Option Investor
Newsletter

Daily Newsletter, Saturday, 3/20/2010

Table of Contents

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

Market Wrap

Dow Streak Expires

by Jim Brown

Click here to email Jim Brown

The Dow's consecutive winning streak of eight days was snapped on Friday due to a multitude of factors including quadruple witching expiration.

Market Statistics

The Dow came very close to a record on Friday. The Dow has not had a streak of nine consecutive daily gains since 1996. Thursday was the eighth consecutive day but the Dow could not stretch it to nine.

Friday was a quadruple witching option expiration and a quarterly S&P rebalance. Crude oil fell -$2 ahead of expiration on Monday and pressured the entire energy sector. The dollar rocketed significantly higher for the second day as the situation with Greece flared up again. The odds were stacked against the markets closing positive.

The only economic report on Friday had little impact on the market. The Risk of Recession report showed the risk rose to 32% in February from 30% in January. This report projects the risk of recession for six months into the future or in this case August.

Analysts believe the increase in risk was weather related. Consumer spending fell simply because everyone was snowed in for several days in February. Jobless claims held over 400,000 per week and that is a big factor in the report. Housing starts declined and that helped push the percentage higher.

The economic calendar for next week is light with a couple of manufacturing surveys and the third revision of the GDP as the only high points. The 800 pound gorilla is still the Non-Farm Payrolls the following Friday. That report is getting so much press you would think it was due out on Monday. We are setting up for a really big letdown if it does not come in as expected.

Economic Calendar

In stock news PALM was crushed for a 38% decline after posting ugly earnings Thursday night. The stock has fallen from $7 after their latest earnings warning on Feb 24th to close at $4 on Friday. The company is under severe pressure with 1.15 million unsold phones and roughly 12 months of cash with an accelerating burn rate. Two analysts downgraded Palm on Friday giving it a price target of ZERO.

Palm projected sales in Q2 to be less than $150 million compared to $349 million last quarter and analyst estimates of $306 million. Total units in inventory rose by 55% from the end of 2009. I have written negative outlooks on Palm several times in the last couple of months and on March 6th I warned it could be a terminal decline.

With the Pre smartphones now dead inventory there may not be anything at Palm worth an acquisition effort. In a recent survey of over 4,000 adults by ChangeWave Research they found that only 4% of respondents would consider looking at a Palm phone as their next purchase. That compares to 37% for the Blackberry and 30% for the iPhone. With analysts starting to slap a zero price target on Palm the outlook is grim.

Palm Chart

There are rumors circulating that Google will close its Chinese website on April 10th and the closing will be announced on Monday. A top Chinese minister warned Google on Friday that it "will have to bear the consequences" if it stops filtering search results in China. Google announced in January it would no longer filter search results after it's website was targeted by Chinese hackers trying to get information on activists inside China.

Google routinely filters results for dozens of other countries according to the laws in those countries. For example in Turkey it is a crime to ridicule "Turkishness" so Google restricts access to videos that the Turkish government deems illegal. In Germany, France and Poland it is illegal to publish pro-Nazi material or content that denies the Holocaust.

Google supplies two thirds of the world's searches so it is the gateway to the Internet for the majority of the world. At one time or another Google has been blocked in 25 different countries for refusing to censor something that the country deemed offensive.

In the case of China the country does not provide specific guidelines and has no specific laws about search content. It is a daily battle with the Chinese government about what content or link is illegal today. Google has probably decided it is not worth the effort to put up with the constant changes from the communist country and cut their losses. This will be a benefit to Baidu, Bing and Yahoo.

Google Chart

Boeing (BA) rallied at the open after it announced it was ramping up production of the 777 and 747 models because of greater demand from commercial airlines. Both wide body planes carry more than 300 passengers. Production on the 777 will increase from 5 planes a month to 7 per month.

The 747-8, the newest version of the decades old plane, carries more than 400 passengers. The new model has been delayed by production problems and is now expected to be delivered in Q2-2011. Boeing will produce two per month and has 108 outstanding orders.

Late Friday Boeing learned it had two new competitors to the lucrative bid for the Air Force tanker project. Boeing found itself as the only bidder recently after Northrop/Airbus dropped out. Late Friday Airbus requested three more months to present a possible bid. Even more strange was a request from Russia to let them bid on supplying our military tankers.

I find it hard to believe that the U.S. Air Force would want to depend on an Ilyushin II-96 tanker that was built by the Russians. We may not be at war with them today but that is always a possibility in the future. For instance they support Iran and should the U.S. decide to attack Iran the Russians would side with Iran. A couple years ago the Russians also signed a joint defense agreement with China AGAINST the United States. If we go to war with China we get Russia as well. I don't know what the Vegas odds would be over the U.S. accepting a tanker bid from Russia but I would definitely bet against it.

Boeing Chart

The FDIC closed seven banks on Friday across five states. That brings the total to 37 so far in 2010 after closing 140 in 2009. The 2009 rate was the largest number since 1992. The banks closed included:

First Lowndes Bank, Fort Deposit, Alabama
Appalachian Community Bank, Ellijay, Georgia
Bank of Hiawasseee, Hiawassee, Georgia
Century Security Bank, Duluth, Georgia
State Bank of Aurora, Aurora, Minnesota
Advanta Bank Corp, Draper, Utah
American National Bank, Parma, Ohio

Of the closed banks Advanta was the only one the FDIC could not find a buyer to assume the $1.6 billion in assets. The FDIC said checks to depositors for insured funds up to $250,000 per account would be mailed on Monday. This will cost the FDIC $635.6 million. The FDIC expects bank closings to cost $100 billion over the next four years.

The FDIC said the pace of closures would increase in the coming months as losses mount on commercial property and development loans.

The first stage of the healthcare battle is coming to a close. In theory there could be a vote on Sunday night and both sides are still unsure if they have enough votes. However, President Obama has now cancelled two overseas trips to stay home to campaign for votes. He has been inviting undecided house members to the oval office for one on one talks. The push is on and the betting sites are now showing an 80% chance of passage.

The current bill and its fixes being pushed by the house will create a new 3.8% Medicare tax on investment income including dividends, interest, rents, annuities, royalties and capital gains. The Medicare tax on regular wages will rise 0.9% to 2.35% on high-income earners.

The Congressional Budget Office had to say that the plan would only cost $940 billion and could save $138 billion in 2020 because the democrats stripped out all the spending sections and put them in another bill. For instance the $250 billion fix for Medicare reimbursements to doctors was taken out and put in another bill that will be submitted to the Senate next week. This meant the CBO could only quote on the skeleton bill and its financial impact. This budgeting trick allowed fence sitters to vote for the bill as a deficit reduction bill.

Anyone with a brain knows there is no possible way that taking over 17% of the U.S. economy and providing healthcare to 32 million uninsured Americans and providing subsidies to anyone making less than $88,000 is going to cut the deficit. No entitlement program has ever come in under budget. Unfunded liabilities for Medicare and Social Security now total $107 trillion. This bill, according to the President and Nancy Pelosi is only the first chapter in recreating the healthcare sector. They both say that future revisions will include ALL of the things they could not get done this time around.

In order to make the bill deficit neutral the taxes begin immediately but the medical benefits don't start for up to four years. So get ready to write those checks but be sure to keep making those insurance payments as well. Medicare will see its funding cut by $500 billion and Medicare Advantage is as good as dead.

Walgreens in Washington State announced this week it was not accepting any new Medicaid patients because they were losing money on filling the prescriptions. Several other pharmacies have voiced concerns over the future of Medicaid but have not taken the step to stop offering the prescription service.

Multiple states have already passed laws canceling the insurance mandate for citizens in their states. Thirty-seven states are planning on forcing their attorney general to sue Congress and the Federal Government to stop the mandate that requires health insurance or financial penalties for not having insurance.

The bill includes a $695 per person annual penalty for failing to buy health insurance but that is sure to go up in years to come. Employers will face a $2,000 per worker penalty for not providing health insurance to their employees.

Caterpillar (CAT) sent a letter to House Speaker Nancy Pelosi saying the bill will increase its health care expenses by $100 million a year. CAT's VP of human resources said in the letter, "In our fragile economy, we can ill-afford cost increases that place us at a disadvantage versus global competitors that are not similarly burdened." CAT was just one of dozens of major firms and industry organizations pleading with Congress not to support the bill.

The problem for those who don't want the plan is simple. Once the initial bill is passed and signed into law it can't be canceled, revoked or voided as long as President Obama is in office. Even though the democrats stand to lose dozens of seats in the November elections there will not be enough votes in both houses to override a presidential veto on any attempt to void the bill. President Obama's next big project is immigration reform and he wants to get a vote on that before he loses his majority in the November elections.

We are living in really interesting times and the next three years are going to be a pivotal point in the future of America not only because of the healthcare bill but the trillions in debt and deficit spending will finally reach a point of unsustainability.

The equity markets suffered late last week after the Greek debt crisis suddenly reappeared. Greece sold some debt a couple weeks ago and the problem was thought to be off the table until the next round of debt sales in late April, early May. The EU had verbally supported Greece but offered no financial support although there were plenty of discussions. When the EU continually failed to follow through on any of their debt guarantee discussions Greece popped up again on Thursday saying it may have to go to the IMF for a bailout if the EU was not prepared to help.

EU countries see calling on the IMF for help as a sign of Eurozone weakness. The Euro crumbled and the dollar spiked significantly over the last two days. The spiking dollar crushed oil and commodities and prevented the U.S. equity markets from continuing their gains. This problem is not over until the EU provides guarantees for future Greek debt.

Natural gas prices fell to nearly $4 after inventory draws for last week were much less than expected. Storage levels fell only 11 BCF last week compared to -111 BCF the prior week. The cause is the warmer weather and traders are facing two months of weak demand before summer electric usage spikes.

The problem is the surge in production. Baker Hughes reported this week that the rig count rose for the 12th straight week. Gas rigs reached 939 and the highest level since Feb-27th 2009. There are 474 rigs drilling for oil. Gas rigs have rebounded by 41% since bottoming at 665 on July 17th. That was the lowest level since May 3rd, 2002 when there were 640 active gas rigs. Total rigs in operation at 1,427 is still below the peak of 1,600 in September 2008. The all time high was 4,530 in 1981 during the height of the oil boom and the low of 488 in 1999.

Natural Gas Chart

Oil prices dropped sharply on the sharp rise in the dollar but the current futures contract expires at the close on Monday. After spending two weeks trying to break above resistance at $82.50 traders probably just decided to take profits ahead of the weekend and the expiration.

Dollar Index Chart

Crude Oil Chart

Friday was a quadruple witching and the drop in the markets had a lot to do with stocks returning to their max pain strikes. The rally over the last week had exceeded most max pain points and this was a return to some of those levels.

However, with the pending health care vote there was some caution in stocks as well. The energy sector was down on the double whammy of the strong dollar and the bearish natural gas inventories. That took another large sector of support away from the market. The banking sector lost ground because of pending financial reforms and the battle of words among lawmakers and regulators. The rebalance of the S&P could not provide enough support to financials to keep them positive.

The S&P quarterly rebalance is done to bring the various ratios back into balance after new stock offerings and major buybacks. Many of the major financial stocks including Citigroup, JP Morgan, Goldman Sachs and Wells Fargo issued stock during the quarter and index fund managers had to buy more of those stocks at the close and sell part of the other 475+ S&P stocks to bring their ratios back into balance.

I am not going to attach too much importance to Friday's minor losses. I believe after an eight-day gain the Dow should have lost ground ahead of the weekend. I don't see any material change in the market from last week and I am still expecting a positive trend ahead of month end. Now that the expiration pressures are over we may need a couple days to find traction again but the dip buyers are probably still there for another eight days.

The Dow actually hit 10,819 Friday morning before losing traction. The intraday decline to below 10,700 rebounded back over the 10,725 resistance at the close. This is very bullish. It appears 10,725 has now become support and baring some bizarre health care event over the weekend or a sell the news event on Monday I think the easy path is still up. The Dow has finally joined the other indexes in breakout mode and we still have eight trading days left in the quarter. Once into April it will be a different story but for next week I am still positive.

Dow Chart

The S&P is following the game plan perfectly. We got the break above resistance at 1150 and a nice sprint to 1170 before Friday's expiration let the air out of the tires. I mentioned last week that I expected resistance at 1150 to be broken and after several days above that level it would be tested as support. A decent profit-taking day on Monday could test that support and I believe it will hold and provide a springboard for the month end run.

S&P-500 Chart

The Nasdaq scares me. The Nasdaq hit round number resistance on Wednesday at exactly 2400 and then failed to touch that level on the next two days. I doubt anyone expected the Nasdaq to just blow through 2400 without a second look so we are still in rally mode. However, the next test needs to punch through by several points or we risk sending a signal that the Nasdaq rally is done. There are dozens of scenarios that see the rally continuing including a return to support at 2350 or even 2325 BUT few of those conform to the quarter end mutual fund window dressing scenario. If fund managers are going to polish those windows they need to keep the Nasdaq from backsliding early next week.

This may be difficult with the Oracle earnings on Thursday. I hope that most tech traders could care less about Larry Ellison's ego or his company but an earnings miss there could blunt any tech gains. I would like to think that the Oracle earnings would be like a tree falling in the forest that nobody hears. To keep the EOM/EOQ party alive we need the Nasdaq to find traction early next week.

Nasdaq Chart

I really like the Russell chart. After being extremely over extended from several weeks of leading the other markets higher the Russell underperformed for the week and was the only major index to post a loss for the week. The range bound trade the prior week followed by the two-day spike to new highs and return to strong support is a perfect setup for next week.

The big two-candle drop at the open was clearly option expiration pressures. The ski jump lift into the close looks like a perfect setup for managers to buy on Monday. We had the big gain, a week of consolidation and abortive new high and then sharp decline to support. This chart is telegraphing a buy signal that any fund manager should drool over.

Russell 2000 Chart

In summary I believe we could wander on Monday depending on the health care vote and the cleanup from options being exercised at the close. A lot of traders are going to wake up on Monday with unexpected changes in their accounts and that always produces some strange eddies in the Monday market.

Assuming there is no sell the news event on health care I still expect to close the month higher. The lure of 300,000-400,000 jobs in the April payroll report is too strong for traders to ignore.

There is a strange scheduling conflict for that jobs report on Friday April 2nd. That is Good Friday and the equity markets will be closed. That means Thursday could be volatile but fortunately that is two weeks away. Once we close the quarter we should be in profit taking mode anyway and the holiday jobs report is going to be an added incentive to take profits on April 1st.

For the coming week I am not anticipating any major change in the markets. The bulls are in charge but still lack conviction. The bears are smart enough to avoid shorting the highs until month end. Until then the melt up should continue.

Jim Brown


Index Wrap

Expiration versus Window Dressing

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

I anticipate a pullback (followed by another rally) although window dressing buying may keep the market steady to higher for a bit longer. Using the S&P 500 (SPX) daily chart, I outlined the pattern I think is unfolding in my first chart below. Per this chart, the most recent run up sure feels like a Wave 3 type power move; e.g., the middle/second rally of three, a strong and prolonged advance that seems immune to selling pressure.

SPX and the Nasdaq Composite (COMP) have probably started corrections, but more time is needed to confirm this view. The last pullback in this current upswing (dating from the 2/5 low) was only a few days, but carried far enough to look like a correction. This next downdraft probably won't be deep either, especially if we're still in the Q1 'window dressing' period.

The odds of a pullback that is enough for traders to call it a correction would relieve a current overbought situation. Certainly it is the case that the indexes are struggling some around technical resistances I will go over in the individual index charts further on.

The very broad picture continues to be bullish and in weekly chart terms SPX is trending higher within a broad uptrend channel (not shown) that intersects currently at 1300 on the upside and around 1110 on the downside. COMP prices do not bump against potential major resistance implied by the top end of its weekly uptrend channel before 2600 currently; key support at the low end of the COMP weekly channel is 2200.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) got above key resistance at 1150 which then suggested staying power for its current advance. Expiration Friday may have brought in some selling pressure that won't be around in the coming week, but no one should rule out some further weakness, even if managers are still 'dressing up' their portfolios for another week or so.

An uptrend channel has been traced out as I have drawn below. Implied resistance at the top end of this channel comes in at 1180 currently. A key near technical support is 1140, an area that should find buying interest. Next support is around 1100.

The market is overbought as I've been saying but this has also been the less frequent case of a market getting 'overbought' by conventional momentum indicator measures, but which 'just keeps on going' per that crazy bunny. If there is going to be a 'power' move, it's usually the second rally after a correction has completed itself; as seen into the 2/5 bottom.

MARKET SENTIMENT:

Extremes in bullish expectations started tapering off on recent profit taking and expiration related selling. A key thing with the sentiment model seen above, is that high extremes in this indicator tends to forecast minor to intermediate pullbacks that may be a day, or as much as 5 days, away.

Bullish extremes as bearish omens are especially true when such occurrences are accompanied by a high RSI and a price pattern that suggests a move that is substantially 'extended'. Sentiment models tend to be leading indicators. If a next correction falls within this 'norm', such a pullback has begun. Stay tuned!

S&P 100 (OEX) INDEX; DAILY CHART

The chart looked quite bullish when the S&P 100 (OEX) pierced its prior highs at 530-531, although OEX fell back to this area on expiration Friday; the index is not clear of its prior high yet. Traders will likely chalk this up to expiration related selling. Unwinding was probably a dominant influence but whatever triggers selling in a sharply overbought market is usually not an 'accident', as in expecting this is always to usually a fluke occurrence.

We can let buyers and sellers sort out this little struggle around current levels. If support around 530 is seen ahead it would suggest that the prior high had become a support base for a next move higher such as to the 540 area. Major resistance begins above 560.

OEX slippage much below 530 would set up a possible test of minor trendline support around 520; with next support beginning at 510. A pullback to the 520-521 area that saw stocks buoyed again would suggest potential for a second rally attempt.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow (INDU) Average hit and then has backed off from resistance implied by (an extension of) its previously broken up trendline; noted as the 'intermediate up trendline' on the INDU daily chart below.

Near resistance at the (lower) trendline is 10800. If prices fall away from this line of resistance it would not be surprising both in terms of this trendline and from a bottoms up look at the 30 individual stock charts (more have seen some setbacks) as well as suggested by the RSI overbought extremes hit recently.

Near support is at 10640-10570, with pivotal technical support then coming in around 10500.

Key near resistance is in the 10800 area. A decisive upside penetration of 10800 would suggest a possible next INDU price target to around 11000. I think it, don't expect it.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) reached and exceeded briefly, resistance implied by the previously broken up trendline traced out by the lows made over the past year; this trendline was intact until the sharp sell off of late-January. Somehow a stock, commodity, bond, oil prices, etc., after a break below an up trendline in a prolonged prior climb, often struggle to get back to/above this previous rate of price ascent.

Key near resistance is at 2400; it becomes the must-overcome level to suggest continued buying interest will fuel a continuation of the rally that had its last spurt higher on NDX's leap above 2300, which is now a key support. 2500 is not out of the question for this index, especially after a correction has 'thrown off' at least some of its overbought condition. Next resistance looks like 2450.

NASDAQ 100 (NDX) DAILY CHART:

I was still somewhat bullish last week on the Nasdaq 100 (NDX) but did not anticipate headway above 1960. NDX got to 1950 and then slipped from weekly highs on expiration Friday.

The recent minor pullback, considering it started at what I consider a key line of resistance, may be the start of a further dip ahead. Window dressing buying in tech may keep a floor under NDX for another week; I am a little doubtful. The correction when it comes will be at least a sideways march of the indexes for a while; probably not only sideways but lower too.

I noted NDX resistance, at least above immediate overhead resistance at 1950, at 1965 and again in the 1980 area.

Near support is at 1905; then at 1890, extending to 1860

I thought last week that "further upside progress would be limited". From the prior week's Close (at 1924), this past Friday brought a weekly close at 1932. There was a greater price move intraday of course, but an 8 point price swing on a week over week basis in NDX wasn't going to add much to the trading coffers. Upside momentum has slowed and I anticipate some more downside ahead, especially after the window dressing rest of March.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 (NDX) chart is bullish and quite strongly bullish going forward especially if QQQQ stays above its recent up trendline, currently suggesting support in the 47 area. Even more pivotal in terms of chart considerations is for bullish holders of the stock or options is be wary of a close below prior highs in the 46.6 area; more than a single day would be bearish. 45.8 is a next support.

I made a chart note below projecting resistance at 48.5, which would mark a return to the Q's previously broken up trendline as highlighted on the chart.

This past Friday's price action constituted a key reversal in technical terms in that the stock went to a new high, followed by a Close below the prior day's low; actually, lower than the prior TWO day's lows, making for a 2-day reversal. Not a big deal, 1-day or two but it was showing some force for change! Monday-Tuesday should tell us if this reversal was due to expiration or the bulls running down a bit.

Daily volume has been rising some over recent days, which is almost a 'contrary indicator' in that QQQQ, unlike company stocks, tends toward reversing the old adage that "volume expands in the direction of the trend".

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) had a very bullish chart formation during the period when RUT blasted back up into its previous uptrend channel and hit 687. However, IF the index was going to then have the possibility for a run for the top end of that channel, currently at 708, RUT needed to say above 680 and it closed below that on Friday. The Friday 673 close takes the index back to just over its minor and steep up trendline intersecting at 670 currently.

Whether RUT bucks an overbought situation for much longer does not seem most likely to me, but followers of this market segment including me, will be acutely watching the early trade in the week ahead. I anticipate some further weakness but it may be minor. Expect some continued buying of the Russell 2000 stocks with the window dressing and the seasonal tendency for strength in small to mid-cap stocks in Q1.

Immediate overhead resistance is 680, extending to 687 at the prior intraday high. Next resistance begins at 700 on up to 708 and the aforementioned up trendline.

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

Insurance, Retail and Semiconductors

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

PartnerRe Ltd. - PRE - close: 79.10 change: +0.61 stop: 77.75

Company Description:
PartnerRe Ltd. (NYSE:PRE) is a provider of risk-assumption solutions for the global insurance and capital markets. We provide insurance companies with multiple lines of reinsurance — property & casualty, catastrophe, specialty lines, life, and alternative risk transfer — through our offices around the world. (source: company press release or website)

Why We Like It:
PRE looks like a bullish candidate right now. The stock has been lagging the rally in the IUX insurance index but shares look a lot more healthy. PRE has been digesting its February gains with a nice sideways consolidation. Traders are buying the dips again and technical indicators are turning bullish. I would be tempted to buy calls now. However, we're expecting a market dip early this week. I want to play it safe so we'll use a trigger.

The plan is to buy calls if PRE hits our trigger at $80.55. If triggered we'll use a stop loss at $77.75 (under Friday's low). Our first target is $84.75. Our second, longer-term target is $89.00. There is potential resistance near the October 2009 highs so don't be surprised to see some congestion there. If the market does retreat this week we'll be watching for an alternative entry point in PRE to buy the rebound.

Trigger to buy calls at $80.55

Suggested Position: BUY CALL APRIL $80.00 (PRE 10D80.00) current ask $1.05

Annotated Chart:

Entry on March xxth at $ xx.xx
Earnings Date 04/27/10
Average Daily Volume = 989 thousand
Listed on March 20th, 2010


NEW DIRECTIONAL PUT PLAYS

Sears Holding - SHLD - close: 103.61 change: -1.23 stop: 106.26

Company Description:
Sears Holdings Corporation (NASDAQ: SHLD) is the nation's fourth largest broadline retailer with approximately 3,900 full-line and specialty retail stores in the United States and Canada. Sears Holdings is the leading home appliance retailer as well as a leader in tools, lawn and garden, home electronics and automotive repair and maintenance (source: company press release or website)

Why We Like It:
I mentioned SHLD as a watch list candidate on Thursday night. This retail stock has been showing lots of relative strength. Yet the rally was unable to breakout past the January highs. Friday's session actually produced a bearish engulfing (reversal) candlestick pattern. I suggested that a failed rally at the January highs could be forming a bearish double top. Normally a bearish engulfing pattern needs to see confirmation. Friday's low was $102.85. I am suggesting a trigger to buy puts at $102.40. If triggered our target is the 50-dma but since that will be a moving target we will aim for $98.50. This isn't the best risk-reward ration because SHLD's daily range was so large on Friday and I'm suggesting a stop loss above Friday's high. Therefore we need to keep positions small and consider this an aggressive trade.

Trigger to buy puts at $102.40 (use small positions)

Suggested Position: BUY PUT APRIL $100 (SHLD 10P100.00) current ask $2.31

Annotated Chart:

Entry on March xxth at $ xx.xx
Earnings Date 05/20/10
Average Daily Volume = 900 thousand
Listed on March 20th, 2010


Varian Semiconductor - VSEA - close: 29.29 change: -0.53 stop: 30.55

Company Description:
Varian Semiconductor Equipment Associates, Inc. is the leading producer of ion implantation equipment used in the manufacture of semiconductors. The company is headquartered in Gloucester, Massachusetts, and operates worldwide. (source: company press release or website)

Why We Like It:
This is a simple relative strength play, or really the lack of strength. VSEA has been under performing the NASDAQ and its peers in the semiconductor sector. The stock's oversold bounce is rolling over and the stock appears to be forming a bearish head-and-shoulders pattern. More conservative traders could wait for a decline under the February low of $27.58 to launch positions. I'm suggesting new bearish positions now given Friday's failed rally and bearish reversal pattern under the $30.00 mark. Our first target to take profits is the $26.00 level. I do expect some support in the $26-25 zone so expect a bounce. Our final target is $23.50. More aggressive traders could aim lower.

Suggested Position: BUY PUT APRIL $30.00 (VSEA 10P30.00) current ask $1.55

Annotated Chart:

Entry on March 22nd at $ 29.29(?)
Earnings Date 04/29/10
Average Daily Volume = 743 thousand
Listed on March 20th, 2010



In Play Updates and Reviews

Commodities Stumble

by James Brown

Click here to email James Brown

Editor's Note:

I am dropping RIG as a bullish candidate given the weakness in commodities. We're also cutting ADSK loose. A few of our stocks are showing possible bearish reversals. Readers need to be very careful here. You may want to consider an early exit or raising your stop loss. I would definitely wait for a dip before considering any new bullish positions.

Current Portfolio:


CALL Play Updates

Cash America - CSH - close: 40.22 change: -0.47 stop: 36.75 *new*

Shares of CSH encountered some profit taking on Friday. The stock actually produced a little bearish engulfing (reversal) candlestick pattern. In addition the MACD has produced a sell signal and a new lower high. I strongly suspect that CSH is going to correct toward support near $38.00 soon. We still have two different entry points just be aware that the breakout entry point is very aggressive and higher risk.

We have two entry points for CSH. Our first is the buy-the-dip strategy with a trigger to buy calls at $38.25. If CSH hits $38.25 we want to buy the April $40 calls and we'll use a stop loss at $36.75 (new). Our first target is $41.00. Our second target is $44.00.

We also have a breakout trigger to buy calls on CSH if shares hit $41.20. This is a much more aggressive entry point so we want to keep positions small. If CSH hits our trigger at $41.20 we'll use a stop loss at $39.40. Our target is $44.25. We want to buy the April $45 calls. They are cheap so don't go overboard. Remember, small positions! This way if CSH reverses on us we will limit our risk.

Buy-the-Dip: Use a trigger at $38.25 to buy calls.

Suggested Position: BUY CALL APRIL $40 (CSH 10D40.00) current ask $1.55

Buy-the-Breakout: Use a trigger at $41.20 to buy calls.

Suggested Position: BUY CALL APRIL $45 (CSH 10D45.00) current ask $0.15

Annotated Chart:

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


Cognizant Technology - CTSH - close: 51.25 change: -0.58 stop: 49.75

I have to urge caution on CTSH. Today's session was bearish. Shares did hit a new high at $52.22 but eventually they reversed. Selling stalled at the rising 10-dma, which is bullish but CTSH has produced a bearish engulfing (reversal) candlestick pattern. These patterns require confirmation but any decline on Monday would be negative. I am not suggesting new bullish positions at this time. More conservative traders may want to up their stops toward the $50.50 level. Our initial target is $54.75.

Current Position: 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


Green Mountain Coffee Roasters - GMCR - cls: 93.90 chg: -2.90 stop: 92.95 *new*

I have to issue a reversal warning on GMCR too. The stock's bullish breakout on Wednesday and sudden reversal and its close under what should have been support near $95.00 is bearish. Plus it looks like a blow-off top on the weekly chart. More conservative traders may want to abandon ship early, especially since our entry point at $95.26 was the aggressive, higher-risk entry point. I am inching up our stop loss to $92.95.

This is an aggressive trade with small positions. Our first target to take profits is at $99.75. More aggressive traders may want to aim higher.

Current Position: BUY CALL APRIL $100 (GMCR 10D100.00) @ $2.00

Annotated Chart:

Entry on March 17th at $ 95.26
Earnings Date 04/29/10
Average Daily Volume = 1.17 million
Listed on March 13th, 2010


L-3 Communications - LLL - close: 94.17 change: -0.01 stop: 91.25

LLL held up reasonably well thanks to strength in the sector. The defense sector was one of the few sector indices to close in positive territory on Friday. Shares of LLL hit a new 52-week high Friday morning before paring its gains. Given the market's weakness on Friday readers may want to wait for a dip or a bounce near the $93.00-92.50 zone before launching new positions. Remember, this was an aggressive, higher-risk trade and we wanted to keep our trade size small. Our first target is $97.00. Our final target is $99.75.

We chose the $100 calls to keep our capital investment very small. Keep your position size limited.

Current Position: BUY CALL APRIL 100.00 (LLL 10D100.00) @ $0.30

Annotated Chart:

Entry on March 18th at $ 93.88
Earnings Date 04/22/10
Average Daily Volume = 908 thousand
Listed on March 17th, 2010


NII Holdings Inc. - NIHD - close: 40.20 change: -0.64 stop: 38.45

It looks like the rally could be in trouble for NIHD as well. It was positive to see the stock hold the $40.00 level on Friday but if the market continues to slip lower it wouldn't take much to have NIHD stop us out. Technical indicators are starting to look bearish. More conservative traders may want to raise their stop loss. I am not suggesting new bullish positions at this time. 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: 78.99 change: +0.40 stop: 74.75

PNRA was showing some strength early this morning. The stock actually tagged another new high before trimming its gains. The trend is up but shares and the market are overbought and the $80 level could end up being round-number, psychological resistance. I am not suggesting new positions at this time. This was an aggressive trade given our entry point. 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


PUT Play Updates

*Currently we do not have any put play updates*


CLOSED BULLISH PLAYS

ADSK - Autodesk - $29.11 Change -0.31 Stop $28.75

I am choosing to throw in the towel on ADSK. We've had the play for a couple of weeks and it can't seem to build up any momentum. Now some of the technical indicators are flashing sell signals. We want to exit early and look elsewhere. Readers may want to put ADSK on their watch list for a correction and buy the bounce.

Closed Position: CALL APR 30.00 (ADSK 10D30.00) @ $0.35(bid)
Entry was at $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


Transocean Ltd. - RIG - close: 81.84 change: -1.83 stop: 83.45

The Greece problem is really affecting the currency markets. The euro plunged again on worries Greece's debt woes are still not solved. The dollar has been rising in response and that's pushing oil futures lower. The oil service stocks are reacting to oil weakness and RIG has collapsed in the last couple of days.

Our trigger to buy calls was never hit at $87.55 so I am dropping this stock as a bullish candidate with the play unopened.

Trigger to buy calls @ 87.55 was never hit.


Annotated Chart:

Entry on March xxth at $ xx.xx *never opened*
Earnings Date 05/05/10
Average Daily Volume = 7.0 million
Listed on March 16th, 2010