Option Investor
Newsletter

Daily Newsletter, Saturday, 3/13/2010

Table of Contents

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

Market Wrap

Dow and NYSE Remain Laggards

by Jim Brown

Click here to email Jim Brown

All the major averages are breaking out to new highs with the exception of the Dow and the NYSE Composite.

Market Statistics

The major indexes continued their two-week rally although the trading range narrowed as the weekend approached. The weight on the market was the 800lb gorilla nobody on stock TV was talking about. That is the Fed meeting next Tuesday. The tone of the Fed member's comments in their individual speaking engagements has changed slightly and it appears they are growing more hawkish.

The official policy remains low for an extended period but analysts are starting to worry that the official post meeting statement will change soon. Nobody is expecting the interest rate to change but they may start changing the statement to prepare the market for a rate hike later this year. Analysts had been targeting Q4 or early 2011 for the first rate change but now they are starting to move those dates closer to Q3 or early Q4.

The markets rallied last week on better than expected economics and some improved earnings and guidance from some big names. The surprising economics on Friday came from the Retail Sales report for February. Sales increased +0.3% in February despite the multiple snowstorms. If you exclude autos those sales rose +0.8%. Core sales excluding autos and gas stations rose +0.9%. Obviously auto sales and gasoline sales were severely impacted by the heavy snow. We have already heard from dealers that auto sales in March are exploding and could hit 12.5 million. Shortages are being reported in some vehicles.

The biggest growth in sales came from electronics and appliance stores, sporting goods and hobby stores and general merchandise. March is shaping up as a blowout month as pent up demand is released. Considering consumers are still constrained by unemployment and lack of credit this surge in buying is even more unexpected. This suggests the consumer is starting to relax after two years of a hoarding mentality.

iPhone sales are running 100% over last year and BlackBerry sales are up 50%. Flat screen sales were up +37% as 2009 ended. Electronics sales were up +3.7% in February alone. The February retail sales report will be very bullish for market sentiment once we get past the Fed meeting.

In contrast to the sharp increase in sales the initial consumer sentiment report for March showed a decline to 72.5% from 73.6%. This was the second consecutive decline but the drops were minimal unlike the huge decline in consumer confidence. Both the internal components declined. Present conditions declined from 81.8 to 80.8 and the expectations component fell to 67.2 from 68.4. These are small moves and probably related to the weather instead of economic conditions.

There was also a drop in sentiment from the rebirth of the healthcare bill. Depending on what survey you read 57% to 63% of consumers do not want this bill to pass. Only 33% to 36% are currently in favor with the rest undecided. To hear that lawmakers are going to use a parliamentary trick to get it passed is a weight on consumer confidence. Consumers don't really understand what is in it, how it will impact them and how much their taxes are going to rise so the majority sees this as a negative event.

Consumer Sentiment

After last week's lackluster schedule the economic calendar for next week has some major events. The price indexes, PPI and CPI, are out on Wednesday and Thursday. Those will show how much inflation may be filtering through the system. The Philly Fed survey on Friday is the first major manufacturing report for the month. The NY Empire survey on Monday does not have the clout as the Philly Fed Survey.

The biggest event is of course the FOMC meeting on Tuesday. This meeting is fraught with negative possibilities. The biggest worry is for a change in the "considerable period" language. We know it is coming but we don't know when. Just changing the language does not mean the rate is going to change. It just means the Fed is preparing for the next step in changing their bias from loose to neutral. They have to move from an accommodative bias to neutral before they can change to a tightening bias. Even if they changed the language at this meeting it would still be months before they would actually change the rate.

The next meeting is April 27/28th and the two-day meeting is more than likely when they will change the statement. They almost need to keep the language next week just to offset the hawkish comments being made by some past and present Fed members. There was also an editorial last week suggesting the Fed would need to remain in the current mode for several more months to offset the uncertainty about the different financial regulation bills in Congress and the potential impact to business sentiment if the healthcare bill passes.

Analysts are already saying several million currently employed workers will find their status changed from full time to part time or from employee to contractor to keep businesses from having to pay the sharply higher health insurance premiums. That means many of those employees will lose their current employer paid insurance coverage. There are always unintended consequences to every new law.

Virginia has already passed a new law making it illegal for the Federal government to require Virginia residents to have health insurance or be forced to pay a tax for not having insurance. Virginia's Health Care Personal Liberty Law, SB417, passed the Virginia House by a vote of 90 to 3 and the Senate 25 to 15. Eighteen other states are already considering the same kind of law to exempt their citizens from the new healthcare rules.

The Fed has already affirmed the timetable for ending numerous stimulus programs so we should continue to see further affirmations in this statement. The risk of Fed statement changes should keep the markets on hold until after the announcement.

Economic Calendar

In stock news Potash (POT) spiked +$8.34 after raising guidance. POT said a sharp increase in demand would push it to record first quarter sales in North America and generate strong offshore shipments. CEO Bill Doyle said, "Strong farmer returns, a depleted distributor pipeline and the agronomic need to replace soil nutrients have kick-started a potash rebound from the 2009 lows." Doyle said POT now expects to earn between $1.30 to $1.50 per share compared to the $.70 to $1.00 previously predicted. Analysts were expecting 87 cents per share.

The drastically improved guidance sent POT to resistance at $125 but once analysts begin raising their estimates next week POT should go much higher. The upgrade also propelled Mosaic (MOS) and Agrium (AGU).

Chart of POT

Chares of CF Industries (CF) and Terra Industries (TRA) declined after Yara International announced it would not raise its bid for Terra. Yara had offered $4.1 billion for Terra but CF sweetened its prior offer to $4.7 billion and Terra accepted the deal. CF had been chasing Terra for over a year but was continually rebuffed. Apparently after being in the clutches of Yara for about a month now they decided being acquired by CF was better than the foreign company Yara. Yara will get a $123 million breakup fee.

CF not only got Terra but they escaped from being acquired themselves by Agrium (AGU). Agrium had been pursuing CF for a year in a hostile takeover of their own. When the final CF/TRA deal was announced on Thursday Agrium said it was withdrawing their offer for CF. The mating dance by the fertilizer foursome has finally come to an end.

The revelation that Lehman used a complicated form of off balance sheet accounting involving phony asset sales to boost its balance sheet is not a revelation inside the banking community. Apparently many banks use this practice.

Essentially Lehman would transfer high quality assets to its London unit. At the end of the quarter Lehman would sell the assets for cash to a third party with an agreement to buy them back the following week. Lehman used the cash to pay down debt making its quarterly earnings statement stronger. Once the quarter ended they would borrow money again and buy back the assets. Lehman reportedly started out small in 2001 but by the second quarter in 2008 they were moving $50 billion a quarter and that reduced their book leverage ratio by about 2 points to 14.7 compared to 20.8 for Goldman Sachs.

Freddie Mac (FRE) admitted it regularly hid $8 billion in mortgage-backed securities using Credit Suisse as their investment partner. Regulators caught on to this trick several years ago at commercial banks and they are now required to report average assets during the month, not just the end of the quarter. With the spotlight on this Lehman process it is going to produce a lot of questions when financial companies report their next quarter. Where there is one cockroach there are normally others.

Banking analysts are now on the hunt for anyone else who may be cooking their books to produce end of quarter window dressing. Goldman, JP Morgan both said they did not use repurchase transactions. Morgan Stanley said they did but did not report them as sales. Bank America and Citigroup refused to comment.

Apple (AAPL) hit a new 52-week high after saying that iPad sales on the Internet were running about 25,000 per hour. Friday was the first day you could place an order for April 3rd delivery. Apple was limiting sales to two per person starting at $499 for the Wi-Fi model. The AT&T 3G version will not be out until closer to May 1st. New details about the 3G model were released. The $15 monthly AT&T plan has a data limit of 250 megabytes. As you near your limit you will get a warning on the screen and the option for purchasing additional megabytes for that month. The $30 a month plan is unlimited and requires no contract. Apple also reported there are only 16,700 iPad apps compared to the more than 140,000 for the iPhone. That number will obviously grow.

The iPad is also drawing an increasing number of detractors who claim it will be just another gadget a year from now and the other tablet computers will be selling like hotcakes. The Hewlett Packard device will run Windows 7 and support flash as well as multiple programs running at the same time. The iPad does not support flash or multiple programs. Other companies with tablet computers in the works include Google, Dell, Motorola, Nvidia, Archos, Pegatron and others. Time will tell but with millions of Apple faithful I find it hard to believe the iPad won't succeed.

Citigroup successfully sold $2 billion in 30-year trust preferred securities on Wednesday and the stock jumped to trade over $4.20 on tha news plus some positive comments from Pandit. CEO Vikram Pandit said Citi could be back to earning $20 billion a year in core profits by the end of 2012. Citigroup has $1.3 trillion in assets and those are expected to grow by 5% per year. The government still owns 27% of Citigroup and there are rumors the stock is about to be sold. The moratorium on government sales expires March 16th.

If Citi's share price can absorb a 27% dillution to the stock in private hands I will start believing in flying pigs. Surely there will be a significant drop BUT everyone who owns shares today knows that stock is outstanding and about to come to market. That is roughly 7.7 billion shares with the cost to the Treasury at $3.25 each. Once it is out of government hands I expect a major reverse split to reduce the 23 billion shares outstanding to something a little more manageable. That will be a major event. If Pandit is right and Citi can grow profits to $20 billion a year in 2012. Those shareholders will be well rewarded.

Citigroup Chart

Google is reportedly 99.9% certain it is going to shutdown Google China. The Google.cn search platform has 30% market share in China but after the recent fight with the Chinese government over hacking and censorship it appears Google is going to leave the country rather than give in. Google is said to be planning an expeditious exit for those workers still in China before announcing the shutdown. Google fears reprisals against the workers. On Friday, Li Yizhong, minister for industry and information technology said, "If Google takes steps that violate Chinese laws, that would be unfriendly, that would be irresponsible, and they would have to bear the consequences. If you don't leave, China will welcome that, if you don't leave, it will be beneficial for the development of the internet in China." That sounds only slightly better than "don't let the door hit you on the way out."

Google lost ground on Friday to $579 but garnered another upgrade from Oppenheimer. The analyst raised his earnings estimates, revenue and price target. He is now targeting $715.

Chart of Google

President Obama is going to nominate Janet Yellen as the Vice Chairman of the Fed. Yellen is the president of the San Francisco Fed and former UC Berkley professor. She headed President Clinton's Council of Economic Advisors in the 1990s. She would replace the 40-year Fed veteran Donald Kohn when he steps down in June. Everybody I have read believes Yellen is the best pick for the job. Yellen, currently 63, would compliment Bernanke in his role as Chairman and keeper of the public trust.

Yellen is normally seen as dovish when it comes to raising rates but as an economics professor with history of being a macroeconomist she would not hesitate to make the changes when needed. She is known for favoring Main Street and high employment rather than Wall Street and inflation worries. Her husband is Nobel Prize winning economist George Akerlof. Former Fed governor Lawrence Meyers was the offsetting hawk to Yellen's dovish vote in the 1990s when both were on the FOMC. Meyers said, "I jumped up and down shouting hurray" when he heard she was going to be nominated.

Janet Yellen

There is rumored to be a rescue package for Greece that will be announced on Monday. The Guardian, a U.K. paper citing anonymous sources, said it would be for €25 billion and will require rewriting some of the EU rules to enforce more fiscal discipline. Reportedly the €25 billion will come from various European capitals in the form of debt guarantees. Greece is expected to need another €55 billion by year-end. The guarantees are being offered in hopes of strengthening the Euro and ending the Greek debt crisis.

Reportedly talks are being held on creating a European Monetary Fund (EMF), which would act like the IMF and loan money to EU nations with strong conditions attached. This can't be formed in time to help Greece but EU officials are well aware that Portugal, Italy and Spain may follow Greece down the crisis path.

Forrester Research raised their estimates for computer sales in 2010 by seven million PCs. They believe business tech spending will grow by 6.6% in 2010 compared to an 8.2% decline in 2009. Forrester also raised their estimates for online sales in 2010 to $172.9 billion from $155.2B in 2009.

China reported their exports exploded with a +46% jump in February. However, China said it could take a couple years before exports returned to the 2008 highs. Analysts believe the February numbers were inflated by shipments rushed in order to complete them before the Chinese New Year and March could show a sharp drop.

China's growth does appear to be increasing and a recent report is predicting sales of 15 million cars in China in 2010. That would be 2.5 million more than what is expected in the USA. That suggests demand for oil will also rise more than currently expected. On Friday the IEA said oil demand in China surged by 28% in January and they raised their estimates for 2010 demand to 86.6 million barrels per day. This was 100,000 bpd more than their last forecast. Demand in developing nations is expected to rise +4.3% in 2010 compared to a decline of -0.3% in developed nations. Oil prices spiked to $83.16 on the report but quickly faded.

Crude Oil Chart

TrimTabs.com reported that the economy appeared to be really improving today and much better off than just six weeks ago. TrimTabs said wages were up +3% year over year. Online job postings were up +9% year-over-year and +18% year to date. This is a strong leading indicator of economic activity. They said investors were still pouring $1.5 billion per day into bond funds rather than favoring equities. That is a strange statistic given the continued rise in equities.

Friday was a neutral day for the markets. The Nasdaq, S&P and Russell all ended fractionally negative, which means only fractionally away from a new high. The Dow, the laggard in the group in terms of recent gains actually closed positive by 12 points thanks to Caterpillar, American Express and General Electric. All had gains for the day of 2-3%.

Volume over the last four days was decent at an average of 8.7 billion shares. That was the strongest average since the first week of February. However, trading volumes were boosted by the billion plus shares a day in Citigroup so removing Citi gives us a 7.6 million share average and relatively low volume.

For the week before option expiration this was pretty anemic volume. Normally the week before an expiration is pretty busy. This is also a triple witching expiration so it should have been even busier. The lack of volume is thought to be from the lack of sellers. Everybody has picked up on the sudden buying spurt among fund managers and the race for quarterly performance. It appears sellers have elected to sit out until after the FOMC meeting or even until the quarter is over.

With just over two weeks left in the quarter and fund managers in a shopping frenzy, shorts have figured out it does not pay to jump in front of the trend. With volume weak there is little conviction but with economic news seemingly improving by the day it may not be long before that conviction arrives.

We are three weeks away from the March nonfarm payroll report and Goldman, JP Morgan and Morgan Stanley analysts are now predicting a gain of 100,000 to 300,000 jobs in March. Goldman expects 275,000 and David Greenlaw at Morgan Stanley as many as 300,000. That total is made up of roughly 50,000 normal jobs, +100,000 attributable to a weather rebound and 125,000 or more to the census.

In this environment of improving economics the potential for a sudden spike of +300,000 jobs is a monster gain in sentiment for the market. For those of us that understand the census impact over the next three months it is not as big a deal but for John and Mary Doe hearing the +300,000 headline on TV it will be a very large sentiment builder. We should get those numbers for the next three months due primarily to the census. Three months of 300,000+ headlines will bring even the most skeptical consumer out of their mental cave and give the administration a serious publicity boost.

If you are a fund manager you probably want to be 100% long when those first jobs are announced on April 2nd. Even though the rising estimates are building expectations into the market there should still be a sentiment spike because 90% of retail traders have no clue about economics until they hear the actual headlines.

This is a serious convergence of factors for fund managers. Triple witching, end of the quarter window dressing and the potential for a monster sentiment spike into earnings. I would not want to be a bear for the next three weeks. Of course that does not mean we are going straight up. It just means there is an underlying bullish trend once we get past the FOMC announcement on Tuesday. That also assumes they don't screw something up in the announcement.

The Dow and the NYSE Composite are the only major indexes that have not broken out to new highs. However, the Dow is starting to show some relative strength and the uptrend resistance from the prior month is now acting as support. The Dow is now only 100 points from the January resistance and 125 points from a new high. If fund managers are starting to become concerned about the over extended gains in the small caps they may want to start putting some extra cash back into the big caps for safety. Dow 10600 emerged as support intraday on Friday with 10550 stronger support if there is a bout of profit taking.

Dow Chart

The S&P has closed twice at 1150. Although refusing to break through that level it the S&P is also refusing to pull back below 1150. Most analysts now believe that we will break through despite the over extended rally. There have only been two days since late February with strong S&P gains. The majority of gains have been slow gains with a small range. This allows for minor profiting taking as we move higher and every intraday dip is bought. Nobody is chasing prices higher but they are definitely buying the dips. Once we get a real breakout over 1150 I expect a pullback to 1150 as support before we begin to move much higher. Current support is 1140. The S&P futures posted 10 consecutive days of gains with the streak ending on Friday. You have to go back to 1987 for an 11-day streak.

S&P-500 Chart

The Nasdaq is now officially in nosebleed territory. The +267 point gain since the February lows is very over extended and could drop on profit taking at any time. Support should be prior resistance at 2325. Monday would be the perfect day for this to happen so the bulls could reload for a post FOMC continuation move higher. The big cap techs appear to be weakening but so far it is more of a lack of conviction for a higher move rather than the arrival of profit taking.

Nasdaq Chart

The Russell is extremely overbought. Since Feb 8th the Russell has closed negative only three times out of 23 days. That equates to overbought in any language. This is better than the 4 losses in 18 days back in July and 4 out of 24 days in May-2005. You have to go back to April 2003 to find 6 losses in 34 days to best the current run. It is time for a rest. These strings don't go on forever even in the best of conditions. For this to continue we need a decent dip to buy. Ideally a pullback to 665 before the FOMC announcement would give everyone a new entry point.

Russell 2000 Chart

In summary, dip buying is alive and well and we need a decent dip. Preferably that dip would come on Mon/Tue and a positive Fed statement would be bought. However, this is a triple witching week so volatility all week is a possibility with the end of quarter rally starting over the following week. I believe funds will want to be long into month end for quarterly window dressing and then long over the April 2nd jobs report for a sentiment bounce into earnings. Just remember once the earnings cycle starts and the closer we get to May the greater the potential for a correction. The current rally is a temporary event that should begin to fade in mid April if not before.

This is daylight savings time weekend. Don't forget to set your clocks forward or you will be late for church.

Jim Brown


Index Wrap

Is Tech Enough?

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

In 4 out of the last 5 weeks, both the S&P and the Nasdaq indexes gained ground, but the S&P could now be stalled at its prior top and Nasdaq may be at some resistance also. One question is whether rising tech stocks can keep pulling all boats higher. The market is also 'overbought' in terms of extremes in bullish sentiment and as measured by the RSI indicator.

I wrote my most recent (Thursday, 3/11) Trader's Corner about how a return to a previously broken trendline can act as strong resistance (or support); this article can be accessed by clicking HERE. The Nasdaq Composite has reached resistance implied by its previously broken 1-year UP trendline and it's a question as to whether it can regain or move above this trendline; especially in an overbought market. On the other hand the Russell 2000 (RUT) has traded back above such implied trendline resistance.

The 21-hour RSI for ALL the major indexes (hourly chart not shown) has been trending lower of late as prices have continued to get pulled higher. This bearish divergence is suggesting possible selling pressures coming up. While I remain bullish on a longer-term basis, the major indexes now look to have some risk, even high risk, of a correction. I'll lay out specifics for each individual index.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart may be stalling at its prior 1150 high, a possibility that's more acute given the recent high levels of bullish sentiment and the Relative Strength Index (RSI) extreme. I'm not taking out puts here, but have exited call positions mostly as we wait to see how this situation of a possible double top plays out. I am not placing bets that the prior high will get pierced AND be followed by a sizable further up leg. Could happen, probably won't.

SPX fulfilled my bullish expectations of a retest of its prior high, once the index exceeded a 2/3rds retracement of its prior downswing. The Nasdaq has of course pierced its January highs and is still on a run. Whether SPX holds tech back or follows Nasdaq to new highs is a key question. I rate the possibility of a corrective pullback or at least a sideways move as greater than the outlook for sizable further gains near-term.

If SPX climbs above 1150, a next potential objective is to the 1180 area. Major resistance implied by extending the previously broken up trendline currently comes into play around 1215.

I've pegged support at 1124, then at 1112, with major support anticipated in the 1080 area.

I've noted already the overbought extreme seen in the 13-day Relative Strength Index (RSI). As I wrote last week: "...overbought situations as prices approach a prior key high can suggest at least a flattening out of the trend or possible period of consolidation."

MARKET SENTIMENT:

High, high and high (see above) in terms of bullish expectations implied by my daily CBOE call to put ratios for total equities options volume. High bullish sentiment, coupled with a return to a prior tough resistance area and an overbought extreme suggested by the elevated RSI, isn't a situation suggesting sticking around to see if there are any further gains to be had in SPX calls.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index is approaching the prior cluster of January highs made in the 530-531 area. OEX has had to date a substantial rebound off its lows and is overbought. How much more upside could there be? A rhetorical question. If OEX pierces its prior highs, a next target is to 540. Between 540 and close to 560, it is hard to measure or project any particular technical resistance.

The limitations on OEX's further upside (above it's prior top) is the same as big brother S&P 500; i.e., an overbought market in terms of momentum oscillators like the Relative Strength Index/RSI and, in a sense, also overbought given such high bullishness.

Very near support is at 520, but the key support remains 515, extending down to the area of the 50-day moving average at 511. The 500 area is the beginning of fairly major support.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow (INDU) Average did finally manage to break out above 10600 resistance. There is not major upside momentum here, as INDU and the S&P lag the Nasdaq. Moreover, the 21-hour RSI (not shown) is trending down, as prices have continued to work higher recently. This bearish price/RSI divergence suggests that INDU is vulnerable to a near-term downside correction.

Concern about a correction here is not suggesting that I am ready to bet against the current trend. I would consider taking out some DJX puts if INDU butts up against tough resistance implied by INDU's prior up trendline, currently intersecting around 10850. This kind of juncture, where momentum slows in an overbought market as there's an approach to a prior top, is where it gets dicey in eking out further gains in bullish strategies.

Next resistance has to be assumed for the previous 10730 high, then at the previously broken up trendline, currently intersecting around 10850.

Immediate support is at 10600 and a dip under this level could be the start of further weakness. Pivotal technical support comes in around 10400, with major support beginning at 10200.

Stocks to watch: bellwether INDU stock General Electric (GE) had a strong move on Friday (to 17) and a further advance above 17.5 could bode well for a similar bullish breakout above 10730 in the Average.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) has maintained a bullish chart by continuing to advance after its breakout above the cluster of prior highs seen in January. I have noted possible resistance now coming in at recent highs, as COMP butts up against its previously broken up trendline. I have not noted any further resistance on my chart above this trendline, currently intersecting at 2374. Prior weekly upswing highs made in August '08 would be challenged at 2457 to 2473.

Support levels are 2300, then 2250. Major support likely begins in the 2200 area. As discussed relative to the S&P, high bullish sentiment and the RSI extreme suggest that it may be difficult for COMP to continue achieving the kind of strong gains seen in the prior two weeks.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) remains bullish in its pattern. The line of prior highs around 1900 now should offer support on pullbacks. Ability to find support on pullbacks to the 1900 area would suggest that the index was consolidating for a further push to try to regain (get back above) its 1-year up trendline, currently intersecting at 1960. If the Nas Composite breaks out above ITS previous up trendline and which COMP is touching now, it would lend credence to NDX continuing to move up to resistance implied by the comparable NDX trendline.

Near technical support is now up to 1900, with next support coming in around 1862, which is where the previous upside gap would get 'filled in'. Upside chart gaps tend to be areas of chart support on subsequent pullbacks.

It's tough to stand up for a prediction that a strong run like what NDX is in won't continue, but I assess further upside progress will be limited. At least downside risk of a correction appears greater than further upside potential.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The same chart pattern exists for QQQQ as with the Nasdaq 100 (NDX) chart, with my same concern about how much longer the current advance can go on. If the QQQQ rally is to continue, I would expect that the Q's will find support on any pullbacks to the prior 46.6 high. Next lower support is highlighted on the chart at 45.8. Major support begins in the 44 area.

Key resistance is projected as being 48-48.1, as such a further advance would return QQQQ to potential resistance implied by its previously broken up trendline and provides a pivotal technical test.

The contraction of daily trade volume on the continued strength seen Thursday-Friday is not adding to a bullish case for a further advance. However, On Balance Volume (OBV) continues to track upward.

RUSSELL 2000 (RUT) DAILY CHART:

I didn't think last week that the Russell 2000 (RUT) would be showing such technical strength. At least as implied by the fact that RUT is back in the same upside momentum (rate of price change) groove as it was before its up trendline got pierced on the last correction.

Where to from here? I noted next potential 'resistance' as suggested by my red down arrow just over 700. Above and beyond that, it is anyone's guess. If the chart remains bullish, we will at least know where technical support should be found: on pullbacks to its (regained) up trendline as was seen over Wed-Fri.

I've bumped up where I'm showing initial support this week to the 653 area; next support is noted at 633 on the chart.

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

Short-term Cash & Coffee

by James Brown

Click here to email James Brown

Editor's Note:

Bullish candidates were plentiful with the market in rally mode. However, we don't want to add too many plays bullish plays if we're expecting a dip. I'm listing a few extra candidates that caught my eye.

Check them out: CHSI, CREE, CHD, CVD, and NFX


NEW DIRECTIONAL CALL PLAYS

Cash America - CSH - close: 40.64 change: +0.47 stop: 35.95

Company Description:
Cash America International, Inc. provides specialty financial services to individuals in the United States and Mexico with over 1,000 locations. We are the largest provider of secured non-recourse loans, commonly referred to as pawn loans, and operate under the brand names Cash America Pawn, SuperPawn and Prenda Fácil. (source: company press release or website)

Why We Like It:
The high levels of unemployment in this country appear to be a boon for the pawn industry. Consumers looking for short-term loans or immediate cash can turn to companies like CSH to help them. Shares of CSH have been consistently marching higher. While I am tempted to open positions now we are expecting the market to see a correction soon. I'd rather wait and buy calls on a dip. The 50-dma has been consistent support in the past. I am suggesting we use a dip to $38.25 as our entry point to buy calls. If triggered our first target is $41.00. Our second target is $44.00. Our time frame is several weeks.

Use a trigger at $38.25 to buy calls.

Suggested Position: BUY CALL APRIL $40 (CSH 10D40.00) current ask $1.95

Annotated Chart:

Entry on March xxth at $ xx.xx
Earnings Date 04/22/10
Average Daily Volume = 272 thousand
Listed on March 13th, 2010


Green Mountain Coffee Roasters - GMCR - cls: 92.65 chg: +0.29 stop: 83.45

Company Description:
As a leader in the specialty coffee industry, Green Mountain Coffee Roasters, Inc. is recognized for its award-winning coffees, innovative brewing technology, and socially responsible business practices. GMCR’s operations are managed through two business units. The Specialty Coffee business unit produces coffee, tea and hot cocoa from its family of brands, including Green Mountain Coffee®, Newman’s Own® Organics coffee, Tully’s Coffee®, and Timothy’s World Coffee®. The Keurig business unit is a pioneer and leading manufacturer of gourmet single-cup brewing systems. K-Cup® portion packs for Keurig® Single-Cup Brewers are produced by a variety of licensed roasters and brands, including Green Mountain Coffee, Tully’s Coffee and Timothy’s (source: company press release or website)

Why We Like It:
Last year, 2009, was an incredible year for GMCR. Shares left a trail of dead bears in its wake with a successful string of short squeezes. Now after consolidating sideways above the $80 level for two months GMCR has begun to rally again. Shares hit new all-time highs last week. On a short-term basis GMCR actually looks poised to rally again right now. However, we are expecting a market pull back. I would much rather buy calls on a dip. The plan is to use a trigger to buy calls at $88.00. We'll place our stop loss under the 50-dma. I would consider this an aggressive trade because shares of GMCR can be so volatile. If triggered at $88.00 our first target is $93.00. Our second target is $99.00 but that could take a few weeks.

Use a trigger at $88.00 to buy calls

Suggested Position: BUY CALL APRIL $90 (GMCR 10D90.00) current ask $5.80

Annotated Chart:

Entry on March xxth at $ xx.xx
Earnings Date 04/29/10
Average Daily Volume = 1.17 million
Listed on March 13th, 2010



In Play Updates and Reviews

Telecom Continues To Climb

by James Brown

Click here to email James Brown

Editor's Note:

Telecom stocks continue to do well. We're adjusting our exit and stop on TEVA. We've dropped IBM as a bearish candidate.

Current Portfolio:


CALL Play Updates

ADSK - Autodesk - $29.16, Change +0.13 Stop $27.50

Upward momentum continues to wane for shares of ADSK. The stock has essentially traded sideways all week in spite of the new 52-week highs. While the trend is up shares are short-term overbought and due for a correction. More aggressive traders may want to consider a wider stop loss. I am not suggesting new bullish positions in ADSK at this time.

Current Position: CALL APR 30.00 (ADSK 10D30.00) @ $0.55

Annotated Chart:

Entry on March 8th at $ 28.72
Earnings Date 02/24/10 (confirmed)
Average Daily Volume = 2.75 million
Listed on March 6th, 2010


ATHN - AthenaHealth Inc - $38.13, Change -0.07 Stop $36.50

Monday is the big day. ATHN reports earnings after the closing bell on March 15th. We are expecting a post-earnings pop. More conservative traders might want to raise their stop loss toward this week's low near $37.30. This "lottery ticket" style of earnings play is risky. Keep that in mind if you open new positions before Monday's closing bell. I would expect some short-term resistance near $42.00 and then near $44.00.

Current Position: CALL APR 40.00 (ATHN 10D40.00) @ $2.00

Annotated Chart:

Entry on March 8th at $ 39.20
Earnings Date = 03/15/2010
Average Daily Volume = 600,000
Listed on March 6th, 2010


BUCY - Bucyrus International - $64.83, Change -0.12 Stop $62.50

BUCY tried to rally Friday morning but quickly failed after filling the gap down from Thursday. I remain concerned that the stock could be forming both a lower high and a bearish double top pattern. Once again I'm suggesting that more conservative traders exit early right now. I am not suggesting new positions at this time. Our target to exit is $68.00.

Current Position: CALL APR 65.00 (BUCY 10D6500) @ $3.82

Annotated Chart:

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


Cognizant Technology - CTSH - close: 50.80 change: -0.21 stop: 48.95

Unfortunately I don't see any changes from my Wednesday night comments. I do want to remind readers that this is probably an aggressive play because the NASDAQ is so overbought and due for a correction. If the market corrects CTSH will likely follow. However, in the mean time the trend is up and shares are poised to breakout from this short-term consolidation above $50.00. Our initial target is $54.75. FYI: Don't go overboard just because the option looks cheap. If CTSH does correct the value will vanish.

Suggested Position: BUY CALL APRIL $55 (CTSH 10D55.00) @ 0.40

Annotated Chart:

Entry on March 11th at $ 50.54
Earnings Date 05/04/10
Average Daily Volume = 4.05 million
Listed on March 10th, 2010


Mobile Telesystems - MBT - close: 57.07 change: +0.92 stop: 51.90

Telecom stocks continued to move higher and MBT out performed the market with a 1.6% gain and a new 52-week high. Shares are arguably overbought with a string of four weekly gains in a row but after consolidating in the $54-55 zone we have a good chance of seeing MBT continue the march higher. Patient traders may want to wait for a dip back toward $55.50-55.00 before launching positions. More conservative traders may want to use a tighter stop loss. Our first target to take profits is at $59.85.

Suggested Position: BUY CALL APR 60.00 (MBT 10D60.00) @ 1.10

Annotated Chart:

Entry on March 12th at $ 56.34
Earnings Date 03/31/10 (unconfirmed)
Average Daily Volume = 1.26 million
Listed on March 11th, 2010


NII Holdings Inc. - NIHD - close: 40.57 change: +0.33 stop: 37.90

NIHD is another wireless telecom stock that is out performing the market. Shares continued to rally on Friday with a 0.8% gain and a new 52-week high. I would still consider new bullish positions at current levels. Our first target is the $44.00 level.

Suggested Position: BUY CALL APRIL $40 (NIHD 10D40.00) @ $1.85

Annotated Chart:

Entry on March 11th at $ 40.10
Earnings Date 04/22/10
Average Daily Volume = 2.68 million
Listed on March 10th, 2010


Panera Bread Co. - PNRA - close: 79.15 change: -0.12 stop: 74.75

After Thursday's big gain PNRA took a day to pause and catch its breath. Friday's session was a quiet drift sideways. The $80.00 level could be round-number resistance. If that's the case then readers may want to wait for a dip, maybe toward the 10-dma, before considering new bullish positions. Remember, this is an aggressive trade with both PNRA and the market so overextended. Our first target is $82.45. FYI: It is worth noting that PNRA could announce a stock split one of these days. The last time shares split was in the $75-80 zone back in June 2002.

Suggested Position: CALL APR 80.00 (PNRA 10D80.00) @ $1.35

Annotated Chart:

Entry on March 11th at $ 77.18
Earnings Date 04/28/10
Average Daily Volume = 519 thousand
Listed on March 9th, 2010


TEVA Pharmaceuticals - TEVA - close: 61.30 change: -0.35 stop: 59.75 *new*

The action on Friday was a little disappointing. TEVA spiked higher at the open, hit a new all-time high and broke through recent resistance. Only the rally didn't last and shares eventually closed in negative territory. I am inching our stop loss a little bit higher to $59.75. We only have one week left before March options expire! More conservative traders may want to exit now with the March $60 calls trading at $1.50. Given our time frame I am lowering our exit target to $63.00. I am not suggesting new positions at this time.

Current Position: CALL MAR 60.00 (TVQ 10C6000) @ $0.70

Annotated Chart:

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


PUT Play Updates

*Currently we do not have any put play updates*


CLOSED BEARISH PLAYS

Intl. Business Machines - IBM - $127.94 change: +0.34 stop: 127.65

I am giving up on IBM for now. On Thursday I said that if IBM continues to rally we'll drop it as a bearish candidate. The stock managed a 0.2% gain although it's worth noting that Friday's candlestick could be setting up for another bearish reversal lower. I'm dropping it from the newsletter with the play unopened but I'm keeping IBM on my watch list.

Trigger to buy puts @ 124.90 (TRIGGER was NEVER hit)

Suggested Position: PUT IBM 120.00 (IBM 10P120.00) @ $x.xx

Annotated Chart:

Entry on March 10th at $ xx.xx
Earnings Date 04/19/10
Average Daily Volume = 5.67 million
Listed on March 9th, 2010