Option Investor
Newsletter

Daily Newsletter, Saturday, 3/27/2010

Table of Contents

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

Market Wrap

Race To Quarter End

by Jim Brown

Click here to email Jim Brown

With three days left in the quarter and the markets suddenly struggling to remain positive it appears the bulls could run out of money before we run out of month.

Market Statistics

First I want to thank Todd for contributing to this commentary. I have been fighting the flu the last several days and he volunteered to share the load.

It was a tough week on the geopolitical front with Greece flaring up again, U.S. bond auctions not going well, China pushing back on its currency, some weak economics in the housing sector, some surprise announcements about the cost of the health care package on corporations and a South Korea patrol boat sunk on Friday under suspicious circumstances. I will get to all those items but first some economics from Friday.

The Greek tragedy in the form of another plea for money hit the markets on Wednesday when Greece said it would go to the IMF if the EU nations were not going to support Greece with money instead of words. By threatening to drag the IMF into the fray it raised the crisis to a new level because the EU wants to be recognized as standing on its own and being independent from outside help. If they lean on the IMF there is a blow to their prestige.

I would say that prestige is already pretty well dented with Greece playing the IMF card so soon after the last debt sale. Add in the downgrade on Portugal's debt by Fitch on Wednesday and the house of cards appears to be crumbling. The downgrade to AA- put Portugal at the same level as Ireland, Italy and Cyprus and that is just two notches above Greece. Fitch said the austerity measures Portugal had submitted for 2012-2013 could lead to "disappointment" and "underperformance."

When the Greek news hit the dollar spiked to a new 52-week high above 82.0 on the dollar index. The Euro and the Pound fell to 52-week lows and the equity markets stumbled on the news. Commodities were crushed and worries continued to circulate on which country would be next in the bulls-eye.

Before the week was out the EU in conjunction with the IMF agreed to give Greece $29.2 billion in guarantees to cover the next round of funding problems. One analyst put it this way. They were faced with two choices, both bad, and they took them both. He was referring to loaning Greece money from the EU and allowing the IMF to also put up money.

Of course, this is not the best of news for the Euro, which did gain a bit of strength of yesterday, but real strength can be seen in the U.S. Dollar. The greenback has gained nearly 1% against the Euro in the past week and is headed for a first-quarter gain of 6.8%. That would be the Dollar's best quarterly gain against the Euro since the third quarter of 2008. For all of the fiscal issues Uncle Sam faces and the soaring budget deficit and national debt we are witness to here in the States, the Dollar is still viewed as a safe-haven.

The greenback realized enough momentum this week to post its first weekly gain in March against the Australian and Canadian Dollars, two of the stronger currencies in the world.

Dollar Index chart

Despite the fact that Greece now has some kind of bailout package with which to work, the Greece theme will not dissipate as we move into next week. The Financial Times reported on Saturday that Greece is planning an auction of $6.7 billion in three- or seven-year Eurobonds before the end of March to test the strength of the aforementioned rescue plan. That auction will be followed by another of a similar size in April, the FT said. These auctions will certainly have forex traders and others watching the Euro carefully.

Euro-Dollar chart

More important to me than the Greek debt crisis is our own debt crisis. This week the government auctioned off $118 billion in debt and it did not go well. The lukewarm auction with a bid to cover ratio of just over 2.5 and rates a lot higher than anybody expected. When there is weak demand the government has to accept a higher rate from reluctant investors. This was NOT a failed auction BUT we are headed in that direction. This was a shot across the bow for the government. These are bond investors saying we don't want the U.S. to follow Greece down the default road. We are not going to buy much more of U.S. debt unless there is a strong sign the government is going to do something to get its financial house in order. The government is planning on selling $1.2 trillion in treasuries in 2010.

The Office of Management and Budget (OMB) said back on February 1st that the administration was projecting a 10-year deficit total of $8.53 trillion. Congress has spent more money in the last year than during the terms of all the past presidents combined. On Friday the OMB said the initial estimate was too low and now the administration is expecting $9.75 trillion in deficits over the next decade. By 2020 the OMB is expecting the debt to rise to more than $20.3 trillion. That will equate to a debt to GDP ratio of 90%. To put this in perspective it would take a stack of $100 bills 690 miles high to make one trillion dollars. Unless bond investors continue buying treasuries at a record pace we will never get to 2020. We could see failed auctions soon and that will push interest rates up too fast for the economy to adjust. I had a 21% home mortgage in the early 1980s as a result of hyperinflation. Don't believe for a minute that it will be different this time.

Alan Greenspan spoke out on the weak auction and said the higher yield was the "canary in the coal mine." He said, "I am very concerned about the fiscal situation. An increase in rates will make the housing recovery difficult to implement and put a damper on capital spending." Also, "I am worried about the politics and what is happening. Historically there has been a large buffer between the level of federal debt and our capacity to borrow. That is narrowing at a time where we need it the most." He had previously said a Value Added Tax (VAT) could be used to produce revenue and reduce deficits BUT he says now, "I am not convinced now that we can succeed in stabilizing this long-term outlook strictly from a VAT." Gee, I can't wait for another new tax.

You have probably heard every day that China refuses to float its currency and about how unfair that is to everyone else around the world. U.S. lawmakers have given China until April 15th to make some changes or be officially labeled a currency manipulator. Officially applying that label requires the U.S. to take action against the country in an effort to force them to make a change. I believe part of the weakness in the treasury auctions could have been because China decided not to bid to show the U.S. just how important their monthly treasury purchases were. China has $1.2 trillion in dollar denominated reserves so they can't just sell dollar assets but they don't have to keep buying more. If lawmakers proceed in putting this label on China it could be a disaster for the U.S. debt sales. Be careful what enforcement action you take because there are always unintended consequences.

You may have heard in the news last week that major corporations are pre warning on lower profits as a result of the healthcare bill. Companies warning last week included 3M with a $90 million charge, AKS $31 million, Valero $20 million, Caterpillar $100 million, John Deere $150 million and AT&T announced a $1 billion charge to earnings. Honeywell said it would impact Q1 earnings by 5-cents per share or roughly $38 million. Companies are already announcing layoffs because they can't afford to continue paying worker insurance at the new rates.

This sudden surge of earnings warnings is just the initial trickle because every public company is going to be negatively impacted by the costs. These costs are coming at a time when American companies can't afford more expenses. This is a new tax on business and that is exactly what killed the country when it was rebounding from the Great Depression. Lawmakers upped the tax rate to try and recover the stimulus money. This caused the recovery to fail and the economy crashed for the next nine years.

The Heritage Foundation put out the table below in response to the earnings warnings. These are not the only taxes but simply a starting point. This does not include things like the 10% tax on tanning salons or the per person penalty for not having health insurance. Also the new tax on individual investment income like interest, dividends, rents, capital gains, etc and the higher Medicare tax rate is not listed. This is just a starting point. Expect for the airwaves to be clogged with earnings warnings over the coming weeks.

You may remember the constant speeches that nobody in America making less than $200,000 will be taxed. You probably also remember the claims last week that the healthcare bill was deficit neutral and would actually reduce the deficit. These claims were possible because the additional spending and taxes were pulled out to be included in the Reconciliation Act to "fix" the Senate version of the healthcare bill. Americans for Tax Reform said on Friday the Reconciliation Act raises taxes by $52.3 billion.

Heritage Tax Table

You probably also heard last week that new home sales in February fell to 308,000 "on an annualized rate" and the lowest level since records were started 47-years ago. Not only was it a record low but it was -6% below the prior record low set in January 2009. The high was 1.4 million in mid-2005. Months of new home inventory rose to 9.2. We are only 35 days away from the end of the homebuyer tax credit. We are only five days away from the end of the Fed's quantitative easing program where they bought $1.25 trillion in home mortgages to keep interest rates low. If the government does not extend the tax credit for another quarter the housing sector is going from bad to worse. Analyst Richard Bove said last week he expects home prices to decline another 15-20% before the end of 2010.

As if the week could not be any more complicated, news broke on Friday afternoon that a South Korean patrol boat had exploded and sank very close to the disputed border with North Korea. The announcement immediately caused a sell off in equities and a spike in the price of gold. The ship had a crew of more than 100 and 59 were reported rescued. South Korea initially expressed concern that the ship could have been torpedoed for straying near NK waters. They backed off that claim later in the interest of not causing a scene before the facts were known. South Korea had said the ship fired at an unidentified vessel farther north earlier on Friday. The two countries have had two major naval battles in the same area over the last decade. In November the navies exchanged fire and ships on both sides were damaged. The odds this ship exploded beneath the waterline without any help from North Korea are very slim. The news on Friday created yet another cloud over our struggling equity market.

South Korean naval ship Cheonan

The Greece theme, along with some "help" from Portugal, has resulted in some headwinds for U.S. equities, as highlighted by the evaporation of strong early session gains on Thursday and Friday, but the S&P 500 is in the midst of its best winning streak since August after notching its fourth consecutive weekly gain. There are some positive stock-specific stories if one knows where to look. In the past week, financials certainly fit that bill as Dow components Bank of America (BAC) and JPMorgan Chase (JPM), the two largest U.S. banks, have gained 8% and 4%, respectively.

Those are nice gains to be sure, but the new king of the big retail bank stocks, at least in terms of capital appreciation is Citigroup. Citigroup is still a member of the federal government's mutual fund of downtrodden financial stocks, but the shares have been anything but downtrodden as of late, gaining more than 10% in the past week alone. The stock is up about 26% in the past month, triple the returns offered by Bank of America and JPMorgan Chase. Citi is usually the most active NYSE issue and on Friday the stock traded more than 587 million shares compared to average daily volume of 480 million.

Citigroup chart

Another stock that offered some positive news on Friday was Brinker International (EAT), the operator of the Chili's, On The Border and Maggiano's restaurants. Brinker said it expects to earn 41 cents to 44 cents a share in its fiscal third quarter while analysts were expecting a profit of 40 cents a share. The company also it said it expects sales at restaurants open at least one year to fall between 1% and 2%. That's better than previous estimates that called for a decline of 2% to 4%.

While the casual dining space is not always on the receiving end of the type of fanfare that is normally reserved for financials, materials or technology names, it is a sector worth watching because it does offer a temperature check on the health of the U.S. consumer and perhaps Brinker's outlook indicates some consumers are willing to once again spend on dining out.

If nothing else, Brinker felt comfortable enough with its bullish guidance to raise its quarterly dividend 27% to 14 cents a share from 11 cents. The new dividend would give Brinker a yield of 2.8% based on Friday's closing price of $19.59. Brinker also said it will add $250 million to a currently existing repurchase plan that has $60 million remaining on it.

Brinker (EAT) chart

On the other hand, there is Oracle (ORCL), which traded down by 1.34% on Friday after issuing fiscal third-quarter results that were somewhat disappointing after the bell on Thursday. The software giant said it earned 38 cents a share on revenue of $6.4 billion. Analysts were expecting a profit of 37 cents a share on revenue of $6.3 billion and Oracle's inability to really impress the Street is one reason why the Nasdaq declined on Friday.

The company's acquisition of Sun Microsystems appears to be going well as Oracle said Sun added $596 million in sales in the quarter. That number was at the higher end of the range of $300 million to $700 million analysts had forecast. Oracle's earnings update was disappointing in comparison to the recent reports we have seen from other tech bellwethers such as Cisco Systems (CSCO) and Hewlett-Packard (HPQ).

It does pay to note that Oracle expects software sales for the current quarter to rise by 3% to 13%. That was the first time in over a year the company did not warn of a sales decline. The company said it would earn 52 cents to 56 cents a share for the current quarter while analysts are expecting a profit of 53 cents a share. Oracle shares are already trading close to a nine-year high, but Jefferies raised its price target on the stock to $31 from $30 and the stock was on the receiving end of a bullish write-up in Barron's today.

Oracle chart

The economics on Friday did not provide any motivation for traders in either direction. The GDP revision for Q4 slipped slightly to 5.6% growth from 5.9% in the last version. This was expected and not a surprise. The consumer Sentiment revision showed a slight gain to 73.6 from the first March reading of 72.5. This split the consensus and whisper numbers and was not a market mover.

Next Friday the market is closed but the biggest economic report of the year will still be released. That is the Non-Farm Payrolls for March. The official estimate has climbed to 155,000 new jobs but the whisper numbers are well over that level. Morgan Stanley is expecting 300,000+ with 100K from the census hiring, 100K from the snapback in weather related declines in February and 100K from organic growth. The +300K estimate is about the middle of the road for the whisper numbers but there are estimates as high as +500,000 depending on the census hires. The census will hire 1.3 million over a four-month period and produce a monster jump in the employment sentiment. Odds are good that 99% of people who hear the headline number will not hear that x-thousand are only temporary due to the census.

Unfortunately all the whisper numbers are already priced into the market and anything on the low side could cause a serious dip in equities the following Monday. I am expecting a number near the middle at the 300K range because job postings have increased 18% year to date according to TrimTabs.com. That is a huge boost and it has nothing to do with the census.

Economic Calendar

The equity markets stalled last week after marking new 18-month highs. Of concern to me was the return of the afternoon sell programs. In Tuesday's commentary I warned that the end of day buying binges were an indicator of a continued reluctant meltup. "Once the end of day selling returns the buyers will become wary again." That is exactly what happened over the last three days. We got the gap and crap in the morning and sell programs into the close. The sentiment tide is turning.

I suspect fund managers have run out of ammo or maybe they are saving it for Tue/Wed to make sure the markets close at new highs. Time will tell. The advances came on weak volume and the declines came on increased volume. There were two billion shares of increased volume on Thursday compared to Tuesday's rally volume.

This has been a great run even though it came complete with its own lack of conviction. It was called the tortoise rally, a stealth rally and the rally only a mother could love. However, it was still a rally. The Dow has climbed for more than 35 days without a 1% decline. That has not happened in over a year. The big cap equity indexes are up about 5% in March, +10% over the last two months. The small cap Russell, S&P-400 and S&P-600 are up 8-14%. Unfortunately the fat lady may be getting ready to sing.

If the rally was a race for competitive returns by fund managers then crossing that end of quarter finish line could be the equivalent of a cold shower. Gains are not gains until they are sold and the cash is in the account. Volume next week is going to be horrible. Passover begins at sundown on Monday. Good Friday is Friday and Easter on Sunday. Volume will be very light and any remaining fund managers with money should be able to push the indexes in the desired direction. The following week should be back to business as usual and that could easily be the business of profit taking.

With dozens of companies expected to announce every day how much the healthcare plan will impact earnings the outlook for guidance is definitely down. Of course anyone with a brain realizes this is an exceptional event that paints everyone with the same broad brush but company after company whining about big writedowns is not going to boost sentiment. This is the year we may have an early "sell in May" event in April.

The Dow spiked to 10955 on Thursday and a +118 point spike before the selling began to push it back to only a single digit gain. On Friday the opening spike was more lethargic and only made it to 10909. That is a lower high but being only one day it is not entirely noteworthy. Resistance is still well above at just over 11000 and initial support is 10850 and exactly where it closed on Friday. The three failed rallies on the last three days of trading is definitely not a bullish indicator. While the fund manager window dressing scenario has the markets pinned to these levels or above through Wednesday's close, I have serious doubts they can pull it off even in the thin volume. The bears have been rather patient over the last month and the afternoon declines are a blue-light special calling them all to dinner. I could easily see a decline to additional support at 10700 over the next week.

Dow Chart

The S&P-500 struggled with resistance at 1165 for four days and finally broke over that level on Tuesday. That level has now been tested every day as support and I believe it will eventually fail. A decline to 1150 will not be that traumatic but a break below 1150 would be a clear signal the bears are planning to stay for the summer. The 1165 and 1150 levels are clear signposts for next week. Resistance is well above at 1200 but I doubt it will be tested. There are simply too many negative influences in the current events.

S&P-500 Chart

The Nasdaq is a chart that says, "Sell me." The sharp rebuff from the uptrend resistance followed by a lower close on Friday is a clear sell signal at least for me. That does not mean it won't retry that resistance next week but I think the earnings warnings on healthcare costs are going to be a wet blanket for the big cap techs. Think of all the employees Microsoft, Intel and Oracle are going to have to cover at higher costs. They will have to warn and with earnings only about three-four weeks away they have to do it soon.

Initial support on the Nasdaq is 2385 followed by 2350. I would not hesitate to sell a break of that 2385 level. Resistance is well above at 2430 and I doubt it will be tested again.

Nasdaq Chart

The Russell has clearly defined support at 670 and a tempting target to short should it break. If the love affair with the small caps expires at the close on Wednesday then it could be an ugly breakup. The Russell has been performing weaker than the big caps for the last week and I think that is an indicator we should watch.

Russell Chart

In summary, Thursday is going to be especially problematic with the jobs report on Friday when the markets are closed. Fund managers with profits to protect are not going to want to hold over Friday's report only to be met with a monster gap down the following Monday if the numbers are less than expected. The ADP report on Wednesday should be a clue to Friday's nonfarm payrolls. If the ADP report is seen as weak then there could be a rush to the exits.

I have told you over the last several weeks to buy the dips until we were proven wrong. At this point I don't want to be proven wrong with a loss of profits. I would let your conscience be your guide on holding or folding next week. I am thinking some June puts on the Russell ETF might be in order.

Jim Brown


Index Wrap

Further Selling Pressures

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The recent pause looks like the early stage of some further downside pressures, especially as the Q1 'window dressing' period is about over. At recent highs the S&P started pulling back from minor technical resistance, the Dow stopped at some intermediate resistance and the Nasdaq Composite (COMP) is either struggling to stay above its long-term resistance trendline or started pulling back after simply touching the equivalent trendline in the Nasdaq 100 index as will be seen with my charts.

While the long-term weekly chart picture, as suggested by the rising uptrend price channels in the major indexes, suggests substantial more upside potential over time (e.g., COMP could reach 2600 and higher, the S&P 500 (SPX) could get to 1300 and above), as a trader I'm most focused on the outlook for the coming 2-3 weeks.

I pointed out some current technical/chart considerations in my Thursday (3/25) Trader's Corner (TC) column, including the key downside reversal seen with the S&P daily chart this past Thursday and the aforementioned SPX and COMP broad weekly chart uptrend channels. For a look at these chart aspects, you can go this article online by clicking HERE.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

As noted in my initial comments, the S&P 500 (SPX) had a key downside reversal on Thursday, a formation that I tend to emphasize when I see it occur in an overbought market.

A downside reversal is typically defined as a new high, especially a decisive new high, followed by a Close below the prior 1-2 days' closing levels. I find the reversal pattern is 'strengthened' when the Close is under the prior day's LOW; e.g., as occurred in SPX but not in the Nas Composite, which had the same decisive new intraday high but closed below its prior day's Close only.

Whereas many market commentators don't define what "overbought" means, I specify that a short to intermediate-term overbought situation (2-3 days out to 2-3 weeks or more) is seen when the 13-day Relative Strength Index (RSI) is above 70/75 and when the CBOE call to put daily equities volume ratio is above 1.9-2.0. In my estimation there should be a yardstick that YOU can follow on your own; especially as I mainly write on a weekly basis. [I should note that the way I keep call/put ratios requires doing a simple division daily of call volume divided BY put volume.]

SPX has been trending higher with past weeks' intraday highs hugging the upper end of a narrow but steep uptrend channel. Near resistance is at 1187, at the upper end of this channel; call key near resistance as 1187-1190. It's difficult to define any major technical resistance before 1235-1240.

Near support is suggested at 1147, the low end of the channel highlighted below. A decisive upside OR downside penetration of this channel would suggest potential for a further move in that direction. Next support below the low end of the channel is in the 1124 to 1115 area.

RSI and MARKET SENTIMENT:

The RSI was recently trending lower as price continued higher, making for a bearish price/indicator divergence after RSI starting hitting overbought extremes above 70/75.

When a rally is extended AND the RSI overbought, extremes in bullish sentiment is something I pay close attention to. In a strong and prolonged run up it tends to be the SECOND or THIRD 'CPRATIO' daily reading above 1.9/2.0 (seen above) that precedes a correction worth strategizing about; e.g., as in deciding to exit some or all calls or taking on some puts for nimble traders.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) has continued to trend higher so I would have to rate the chart as bullish, but with the caveat that upside momentum is faltering. Given an overbought situation, I suggest being alert to signs of further weakness and to protecting profits gained on the strong and prolonged advance.

Above near technical resistance at 545, I don't see clear cut chart resistance until or unless OEX hits potentially tough resistance implied by the previously broken up trendline, currently intersecting up in the 565 area.

Near support comes in around 527, then in the 520 area, extending to 510.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow (INDU) Average has managed to trade above resistance implied by its previously pierced intermediate up trendline, but by the end of this past week INDU was back under this line suggesting possible faltering upside momentum. INDU may have to 'throw off' some of the overbought condition by pulling back some, before it is in a position to manage a next up leg and achieve again the upside rate of (price) change or upside momentum it had before its late-January sell off; i.e., as would be seen in a move back above the steep upper trendline.

Next resistance above recent highs is at 11000. Major resistance is not seen before 11400-11500. It would be a major achievement for the Dow to advance another several hundred points from recent highs, WITHOUT an intervening correction, given how far INDU has advanced since the early-February lows. I don't see a further major up leg given the relatively few (around 9) Dow stocks that are in rip roaring advances; e.g., BA, DD, DIS, HD, HPQ, INTC, KFT, MCD, and UTX.

I peg near Dow support at the prior highs in the 10730 area; call it 10730-10700. Next support is at 10500.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

I kept some notations on the Nasdaq Composite (COMP) daily chart from recent Trader's Corner column. The chart demonstrates COMP's struggle to maintain its prior rate of upside momentum. My anticipation right now is that the upper trendline is also the upper resistance zone and the lower trendline the low end of a possible price channel going forward. While this doesn't imply that prices will fall to the LOW end of this uptrend channel, but it is common to see a pullback to or a bit below the middle of this channel.

Important near resistance comes in around 2411 back up at the trendline as noted by the first red down arrow, with resistance extending to the recent high at 2432; next resistance is 2450.

Near support is in the 2350 area, with next lower and a key support, at 2300.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) just about got to resistance I estimated last week for 1980 but then slipped back this past week. While NDX has been in a very strong uptrend, at its recent 1976 high it has finally hit tough resistance implied by the previously broken up trendline as highlighted on the chart. If NDX starts slipping under 1950, especially on a closing basis, there is potential for a pullback back to substantial support in the 1900 area; next support is seen around 1860.

Conversely, a move above 2000 resistance would demonstrate continued major buying interest. As well as putting the index back above the NDX up trendline traced out in the year prior to the late-January break. Such a move (above 2000) would represent a continued major bullish chart, contrary to some indicator warning signs I've been discussing.

Price action is the number one determinant of a bullish pattern, indicators are secondary. However, a corrective pullback near-term has an increased probability given the move back to the prior up trendline and also diminishes the odds of a less severe correction later. Straight up moves get precarious as far as potential for an eventual sharp reversal and pullback.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 (NDX) chart is bullish but faces increasing odds of a bigger pullback than seen in awhile, which would no doubt be accompanied by a sharp spike in daily trading volume.

This past week's high saw a touch to resistance implied by the extension of the previously pierced up trendline. I have sometimes called such trendlines, the 'kiss of death' trendline. Reversals happen often when a stock or index returns to its prior rate of upside price change/momentum. Price breaks, such as occurred earlier this year suggest that the prior rate of upside momentum cannot be maintained and this fact is visually confirmed on an attempt to regain the previous up trendline.

Key near resistance is at 48.6, extending to 49.0. A move above 49 in the coming week would demonstrate continued strong buying in the big cap tech stocks and where prices would go from there is a guess. No major resistance is in evidence before the 50-50.6 area.

Conversely, a move under 48, would suggest downside potential to the 47 area and a bit lower, especially back to 46.6, support anticipated at the area of the cluster of QQQQ prior highs. Next lower support is at 45.8, at the low end of the outlined uptrend channel.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) pulled back from its move well up into its previous uptrend channel. Immediate overhead resistance is at 685, then at the prior recent high at 693; above this prior high, potentially tough resistance then comes in around 714-715.

The slip in momentum seen recently suggests potential for some further weakness such as back to the 670 area or a bit lower. I do not mean to imply that RUT won't go still higher over time, only that a pullback may have begun now that buying related to the Q1 'window dressing' period is about over.

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

ETFs & Basic Materials

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

ishares China - FXI - close: 40.83 change: +0.83 stop: 42.25

Company Description:
The FXI is the ishares exchange traded fund for the FTSE/Xinhau China 25 index.

Why We Like It:
China currently has one of the strongest economies on the planet with 2010 expectations in the 8-to-10% growth range. Unfortunately for investors that has already been priced into the market. The challenge now is rising inflation and the Chinese governments recent attempts to slow down their economy from overheating. Banking regulators have already raised bank reserve requirements twice this year and they tend to use that tool to slow down growth several times in a row. Now just this past week the Chinese market managed to rebound off their lows when a member of the central bank was quoted in an interview that China would not remove their stimulus from the economy too soon. As we all know sometimes a regulator's idea of not removing stimulus may not match up with what the market expects.

The oversold bounce in the FXI has stalled in the $41.50-42.00 zone near the 200-dma and 100-dma. I suspect that this ETF will correct toward the $35.00 region over the next few weeks. I am suggesting bearish positions now. More conservative traders may want to wait for a move or a close under the $40.00 level before initiating positions. Our target to exit is $35.75.

Suggested Position: BUY PUT MAY $40.00 (FXI 10Q40.00) current ask $1.43

Annotated Chart:

Entry on March 29th at $ 40.83(?)
Earnings Date --/--/--
Average Daily Volume = 21.3 million
Listed on March 27th, 2010


iShares Russell 2000 - IWM - close: 67.81 change: -0.03 stop: 70.15

Company Description:
The IWM is the iShares exchange traded fund (ETF) that seeks to mimic the performance of the small cap Russell 2000 index.

Why We Like It:
Small caps have had an incredible rally off their February lows with a 19% surge in just the last several weeks. Now the rally is getting a little frothy at the top and it looks like traders are starting to sell into strength. These are clues the rally could be poised to correct. Since the small caps had the biggest move higher they could have a substantial pull back.

I am suggesting bearish positions now. It's a little aggressive since we still have three days left for the first quarter and last minute window dressing could still push stocks higher. More conservative traders could wait until Thursday before initiating positions. I am suggesting a stop loss at $70.15. An alternative, more cautious stop loss would be near $69.40, which is just above the Thursday high. Broken resistance near $65.00 should be new support. Our target will be $65.10. We're not trying to knock the ball of the cover with this trade. We're just looking for a decent gain on what could be a temporary correction for the small caps.

Keep in mind that April options expire in three weeks. You may want to trade May options instead.

Suggested Position: BUY PUT APRIL $65.00 (IWM 10P65.00) current ask $0.55

Annotated Chart:

Entry on March 29th at $ 67.81(?)
Earnings Date --/--/--
Average Daily Volume = 60.4 million
Listed on March 27th, 2010


ProShares Ultra(Long) Basic Mat. - UYM - close: 35.16 chg: +0.55 stop: 37.26

Company Description:
The UYM is the ultra long or double-long exchange traded fund (ETF) that tries to mimic twice the daily performance of the Dow Jones U.S. Basic Materials index. There are 68 companies in the index that are involved in aluminum, commodity chemicals, specialty chemicals, forest products, non-ferrous metals, paper products, precious metals and steel. The top ten companies are: FCX, DOW, DD, NEM, APD, AA, NUE, BTU, IP, and PX.

Why We Like It:
The rally in the UYM appears to have run out of gas. Weakness in the euro and strength in the dollar has been a major issue affecting this group. While the dollar might look a little short-term overbought the new trend is up and I expect it to remain strong. Meanwhile the UYM is struggling with resistance near its January highs. Thursday's session was a bearish reversal but we have yet to see any follow through on it. I am suggesting a trigger at $34.30 to buy puts. If triggered our target is the $30.25 mark. More aggressive traders could aim for the 200-dma closer to $28.00. I do consider this somewhat aggressive since our stop is so wide. Keep your position size small, especially since we're trading a double-long ETF. FYI: If you want a more aggressive trade look at our put play for FCX below.

Trigger to buy puts at $34.30

Suggested Position: BUY PUT MAY $30.00 (UYM 10Q30.00) current ask $1.20

Annotated Chart:

Entry on March xxth at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 4.5 million
Listed on March 27th, 2010


Freeport McMoran - FCX - close: 79.17 change: +1.26 stop: 81.26

Company Description:
FCX is a leading international mining company with headquarters in Phoenix, Arizona. FCX operates large, long-lived, geographically diverse assets with significant proven and probable reserves of copper, gold and m olybdenum. FCX has a dynamic portfolio of operating, expansion and growth projects in the copper industry and is the world’s largest producer of molybdenum. The company’s portfolio of assets includes the Grasberg mining complex, the world’s largest copper and gold mine in terms of recoverable reserves, significant mining operations in the Americas, including the large scale Morenci and Safford minerals districts in North America and the Cerro Verde and El Abra operations in South America, and the Tenke Fungurume minerals district in the Democratic Republic of Congo. (source: company press release or website)

Why We Like It:
The thought process here with FCX is the same as that on the UYM. The rally in basic materials is slowing down thanks in part to the strength in the dollar. We know China is trying to slow down their economy and India recently raised their interest rates to slow down their economy. The trading action in FCX looks like momentum is about to roll over in favor of the bears. However, readers should keep in mind that if geopolitical tensions rise again gold would normally rally and that could give FCX a boost.

I am suggesting a trigger to buy puts on FCX at $77.90. If triggered our target is $72.00. I expect the 200-dma near $71.00 to act as technical support. This can be a volatile stock. I do consider this an aggressive, higher-risk trade. Keep your position size small.

Trigger to buy puts at $77.90

Suggested Position: BUY PUT APRIL $75.00 (FCX 10P75.00) current ask $1.07

Keep in mind that April options expire in three weeks. I expect this trade to be over before April options expire.

Annotated Chart:

Entry on March xxth at $ xx.xx
Earnings Date 04/22/10
Average Daily Volume = 5.67 million
Listed on March 27th, 2010



In Play Updates and Reviews

Tech Stalls, Gambling Gains Again

by James Brown

Click here to email James Brown

Editor's Note:

The action in the stock market this past week offers some warning signals that the rally is extremely tired. I would look at the recent intraday failed rallies as another clue the market's rally could be ready for a correction. More conservative traders may want to adjust their stops higher or just take their money off the table. We only have three days left for the first quarter and stocks might end up drifting sideways as fund managers run out the clock.

Current Portfolio:


CALL Play Updates

Apple Inc - AAPL close: 230.90 change: +4.25 stop: 222.49

Shares of AAPL managed to hit a new high at $231.95 this morning after Credit Suisse raised their price target on the stock to $300. Analysts are expecting great things from the upcoming iPad launch, which should happen in April. I am encouraged that AAPL did not see any follow through on Thursday's bearish reversal pattern. If you were looking for a bullish candidate, AAPL would qualify, but I'm still cautious on the rest of the market.

Our first target is $234.90. Our second target is $239.75. More aggressive traders may want to keep their stop loss under support at the $220 level. I would keep your position size small.

Current Position: BUY CALL APRIL $230 (AAPL 10D230.00) current ask $5.25

Annotated Chart:

Entry on March 23rd at $228.00
Earnings Date 04/21/10
Average Daily Volume = 18.6 million
Listed on March 22nd, 2010


Cash America - CSH - close: 39.35 change: -0.43 stop: 37.45 *new*

CSH is one of the largest pawnbrokers in the country. Consumers are still hurting to the need for short-term cash means traffic should stay strong, especially with the country's stubbornly high unemployment. The upward momentum in CSH has definitely stalled. The action on Friday looks like a bearish failed rally pattern with the rise to $40.50 and its reversal intraday. I am growing more cautious and suggest readers use small positions. I am also eliminating the breakout entry point to buy calls on a move at $41.20. Instead we'll focus on the buy-the-dip entry point at $38.25. The $38.00 level and the 50-dma should offer support. Please note that I am moving our stop loss to $37.45 to reduce 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

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: 51.09 change: -0.37 stop: 49.95

The rally in technology stocks has stalled with the NASDAQ churning near the 2400 level the last few days. CTSH also looks tired. The last candle on the weekly chart appears to be a top formation. I would expect a dip toward $50.00. The question is, will support at $50.00 hold this time? Nimble traders could buy calls on a bounce near $50.00 but if you do I would keep your position size small. The market looks fragile here and CTSH is overbought with some bearish looking technical indicators. 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


Express Scripts - ESRX - close: 100.62 change: +0.04 stop: 99.40 *new*

The rally in healthcare stocks appears to have peaked on Monday following Sunday's vote on the reform bill. The HMO healthcare index has bee sinking ever since. Friday saw the HMO accelerate lower with a 1.3% decline to its rising 10-dma. It's possible that the HMO index is forming a bearish double top with the peak in January and now in March but we won't know until it's in our rearview mirror. If you're an optimist then this is just normal, overdue profit taking and we can buy the next bounce.

The action in ESRX looks a lot healthier but shares have been slipping lower since Monday's pop. Traders bought the dip today at $99.58 and the afternoon bounce this Friday looks like a new bullish entry point. However, traders should be cautious here. I just described the weakness in the sector and the major market indices look tired too. If you do choose to buy calls on ESRX's Friday bounce then adjust your stop. We are raising our stop loss to $99.40. Remember, this is an aggressive, higher-risk trade. Our first target is $104.90. Our second target is $107.45. Our time frame is just a couple of weeks.

Current Position: BUY CALL APRIL $105 (ESRX 10D105.00) at $1.10

Annotated Chart:

Entry on March 24th at $101.99
Earnings Date 04/29/10
Average Daily Volume = 2.51 million
Listed on March 23rd, 2010


Coca-Cola - KO - close: 54.65 change: -0.15 stop: 52.95

Right on cue shares of KO dipped back to the $54.50 level for us. I cautioned traders on Thursday to look for this dip. KO has been digesting its breakout past resistance at its downtrend of lower highs and its 50-dma. I strongly suspect shares are building up steam again for a new rally higher. Yet the correction may not be over yet. Readers could wait for a dip closer to $54.00 or wait for a nice intraday bounce before launching new positions. The 200-dma near $53.00 should offer some technical support. The stock doesn't move super fast but I envision a rally toward the December highs over the next few weeks. Our target to exit is $59.00.

Current Position: BUY CALL May $55.00 (KO 10E55.00) at $1.62

Annotated Chart:

Entry on March 24th at $ 55.22
Earnings Date 04/21/10
Average Daily Volume = 14.6 million
Listed on March 23rd, 2010


L-3 Communications - LLL - close: 92.96 change: -0.56 stop: 91.25

The DFI and DFX defense sector indices have been somewhat resilient to the market's recent malaise the last couple of days. This group remains overbought but until the trend changes bulls are in charge. LLL hasn't been quite that strong and did suffer a little pull back this past week. On Thursday I suggested more conservative traders may want to abandon ship early. My concern is that when the correction does come to the defense sector it will be swift. On a short-term basis I'm expecting a slip toward the $92.00 level. More nimble traders could buy a bounce from $92.00. 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: 40.83 change: -0.23 stop: 39.60

Unfortunately nothing has changed for us with NIHD. The relative strength we were seeing in the communication sector a couple of weeks ago has mellowed. While NIHD's trend is still up momentum has definitely slowed. I would still be tempted to buy calls on a bounce from the $40.00 level but keep your positions very small. Technical indicators are looking bearish because the rally is so tired. The March 22nd low was $39.66 and last week we moved the stop loss to $39.60. Our first target is the $44.00 level.

Current 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


Priceline.com - PCLN - close: 252.11 change: - 2.92 stop: 239.85

I am not the least bit surprised to see PCLN slipping lower on Friday after Thursday's $11 gain. Traders did buy the dip near the $250.00 level, which is encouraging. If you're the optimistic type then this dip to $250 could be used as a new bullish entry point. Don't forget this is an aggressive, higher-risk trade given PCLN's volatility and overbought stature. We need to keep our positions small. Our target is $275.00. Our time frame is about four weeks.

Current Position: BUY CALL APRIL $260 (PCLN 10D260.00) @ 2.15

Annotated Chart:

Entry on March 25th at $246.60
Earnings Date 05/11/10
Average Daily Volume = 793 thousand
Listed on March 23rd, 2010


Panera Bread Co. - PNRA - close: 76.91 change: -0.38 stop: 74.75

There are no surprises here. We have been expecting a short-term pull back in PNRA. I am going to repeat my earlier comments that more conservative traders may want to exit early given the stock's failure to breakout over the $80.00 level the past two weeks. Currently I'm looking for PNRA to dip toward what should be support near $75.00 before making another rally attempt.

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.

Current 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


PartnerRe Ltd. - PRE - close: 80.20 change: +0.19 stop: 77.75

The relative strength in PRE continues with a 0.2% gain on Friday. This time the IUX insurance index participated with a +0.4% gain. Shares of PRE are now testing short-term resistance at their late February highs near $80.50. We have a trigger to buy calls at $80.55. More conservative traders may want to raise that trigger to $80.75 or higher just to reduce the chance we get triggered on an intraday spike higher.

If triggered we'll use a stop loss at $77.75 (under the March 19th low). Our first target is $84.75. Our second, longer-term target is $89.00. There is potential resistance near the October 2009 highs ($81.70) so don't be surprised to see some congestion there.

Trigger to buy calls at $80.55

Suggested Position: BUY CALL APRIL $80.00 (PRE 10D80.00) current ask $1.40

Annotated Chart:

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


Wynn Resorts - WYNN - close: 76.63 change: +2.22 stop: 69.29

Hmm... the rally in WYNN on Friday (+2.9%) was unexpected. At Thursday's close shares look poised to correct back toward $70.00. Now WYNN looks ready to breakout to new highs. More aggressive traders can still play this. If you are nimble enough I would be tempted to buy calls on a move over $78.00 with a stop near Thursday's low (74.30) or maybe Friday's low (74.81). Aim for the $82 region. As for the newsletter we will stock with the original plan and wait for a dip to $71.50. If triggered at $71.50 we'll use a stop loss at $69.29. Our first target is $76.50. Our second target is $79.90. Longer-term traders could aim a lot higher.

Trigger to buy calls at $71.50

Suggested Position: BUY CALL APRIL $75 (WYNN 10D75.00) current ask $3.40

Annotated Chart:

Entry on March xxth at $ xx.xx
Earnings Date 05/05/10
Average Daily Volume = 2.7 million
Listed on March 24th, 2010


PUT Play Updates

*Currently we do not have any put play updates*