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Newsletter

Daily Newsletter, Saturday, 4/24/2010

Table of Contents

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

Market Wrap

Bulls Win Tug of War

by Jim Brown

Click here to email Jim Brown

After a flurry of earnings disappointments and several sharp drops the bulls pulled it out at the close to push the indexes to new 52-week highs.

Market Statistics

The selling in Amazon and Microsoft pressured the Nasdaq all day but dip buyers are alive and well and the shorts were forced to cover as the market rallied into the close. All the indexes broke out to new highs on the strength of that short covering. The major indexes have now posted gains for eight consecutive weeks. Bears continue to believe there is a drop in our future but that drop never comes. We have not seen eight consecutive weeks of gains since January 2004.

Helping to overcome some earnings disappointments was news that the New Home Sales in March spiked to an annualized rate of 411,000 compared to the February rate of 308,000. This is a +26.9% jump and the biggest monthly gain since 1963. Obviously this is directly related to the homebuyer tax credit that expires next Friday.

Months of supply fell from 8.6 months to 6.7 months and the lowest in 39 years. Despite the sharp spike in sales the overall pace of sales is still well below the pace in early 2008 with sales over 500,000. The high was set back in Oct 2005 with sales running at a 1.4 million pace. Seeing a spike from 308K to 411K may be encouraging to the struggling home sector today but it is far from healthy. Once the tax credit expires next Friday we are going to see sales implode.

New Home Sales

Builders jumped on the news even though it is a temporary spike. Hovnanian (HOV) gained +33% for the week. Lennar (LEN) +20%, Pulte (PHM) +19%, KB Home (KBH) +13%. KB Homes has a countdown clock on their website showing the exact time remaining on the tax credit to the millisecond.

KB Home Countdown Clock

On Thursday we saw an equivalent spike in Existing Home Sales with a +6.8% rise in March to an annualized rate of 5.35 million homes. That is the fastest pace since the initial tax credit expired in November. Home prices are stagnant and are not rising with the increased sales volume. Sales of repossessed and bank owned properties are keeping the pressure on prices. Nobody wants to have a house that is unsold on May 1st because it will probably still be for sale in April of next year once the tax credit expires. This is pressuring prices as homes for sale are in a continued state of price discounting. These numbers were for March sales so the number for April is probably going to be a lot stronger.

Existing Home Sales

Housing Sector Index

The mass layoff report for March showed the number of layoffs for 50 workers or more climbed to 1,628 from 1,570 in February. The number of workers impacted fell to 150,864 from the 155,718 in the prior month. The long-term trend in mass layoffs is still down but it is moving very slow. The weekly jobless claims refuse to decline under 450,000 with a high of 480,000 on the April 10th report. There is still significant weakness in the job market. They need to decline into the 320,000 range in order for employment to rise.

I warned you a couple months ago that the census hiring was going to give politicians a free gift in the form of positive jobs growth over the next several months. The ATF said last week it was putting a two week hold on various requests from local law enforcement agencies for finger print searches in order to process their backlog of 500,000 census worker applications. That is a clear sign there will be a major jump in jobs for April and May. The next payroll report will be Friday May 7th.

In an effort to never let a press opportunity go to waste VP Joe Biden said he expects the U.S. economy to create more than 250,000 jobs in April and 500,000 in May. Absolutely no mention was made that up to a million of those jobs would be temporary three month census jobs. Politicians know they can get some excellent mileage out of the next two payroll reports and hopefully wash away that healthcare stain with sound bites about their strong jobs creation efforts. Don't be fooled!

The Durable Goods Orders report was negative and responsible for some of the early morning weakness on Friday. Orders declined -1.3% for March compared to a gain of +0.7% in the prior month and expectations for a +0.5% gain. However, the headline number here is almost always not the true picture.

The headline number was penalized for a sharp drop in nondefense aircraft orders after a monster spike of 22% in February. Excluding transportation equipment orders rose +2.8%, shipments +1.2%. Core capital goods and shipments rose +4% and +2.2% respectively.

This was a lagging report but it was also a strong indication the economy is accelerating. The internal components for the durable goods orders report strongly suggest the Q1 GDP could be +3.4% or higher. The first release of the Q1-GDP will be next Friday. Initial predictions several months ago were for something in the +2% range.

The economic calendar for next week is full of regional manufacturing reports plus a two-day Fed meeting. The Fed meeting is the most important event for the market but analysts will still be hoping for a significant increase in activity in the regional reports.

I heard several analysts last week that believe the Fed will change their "extended period" statement next week. There appears to be far fewer analysts that continue to believe the Fed is going to remain on hold for the rest of the year. This is going to be a major stumbling block for the markets if the Fed changes the statement dramatically. I was shocked to see the markets rally into the close with the Fed meeting ahead.

Economic Calendar

The economic calendar, with the exception of the Fed meeting, will be overshadowed by extreme number of earnings reports next week. Since Yahoo's website started including earnings from international exchanges it is pretty hard to tell exactly how many companies are reporting next week. They have over 2,300 earnings reports on the schedule just for next week. There are probably more than 500 U.S. companies but there are very few big names. The exceptions would be those on the list below.

Earnings Calendar

Over all the earnings have been positive but almost every major company other than Apple has seen their stock sold hard because of weak revenue or weak guidance. Amazon lost -6.50 after their earnings on Thursday night. Cheesecake Factory lost -3%, Diamond Offshore lost $5 despite beating estimates by 16-cents. Nokia (NOK) lost -13%, STMicroelectronics (STM) gave back -8%, Horizon Lines (HRZ) -9% and Ingersoll Rand (IR) -5%. Microsoft lost about 50-cents despite posting a huge +35% jump in earnings.

On the positive side of the earnings ledger there were some real winners. Dover Corp (DOV) spiked +8%, Idexx Labs (IDXX) gained +11%, MDC Holdings (MDC) +5%, Patriot Coal (PCX) +6% and Xerox (XRX) +8%.

Honeywell (HON) rose only fractionally but they did offer great guidance. Honeywell said there was clear evidence the economy was improving.

Schlumberger Ltd (SLB) provided a boost to the entire energy sector despite reporting a -28% drop in profits. SLB posted earnings of 67-cents that beat estimates of 62-cents. The earnings were not the pivotal part of the SLB report. SLB said margins had bottomed at the beginning of the year and their optimism they offered with the Q4 earnings had now been confirmed with rising sales and service contracts. SLB said that $80 oil had international and nationally owned oil companies ramping up energy projects again. Profits fell in Q1 due mostly to adverse weather conditions in the North Sea, Russia and Asia. With those weather problems now behind them they expect a strong rebound in earnings.

The SLB news cheered the entire sector and nearly all the drillers and service companies are now trading at or near new highs. The majority of the big oils report next week with XOM, CVX, BP, COP, OXY and TOT. Oil over $80 should have boosted profits for everyone.

Schlumberger Chart

S&P Energy SPDR Chart

The home sales reports, strong durable goods orders and comments by companies like Honeywell raised expectations for crude demand. The new June futures contract appears to have found support at $83 on those rising estimates.

Crude Oil Chart

I am sure everyone has heard about the disaster on the oilrig in the gulf. Transocean Offshore (RIG) and BP Plc (BP) both rebounded after they announced a remotely operated submarine had confirmed that there was no oil leaking from the wellhead on the sea floor. The five mile long oil slick after the Deepwater Horizon sunk appears to have been oil stored on the rig and not a blowout on the ocean floor. This means Transocean will not face a major environmental catastrophe and the associated costs of cleanup. The fire was fed by 336,000 gallons of oil on the rig along with 700,000 gallons of diesel.

The $600 million Deepwater Horizon rig may have sunk but its loss will be mostly covered by insurance. Transocean will be out the $15 million a month in lease rentals on the 42 months left on the BP contracts. RIG does not have another rig it can use for those contracts. It is unknown if the lost rentals are covered in some form by insurance.

Deepwater Horizon

The rig had just completed drilling an 18,000-foot well in 4,993 feet of water and was cementing the casing and temporarily plugging the well when the blowout occurred. Transocean said they were baffled by the blowout since the drilling work had been completed and they were just doing routine maintenance to plug the hole until it could be completed for production.

A blowout is when the pressures in the well exceed the steps taken to prevent the hydrocarbons from surging up the well pipe and onto the rig floor. At the depths these rigs drill there are enormous pressures as the trapped oil and gas tries to escape the well. A BP representative said oil and gas temperatures and pressures at the bottom of this type of well can be up to 450 degrees and pressures up to 2,000 times atmospheric.

With the $600 million rig "submerged" as Transocean calls it there is always the potential for a salvage operation to refloat it and haul it back to dry-dock for repairs. If they can raise it the cost and time to overhaul it would be less than the time required to build another one. There are order backlogs in every major shipyard where these are built. The backlog of rig orders to be used in the Brazilian Tupi field will take 5-8 years to complete. I am sure Transocean does not want to move to the end of the line and wait five years for a new rig to be started. This rig was built in the Hyundai Shipyard in South Korea.

Deepwater Horizon before it sunk

American Express reported earnings on Thursday and said a big jump in cardholder spending of more than 15% helped their Q1 earnings to more than double. AXP said the biggest turnaround in spending came from corporate cardholders. Consumer and small business charges for travel and entertainment also rose. At the same time AXP said there was a drop in the delinquency rate.

Capital One also reported on Thursday and reported a profit compared to a loss in the year ago quarter. COF said fees and interest grew enough to offset slightly higher loan loss provisions. Both companies are further evidence the economy and more importantly consumers are recovering. Both companies also saw their shares gain on the news.

The Greek debt crisis returned to cause new problems for the markets. This is a problem that just keeps on going even longer than the Energizer bunny. Debt stricken Greece finally appealed to its European partners and the IMF for emergency loans on Friday. Greece yielded to overwhelming market pressure to start the first rescue of a euro zone member.

Prime Minister George Papandreou formally asked to borrow from the 45 billion euro package that the EU put together a couple weeks back. The reason Greece had to bite the euro bullet was a sharply rising interest rate and the lack of any bidders on its various efforts to sell additional debt. The last straw came in the form of the EU auditor revealing that the 2009 Greek budget deficit was even higher than feared at 13.6% and that drove Greek bond yields to 12-year highs making borrowing in the public markets prohibitive. The deficit is twice previous estimates and four times the EU ceiling. Papandreou won an election in 2009 by pledging to tax the rich to help the poor. Looks like the rich are going to become poor.

The euro and the European markets fell on the news of the formal request. Investors in Europe believe that the 45 billion will be just the first of several bailouts needed to keep Greece afloat over the next few years.

Greece has an 8.5 billion euro bond that matures on May 19th. In order to avoid a default the actual funding from the EU and IMF must occur prior to that date. There is still disagreement between EU countries on the loan. Many want far harsher austerity measures by Greece despite the daily riots and strikes that are already crippling the Greek economy.

The timing is tough for German Chancellor Angela Merkel. As the strongest economy in the EU the Germans are violently opposed to the bailout and Merkel is facing a key election on May 9th that could cost her the majority in the upper house. I am sure she was hoping to get past the election before Greece imploded.

There is increasing worry that other weak EU nations are going to be lining up for bailouts of their own. Portugal has been the next suspect in the default lineup. They have 5.6 billion euro in bonds that come due in May and their cost of borrowing has been rising rapidly thanks to the spotlight on Greece. Moody's has warned that Portugal is facing a slow death from rapidly rising rates as it tries to cycle its debt. EuroStat reported last week that Portugal had also "misstated" its deficit at 8% when it is really 9.4%.

Back in the U.S. the Treasury is going to auction $118 billion in various types of debt next week. There will be $44 billion in 2-year, $42B in 5-year, $32B in 7-year and $11B in 5-year TIPS. Thanks to the weakness in the euro our auctions have been going relatively smoothly. That will eventually change.

The FDIC reported it closed Chicago's Broadway Bank, which happens to have been owned by Alexi Giannoulias. He is the Illinois state treasurer and running for President Obama's vacated Senate seat. Alexi blamed his bank failure on lending to convicted felons. This guy is the state treasurer? The $1.2 billion bank closure will cost the FDIC $394.3 million. The FDIC closed seven banks on Friday, all in Illinois, bringing the 2010 total to 140.

The Rodney Dangerfield rally continues to get no respect. All the indexes broke out to new highs at the close with shorts afraid to hold over the weekend. I watched in amazement as the dips were bought on Monday and Thursday and I felt sure we would not retest the 1214 high from last week on the S&P.

That 1214 level was broken in the last hour of trading as everyone who shorted the opening dip was forced to cover at the close. The eight-week rally is very overdone but we did see a couple decent declines over the last week bought very quickly.

While I don't buy into the continued rally thesis this is something we don't want to fight. The economics are getting better and despite some weak earnings guidance by some companies the overall guidance has been good.

Retail investors are still not buying the breakout but funds are buying the dips in greater volume. Eventually there will be a dip that lasts more than two days and hopefully is corrective enough to attract those retail investors that are still sitting in cash.

The FOMC meeting next week "should" have been serious pothole on the horizon that should have slowed down the bulls. I am starting to believe that a statement change could actually be bullish in the eyes of investors as a positive outlook by the Fed that the economy is accelerating.

The Dow rallied to close at 11,202 and a new 52-week high. The resistance at 11,150 that held the market back for a week was busted right at the close. However, the 11,200 level is also strong uptrend resistance of its own. For the coming week we are looking at support at 11,000 and resistance at the closing high of 11,200.

Dow Chart

The S&P broke over the resistance high at 1214 and over uptrend resistance to close at a new 52-week high. This is bullish but there is still a resistance hurdle to cross at 1222, which is the 61.8% Fib retracement level from bear market lows in March 2009.

If you look at the rebound from 1044 back in February to the 1217 close that is a +17% rally with only two days of significant decline on Feb-23rd and Apr-16th. Nobody in their right mind would claim this rally is not due for a significant 5%-10% decline. Markets simply do not rally nonstop without a pause for profit taking. Yes, I know the economic recovery is accelerating but that is already priced into this chart. If we do correct next week the initial support is 1190.

S&P-500 Chart

The breakout on the Nasdaq is very bullish. It is especially bullish when you realize that several Nasdaq big caps are not participating. AMZN, ISRG, CME, CYMI, BUCY, GOOG, MSFT, APOL, BWLD, QCOM, CREE and others closed sharply negative on Friday. Despite those losses the winners in DECK, SHLD, IDXX, BIDU, AAPL, SNDK, and PCLN tacked on more than enough gains to offset the decliners.

The breakout over resistance highs and the Fib line suggests there is more to come. I know as soon as I start looking for additional gains I will be flushed for a loss but this is bullish at least on the surface. The Nasdaq did not rally quite as continuous as the S&P. There was a period in late March where the index went nowhere for over two weeks. This consolidation in place gave it the support necessary to spring higher in April. Initial support should be 2475.

Nasdaq Chart

The Russell is the clear leader on the breakout. After a brief pullback to uptrend support the Russell launched itself to close at 742 and nearly a +4% gain for the week. This is clearly a sign that fund managers are not afraid of the market. They are buying the small caps on any dip and with reckless abandon.

However, the Russell has significant resistance at 760. This level was tested three times in 2008 and failed on each test. I do not expect the Russell just to blow past this level without a least acknowledging the prior battles.

As long as the Russell remains in rocket mode the rest of the market is not going to decline far.

Russell Chart

Russell Chart - Weekly

In summary, I am surprised at the continued gains and don't believe we can continue much higher without a rest. I am surprised the Fed meeting next Tuesday did not get more play on Friday. The lack of apparent concern over the Fed suggests there are still plenty of bulls in the market and maybe we are not done going up.

If in fact the market sentiment has turned from fear of the Fed to who cares about the Fed then the "sell in May" crowd may be in for an unpleasant surprise. After all we are recovering from the "Great Recession" and who is to say we can't have a "Great Rally" that breaks all the rules? Actually I think it has already broken all the rules with the current +83% rally in the S&P since the March lows. That kind of rally is generational as in once a generation but there is no limit when records are being broken. For months I wrote about the low volume rally and over the last nine days the volume has averaged more than 10 billion shares a day. The internals have changed and they are growing increasingly bullish. Yes, I know volume increases at market tops but internals are normally negative when that occurs.

I don't want everyone to think I have been pilfering the drug cabinet and I am writing in a state of blissful stupor. The Rodney Dangerfield rally may not be able to get any respect but until it ends I am not going to stand in its way.

We recently spent three months interviewing dozens of traders to replace James. He has been writing the OI/PI plays for nearly 10 years and decided he wanted to change his daily routine. He will continue to write the LEAPS newsletter and I hope to get him to do a market wrap once a week.

I want to take this opportunity to formally introduce our new play writer Scott Hawes. Scott got his start in the early 90s as a registered representative working on a trading desk for Fidelity Investments. He started a financial services business in the late 90s before transitioning into a managing director position for a boutique investment banking firm in Denver. He spent five years raising venture capital and managing mergers and acquisitions. He became an active trader after attending several seminars, studying and testing various methods of trading. Since 2005 he has been a full time trader managing a sizeable portfolio. Scott trades long/short options, option spreads, equities and equity futures. Scott's preferred strategy on long calls and puts is to capture quick profits and exit the trade. Please join me in welcoming Scott to the team. He will be doing the OI/PI plays, intraday updates and posting in the Market Monitor.

Jim Brown


Index Wrap

Takes a Licking and Keeps on Ticking

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

As I noted last Saturday (re the week ending 4/16), the CBOE Volatility Index (VIX) had fallen on the preceding Friday to 5 percent under its 10-day moving average. These kind of VIX lows have often been a precursor to a bout of increased volatility ahead, if not a decline. We got my anticipated increase in short-term volatility with intraday dips on Monday and Thursday of this past week. However, the S&P (SPX) came back on both of these days to Close higher and stay within its uptrend channel.

Nothing has been knocking this market down for long and the strong April seasonal pattern has dominated. The NYSE and Nasdaq then finished the week with a breakout above a line of prior highs (resistance) in the SPX, the Dow and the Nasdaq Composite on the impressive jump in new home sales. NYSE Advance/Decline (A/D) figures especially were impressive at 2.5 advancers for every 1 decline.

The speculative oil run up helped a number of energy stocks and that helped boost the S&P 500 index. I'm a free market guy but I wonder if we don't need revised futures' position limits for hedge funds (as speculators) given their at times massive acquisition of long oil futures contracts, thereby driving up gas prices we all then pay at the pump. Normal price setting, driven by true supply/demand considerations, goes by the wayside.

While my inclination is to be adverse to continued buying in such an overbought market, all such technical indicators be damned, this market is still going full speed ahead. I did end with this note last week: "I suspect that they'll keep this rally going a while longer, but it looks like its time to take profits on call positions and other bullish strategies on further rallies or exit on breaking support and to be alert for opportunities on the short side."

Traders are very bullish and have been for awhile. The duration of such a high level of bullish sentiment is unusual but I've seen this before from time to time where prices just kept moving higher and higher. I've seen the ability of stocks over many market cycles to correctly gauge the future economy and future earnings and have learned to not buck the trend as long as the chart pattern remains bullish. I may try to position for a counter-trend reaction but only when I am not risking much.

I dumped the few SPX May (1200) puts I had at a small profit. Conversely, I don't want to be in a recently acquired leveraged long call position for when this market does shake out so am only holding QQQQ stock as far as the indexes. The Nas 100 (NDX) advance is still very powerful and increasing volume is even finally coming into QQQQ on rallies; imagine that! The NDX (QQQQ) tracking stock is a good indicator that small investor/trader types are tiptoeing back into the market. It's still a big boy's game in stocks with market participation mostly off the radar for average investors, especially with shaky job security issues.

Meanwhile, let the party roll on. I like what this rally is saying about our economic prospects ahead.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

There have been a couple of intraday declines to below the current S&P 500 (SPX) up trendline but these were followed by the 'real body' (Close-Open) of those candlestick bars ending within SPX's uptrend channel, with the chart has staying bullish. Support came in as the Index approached and touched its 21-day moving average which is also bullish action.

The Relative Strength Index is still quite high but the RSI is not at as high an overbought level as it was. It's extreme for a 'normal' advance but less common in such a strong move as we've been in. I am wondering more about the bullish extremes seen in my call to put ratio line below. It's natural to wonder how long this run can go on with so much bullishness.

What has tended to have more of a finite life than the high RSI is a very prolonged period where the CPRATIO line stays above 2.0. CBOE daily call volume has been as high as 3 to 1 relative to put volume; quite unusual.

SPX has closed above the prior 1214 high and next technical resistance is guess work only and I try to not just guess resistance without something to go on; e.g., a prior high, the top end a price channel, etc. In this case, the top end of my highlighted uptrend channel suggests possible next resistance in the 1246 area.

Immediate technical support is 1205, with a next key support at 1183, extending to 1180-1175.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) remains bullish in its pattern; although unlike the S&P 500, the big cap OEX hasn't yet cleared its prior high. It looks poised to, but stay tuned for the actual event; or not. Potential immediate overhead resistance is implied by the prior 555 OEX peak. Resistance implied by where the top end of the bullish uptrend channel intersects on Monday is at 564. Of course, this intersection/this number, goes up a bit over the coming week, tracking the trendline up.

I've noted expected first support at 544, then at 540. A close below the 544-540 zone would be bearish. Less so, if such a Close is only a 1-day affair and OEX rebounds after that. That tends to be the scenario of running stops, scare a few or many holding calls and long futures and then take it back up again.

I discussed the continued overbought readings in the 13-day RSI relative to the S&P 500 and there's not more to say here other than the extended duration is unusual and suggests risk of a sell off at some point ahead.

DOW 30 (INDU) AVERAGE; DAILY CHART:

I thought that the 11000 level might prove to be a tougher area of selling pressure than it has turned out to be. We've got more Dow stocks in strong to semi-strong bull moves this week than last: from 8 INDU stocks in moderate to strong uptrends, to 11.

Moderately strong based on this most recent week's action is CVX (Chevron...who would have thought it), DD, DIS, INTC and UTX. Strong to very strong uptrends are seen with AXP, BA, CAT, HD, MCD and MMM. There are some themes here like fixing up the old rather than buying the new, cheap eating out, etc.

11100 now is immediate support, then back in the 11000 to 10955 zone.

Near resistance might still develop in the low-11200 area. Mostly, there is just free-sailing 'air' overhead chart-wise until INDU gets to the top end of its price channel around 11430, before I would anticipate anything like substantial resistance.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

Clear sailing for the Nasdaq Composite (COMP) to date as it keeps trending higher, centered within its relatively steep uptrend channel.

Near support is noted for the 2475 area, at Monday's intersection of COMP's up trendline; support then extends to 2450, with next support in the low-2400 area to around 2385.

Near resistance could come in around 2550, the area of a 4-week cluster of highs going back to May-early June 2008. This was the top end of the March-June '08 rally, but on the way down within the 2007-2209 bear market. Perhaps even more substantial resistance comes in at the top end of COMP's uptrend channel, intersecting at 2583 currently.

There's very high continued bullish sentiment as discussed as part of my SPX commentary. Bullishness on tech stocks like Apple and the semiconductors is a driving factor. Such extremes in sentiment usually come at the end of at least a multimonth steep advance. More and more traders decide to get on board such a strong trend and figure it will go on longer than it usually does. Occasionally a strong rally does go on and on and seems like it will never end. And the thinking is I WILL be out before it reverses and I WON'T ride a (counter-trend) move back down; more of a risk in stocks than in options with a time duration.

NASDAQ 100 (NDX) DAILY CHART:

It's a heck of a rally Charlie Brown, as the Nasdaq 100 (NDX) has a strong bounce from what had been possible significant prior resistance in the 2000 area. Next stop 2100? A move to this area would finally hit potential technical resistance. Stay tuned on that! I mentioned the rebound into May-early June '08 in COMP; the equivalent high for that bear market rally in NDX was at 2056.

Near support is at 2000, then down in the 1950 area. I see nothing with recent price action that suggests NDX can't/won't get to 2100. The market is overbought on several fronts but the chart remains bullish. The indicators only suggest increasing risk of further volatility, if not a downturn that comes out of the blue.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The pattern of the Nas 100 (QQQQ) tracking stock of course mirrors the underlying Nasdaq 100 (NDX) chart and remains quite bullish. Potential technical resistance however is now not far overhead, at 51.2 starting out the week.

Near support is at 49-48.8, extending to 48.5, and then comes in next around 48 even.

Daily trading volume jumped on Thursday of this past week along with higher prices. Since there was a sharp sell off on and around the Opening, some of that jump in volume likely stemmed from long liquidation; e.g., from resting stop-loss sell orders partly. However, the Close on Thursday at 50.31 was quite strong relative to the early morning low at 49.26.

The important On Balance Volume (OBV) running tally was up sharply on the week, consistent with the bullish chart.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) chart remains strongly bullish in its pattern and RUT could be headed next to the 760 area. If so, this might also then (finally) be an area to take call profits and run. For a trading turn I may also consider buying May (at the money) RUT puts if the Index gets to, or a bit above, 760.

720 is a key immediate support, with even more pivotal support down at 700. A close below 700 for a couple of days running would suggest that a more significant correction than we've see for awhile was underway.

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

Oil Well Services & Equipment

by Scott Hawes

Click here to email Scott Hawes
Weatherford International - WFT - close 17.73 change +1.01 stop 15.90

Company Description:
Weatherford International Ltd. (Weatherford) is a provider of equipment and services used in the drilling, evaluation, completion, production and intervention of oil and natural gas wells. It conducts operations in approximately 100 countries and has service and sales locations in the oil and natural gas producing regions in the world. The Company’s product offerings are grouped into ten service lines: drilling services; artificial lift systems; well construction; completion systems; integrated drilling; drilling tools, re-entry and fishing; stimulation and chemicals services; wireline and evaluation services, and pipeline and specialty services. Its geographic reporting segments include North America, Latin America, Europe/West Africa/ the Former Soviet Union (FSU) and Middle East/North Africa/Asia. In July 2009, the Company acquired the Oilfield Services Division (OFS) of TNK-BP. (source: company press release or website)

Why We Like It:
WFT double bottomed on last week on April 19 and 22 (see oval on chart) and has since exploded. It has also broken a downward trend line This was probably due to data released late last week regarding oil rig count activity which is through the roof. Rig counts are near all time highs in many parts of the United States. We are talking about 25%+ sequential quarterly growth, in both oil and gas. This should bode well for WFT and their sector. And I would like to participate in this momentum on the first WFT pullback. I suggest traders buy June calls if WFT trades to $17.55. There is some resistance at $17.80 but I think it's only a matter of time before it busts through this level. I am going to place wide stop on this trade at $15.90. I think this trade has some potential but we may need to give it some time and room to work which is which is why I want to buy June calls.

Trigger to buy June Calls if WFT trades to $17.55

Suggested Position: JUNE $17.00 CALL, current ask $1.41, estimated ask at entry $1.30

Annotated Chart:

Entry on April xxth at $ xx.xx
Earnings Date Over 2 months
Average Daily Volume = 14.9 million
Listed on April 24 2010


In Play Updates and Reviews

DSX and GT Closed for Nice Gains

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:

Good evening traders. The markets surged higher on Friday reaching new 52-week highs across the board. I believe we will see a longer term meaningful correction soon, but that could be one or three or five months away, etc. Who really knows? I thought we would get at least some sort of multi-week pullback this month but that has obviously not panned out. So we have to deal with the circumstances in front of us. The catalyst may not have been Goldman Sachs like it was shaping up to be. I will be looking for the markets to sell off on good news which I think will provide us some good clues about the direction of prices. They have already started doing this on some of the earnings reports last week. I expect the markets to continue their volatility this week as the bulls and bears continue the battle. I wrote about a bearish shorter term megaphone pattern forming on the S&P 500 intraday charts in Thursday's Intraday Market Update (archived on the Website). I will be using this as a guide for price action this week. Good luck trading to all of you, and remember to be nimble with position management.

Current Portfolio:


CALL Play Updates

Hanson Natural Corp. - HANS - close 43.08 change +1.76 stop 39.25

Wow! Our trigger was almost hit on Thursday (it traded down to $40.82) which would have been beautiful because the stock closed +4.26% higher on Friday. When I released this play I thought about setting the trigger at $41.05 and in hindsight that was probably an error on my part. With that being said, this stock looks very bullish to me. My only concern is a broader market pullback, but that doesn't seem to be happening either. So I ponder whether or not this trade can still work, and I think it can. Here is what I want to do. If HANS retraces about half of Friday's gain to $42.30 I suggest readers initiate call positions as outlined below. From a technical standpoint HANS almost touched its upward trend line and a recent support/resistance level at about $40.75 before bouncing hard. In addition, the stock is forming a longer term ascending triangle and is currently in the middle of an upward channel that has been intact since mid 2009 (see weekly chart below). I believe the stock is poised to breakout higher or at least trade to $43.75 which is our first target. Our second target is $44.95. The company reports earnings on May 6 so we will be out of this trade prior to the report. Although there was unusual call buying late last week so traders may be expecting a good earnings report, but this is just speculation. Let's use a stop of $39.25. Our time frame is 1 to 2 weeks.

Trigger to buy calls if HANS trades to $42.30

Suggested Position: Buy MAY $43.00 CALL, current ask $1.85, estimated ask at entry $1.40

Annotated Weekly Chart:

Entry on April xx at $ xx.xx
Earnings Date 5/06/10
Average Daily Volume = 854,000
Listed on April 21, 2010


PUT Play Updates

Bard (CR), Inc – BCR – close 85.94 change +0.52 stop 90.10 *NEW*

We got a gift today when BCR gapped open higher which allowed us to initiate puts at a bargain price. I used the same strategy I mentioned in Tuesday's updates (April 20). The same strategy can be used when entering or exiting positions. BCR traded in wild fashion during the first 15 minutes of trading (b/w $86 and $90 representing a 5% range). Once the price action settled down it was clear to me that momentum was waning so we initiated our put position at about 10:15 AM EDT when the 15-minute candlestick broke below the prior bar. We are now long puts at $1.45. I continue to believe healthcare related companies will struggle and be volatile as more details surface about the healthcare reform bill. This also means that we could get stopped out of the position on any good news that surfaces as well. From a technical standpoint, BCR is forming a bearish wedge pattern on its daily chart and looks vulnerable. The stock is oscillating above and below its 20-day SMA and is also approaching a congestion zone from late 2007 through early 2009 that I believe will hold. I initially thought this trade was going to last about 2 weeks but I am now looking for a quick exit and suggest readers take profits when they have the chance. Our initial target was $83.05 but a more conservative target would be $84.60, which is just above Thursday's low. If BCR trades down to $84.60 our $1.45 puts should be worth about $2.45 (the delta is .43), which would be about a +70% gain. I will gladly take profits at this level. I want to place a wide stop on the position at $90.10 (above Friday's high) due to its recent volatility, and will adjut it in the coming days unless our target is achieved.

Current Position: JUNE $85.00 PUT, entry at $1.45

Annotated Chart:

Entry on April xxth at $ xx.xx
Earnings Date Greater than 1 month
Average Daily Volume = 1.5 million
Listed on April 22


SPDR S&P 500 Index - SPY - close: 121.81 change: +0.79 stop: 123.05

SPY surged higher late Friday afternoon and our position is struggling. It spent most of the week battling the backside of its broken trend line from February 5. I expect the volatility to continue this week and at some point SPY should have a significant intraday correction before getting bought. When that happens I will be looking to exit the position. I have two targets: the first is $120.05 which is just above the lows on Wednesday and Thursday, and the second is just above SPY's 20-day SMA (currently at $119.31), which SPY bounced off of twice last week. I will tighten stops if these levels are reached with the assumption that I will be taken out. If SPY trades down to $120.00 our put should be worth about $1.60 and at 119.35 it should be worth about $1.80. If volatility surges it could be worth more. Our stop remains 123.05 which is just above SPY's 200-week SMA. Our time frame is 1 to 5 days.

Current Position: SPY PUT MAY $119.00, entry at $2.05

Annotated Chart:

Entry on April 13th at $ 2.05
Earnings Date Not Applicable
Average Daily Volume = 164 million
Listed on April 12th, 2010


CLOSED BULLISH PLAYS

Diana Shipping Inc - DSX - close 15.45 change +0.20 stop 14.32

It is a thing of beauty when your position reaches your target, you take profits, and then the position reverses. Although it is just as painful when the opposite happens, when you get taken out by a stop and the position proceeds to turn into a winner. In any event, DSX hit our $15.65 target today. The stock traded up to $15.73 before retreating and closing the day at $15.45. Our $0.60 calls were sold for $0.95 and we are happy to take our +58% gain, thank you very much Mr. Market. For readers who may still have positions I think DSX has a good chance of reaching $16.00 which is below its YTD highs. But if the market corrects DSX may not be able to muster a rally up to these levels, at least in the short term prior to your options starting to suffer from time decay. DSX also reports earnings on May 6.

Closed Position: MAY $15 CALL @ $0.95, entry was at $0.60

Annotated Chart:

Entry on April 21, at $ 0.60
Earnings Date 5/6/2010 (unconfirmed)
Average Daily Volume = 1.2 million
Listed on April 20th, 2010


Goodyear Tire & Rubber Co. – GT – close 14.58 change +0.09 stop 13.50

This is another great example of sticking to the trade set-up and it worked nicely. At about 2:30 EDT today GT started surging and our target was hit at $14.75. Our $1.90 calls were worth $2.45 and we realized a healthy +29% profit. Our more aggressive target of $15.90 may be achievable but remember GT has earnings on April 28 so I would be leery of holding the position over earnings. Sometimes that works and many times it doesn't. I am happy to take profits here and move on to the next trade.

Closed Position: MAY $12.50 CALL @ $2.45, entry was $1.90

Annotated Chart:

Entry on April 20th at $ 1.90
Earnings Date 4/28/10
Average Daily Volume = 4.3 million
Listed on April 19th, 2010