Option Investor
Newsletter

Daily Newsletter, Saturday, 4/10/2010

Table of Contents

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

Market Wrap

Dow 11,000 Bell Has Rung

by Jim Brown

Click here to email Jim Brown

The Dow 11,000 bell was rung at the close and now the question is how long it remains at this level and will it move higher.

Market Statistics

The closing spike came on low volume and was obviously a small buy program that triggered some short covering above resistance at 10985. Yes, Dow 11K was touched but it is not the major milestone the press claiming it to be. It was psychological only and not a specific resistance level that changes the characteristics of the market. The last time the Dow closed over 11,000 was Sept-26th 2008.

The first Dow close over 10,000 during the rebound was October 14th. Since that close only five Dow stocks contributed 459 of the next 1000 Dow points. To say it was a broad based rally would be an error. The following five stocks contributed the most to the Dow gain.

Dow Movers

Dow Intraday Chart

There was only one economic report on Friday and that was the lagging Wholesale Trade report. The wholesale inventories rose by +0.6% in February after a +0.1% gain in January. February was the fourth month in positive territory in the last five months. Sales rose +0.8% compared to January's +0.9%. The report was seriously underwhelming and had no impact on the market.

There are a lot of reports next week but none are really market movers other than the Fed Beige Book on Wednesday. If the Fed says the regional economies were doing better or worse than in their last report then the markets could move on the news. It the report is just more of the same with slow improvement then it will likely be ignored.

The Philly Fed survey on Thursday will be of interest but I doubt it will be a market mover. The real problem for the markets next week will be earnings not economics.

Economic Calendar

Alcoa kicks off the Q1 earnings reporting cycle on Monday but all eyes will be on Intel, JP Morgan, Google and Bank America starting on Tuesday with Intel. There has been some discussion that Alcoa could miss earnings and that would not be a good way to start off the reporting cycle even if the majority of traders don't have a vested interest in Alcoa. They were downgraded twice last week so the negativity may already be priced into AA.

Intel is probably going to set the tone for the entire earnings cycle. Estimates have been raised to the point where they may not be able to hit the target. We know Intel is having a good quarter but analysts have built up expectations for a +39% jump in earnings. If Intel misses that target it could produce a serious crimp in market sentiment.

JP Morgan is in the same boat. Earnings are expected to be 65-cents per share compared to 40-cents a year earlier and I am not sure Jamie Dimon is going to be that excited about posting blowout earnings. That will just bring more government wrath down on the banking sector for higher taxes and fees on big banks.

Google always has trouble with earnings. Everyone always expects more than Google delivers and the stock normally tanks after the report. Will this time be different?

Bank America is expected to report only 8-cents compared to 44-cents in the year ago period. That is not likely to go over well despite the reasons being TARP repayment. Richard Bove posted a note on BAC on Friday that caused the stock to decline slightly although I thought it was positive. Bove said BAC would be worth three times as much if it were broken up instead of allowed to continue as a conglomerate. He projected a $53 stock price if it was split into three companies. He projected a double for JP Morgan using the same logic last week. He believes JPM would be worth $102 in a split.

I really hope the headliners in the earnings table below don't let the market down next week.

Earnings Calendar

Greece was back in the headlines on Friday as Fitch cut its debt rating on Greece by two notches to BBB- from BBB+. Fitch said Greece was facing new problems in raising fresh money on the global markets. This downgrade again roiled the markets but it was quickly reversed after several EU nations said they were ready to bailout Greece if needed. Greek debt is bid at 7.5% and rising and the EU bailout would lower that rate based on the guarantees. Greece needs 11.5 billion euros by next month to cover current obligations and another 32 billion euros by year-end.

I believe the Greek debt crisis is over. I don't think anything is going to happen to materially impact the global debt market. That does not mean there will not be volatility as events are announced. The EU and the IMF are ready to provide the bailout and this daily barrage of news is simply political wrangling and positioning ahead of the bailout. The other EU countries want to make it difficult for Greece to borrow the money so they will be forced to agree to stronger fiscal rules in order to get the funding. We know Greece will be bailed out so all this talk is wasted breath.

What we do need to worry about is the next shoe to drop in July when the ECB upgrades its outlook on the rest of the EU countries. The countries below are each going to get their time in the spotlight because nobody is going to want to loan them any more money until they get the same kind of guarantees Greek debt is about to get.

EU Debt Problems

The resolution of the Greek debt crisis, again, caused the Euro to spike a whopping +1.42 points to 134.58 and the dollar to plunge to the low for the week at 81.0 on the dollar index.

Chevron gave the energy sector a boost after they preannounced a better than expected quarter after the bell on Thursday. Chevron said its refining division would return to profitability in Q1 as margins increased. Refiners have been operating at less than 80% of capacity until the last couple weeks because of low demand and high inventory levels. The pickup in demand over the last month has increased crack spreads to nearly $14 per barrel and that is music to their ears.

Chevron said global oil and gas production of 2.75 mbpd in the first two months of the quarter was down slightly but increased oil prices would make up for the shortfall. Chevron is hoping to maintain 2.73 mbpd for the rest of 2010. Their average selling price in Q1 was $79 and that was significantly over the $43 average in Q1-2009. S&P quickly boosted earnings for Chevron by a whopping 38 cents to $1.95 per share. Chevron rallied +1.84 on the news.


Are you getting my daily energy newsletter? If you want to know what is happening in the energy markets on a daily basis just click the link below to sign up. The cost is FREE and you can't beat a deal like that.

Click here to register!


Palm (PALM) continued to find a bid after unconfirmed reports that Taiwan's HTC might be a potential suitor. HTC is the world's fifth largest smartphone maker. The acquisition of Palm would give HTC the access to the new Palm OS, which has been well received by the industry. The decline in Palm's stock price over the last couple months has reduced their market cap from $2.4 billion to $780 million. That is chump change for any acquirer. Earlier in the week Palm spiked on rumors that Lenovo was also interested in acquiring the company. Barclay's Capital immediately downplayed the potential Lenovo deal for various reasons. However, HTC could be a viable candidate.

Palm Chart

The major indexes hit a major milestone this week and I am not talking about Dow 11,000. They completed six consecutive weeks of gains. This has not happened since March/April 2009 when the rebound first began. The Dow has not had a single day with a -1% decline since February 4th. The markets have moved slowly higher on light volume with everyone and their brother talking about the impending correction.

That correction never comes and everyone is stuck scratching their heads and wondering if it is too late to go long. Those bears with conviction have been shorting every high to no avail. This is the worst kind of market for a bear. A melt up market lacking conviction provides almost perfect daily setups for the bears. You have the intraday spike and failed high and shorts start taking positions only to see a minor new high the next day and the process repeats.

This week the Dow resistance at 10985 was rock solid on Monday and Tuesday and Wednesday's high volume dip (9.5 billion shares) was the perfect confirmation for the bears after they shorted the 10985 highs. You could easily visualize them piling on the shorts on that cascade decline just before Wednesday's close. Unfortunately for the bears the Thursday rebound was yet another short covering rally and that continued into Friday's close. What intelligent bear wanted to carry already losing positions into a new closing high before the weekend?

Now the stage is set for next week. The market is at new highs and there are major earnings reports on tap. S&P is expecting earnings for the quarter to come in at +30% and that was before the upgrade from Chevron that will boost estimates for the entire energy sector. Earnings at +30% are great but lower than Q4 because the comparisons are more difficult.

On the downside the earnings expectations are already priced into the market. Intel has been stuck at its 52-week high for three weeks on anticipation of good news. JP Morgan is also holding at its resistance highs and can't seem to make any upward progress. Google is trading exactly where it was a month ago and there is no pre earnings ramp. Expectations are actually holding Google back this time.

At the risk of repeating every earnings cycle warning I have given over the last 13 years I believe we are setting up for an upset. The markets are up +75% over the last year. The economy is recovering but recovering slowly. The Fed is getting ready to change its bias and we are heading into the normal summer doldrums. I have reported on the "Sell in May and go away" trend more times than I care to count but this year I fear it will happen.

It is not going to happen because earnings are terrible or the economy is going to roll over. It is going to happen because it is time for the market to rest. The historical cycle for the markets is to be weak or choppy over the summer months and then rally again in the fall. The best six months strategy of being invested over the winter and in cash over the summer has been proven accurate over and over. That frees up investors from worrying about their investments while walking through Disneyworld or while driving across country on a vacation trip.

I took a four-week vacation a couple years ago and drove from Denver, to Vegas, Los Angeles, Yosemite, San Francisco, Seattle, Cor D'Alene, Yellowstone, Grand Teton and back to Denver. Roughly 4,500 miles with stops to visit friends and relatives in every major city. Keeping up with the market and my positions was a nightmare. Every night was drag out the laptop and see what happened. Millions of investors have figured this out and they simply clear the table of anything not a long term core position and tune out the markets over the summer.

Last year the markets were in full rebound mode and the Dow still lost -600 points from June 11th to July 10th. The Dow only gained +75 points from May 1st to May 29th. The markets were in rally mode and still suffered from the historical May-July weakness.

How are they going to hold up this year after a 75% rebound? I am concerned we could see a real correction of 5-10% sometime this summer. I am starting to see less bullish bias in the mainstream media. They have been in buy the dip mode since the January decline. I completely agreed and have been recommending the same thing. Now I am less confident and I am seeing more analysts hedging their bets with comments about a potential market dip. While having a rising number of analysts calling for a dip is actually a bullish signal for contrarians, I think retail investors are already cautious and that may make them even more cautious.

Obviously nobody can claim with 100% certainty that a dip or rally is about to occur but there is plenty of precedence to justify caution over the next three weeks.

For next week we have the major earnings from Intel and JPM and it is also option expiration. The market bias should be bullish through expiration assuming there is no major earnings disaster.

The following week has earnings from IBM, MSFT, AMZN, YHOO, and GS plus a dozen Dow components and over 500 other companies too numerous to mention. When that week is over the market will be primed for a decline. Add in the Fed meeting on April 27/28 and the potential for a language change and even a market rookie could find a sell signal.

Since the market exists to make fools of as many people as possible that will probably be the turning point towards Dow 12,000. Personally I am betting on the other direction so I will be the one farthest out on the prediction limb when the guy with the saw appears.

The Dow punch through to 11,000 on Friday lasted less than 30 seconds and was greeted by a huge cheer from the NYSE floor. Had it occurred at noon instead of 3:55 I suspect the closing print would have been much different as it would have been another shorting opportunity for the bears.

Closing at that level ahead of the weekend was due to short covering and the lack of anyone being around to apply any selling volume. Springtime Friday's are notoriously lacking in afternoon volume.

Despite the close at 10,997 the Dow is still at resistance. Plus or minus 10 points on the Dow is only a rounding error. The Dow hit 10987 on Monday and Tuesday so to bookend the week at 10,997 was not a big deal.

For Monday I suspect we won't see a big decline and the markets should remain relatively calm until the Intel earnings on Tuesday assuming there is not a news event that causes traders to become nervous. Once Intel reports and assuming they don't blow away earnings I think the tide will start to weaken. I don't really expect any material decline until the following week and the FOMC meeting but I am not trying to predict a short-term event today. I just want everyone to be prepared for additional weakness as April comes to a close. Whether that starts next week or the Friday before the Fed meeting is anybody's guess.

Dow Chart

The S&P resistance at 1200 is clearly the next target and one that I think could be tested next week. While the 11,000 level on the Dow was purely a psychological resistance level, S&P 1200 is real resistance PLUS it was the anticipated year-end target for the S&P by quite a few analysts. SPX 1200-1250 was the Holy Grail for analysts back in September when the S&P was 1000. The common comment was "This would be a +20% gain and the best we could hope for given the +40% rally from March." Surprise, surprise! Here we are in April and the S&P is up +65% from the March 2009 lows at 666 and there are still eight months left in 2010.

I have heard a couple analysts upgrading their targets to 1300 by year-end but most are being very quiet about their outlook. They either want the world to forget they predicted 1200 by year-end or they are hoping for a decline to appear so they can get a second chance at being right.

I believe touching 1200 next week would produce more bearish reaction than Dow 11K. This is a much more targeted number and like I said last week it would be the equivalent of an electric shock to the markets. If we reach that level I would be VERY surprised to see us pass it without a blowout number from Intel, Google, JPM and BAC.

S&P-500 Chart

The Nasdaq benefited on Friday from big gains in ISRG, CREE, CASY, ATLS, BIDU and DECK. All the other major players like GOOG, MSFT, INTC, RIMM, ORCL and DELL were either negative or up only a few cents. Most of those cents gained came on the closing spike. It was not a broad rally.

The Nasdaq came to rest at 2454 and almost exactly on the uptrend resistance and the resistance highs from August 2008. This is where the Nasdaq should fail if it is going to fail. Obviously with Intel earnings on Tuesday the Nasdaq bulls are going to be hesitant to put any more money into longs on the outside chance Intel is less than a blowout. With Google earnings on Wednesday they have double risk. I would be surprised if the Nasdaq moved higher but it is a broad market index and small positive gains on hundreds of stocks can offset hesitancy in the leaders.

A breakout on strong volume here would be bullish. I would have to hold my nose to go long but it would be bullish.

Nasdaq Chart

The Russell-2000 sprinted higher on Monday-Tuesday and then stalled after touching the uptrend resistance from Jan-2009. The first two days of the week were incredibly bullish but then the buying ended. I thought we were seeing another rotation from big caps to small caps but apparently it was not a broad market move and probably just a major fund restructuring positions.

I will be very surprised if the Russell moves higher this close to expiration, major earnings, FOMC meeting and summer. Small caps don't normally do well over the summer. Small caps are however a sentiment indicator for fund managers and despite the stall at resistance I see no indications today that managers are becoming squeamish.

Russell 2000 Chart

In summary, expiration week is normally bullish but earnings misses could sour that sentiment. I expect no major market changes next week without a major news or earnings event to provide motive power.

The following week has earnings from over 500 companies that will include nearly all the major companies left to report. When these earnings are over the earnings cycle will be over for all practical purposes. With the FOMC meeting the following Tue/Wed the potential for a decline increases. If the Fed does change the language in their statement I think the profit taking will begin. Obviously this is only my opinion but as a student of the market it is my best guess. I will continue to refine this outlook as April progresses and I will be publicly eating my words if we continue to move higher.

Jim Brown


Index Wrap

Market Keeps Rolling in Seasonally Strong April

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

Areas of potential technical 'resistance' in this Market are still well above where the major indexes are currently. It'll be over when it's over and seasonally, April has historically been a strong month.

In the last 50 years in terms of the Dow at least, April has been the strongest month in the Market, followed by December, November, January and March.

This is no doubt why, as an OIN Subscriber reminded me, there's the old investor saying: "sell in May and go Away". Until, November anyway!

Usual measures of 'overbought-ness' don't 'work' in this kind of runaway bull move in terms of identifying areas where the market 'should' be due for a shakeout. That would include indicators like the Relative Strength Index and the like, 'sentiment' models showing extreme trader/investor bullishness and low Volatility numbers, such as seen in the CBOE Volatility Index (VIX) as measured for the S&P 500 group of stocks.

There is a heightened risk of a shake out no doubt. There's also a powerful move going on and that's an opportunity to stay with the trend, as in calls and other bullish strategies. If you are leery of a correction but don't want to go against the trend (wise choice), you can stay out of new bullish directional trades of much duration, including spreads where profits depend on a cap on the upside. Being on the sidelines, at least for any major further or additional commitments is a choice too.

Speaking of indicators, I took a look at VIX as a buy/sell indicator in my recent Trader's Corner (TC) article Thursday (4/8); you should have that recent e-mail or can go to it online by clicking on the OIN Trader's Corner tab. I mention it here, not as another 'worthless' indicator that is suggesting a top that doesn't come, but to show a method of using VIX that works often enough to keep tabs on.

You know the drill; high volatility numbers relative to some historical period (e.g., the past 1-2 years) suggest an impending major correction. Low volatility numbers suggest complacency and to be alert for a significant shorting opportunity.

Well, of course in this market, VIX is quite low in terms of the past year, but this Market hasn't been kind to those trying to pick a top because of the low VIX.

As a SHORT-TERM indicator there are traders who pay attention to when VIX rises to more than 5 percent above its 10-day moving average, as suggesting potential for the S&P (and the overall market) to rebound in the short to intermediate-term. This trading 'model' is used most as a short-term indicator. If prices accelerate to the downside, you can stay with that move and see where it goes of course.

Conversely, when VIX falls 5 percent or more under its 10-day moving average, there's potential for an upcoming few days (e.g. 5) or more where the market will underperform its prior rise and flatten out OR begin a downside pullback.

In the last couple of instances of dips BELOW the lower 5% VIX 'envelope' line (seen above), a correction (in February) followed, but there was a lag before it did. In early-March a second dip below this line produced only a flattening out the strong uptrend in the following few days.

The Market advance since early-March has not seen ANY occasion where VIX fell under the 5% lower line. This is something I'm going to track to see if the NEXT instance of a fall below the lower line leads to the correction that we all know will come; maybe not until close to, or in, May as the old saying goes. I'd like to have all the alerts I can to suggest a shakeouts is near. Meanwhile, if you are on long side, not the wrong side, enjoy the party.

A general note on my charts seen below of the major indexes: I've redrawn my major up trendlines on the daily charts. My revised up trendlines (forming the low end of bullish price channels) have reverted to a start point at the March lows of last year as connected to the cluster of early-February lows of this year.

Given the strong move we've been in, it no longer made sense that any significant major daily chart up trendline was violated in the January-early February sell off and brings my daily charts in line with the long-time bullish weekly charts.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

Note: Please see reference at top (in the 'bottom line' comments) about my redrawn of all the broad uptrend price channels.

The chart remains bullish in its pattern as the S&P 500 (SPX) keeps chugging higher. If you haven't seen it recently, look at the weekly SPX chart. Some of the down days, when viewed on a daily chart basis, kind of masks the strong weekly climb that has been going on since the early-February low.

How long can this rally go on is a big question, but I don't see 'major' technical resistance until significantly higher levels, at the top end of the broad uptrend channel traced out since the low of 13 months ago. April has tended to have the biggest monthly gains over the past 50 years. Earnings reporting period for Q1 lies ahead of course. Either key surprises will be reports that exceed expectations or, if only in line or down some, the market is probably going to continue its bullish focus on a growing economy anyway.

I've talked enough (in the last couple of weeks) about the 'overbought' condition seen by overbought/oversold models on both the daily and weekly charts. However, in a powerful move like this coming out of a major recession, certain conventional technical 'facts' like this haven't been of much import.

Extreme bullish trader sentiment and overbought extremes in the Relative Strength Index DO tell us that the market is at some risk of a sharp shakeout IF/WHEN some bearish news hits. These indicators do not tell us, with any precision anyway, how long this rally will continue to get stretched out.

If we see such indicator extremes at the same time that prices hit resistance implied at the top end of a major uptrend channel, OR there is a key downside reversal, then the indicators should be taken into account; such as by a quick exit from bullish strategies and/or a move into puts.

SPX technical resistance is likely to come in around 1200, extending to 1218, at the top end of the minor uptrend channel. Resistance above 1218 is not really measurable on the chart based on any trendline analysis or the like. Major resistance is likely just over 1300.

Very near support is at 1178-1180, then at 1150; major support is implied for the 1126 area currently, at the low end of SPX's broad uptrend channel.

S&P 100 (OEX) INDEX; DAILY CHART

I've taken a bigger chart view this week showing the longer term bullish uptrend for the S&P 100 (OEX). The index has yet again broken out of a minor consolidation to the upside.

I don't envision resistance coming in before 555 currently, extending to 560, with major resistance coming up in the 600 area. The index has a shot of getting there, the next big round number. If I sound 'too' bullish here, it must be time to short the market:-

Near support is at 540, then at 530, with fairly major support expected around 520.

OEX is quite overbought in terms of the both the 13-day and the 8-week (not shown) RSI. It seems that the period we are in can continue to move higher regardless. This situation does suggest caution however in getting complacent in a bullish viewpoint. Be alert for trend reversals as always, but even more so currently. Meanwhile respect the trend.

DOW 30 (INDU) AVERAGE; DAILY CHART:

Enough Dow (INDU) Industrial stocks are in strong uptrends that INDU should be able to move above 11000 and then some, maybe going on over this month especially of getting near 12000. Well, we'll see. In particularly solid uptrends are AXP, BA, CAT, DD, DIS, HD, HPQ and MCD. Surging recently are CVX and XOM as oil prices seem to be disregarding the laws of supply and demand.

Many other Dow stocks are not doing much or are correcting. 11000 is the big kahuna resistance level currently; not only from it being a big fat round (1000) number that the media talking heads will be a-twitter about, but also in terms of potential trendline resistance as highlighted on my INDU daily chart below.

I've noted next technical/chart resistance for the 11200 area and major resistance around 12000, implied by the top end of INDU's broad 13-month uptrend channel.

Near support is in the 10885 area, then at 10700-10680, with fairly major support just over 10500.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

Note: Please see reference at top (in the 'bottom line' comments) about my redrawn of all the broad uptrend price channels.

The Nasdaq Composite (COMP) is bullish in its pattern, as the index continues to trade higher within a relatively narrow, as well as a much broader, uptrend channel. It appears that regardless of an overbought extreme and the highest bullish sentiment numbers seen since August-September of last year, at time when prices last hit the upper end of the (broad) channel, COMP looks poised to go still higher. If the trend is our friend, we've got a real buddy here.

Near overhead resistance is suggested in the 2500 area, at the narrower upper trend channel line as noted on the chart. Major resistance implied by the top of the broad channel comes in around 2650 currently.

Near support is seen in the 2400 area, then at 2350, with fairly major support toward 2300.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) also continues to march higher and looks set to challenge resistance at 2000. Even more so than 11000 in the Dow, this is a key number for NDX and represents almost a doubling of its 1040 low of just 13 months ago. Impossible to believe back then that in the right tech stocks you would have a double or more as an annual return!

Next resistance looks like it would come in around 2050, with major resistance not seen until 2160 if there was another run all the way to the top end of its major uptrend channel. A move such as this puts the Nas 100 within striking distance of its all time high of 2239. A challenge to a prior high like this is always a possibility once a retracement exceeds 2/3rs or 66%. I've been always saying that in general about retracement theory, but the reality of it for big-cap tech is hard to believe when you think of the difference between late-2007 and somewhere ahead perhaps in 2010. Tech is forecasting not just a recovery but a major one.

Back to earth and a look at support, suggests 1965, extending to 1950, as near support. Next lower chart support is noted at 1900, with key long-term support suggested at the up trendline intersecting currently around 1860.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 (NDX) tracking stock (QQQQ) next looks capable of hitting $50, which will be a major milestone number for the stock. As usual the stock goes higher on less volume which would tend to look bearish in company stocks. Caution here by potential buyers. This isn't yet a market where Mr. and Mrs. Average investor is buying up a lot of stock. Not only are people holding on, not expanding what they got, they don't 'believe' this rally. The strongest rallies are often such.

Major resistance looks to be the top end of my redrawn uptrend channel currently intersecting just below 53.

Near support is seen at 48.0, extending to 47.7, with next support at 47 even and major support just under 46.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) is another index that could see a double from its 393 closing low of last year. The index reflecting small and mid-cap stocks, where a lot of job growth comes in, look poised to finally stay above 700. Stay tuned on that but assuming RUT can hold above 695-680 going forward, the index looks poised to head up toward the 735 area, perhaps to 760.

Very near support is at 695, then at 680, with next lower support at 650-648. Support implied by the low end of its major uptrend channel intersects currently around 630.

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

Semiconductors continue to show relative strength.

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:

We are adding Silicon Laboratories as a new call play, but only if the stock pulls back to its prior resistance near $49.00, which should now act as support. I am expecting to add bearish plays in the coming days but I want to see how the market reacts to the first round of earnings next week.


NEW DIRECTIONAL CALL PLAYS

Silicon Laboratories – SLAB – close: 50.89 change: +1.15 stop: 47.95

Company Description:
Silicon Laboratories Inc. designs and develops analog intensive, mixed-signal integrated circuits (ICs) for a range of applications. Its mixed-signal ICs are electronic components that convert analog signals, such as sound and radio waves into digital signals that electronic products can process. The Company provides products for use in a variety of electronic products in a range of applications, including portable devices, satellite set top boxes, amplitude modulation/frequency modulation (AM/FM) radios, and other consumer electronics, networking equipment, test and measurement equipment, industrial monitoring and control, central office telephone equipment and customer premises equipment. Its products integrate complex mixed-signal functions that are frequently performed by numerous discrete components in competitive products into single chips or chipsets. (source: company press release or website)

Why We Like It:
SLAB broke out of resistance in the $49 area on Monday (4/5). The stock closed the week almost $2 higher at $50.89. SLAB is in the semiconductor sector which has been showing overall relative strength recently. The SOX index and SLAB have been holding their uptrend line, and upward channel, since February. I am expecting a quick retracement of SLAB down to its prior resistance line (which is now support) at around $49.25 which we will use as a trigger to buy calls. Our first target is $51.95 and our second more aggressive target is $53.95. Both of these levels are near highs from 2006 and 2003. We'll place our initial stop at $47.95.

Trigger to open bullish positions at $49.25

Suggested Position: CALL MAY $50.00, current ask $2.50, estimated ask at trigger price $1.30

Annotated Chart:

Entry on April xxth at $ xx.xx
Earnings Date 4/28/10
Average Daily Volume = 762,000
Listed on April 10th, 2010



In Play Updates and Reviews

All Indices Close At Fresh 52-week Highs

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:

The bulls are firmly in control of this market but it can not stay overbought forever. I am recommending to readers in most of our play updates to consider selling into any strength this week to ensure we lock in profits.

Current Portfolio:


CALL Play Updates

F5 Networks - FFIV - close: 64.76 change: +0.84 stop: 61.40

FFIV has had a remarkable run since it lows in March 2009 and February 2010. The stock has run up +251% since March 2009 and +37.50% in the last two months. The stock broke out to an all-time high last October and has never looked back. Most recently the stock has been consolidating in the $62.00 to $65.00 level for about a month. There is no question the stock is bullish as evidenced by the bottoming tail candlestick on Thursday which had follow through on Friday. If the stock can break-out above $65.75 with conviction it has a good chance of hitting our target of $69.75. Our current call position is doing well and we have made almost a 5% profit at current levels, however, I want to be cautious about a broader market sell-off which would probably take FFIV with it. I also looked at the open interest in April FFIV options to get a sense what the stock may do next week. It appears to me that FFIV could get pinned at the &65 level due to the amount open interest in puts at or below $65 and the amount of calls at or above $65. If the stock gets stuck at this level we will experience a week's worth of time decay. I am recommending readers sell positions into any strength next week (or at least move up stops) to protect profits. We will keep our stop at $61.40 for now. I am not suggesting any new positions at this time. I want to remind readers again that this is an aggressive, higher-risk trade and we want to keep our position size small.

Current Position: CALL MAY $65.00 (FFIV 10E65.00) @ $3.00

Annotated Chart:

Entry on April 6th at $ 65.26
Earnings Date 04/21/10
Average Daily Volume = 1.0 million
Listed on April 5th, 2010


Coca-Cola - KO - close: 54.59 change: +0.83 stop: 52.95

Last week we were looking for a bounce in KO off of its 200-day SMA. This happened on Thursday and the stock followed through very nicely on Friday closing up +1.54%. KO also appears to be forming a higher low on the daily chart. Another positive sign for KO is that it closed above its 20-day and 50-day SMA's. KO is entering a congestion/resistance area just overhead at the $55 to $56 level. KO still looks a little oversold and if it can break through this level the stock should see $57.00. We've lost about $0.60 of the $1.62 call we purchased. I am suggesting readers consider selling into any strength KO exhibits to limit any losses in the position. We still have plenty of time with our May options but KO is a slow mover and I don't want to get stuck in a losing position. KO tends to be a defensive play so it could rally if the overall market is weak. I am moving our target to exit the position from $59.00 to $57.00 but will consider closing position prior to this level if KO starts to struggle.

Current Position: 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: 93.91 change: +1.39 stop: 88.90

Our comments on LLL remain the same. We initially viewed this trade as a highly speculative trade and our $0.30 options are now only worth $0.05. I don't think it is worth exiting the options for a nickel so we will hold onto them to see if LLL can muster a rally into next week's expiration. At this point we will probably need some sort of a catalyst or news event on LLL to make any money. Otherwise the $0.30 call options will expire worthless. I am not suggesting any new positions in LLL at this time.

We chose the out of the money $100 calls to keep our capital investment very small and our position size limited.

Current Position: 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


Occidental Petrol. - OXY - close: 86.58 change: +0.28 stop: 83.45

Buyers stepped in again on Friday and bought OXY on weakness. OXY has strong support in the $84.50 to $85.00 level and are I am expecting this support to hold if there is any weakness in OXY this week. OXY appears poised to rally from here to new 52-week highs. But we will need crude oil and overall market strength to be in our favor. Our calls in OXY have gained about $0.55 and we are up +16%. Conservative readers should consider selling their positions, or at least moving stops up, on any strength in OXY, especially if it reaches its high from last week which was $88.80. I am going to move our first target down $1.00 to $88.75 which is just below last weeks highs. I am looking for OXY to rally to this level in the next week and if it does it will ensure a nice profit on our position. We'll use a longer-term target at $94.00 but this could take several weeks to achieve.

Current Position: BUY CALL MAY $85.00 (OXY 10E85.00) at $3.25

Annotated Weekly Chart:

Entry on April 7th at $85.50
Earnings Date 04/29/10 (unconfirmed)
Average Daily Volume = 5.5 million
Listed on April 6th, 2010


PartnerRe Ltd. - PRE - close: 80.70 change: +0.19 stop: 77.75

PRE keeps poking its head above the $80 and has now reached its highest weekly closing level since January 2008. The stock is still holding its upward trend line from early October 2008 and appears to be forming a nice upward channel. PRE looks poised for another leg up but there is potential resistance near the October 2009 highs ($81.70). If PRE follows through and breaks out above $81.70 we have a good chance to reach our first target, which I have lowered to $83.90 (just below the late 2007 highs). Our second, longer-term target is $89.00 but it could take several weeks to get there. Conservative traders should consider lightening up positions or taking profits if PRE rallies into the $81.70 level, which should also produce a winning trade.

Current Position: CALL MAY $80.00 (PRE 10E80.00) $ $2.40

Annotated Weekly Chart:

Entry on April 6th at $ 80.55
Earnings Date 04/27/10
Average Daily Volume = 989 thousand
Listed on March 20th, 2010


PUT Play Updates

None, stopped out of CERN. See closed plays.


CLOSED BULLISH PLAYS

Wynn Resorts - WYNN - close: 86.23 change: +4.57 stop: 74.45

WYNN has run away from us and through our initial target so we are dropping the play. I would not be surprised to see casino stocks sell off here, at which time we may consider another position. I do not want to chase these stocks right now considering the overbought market conditions and they are very fast movers.

Trigger to buy calls at $78.50

Suggested Position: Dropped

Annotated Weekly Chart:

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


CLOSED BEARISH PLAYS

Cerner Corp. - CERN - close: 86.12 change: +1.23 stop: 88.25

CERN has rallied over +5.00% in two days after hitting our trigger to buy puts. The stock touched our stop late Friday and we are out the trade for a loss of $0.90. The stock did not follow through lower for us and in hindsight we were completely wrong in placing our trigger and stop at $83.75 and $88.25, respectively. Although we believed in our set-up, it did not work so we'll take our medicine, learn from the mistake and get out of the way of this trade as it reversing on us. We are now flat CERN and are looking for better trading opportunities.

Closed Position: PUT MAY $80.00 (CERN 10Q80.00) at $1.00, Entry was at $1.90

Annotated Chart:

Entry on April 8 at $ 85.75
Earnings Date 04/28/10 (unconfirmed)
Average Daily Volume = 526 thousand
Listed on April 3rd, 2010