iran to ratchet up prices. China and India are seeing demand rise steadily but the developed countries are still mired in a low demand recovery. If there were a fundamental reason for the rise in prices the futures would be showing a higher price farther out on the calendar. This is called contango.

Instead the contango has almost entirely evaporated and we are on the verge of backwardation. That means prices would be higher in the front months than farther out on the calendar. If the U.S. said it was going to bomb Iran in March then current month futures would be high on the worries about a shortage of oil. Prices farther our on the calendar would be lower because within 90-days Saudi Arabia can pump an estimated five million barrels of oil per day more than they are producing now. They could fill any Iranian shortfall and prices would return to normal. I believe the current rise in prices is due to an Iranian premium that could be with us for some time.

Iran makes some announcement almost every day that is meant to agitate the U.N. nations into making some kind of obscene deal to shut down the uranium enrichment. Of course they also benefit from escalating the war of words because it is keeping oil prices high and funding their country. I wrote an article in early February on how Saudi Arabia could bankrupt Iran and put an end to their regime by simply turning on the pumps for that additional five million barrels. They did it before when asked by Ronald Reagan and put the Soviet Union out of business. There are other ramifications to pushing oil prices a lot lower but what are the ramifications of a nuclear Iran?

Crude Oil Chart

Volume last week was very light with the market alternating direction every day. Evidently there is much confusion about direction just like there is confusion about the potential for another recessionary dip. Former Fed governor Robert Heller made the case for a second dip on Thursday saying the deficit is going to force interest rates up as the government continues to sell massive amounts of debt. He believes the spike in real rates will kill both the business and consumer recovery. The current recovery is struggling even though being helped by the stimulus and the inventory cycle. According to Heller, as those things end in Q2 the recovery will end because of the high unemployment.

JP Morgan's CEO, Jamie Dimon, warned again on Friday of huge potential negatives ahead. He said JP Morgan was in no hurry to raise the dividend because the bank wanted to continue to hold additional capital in case of a second recessionary dip. Dimon said he wanted to increase the dividend to around 75-cents to a dollar but only when he was convinced the worst of this crisis is over. He also warned that the banking sector was in danger from the administration and major banks were not going to resume lending until the danger passed. James Staley, the JPM Investment Banking Chief also acknowledged that fear of punitive regulations was changing the way banks and investor clients viewed their acquisition strategies. That means mergers and acquisitions will be very slow until the regulation danger passes.

Rising fear about that potential second dip is preventing the markets from acting on the record earnings from Q4. Several analysts claimed the hedge funds pulled out all the stops last week to keep the markets at the current level into month end and next week could be a rocky ride. I don't know why February month end would be so critical that funds would be struggling to keep the markets at a specific level. After all March is historically a bullish month 65% of the time. The March triple witching expiration week is bullish 85% of the time.

If hedge funds really were trying to hold the markets up they did a good job. The rally from the Feb-5th lows was strong and uninterrupted until last week. Unfortunately we are starting to develop some bearish formations on the charts. On the daily chart of the Dow the prior uptrend support is proving to be stubborn resistance, currently at 10400 and initial support is 10300. A failure at initial support suggests a lower high from January and the potential for a serious second dip.

Dow Daily Line Chart

The Dow formation for the last week is a definite series of lower highs and lower lows and another retest of 10200 may not hold. There is nothing in the news to keep us elevated and we have a real possibility of a seriously negative number on the payroll report on Friday. The path of least resistance is down on the Dow.

Dow Chart - 120 Min

The S&P is having a tortured relationship with 1100. It can't seem to move away from it for more than a brief period. Monday was the only day the index did not cross 1100 but it came very close. We saw new resistance form just under the 1115 50% fib retracement and we saw a lower low on Thursday.

The second chart is the daily and you can see how it respected the 50/100-day averages as support and resistance. That will not continue since the averages are on a converging path. 1085 is going to be our line in the sand on the support side and 1115 the resistance barrier. I strongly suspect one of those is going to be broken next week and without a news event to the contrary the path of least resistance is down.

S&P-500 Chart - 120 Min

S&P-500 Chart - Daily

The Nasdaq chart is slightly more positive than the Dow/SPX but only slightly. The 61% fib retracement was rock solid last week but support at 2200 also held on two tests. I am neutral on the Nasdaq and I believe tech investors are braver than the general population and will try to keep betting on the bullish trend until they run out of money. If they can punch through that 2250 level then the rally may continue.

The chart of the NDX (big caps) is a little easier to read. We have the same 50/100-day trading range and the resistance at 1815-1818 is wearing down. It would not take much to punch through. Unfortunately GOOG, AAPL, QCOM and DELL are not positive charts. Apple saw a bounce on Thursday on the rumor they were going to split 4:1 but that rumor and the dividend rumor were firmly dashed on Friday. Cisco is the most positive big cap with rumors of a major announcement in March that "will change the Internet forever." Whether that is enough to keep the Nasdaq moving higher remains to be seen.

Nasdaq Chart - Daily

Nasdaq 10 Chart - Daily

The Russell 2000 hit resistance at 633 on the prior Friday and could not break through despite several subsequent tries. Trapped between support at 623 and declining resistance at 633-630 the box is growing progressively smaller. Something is going to break on the Russell next week and it could be explosive. The rebound from 580 back on Feb-5th was very strong and pushed the Russell to a +4% gain for the month despite starting off with a -22 point disadvantage. It recovered all of those points and added 30 more.

This rally has seen five days of consolidation without any real evidence of the next direction. There was a pattern of lower highs, lower lows last week but it was very minimal with Friday's close only -4 points below Monday's close. Fund managers are not dumping small caps. They are still dancing with stocks that got them to this level. A break below 620 would be a short signal and a break over 633 would be a signal to go long.

Russell Chart - Daily

I left you last weekend with the NYSE Composite chart and resistance at the 100-day average. That resistance has not changed and the index still holding the high ground over 7000 but like 1100 on the S&P it can't seem to remain over 7000 for an entire day. The dip on Thursday saw it trade under 6900 but the rebound was quick and back to the initial resistance at 7035. The 100-day is just below 7100 so there is plenty of room to play.

I would use the NYSE and the Russell as confirming indicators of a breakout/down because the levels are so clearly defined. Both are broad market indexes and both are currently stronger than the Dow.

NYSE Composite Chart - Daily

The wildcards for next week are the ISM Manufacturing number on Monday, the payroll number on Friday and the potential for a Greek bailout by Germany. I know they have said several times that it won't happen but a rumor after the close on Friday suggested the German bank KfW could either buy Greek bonds or guarantee up to $34 billion in aid when the Greek prime minister visited Germany next week. It was Friday at month end so a rumor about something was bound to appear. Late Saturday a senior German official denied the report while a parliamentary source told Reuters Germany and France were preparing an aid package.

However, conditions in Greece continue to deteriorate and Greece did not sell the 10 billion in 10-year bonds it had threatened to offer last week. Odds are good the sale would have failed and that is why it did not take place. Greece claims it has sufficient money to last through the middle of March so something has to happen soon. If Greece did sell the bonds and the sale was successful then the market would celebrate even if the interest rate was high. If a bailout is announced the market would rally sharply on the perceived view that the debt crisis was over.

A bailout could come in the form of EU state banks pledging support and actually bidding on the 10B in bonds to make sure the sale is successful. Buying debt in the open auction would be different than just giving Greece the money in a bailout. It would circumvent the EU rules and spread the risk around the EU in manageable amounts. This would only be temporary but could buy another 90-120 days for austerity measures to be enacted.

I believe the potential for at least a partial resolution on Greece is the biggest wildcard for next week. That could provide a substantial lift to the equity market. However, if that spike were sold I would run to the sidelines or adopt a bearish bias.

I believe by Friday the payroll expectations will be priced into the market and while there is likely to be volatility on the announcement the reaction should be muted by the week of pessimism regarding the report and the impact of the weather.

I just finished reading a book called the China Study by T. Colin Campbell. It is not about the market but about solving your health problems. I strongly advise everyone to read it. I don't advertise products in the newsletter other than the EOY subscription in December. I feel this is important enough to personally recommend it to everyone. What good is making money in the market if you don't live to spend it?

The China Study: The Startling Implications for Long-Term Health

Jim Brown

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Index Wrap

Lean Bullish

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The recent whippy price action, but with closing levels holding not far under recent highs, suggests potential for more upside. I lean to this bullish view but also suspect that 'getting there' might be a little torturous.

The major indexes have stayed close below levels (a bullish consolidation) that could suggest a coming/next move above a sort of last hurdle resistance that seems to show up fairly often: this being the area representing a 62 to 66 percent retracement of a prior decline. There's a tendency for rally failures in this (retracement) zone, but when this area is pierced, an equal tendency for a re-test of the prior top at a 'minimum'.

There is more too it than this, there always is, regarding breakout points in either direction in the two key broad popular indices.

In the S&P 500 (SPX), a move above 1110-1115 is a bullish breakout; a drop below 1078-1080 would suggest a possible retest of prior lows perhaps or something in between.

In the Nasdaq Composite (COMP), a decisive and sustained upside penetration of 2250, would suggest COMP potential back to the area of the prior 2326 high. Conversely, a fall to below 2185 for more than a day would suggest prices were headed back down again.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart is in a pattern that suggests that the index is consolidating before a future move above its recent 1112 high. Such a move above 1112-1115 would fulfill the bullish potential suggested by the fact they kept knocking them down last week but they also kept coming back; 'back' as in back closer to recent highs than recent lows. I previously emphasized the pivotal bullish 1100 level in the S&P and with one exception (Tuesday), from several onslaughts of selling, SPX managed to maintain closes above 1100.

Beyond and above a breakout above 1112-1115, next resistance looks like 1133 and the most pivotal chart/technical level that could be retested is the prior 1150 high.

If SPX sails above 1115 and the bulls are find and dandy, any sustained move below 1078-1080 should cheer the bears. Support/buying interest below 1080 next comes in around 1060, extending to the prior 1044 low.

There's nothing that's earthshaking showing up with two major indicators I track and seen above. RSI and sentiment readings are mostly 'neutral'. 1-day dips toward bullish territory have recently showed up in my CPRATIO model. This is encouraging or would 'support' a breakout scenario suggested by the chart pattern.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index might I suppose continue in a trading range between 500 on the downside and 510 on the upside, both levels being offering key nearby resistance and support levels. The ability for OEX to consolidate near the HIGH end of the run up from 482 up to 510, suggests some potential for another up leg, such as back up to the 530 area again.

Sometimes a moving average 'defines' a significant area of support or resistance and a move above the 50-day average at 510 here would suggest continued upside momentum and that the bulls were still in the forefront of moving this market.

Pivotal resistance is at 510, extending to 512-514, with next resistance starting around 525 and then most importantly, at the prior 531 high.

Key near support is at 500 extending to 496, a price which is the low end of an upside chart gap that showed an acceleration of the rally in mid-February. Next support is at 490, extending to the prior 482 early-February).

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow (INDU) Average has significant resistance at its recent high at 10438, representing a key 66% retracement of the prior early-Jan to early Feb 'waterfall' type decline. Support showed up in the 10200 area and prices rebounded.

If INDU can pierce 10400 then stay mostly above this level, good potential is suggested for extending the prior rally up to the 10600 area. 'Ultimate' (for the current move) resistance is at the prior intraday high at 10730.

Key near support is at 10200; piercing this, the Dow could be headed for a retest of support at 10000; next support, the 9830-9900 area.

Of the 30 Dow stocks, only 8 are still trading above their longer-term up trendlines dating from the March (2009) bottom: BA, HD, KFT, MCD, MRK, PG, TRV and WMT.

Of the remaining 22 Dow stocks, I mostly see potential to challenge and possibly exceed recent highs by another 5 stocks in the Dow: CAT, CSCO, DIS, HPQ and INTC. 13 Dow stocks, if in strong uptrends, can move the Average higher, but back to the 10700 area? An open question.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

I feel like a broken record when I repeat from last week that: "The Nasdaq Composite (COMP) only has to pierce 2250, at the 66% retracement, to suggest fairly clear sailing toward a retest of the prior top." I don't why I said 'only'!

Considering how buffeted tech stocks were last week on at least a couple of sharp selloffs. The most telling of which was on Thursday when COMP shot up to close at 2234 after trading down to 2198. After making a new low for the week, a rebound like Thursday's suggests that the investors still have a buying or accumulation appetite; an outlook that says buy on dips.

It's clear that the key COMP resistance is 2250. It's useful to have a well defined key resistance, when then also makes it a key breakout point. A decisive upside penetration of this level, followed by support developing in this area on dips could then 'support' so to speak a move to back up to 2300-2330 or above. The Index seems to want to go beyond the recent 2250 high. Let em go.

In a bearish scenario, COMP cracks 2185 and heads to next support in the 2130-2100 area. I lean bullishly but will give that view a rest if we start getting COMP closes below 2200.

NASDAQ 100 (NDX) DAILY CHART:

There is likely no need to tell you that volatility increased this past week. What may mark a short-term low in the Nas 100 (NDX) may have been made Thursday, as also discussed in regards to the Nasdaq Composite index. A strong rebound from the 1780 area in NDX, led to a springboard move back toward (but still under) prior highs.

A next up leg and bullish phase, would be suggested by an NDX rally that pierced the recent 1826-1830 minor double top. If no such bullish move occurs, this same area could instead form the top end of a trading range that goes on for a week or two more.

The NDX chart seems to reflect continued buying interest in key tech stocks in that recent dips have led to rebounds. Stay tuned for whether independent strength (not bargain buying) can pull NDX above its resistance at 1828-1830. I think the chart (pattern) suggests this outcome.

Near support is 1780, then 1740 and extending to 1712, the intraday low from which the recent upside reversal sprang. A sinking spell taking NDX below 1780 and especially a move next back to the 1740 area, would turn the chart mixed to bearish short-term. On that note, I rate the intermediate-term trend as 'mixed' due to the broad sideways trend of recent months. Only the long-term trend remains bullish in my view.)

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) continues to hold above 44 support, suggesting still decent upside potential. Current resistance that has to be overcome begins at 44.8 and extends to 45.1.

If the stock climbed above 45 and the chart pattern suggests that possibility, next resistance begins at 45.5 and where QQQQ would rise into a potential supply overhang. Stock for sale versus plentiful willing buyers would reach a key test at 46.5-46.6, where QQQQ would be retesting levels seen at the January top.

Key support is at 43.8; if this level was pierced next support/buying interest probably begins in earnest on dips to below 43, extending to the 42.6 area and lower; e.g., back to 42.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) Index pattern of recent days looks most like the sideways move of a bull flag or pennant pattern reflecting a bullish consolidation prior to another push higher; i.e., through and above 632-633 resistance.

Above the prior 649 high, major resistance can also be implied by the intersection of the previously broken up trendline in the 660 area. Reversals at such trendline junctures have been common.

The current pattern will not be of the bullish flag 'type' (in terms of common outcome) if the RUT does NOT have such a upside 'breakout' type move within 1-3 more trading days. If the index can't pierce resistance, the possibility or likelihood becomes RUT has plateaued at recent highs. The potential for a decline by just not going forward increases significantly.

Near, and key, support is at 620-621. A break of 620 sets up a test of potential support around 611, extending to 597. 585-587 begins a next prior support zone that goes down to the 580 intraday 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

ISM on Monday, Jobs on Friday

by Jim Brown

Click here to email Jim Brown

Editor's Note:

I am not sure the volatility could increase any more after last week's bout of triple digit ranges. With the majority of earnings over there is little in the way of stock news to keep the markets moving higher. What earnings we did have last week resulted in some severe disappointments and that is always bad for overall market sentiment.

The national ISM on Monday has already been previewed with the NY and Chicago versions last week. That suggests Monday's economic events probably won't rock the market.

The Non-Farm Payrolls on Friday could be a different story. Rising first time jobless claims and the three blizzards point to a loss of jobs for the month. New estimates are for a loss of 75,000 jobs rather than a small gain. This pessimism should be priced into the market by Friday and render the actual announcement less meaningful in terms of market moving potential.

James is traveling this week and will be back in mid March.


NEW DIRECTIONAL CALL PLAYS

MYGN - Myriad Genetics - $23.00

Company Description:

Myriad Genetics, Inc. is a healthcare company focused on the development and marketing of molecular diagnostic products. The Company is focused on providing physicians with information that guide the healthcare management of their patients to prevent disease, delay the onset of disease, or catch the disease at an earlier stage when it is treatable. As of June 30, 2009, the Company launched seven commercial molecular diagnostic products, including four predictive medicine and three personalized medicine products.

Why We Like It:
Myriad posted profits that increased +67% in early February. The beat the street by 2-cents, saw their stock shoot up to nearly $26 and then implode to trade under $21 two weeks later. The selling appears to be over and the stock is ramping back up to retest that $26 level. Myriad will host an investor day in New York on Wednesday and unveil several new products.

Exit Target = $25.00

Suggested Options:
I am looking for a quick retracement to $25 or higher and I am recommending the MAY $25 calls.

BUY CALL MAY 25.00 (MYGN 10E2500) open interest= 1,170 current ask $1.15


Annotated Chart:

Entry  on  March 1st at $ 23.01 
Change since picked:       + 0.00
Earnings Date            02/3/10 
Average Daily Volume =  1.62   million  
Listed on  February 28, 2010         


BUCY - Bucyrus International - $62.56

Company Description:

Bucyrus International, Inc. designs, manufactures mining equipment for the extraction of coal, copper, oil sands, iron ore and other minerals in mining centers throughout the world. In addition to the manufacture of original equipment, the Company also provides the aftermarket replacement parts and service for equipment. The Company operates in two business segments: surface mining and underground mining.

Why We Like It:
On their earnings conference call the company said they were seeing a strong pickup in demand and improving. Earnings were up +21% to $1.07 and beat the consensus of 92-cents. Earnings were on the 18th and there was the obligatory post earnings decline but investors quickly bought the dip.

Exit Target = $68.00

Suggested Options:
I am looking for a return to the January highs and I am recommending the April $65 calls.

BUY CALL APR 65.00 (BUCY 10D6500) open interest= 2,795 current ask $3.30 

Annotated Chart:

Entry  on  March 1st at $ 62.56 
Change since picked:       + 0.00
Earnings Date            02/18/10 
Average Daily Volume =  1.75   million  
Listed on  February 28, 2010         


NEW DIRECTIONAL PUT PLAYS

NONE



In Play Updates and Reviews

Volatility Ahead

by Jim Brown

Click here to email Jim Brown


CALL Play Updates

Autozone Inc - AZO - close: 166.00 change: -.15 *Close Play*

Autozone earnings are Tuesday and the game plan has been to close this position on Monday. AZO reached a new 10-month high on Friday. If the market cooperates we could see another bounce over $166 on Monday and give us a perfect exit on the play. We will exit on Monday, March 1st at the closing bell.

Entry  on  February 16 at $161.75 (small positions)
Change since picked:       + 3.21
Earnings Date            03/02/10 (unconfirmed)
Average Daily Volume =        538 thousand 
Listed on  February 13, 2010         
Chart of AZO


Colgate Palmolive - CL - close: 82.97 change: -.17 stop: 80.75 *NEW*

No real change in CL on Friday and the trend remains intact. The surge to new relative highs continues to be bullish.

Our target to exit is $85.00.

Entry  on  February 20 at $ 81.75 
Change since picked:       + 1.65
Earnings Date            04/29/10 (unconfirmed)
Average Daily Volume =        2.8 million  
Listed on  February 20, 2010         
Chart of CL


Sina Corp. - SINA - close: 37.83 change: +0.261 stop: 35.90

Traders did buy the dip at $36.00 near its 200-dma on Thursday. The bounce off its lows is encouraging but shares remain stuck in their sideways consolidation. The Chinese market has rebounded to six-week resistance highs that have held more than once. With earnings on Wednesday we need to exit this position on Tuesday at the close.

Currently we have a target to take profits at $39.95. James has a second target at $41.75 but we'll need to keep a wary eye on possible resistance at the 50 and 100-dma ($41).

Entry  on  February 22 at $ 36.50
Change since picked:       + 0.71
Earnings Date            03/03/10 (confirmed)
Average Daily Volume =        1.4 million  
Listed on  February 18, 2010         
Chart of SINA


TEVA Pharmaceuticals - TEVA - close: 60.01 change: -0.27 stop: 58.75 *NEW*

Shares of TEVA continue to show relative strength. TEVA traded at the highs again on Friday but gave up a little ground at the close. I am raising our stop loss to our entry point at $58.74. Our target to exit is $64.00.

Entry  on  February 20 at $ 58.74 
Change since picked:       + 1.54
Earnings Date            05/05/10 (unconfirmed)
Average Daily Volume =        5.1 million  
Listed on  February 20, 2010         
Chart of TEVA


PUT Play Updates

Franklin Resources Inc. - BEN - close: 101.72 change: +1.55 stop: 102.51

BEN rallied from the dip on Thursday and continued to rally on Friday. I am not convinced BEN is going lower and I agree with the current stop at $102.51. The trend in BEN is changing from bearish to neutral and a breakout over $102 would be bullish. However, it is at the point where a failure could occur. This should be a make or break week. I raised the exit target to support.

We are not suggesting new bearish positions in BEN at this time. Our exit target is $96.50. *NEW*

Entry  on   January 30 at $ 99.59 /gap higher entry point (small positions)
Change since picked:       + 0.58 
Earnings Date            01/28/10 (confirmed)
Average Daily Volume =        1.2 million  
Listed on   January 30, 2010         
Chart of BEN


Caterpillar - CAT - close: 57.05 change: +0.26 stop: 59.01

CAT is an aggressive put. If the global economy is recovering then CAT should lead the advance. However, if the recovery is losing traction CAT should also lead the way down. I am encouraged that the Thursday rally did not exceed the highs from Tuesday. This suggests sellers are following the price down. We are not suggesting new positions at this time. This is an aggressive short-term trade. Our target to exit is $52.50. *NEW*

Entry  on  February 23 at $ 56.66 
Change since picked:       + 0.13
Earnings Date            04/21/10 (unconfirmed)
Average Daily Volume =         12 million  
Listed on  February 23, 2010         
Chart of CAT


Australian Dollar ETF - FXA - close: 89.83 change: -0.39 stop: 90.60

The rebound in the FXA on Friday was short covering before the weekend after the big dip recovery on Thursday. The 50-dma is strong resistance at 89.86. The FXA is in a trend of lower highs and lower lows. Our time frame for the Australian dollar to decline is several weeks so you'll need to exercise some patience. There is possible support at the 200-dma but our first target is $83.00. Our second, longer-term target is $80.10.

Entry  on  February 23 at $ 89.23 /gap higher entry
Change since picked:       - 0.12
Earnings Date            --/--/--
Average Daily Volume =        200 thousand 
Listed on  February 23, 2010         
Chart of FXA


Mckesson Corp. - MCK - close: 59.15 change: +0.01 stop: 59.75 *NEW*

Thus far MCK hasn't seen much follow through on Tuesday's decline but shares are still building a trend of lower highs and lower lows. The lackluster bounce gives credibility to this put play. The first target to exit is $55.55 and just above the 200-dma.

Entry  on   January 30 at $ 58.82 
Change since picked:       + 0.32
Earnings Date            01/26/10 (confirmed)
Average Daily Volume =        2.8 million  
Listed on   January 30, 2010         
Chart of MCK


SIEMENS - SI - close: 86.27 change: +.80 stop: 89.75 *NEW*

Siemens posted another nice gain on Friday but finished with another lower high. With oil prices at resistance at $80 the odds are good they will decline next week and take Siemens down with them. Support has firmed at $84 but the next retest could be from a lower high and that might cause some buyers to rethink their position.

More conservative traders may want to take profits early right now since SI is bouncing from its February lows and possible support. Officially our second and final target is $81.00.

Entry  on   January 26 at $ 94.34 /gap higher entry
Change since picked:       - 8.88
                            /1st target hit @ 87.55 (-7.1%)
Earnings Date            01/26/10 (confirmed)
Average Daily Volume =        368 thousand 
Listed on   January 26, 2010         
Chart of SI


CLOSED BULLISH PLAYS

Celgene Corp. - CELG - close: 59.49

Cancel this potential trade. The trigger point was never reached. I would rather not buy a potential breakout here and with the market showing signs of stress I don't want to buy a dip in a stock ripe for profit taking.