Option Investor
Newsletter

Daily Newsletter, Saturday, 11/6/2010

Table of Contents

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

Market Wrap

Sugar High

by Jim Brown

Click here to email Jim Brown

The markets posted some very strong gains last week as a result of the Fed passing out tons of candy for investors. This sugar high is bound to produce a headache once the QE2 news fades.

Market Statistics

I am not suggesting we are in for a big market crash because the Fed is working hard to keep the rally moving. What I am suggesting is the news driven gains from last week could fade as the market commentators lose interest in repeating the QE2 news in every broadcast. A minor decline would be a welcome pause to rest and reload because it is pretty much a sure thing that the market is going a lot higher longer term.

I have been recommending readers buy the dips for about four weeks now. I had one reader email on Thursday saying, "what dip?" Unfortunately that is the problem. The dips have been very shallow and mostly intraday. That makes it tough for investors who have day jobs to participate.

There are still hundreds of billions in cash waiting on the sideline for a dip to buy. The decision to buy has already been made but they don't want to buy into a new high every day. It goes against everything a professional trader has ever been taught. If we could get a decent 3-5% dip I think we would be good for another 1,000 Dow points on the rebound. However, I think we will be lucky if we get a 1% dip.

The reason for my optimism has little to do with the Fed QE2 put but that is a factor. That is the insurance that we will not have a material decline. The real incentive for me is the better than expected economics. Suddenly every report seems to be brimming with good news and this is before the first QE2 dollar has been spent.

Last week we saw better than expected numbers in the ISM Manufacturing, ISM Services, Construction Spending and now the Jobs report.

The economy created +151,000 jobs in October according to the government report. That was more than twice what economists expected. There was also good news from revisions to prior months. September was revised higher to a loss of only -41,000 from a previously reported loss of -95,000 jobs. August job losses were revised to only -1,000 from the previously reported -57,000. That was a total improvement of +100,000 jobs in the revision plus the +151,000 in the October headline number.

That was the strongest job gains since May and most of May's increase was temporary census employees. There were also positive gains in the components. The average hourly workweek increased and average hourly earnings rose.

The diffusion index rose to 55 in October. That means more than half of the 278 industries covered in the report added jobs in October.

This was a very positive report and would have moved the market if investors were not already dulled by the news overload from earlier in the week. Once you have had five or six margaritas you have probably already passed the high point in your buzz. If somebody puts another one on the table in front of you it is only going to dull your senses further as you spiral down into the inevitable hangover.

Investors were suffering from news overload and the market was already up nearly 4% for the week. It was too much of a good thing.

I believe we are going to see a major jump in jobs in the November report. October was just the tip of the iceberg.

Nonfarm Payroll Chart (Before Friday's report)

Nonfarm Payroll Chart (After Friday's report)

Another positive economic sign on Friday was an unexpected increase in consumer credit by $2.1 billion. That was the first increase in credit since January. The gain was in nonrevolving credit for things like cars and appliances. Credit card debt declined by -8.3% while nonrevolving credit climbed by +10.4% month to month. Before Friday Consumer Credit had contracted for 22 of the last 24 months. The unexpected rebound is just one more green shoot suggesting the economy is improving.

Next week the economic calendar is devoid of any material headline grabbing report. The only event I felt was material enough for a highlight was the Cisco earnings after the bell on Wednesday. If traders are going to come down off their sugar high it could be because of the bland week for news.

Economic Calendar

Cisco's earnings are material because they operate worldwide and they are a leading edge indicator of technology spending. You have to have the routers and switches in place and the network built before you can use the servers and desktops in any business expansion. That means an increase in Cisco's business should be followed by an increase in server, PC and software sales and that would mean more orders for chip companies.

Cisco's CEO, John Chambers, is also a bullish cheerleader for the company and economy. He has been rather downbeat in recent quarters and a return to his formerly bullish self would be positive for the markets.

Secondly Cisco has $30 billion in cash stuck overseas and Chambers would love to bring that money home. He has been an outspoken advocate for a tax holiday for repatriated funds so that money could be put to work in the U.S. to stimulate the economy and produce jobs. Currently there is a 35% tax on repatriated funds, the highest in the developed world. The announcement of a temporary tax holiday (it has been done before) would bring hundreds of billions in spendable capital back home to be put to work. If the Republicans want to do something quick to create jobs this would be a good place to start. Unfortunately most consumers would see this as a payoff to big business as a reward for getting them elected. Nothing could be further from the truth because bringing the money home would create immediate jobs. Unfortunately politics will probably win out and nothing will happen until the election has fallen from the headlines and the lame duck session is over.

In stock news Massey Energy (MEE) rallied nearly $5 on Friday after the company said it was considering a takeover offer from rival Alpha Natural Resources. Massey has been under pressure since the high profile mine accident in April that killed 29 miners. Alpha was created to acquire other firms and build a major coal company. Alpha acquired Foundation Coal in July 2009. Massey has 2.9 billion tons of coal reserves with 1.3 billion in metallurgical coal. There is a strong demand for the met coal because of its use to make steel. Alpha is already the largest U.S. metallurgical coal producer and would greatly increase its dominance if it acquired Massey.

Massey Chart

Boeing declined about $3 in after hours after a story broke in Aviation Week that the company would again delay the delivery of the first 787 Dreamliner until August 2012. The story appeared to be based on a previously released production schedule claiming that Korean Air would see the delivery of the first 787 in August, ten months later than previously scheduled.

Boeing immediately denied the rumor and claimed the story was not factual. In recent weeks there have been multiple rumors of further delays and several news stories hinting at the possibility. The most recent actual delay was announced in August when Boeing pushed back the first delivery from Q4-2010 to Q1-2011 because of problems in the manufacture of a Rolls-Royce engine needed for testing. Boeing has orders for 847 of these planes, an unprecedented number for a new plane, and quite a few more have been canceled because of the repeated delays.

Starbucks gave investors a shot of highly caffeinated news with an 85% spike in earnings to $278.9 million. Same store sales increased by 8% and revenue surged by 17%. Average ticket prices rose by 2%. The increase in sales at Starbucks is another sign consumers are starting to turn loose of their cash. Sales for $3 coffees had declined sharply through the recession.

Berkshire reported earnings of $1,692 per share compared to $1,325 in Q3-2009. Analysts had expected earnings of $1,676.67 per share. Berkshire lost $146 million on its $60 billion in derivatives but the other businesses appeared to be accelerating. Buffet made a monster bet a couple years ago that the stock market would be significantly higher by 2025 and those bets must be marked to market at the end of every quarter. Last year in Q3 they accounted for a $1.73 billion gain. This year's Q3 was not as market positive so the value of the contract declined.

Berkshire had $34.5 billion in cash and $57.6 billion in securities at the end of the quarter so you can bet Buffett is on the prowl for his next acquisition. His last major acquisition was Burlington Northern for $27 billion. Burlington added $706 million to Berkshire earnings in Q3 compared to a $488 million profit for the independent railroad a year earlier.

Bank of America rallied sharply after it announced the court had dismissed a suit over 427 mortgage securities with a face value of $352 billion. The mortgage suit by MBS purchasers claimed Countrywide had made false statements in their documentation for the sales. The court said the investors did not sufficiently demonstrate they suffered an injury and the stature of limitations had expired for some claims. The court said it would entertain a new filing after the deficiencies in the suit were corrected. BAC said based on the court's instructions the number of offerings covered by the new suit would decline to 22 with a face value of $31 billion. This was a major win by BAC and any eventual judgment by the court is likely to be only a fraction of the face value.

Earlier this week BAC told BlackRock and Pimco what they could do with their mortgages and it was not pretty. Pimco, BlackRock and the NY Fed are suing BAC to buy back $47 billion in mortgage-backed securities. BAC refused and is now going after the lawyers who filed the case claiming they had an "ulterior motive."

BAC owns 34% of BlackRock (BLK) and decided to punish BLK for suing the bank in what BAC calls a frivolous lawsuit. BAC said it would sell 34.5 million shares of BLK and evidently they convinced another shareholder, PNC Financial, to sell another 7.5 million shares. Shares of BLK dropped -4% on the news when it was announced on Wednesday. BAC still has 29 million shares they can sell later if BLK continues the suit. PNC still has 39 million shares of both common and preferred. PNC was BlackRock's owner before the fund went public in 1999.

Gold came within $1.30 of hitting $1,400 on Friday as the QE2 prepares to leave the dock. Ironically the dollar was also up so it appears investors were buying gold in anticipation of future gains as the dollar rally ends. Just three months ago gold was $1,160 and analysts were talking about a return to $1,000. Of course the gold bugs were talking about $1500 and we can easily see who was right.

Conventional wisdom would probably tell you that gold was grossly overbought. After all it is up +$70 since Wednesday's lows. Conventional wisdom would be wrong. I personally would not buy it without a decent pullback but the QE2 program has not even begun so the dollar has a lot farther to fall and inflation will eventually descend on the U.S. like an avenging angel delivering financial plagues on the population. While that maybe a couple years away it is coming and that will push gold even higher.

While gold may be breaking records there are other commodities stealing the spotlight. Copper set a new two-year high on Friday. Silver set a new 30-year high as well. Oil hit a new six-month high at $87.43. Energy stocks are rocking higher even though demand has not yet caught up with production. The high oil prices are going to provide a catalyst for further exploration and higher profits. Energy and miners should be two sectors that will benefit the most from the QE2 program.

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Crude Oil Chart

The downside to the QE2 trade is the sudden appearance of improvements in the economy. A stronger economy will produce a stronger dollar. If we really begin to see some significant improvements the short dollar long commodity trade could unwind very quickly. We are probably a couple months away from that risk but it does exist. If asked most traders would prefer a stronger economy over an artificial boost provided by an aggressive Fed.

Bernanke alluded to the QE2 program back in August and the market rallied +13% over the next two months on "hopes" it would come true. Now that the Fed has formerly announced the terms and timing Ben Bernanke is taking some heat. You would think if the U.S. was so strongly against a QE program that someone would have warned him off before he made it official.

Now they are accusing him of wrecking the economy, producing profits for the wealthy and sending future generations into financial ruin by printing billions in new money. The misinformation is unbelievable. I heard on the radio that the Fed was "giving" banks $900 billion in new money at zero percent interest so they could increase profits and fund the next election campaign. I actually stared at the radio in disbelief.

The Fed is creating new money by punching a few keys on a computer. They did not have to get it from Congress or borrow it from the Treasury Dept. They are using that money to "BUY" U.S. government debt with an average maturity of 5-6 years. They are NOT giving it to banks. This debt pays interest and the principal will be returned when the debt matures or is sold. The Fed will take that principal and "CANCEL" those electronic dollars when it is returned. The Fed will make a few bucks from the interest and the entire program will not cost taxpayers a single cent other than make our dollars temporarily cheaper compared to the Euro, Yen and Yuan. No Fed debt will be passed on to any future generation.

The impact of buying the U.S. government debt means that private money that would otherwise be buying the same debt will have to find some other home. It is the private money from banks, insurance companies, market funds, etc, that will be bouncing around in the system trying to find a decent return. That private money will end up in the stock market, in real estate and business investments because the Fed QE2 put is in play and theoretically protecting the economy from a further decline.

The Fed money was created, bought government bonds and will be returned to the Fed. Nowhere in that cycle does any other entity get to hold the funds. There is no risk other than the U.S. government defaulting. The concept that the $900 billion in Fed money is being loaned to banks to play with for the next five years is completely bogus. The only way a bank would get any Fed QE2 funds is from a sale of government bonds they already owned. There may not be enough new bonds being sold by the government to use up all the Fed funds so the Fed may have to purchase existing debt on the open market.

John & Suzie Consumer get their news from the daily paper. They don't have the insight readers of this newsletter have. It is up to you to put a stop to these unfounded rumors whenever you hear them. Your friends will be amazed at your depth of knowledge.

We know the Fed has basically told investors and businesses they are going to do whatever is necessary to force the markets higher. I said markets not economy. If they are successful in pushing the markets higher, and we know from past experience they will be successful, then businesses and investors will fell better about the outlook and they will begin to spend money. Even if it takes another QE program after this one the Fed is going to force the markets higher. Period. That means there is little chance of a major decline and we can confidently take larger risk positions to profit from this push higher.

It is the ultimate ponzi scheme. The Fed convinces investors to buy stocks. The stocks go up over the next six to nine months and everyone makes a nice profit at no cost to the Fed. We can sell our stocks, pay our taxes and spend our profits. The economy accelerates as the cash flows through the system. Nobody was harmed and it did not cost the Fed any money.

Did you catch the flaw in that last sentence? There will be people harmed. The last buyers of our stock will be left holding the bag. When the Fed begins to withdraw the QE money the impact to the market will be ugly. Withdrawing $2 trillion from the QE put will leave a major void in the financial markets. Money will immediately begin to flow out of equities and back into bonds and a new bear market could appear.

Offsetting the withdrawal of the QE funds will be the accelerating economy. In theory this is in early 2012 when the economy accelerates to the point where inflation starts to move higher. The Fed will have to hike rates aggressively in order to slow down the inflation monster. That monster will have grown strong during its incubation on a steady diet of cheap dollars for more than a year. Hiking a quarter point a meeting won't even begin to slow it down. The Fed has acknowledged this by saying they will have to act aggressively when the time comes. We could be talking a full percentage point per meeting.

Unfortunately the Fed will have to extract the QE funds BEFORE they can begin hiking rates. This is where the problem lies. Inflation could continue to be almost nonexistent for most of 2011 but when it does begin to rise it may happen almost at once. That will force the Fed to extract the $2 trillion in QE funds at a very rapid pace and then begin hiking rates at a pace unheard of in recent times. When this day comes, the day the first QE dollar goes back to the Fed we will want to be short everything sight.

I am sure I painted an overly graphic picture of our future but the key point here is that we have been given a generational opportunity to profit from the market rise over the next few months. How long it will last is anybody's guess but we will be able to see the warnings signs when it approaches. Until then we should bet with the Fed and be long equities and commodities. Six months from now or maybe even as long as 12 months we will see the end approaching. We can cash out and reverse to shorts and ride the wave back down. Never in our lifetime has the Fed been this accommodative. Don't fear it and run around like Chicken Little proclaiming the sky is falling because of some great conspiracy. Profit from it!

Since Wednesday's low the S&P has gained +42 points to close at 1225. That is strong resistance from 2005-2006 and just a couple points under the 61% Fib retracement level at 1228. This should be strong resistance in a normal market. This is NOT a normal market. I would normally expect some weakness as the market digests its gains from last week. This may or may not happen but it is no concern to us. We need to remain long or get long buy buying the dips. The recent dips have only been intraday because of the rising number of buyers trying to get into the market rather than out. If we do see a dip back to 1175 I would be extremely surprised but very happy. I would be backing up the truck to load up on positions.

S&P-500 Chart - Monthly

S&P-500 Chart - Daily

The Dow has clearly broken out over the last resistance hurdle into new two-year highs. This is the highest level for the Dow since Lehman's failure. The 2008-2009 bear market has almost completely been erased. The gain was minor on Friday but it came after a +219 point sprint the day before. That is another bullish confirmation that the market is in Fed mode. The Dow traded in a very narrow 58-point range and closed near the highs. Support was 11,400 and it was solid.

Overhead resistance appears to be 11750 and we could easily test that next week if the Cisco earnings are good.

Dow Chart - Weekly

Dow Chart - Daily

The Nasdaq is on the verge of making a true multiyear move. It closed at 2577 on Friday so there is still some work to be done before challenging the 2007 resistance highs at 2850 but with the Fed greasing the wheels I believe it will happen. It won't happen next week but there is a good chance it will happen before year-end. The closer we get to that level the more sidelined investors will pile into techs as they fantasize about reliving the dot.com bubble days with a far better game plan than they had before.

The go-go stocks today of Apple, Google, Amazon, Bidu, etc, are a far different breed than we saw in 2000 but they still have to the power to push us higher. However, that discussion is for many months down the road not this week.

The Nasdaq gained +71 points last week and really only had three positive days. If we averaged 50 points a week we could test that strong resistance at 2850 before year-end. If the pattern holds it would be a good place to end the year with a small move over that level. That would setup nicely for 2011 and the economic recovery.

Support on Thr/Fri was a solid 2570. I would have sworn the Fed was sitting on that level with a buy order it was so solid.

Nasdaq Chart - Weekly

Nasdaq Chart - Monthly

The Russell has lagged the big cap indexes throughout the bullish consolidation in October. Now that the news is behind us it appears the race is on to switch to small cap stocks for the rally ahead. The Russell was the highest percentage gainer last week at nearly 5%.

The Russell is within shouting distance of major resistance from 2008 at 760. I suspect the first test will be a bit rocky but I do think it will eventually break through that level. The next resistance at 855 is going to be tough because the rally will be really over extended by then. I only hope we can close the year within a few points of that 855 level.

Russell 2000 Chart - Monthly

The Dow Transports are confirming the bullishness in the other indexes, especially the industrials. The Transports are a leading edge indicator of economic activity. Manufacturers need the transports to deliver raw materials and then pickup and deliver the products once completed. As activity begins to increase in the transports, investors start to get excited about the coming recovery.

Dow Transports - Monthly

In summary I will continue to suggest buying the dips. That assumes we are lucky enough to actually have some dips. The calendar is devoid of any material economic events to provide a spark so we will be left to depend on Cisco's earnings after the bell on Wednesday.

I strongly suggest that everyone spend more time planning what they are going to buy than they spend worrying about the future mess this QE2 program will create. The future problems are far enough into the future that we should have many months of gains to add to our accounts before the storm clouds begin to appear. Having a large cushion of QE2 profits in our trading accounts will make the future challenges much easier to endure. Who knows, this Fed could accidentally get it right and create an economic recovery without a sudden crash at the end. Hey, a person can have his fantasies.

Don't fight the Fed!

Jim Brown

You have to learn the rules of the game. And then you have to play it better than anyone else. Albert Einstein


Index Wrap

S&P catches fire, matching Nasdaq

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

High bullishness now matches high overbought readings but this rally won't necessarily stop just because there's increasing risk of a shakeout. By my count, a correction is coming but there should be a rally to higher highs after that.

As I've said many times about major bull moves, forecasting a particular price level where the indexes might top out (even if just an interim correction), is hard to predict. However, as usual with technical analysis there are some levels to watch as potential resistance. This is a time to go to a couple of weekly price charts to assess the bigger picture, starting with the S&P 500 (SPX) weekly chart.

I was a bit off in a prior column calculation that 1220 would represent a fibonacci 62% retracement of the Oct. 2007 to Mch. 2009 bear market decline; the actual retracement level is 1228. A 2/3rds-66% retracement at 1272 is also an area of potential resistance. If SPX gets to the 1270 area, the index might reach 1300, at least as an intraday high and where I'd be tempted to speculate on some puts (with an exit point at 1325).

As far as the longer-term Relative Strength Index (RSI) seen above, a measure both of trend momentum and potential overbought/oversold extremes, this indicator is about as high as it gets before a price correction sets in. However, RSI extremes are mostly warning of high risk situations (in terms of putting on new bullish trades), but aren't good at suggesting a specific resistance point that might deflect the current powerful advance.

I recently wrote an initial Trader's Corner article about (Elliott) Wave analysis of trends and am including these musings about what I see as an 'obvious' wave pattern based on weekly NDX index chart. This analysis would suggest that this index (and the market) is in a strong 3-wave type move, within a wave 5 advance.

A correction ahead, which is certainly due or overdue, would likely constitute the second corrective downswing ('small' wave 4) within a 5th wave 'final' rally, before a more major corrective pullback, most likely in the Q1 to Q2 period. This is some thoughts on the bigger picture and not a specific guideline to trading decisions obviously.

Indicators that provide some shorter-term trading guidance are seen above by the approach of the weekly MACD and RSI to overbought extremes. I'm keenly interested in what happens if/when there's a weekly MACD reading at or above 83, as this level has been a predictor of tops for the period shown.

I respect a strong trend and haven't traded against this strong bull market, but I'm waiting and watching. While I still am long (unleveraged) some QQQQ stock, I'm out of my index call positions based on my trading philosophy to shy away from situations when daily chart indicators show overbought extremes, especially for a second and third time. However, I tend to get INTO positions when few believe the trend will turn; e.g., when there's low levels of bullish sentiment and low RSI readings as in the July and late-August (upside) reversals. This kind of entry strategy, when successful, makes for a no-pain gain if exiting before most traders believes in the new trend. Of course there were bullish chart patterns to go along with the mentioned upside reversals; e.g., the exact double bottom in RUT made in late-August.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

While I was also cautious last week about the S&P 500 (SPX) index and its prospects for a breakout move, I did note that "a breakout above recent highs that continues on above 1220 could be a final leg up before there was a correction." How far any such 'final' upleg will carry is a big question. I've noted near resistance around 1240, or the high end of the bullish uptrend channel seen on the daily chart. (The weekly SPX chart is shown above in my initial 'bottom line' comments.)

Bullish sentiment also shot up this past week as you can see with my CPRATIO indicator and puts my sentiment model into a higher risk area in terms of prospects for a correction. This is a 'leading' indicator in that some time can elapse before a top actually develops. Such high bullish sentiment is something I pay close attention to. It's as if many traders decided definitely that the Fed putting more money into circulation (by buying T-Bonds and printing the money for those purchases) is a done deal in terms of boosting our very slow economic recovery. However, this type action is unproven as to its effectiveness.

You'll note that the RSI is also at a major 'overbought' extreme. This can go on a while longer but such extreme readings (e.g., at 80 & above) are associated with market tops as you can see.

Initial support is again projected at the 21-day moving average (at 1180 currently), with pivotal technical support at 1160, extending to 1140. Near resistance is projected at 1240. Major resistance is suggested at 1300-1310 (not shown) based on a prior cluster of highs in Aug-early Sept 2008.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart has a renewed bullish pattern as the index pierced significant resistance in the 535 area, although OEX hasn't yet cleared its prior 555 high. Resistance around 560 is suggested by the top end of the uptrend channel I've highlighted on the chart. I pointed out the extreme high reading seen with the 13-day RSI. While this (RSI) extreme doesn't point to top like a rally failure around 555 might, it does suggest high risk of a shakeout. Any bearish news coming along in an overbought market has a much greater impact than if the same market was oversold to neutral in terms of the RSI.

Near support continues to be assumed in the area of OEX's 21-day moving average, now up to 534. Next support should comes in around 520.

Near resistance is projected at 555, with this extending to 560, the top end of its current uptrend channel. Major resistance (not shown) is at 600, after a line of highs developed in this area in August-September 2008.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) renewed its bullish chart by breaking out above its prior highs. I've redrawn a bullish rising channel consistent with how I've highlighted the S&P indices. Next resistance implied by the upper end of this bull channel is suggested for the 11600 area. Major resistance, based on weekly chart (not shown) considerations is suggested at 11770-11850.

I wasn't seeing much on the 30 individual Dow stock charts last week that would have 'supported' such a strong move, but (besides IBM) AA, CAT, DIS, GE (a bellwether for the Dow), INTC, JNJ, JPM (maybe I should have taken that program head job at Chase in 1998!), PG, TRV, WMT and XOM looked especially good.

Near support begins at 11200, extending to 11138, at the 21-day moving average. Next support is at 10917-10900.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

I feel like a weekly broken record as the Nasdaq Composite (COMP) Index chart continues on its strong bullish course. This is visually confirmed by COMP's steep up trendline, with the latest move an overnight gap up from that line.

And speaking of repeats, I'd say again that "The RSI extreme suggests caution in adopting further or new bullish options strategies in key Nasdaq stocks but being overbought alone doesn't provide a compelling reason in adopting bearish strategies." Now the index is at a much greater 'overbought' extreme of course but it still doesn’t mean that translates into an immediate top. (Forget of course about shorting a potential double top in the 2535 area.)

Resistance is suggested if COMP stalled at the top end of its uptrend channel intersecting at 2662 currently. Major resistance isn't suggested on the weekly chart (not shown) until the 2725-2735 area. Near support is noted at 2475, then at 2400.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart is quite bullish and with the same steep uptrend as the Nas Composite, only a little more so. Potential resistance comes in next around 2239, at the November high of 3 years ago which may prove to be an interesting 'anniversary'. Possible resistance comes in around 2250, the upper end of NDX's uptrend channel. Of interest is potential resistance around 2330, which represents (only now) a 'minimal' 38% retracement of the huge bear decline from Mch 2000 to Oct 2002; NDX went from a closing high of 4691 to closing low of 815!

On such a current power march higher, overbought extremes are seen in momentum indicators like the Relative Strength Index (RSI), Stochastics and MACD; although with the NDX weekly MACD (at 74 Friday) doesn't hit an extremely 'overbought' condition until at 83 and above on any weekly close; see above weekly chart with my top-of-the-page "bottom line" comments that has NDX as THE current bellwether index.

The 13-day RSI at 88.8 is as high as it typically gets in the period shown below; this is also mostly true for a period going back to 2008. Theoretically the RSI could reach 100, but to do so the market would have to have the kind of rallies seen Thursday, every day for 13 days.

Support is suggested at 2100, then at 2050. Resistance noted in my opening paragraph.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

There's little to add for the QQQQ tracking stock in terms of bullish comments made for the underlying Nasdaq 100. The big story that we see with THIS chart is that there was finally a big volume pickup on this latest rally in QQQQ. Finally, there's the kind of volume confirmation that we would expect to see on a company stock that is in a maximum bullish posture.

Near support: 52.0-51.6

Next support: 51.0, then 50.0

Near resistance: 54

Major resistance: 55.0

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) is no longer of course in a sideways drift after buyers powered the index well above resistance marked by the lengthily prior period (10/13-11/2) of resistance/selling pressure coming in that kept highs in the 711-714 area. This chart goes from bullish/mixed to bullish period.

As I wrote last week, the A breakout above 720 suggests that prior highs in the 740-746 area could be retested and RUT is almost there. I don't have a higher upside projection except to only marginally higher levels if prices start hitting the upper end of RUT's bullish uptrend channel; e.g., by 11/11, Thursday of this coming week, an intersection at 754.

Near support is at 700, extending to 690.



GOOD TRADING SUCCESS!


New Option Plays

Breakout Bonanza

by James Brown

Click here to email James Brown

Editor's Note:
We've got three new candidates tonight. I'd like to build up the OI newsletter so we're always carrying 12 to 15 active candidates (not just candidates waiting to be triggered). That's going to be tricky, especially right now since we don't want to chase new highs. However, to actually carry that many trades we might be making some format changes in the play updates and new plays section of the newsletter. I wanted to let you know now so you can bear with me as we find the right mix and layout. Please note I'm listing some additional ideas here in the editor's note.

- James

More Trading Ideas:

ESS - I was tempted to buy calls on ESS now but I think we might get a better entry point on a dip near $114.00.
BWA - this stock is screaming higher. We don't want to chase it. Keep an eye on what should be short-term support near $55.00.
BIIB - This biotech stock is seeing a mild correction after rallying to new two-year highs. Keep an eye on the $60 level as potential support.
BA - Shares are consolidating under resistance near $72.00-72.50. Readers may want to use a trigger or wait for a close over $72.50 as a bullish entry point.
UPS - UPS has rallied right to major resistance near $70.00. I would consider a trigger over $70.00 (maybe 70.25) as a potential entry point. However, the May high of $71.00 could be resistance.
FCX - Commodity names are moving higher again. FCX just broke out from a three-week consolidation pattern. I'm waiting for a dip toward $101 or $100 as a possible entry point.


NEW DIRECTIONAL CALL PLAYS

Caterpillar - CAT - close: 83.54 change: +0.36

Stop Loss: 79.40
Target(s): 84.85, 89.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

Company Description:
For more than 85 years, Caterpillar Inc. has been making progress possible and driving positive and sustainable change on every continent. With 2009 sales and revenues of $32.396 billion, Caterpillar is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company also is a leading services provider through Caterpillar Financial Services, Caterpillar Remanufacturing Services, Caterpillar Logistics Services and Progress Rail Services. (source: company press release or website)

Why We Like It:
Shares of CAT spent more than five weeks consolidating sideways on either side of $80.00. Now with the market breaking out to new multi-month highs, CAT has broken out and closed at new two-year highs. We don't want to buy calls just yet. The $85.00 level is pretty heavy resistance. The plan is to wait for a dip. I'm suggesting a trigger to buy calls at $81.75. We'll use a stop loss at $79.40. If triggered our first target is $84.85. We want to exit the majority of our position here. We'll set a secondary target at $89.50 but again I warn you the $85 level should be touch resistance. FYI: The P&F chart is bullish with a $118 target.

Trigger @ 81.75

Suggested Position:
Buy the December $85.00 calls (symbol: CAT1018L85), current ask $2.18

Annotated Chart:

Entry on November xxth at $ xx.xx
Earnings Date 01/27/11
Average Daily Volume = 7.7 million
Listed on November 6th, 2010


Costco Wholesale - COST - close: 65.40 change: -0.08

Stop Loss: 62.90
Target(s): 69.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

Company Description:
Costco currently operates 577 warehouses, including 420 in the United States and Puerto Rico, 80 in Canada, 22 in the United Kingdom, seven in Korea, six in Taiwan, nine in Japan, one in Australia and 32 in Mexico. The Company also operates Costco Online, an electronic commerce web site, at www.costco.com and at www.costco.ca in Canada. The Company plans to open up to five additional warehouses in the next two months, prior to the end of calendar year 2010. (source: company press release or website)

Why We Like It:
I like the breakout in COST this past week. Shares spent the month of October consolidating previous gains. Friday's action looks like a failed rally at $65.00, which will hopefully lead to a minor pull back. I'm suggesting we buy calls on a dip to $64.50. If triggered we'll use a stop loss at $62.90. Our upside target is $69.00.

Trigger @ 64.50

Suggested Position:
Buy the December $65.00 calls (symbol: COST1018L65) current ask $1.91

Annotated Chart:

Entry on November xxth at $ xx.xx
Earnings Date 12/09/10
Average Daily Volume = 3.4 million
Listed on November 6th, 2010


Nike Inc. - NKE - close: 84.11 change: +0.70

Stop Loss: 79.90
Target(s): 87.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

Company Description:
NIKE, Inc. based near Beaverton, Oregon, is the world’s leading designer, marketer and distributor of authentic athletic footwear, apparel, equipment and accessories for a wide variety of sports and fitness activities. Wholly-owned Nike subsidiaries include Cole Haan, which designs, markets and distributes luxury shoes, handbags, accessories and coats; Converse Inc., which designs, markets and distributes athletic footwear, apparel and accessories; Hurley International LLC, which designs, markets and distributes action sports and youth lifestyle footwear, apparel and accessories; and Umbro Ltd., a leading United Kingdom-based global football (soccer) brand. (source: company press release or website)

Why We Like It:
NKE has delivered a very impressive performance once it broke out past $75.00 several weeks ago. Now instead of correcting the stock spent most of October consolidating sideways. We want to hop on board but not at new highs. I'm suggesting we use a trigger at $82.50 to buy calls. We'll use a stop loss at $79.90. Our first target is $87.25. FYI: The Point & Figure chart is very bullish with a long-term target of $115.

Trigger @ 82.50

Suggested Position:

Annotated Chart:

Entry on November xxth at $ xx.xx
Earnings Date 12/21/10
Average Daily Volume = 2.3 million
Listed on November 6th, 2010


In Play Updates and Reviews

Right Of Way

by James Brown

Click here to email James Brown

Editor's Note:

Did you notice that road sign a couple of days ago? It said, "Bulls Have Right of Way".

The OI newsletter was expecting some sort of pull back or correction following the QE news on Wednesday. The sell-off never showed up. Our bias was always bullish we just expected some sort of pull back. Now we're in the buy-the-dip mode if we can ever get a dip. I'll also be looking for some breakout candidates as well. I have updated most of the triggers for our current candidates tonight.

You might notice a few small changes in the format today. I've moved the stop loss data to the rest of the stat block with targets, etc.

-James

Current Portfolio:


CALL Play Updates

Cliffs Natural Resources - CLF - close: 71.10 change: +1.10

Stop Loss: 61.85
Target(s): 68.75, 70.75
Current Option Gain/Loss: Unopened
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
11/6 (James): Commodity and resource names should be strong candidates thanks to the new QE2 program and what should be a weaker dollar. Eventually the dollar is going to see an oversold bounce. When that happens commodities will pull back and CLF should pull back as well. We want to hop on board when that occurs.

I am adjusting our trigger to buy calls on CLF to $68.00. Our new stop loss is $64.75. Our new targets are $72.00 and $74.75. My time frame is four to six weeks.

Trigger to buy calls @ $68.00

Suggested Position: Buy the 2010 December $70.00 CALL

Annotated Chart:

Entry on November XX
Earnings Date 02/17/11
Average Daily Volume = 4.3 million
Listed on November 1, 2010


Humana Inc. - HUM - close: 59.56 change: +0.30

Stop Loss: 51.75
Target(s): 59.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes

Comments:
11/6 (James): I'm not willing to give up on HUM yet. The company just reported earnings last week and that seems to have stalled the upward momentum. You can look at a daily or weekly chart and see how shares seem to be forming a short-term top. Truly nimble traders may want to buy some puts because I think HUM is going to pull back toward the $55 level. I'm suggesting we buy calls when HUM hits $55.25. If triggered we'll use a stop loss at $51.75. Our first target is $59.75.

Suggested Position:

Trigger to buy calls at $55.25 <-- new trigger!

BUY the 2011 January $55 calls.

Annotated Chart:

Entry on November xxth at $ xx.xx
Earnings Date 11/01/10 (confirmed)
Average Daily Volume = 2.1 million
Listed on October 16th, 2010


iShares DJ Financial ETF - IYF - close 56.36 change +1.02

Stop Loss: 53.40
Target(s): 57.50, 59.75
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes

Comments:
11/6 (James): The financials have been several months building a base and the action this past week has finally produced a breakout through the top of this range. We want to jump on board but not after this very sharp two-day rally. I am suggesting we use a trigger to buy calls at $54.75. If triggered we'll use a stop loss at $53.40. Our first target is $57.50. Our second, longer-term target is $59.75.

Trigger to buy calls @ 55.00

Suggested Position: Buy the December $55.00 CALLS

Annotated Chart:

Entry on November XX
Earnings Date N/A (unconfirmed)
Average Daily Volume: 1.0 million
Listed on November 4, 2010


VimpelCom Ltd - VIP - close 15.99 change -0.26

Stop Loss: 14.80
Target(s): 16.75, 17.75
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes

Comments:
11/6 (James): The action on Friday looks like a bearish reversal for VIP. That's okay since we're still waiting for an entry point. I'm suggesting we use a trigger to buy calls on a dip at $15.60. We'll keep our stop loss at $14.80. If triggered our targets are $16.75 and $17.75.

Trigger to buy calls @ 15.60

Suggested Position: Buy the December $15.00 CALL

Annotated Chart:

Entry on November XX
Earnings Date 11/24/2010 (unconfirmed)
Average Daily Volume: 3.5 million
Listed on November 3, 2010


PUT Play Updates

Millicom Intl. - MICC - close: 95.99 change: -0.98

Stop Loss: 98.25
Target(s): 92.50, 90.25
Current Option Gain/Loss: -20.0%
Time Frame: 3 to 4 weeks
New Positions: No

Comments:
11/6 (James): MICC failed at the $98.00 level a couple of days ago but I don't trust it. Even though it looks like MICC is rolling over I am concerned since the market is in rally mode. Thus I'm not suggesting new bearish positions at this time. Even if you're not playing our puts I would keep MICC on your watch list. We plan to buy the dip when shares trade near $90 or their 200-dma, which should line up with the stock's long-term bullish trend.

Current Position: Long December 2010 $90 puts (MICC1018X90)
Entry @ $2.45

Annotated Chart:

Entry on November 1, 2010
Earnings Date 02/01/11
Average Daily Volume = 490 thousand
Listed on October 30th, 2010


CLOSED BULLISH PLAYS

Volatility Index - VIX - close: 18.26 change: -0.26 stop: 17.45

Target(s): 24.90, 29.00
Key Support/Resistance Areas: 18.00, 21.00, 25.00, 30.00
Current Option Gain/Loss: -50%
Time Frame: Two or Three weeks
Comments:
11/6 (James): Sadly I was wrong on the VIX. It seemed like odds for some sort of sell-the-news move on the QE announcement were pretty good. Unfortunately, the VIX moved the opposite direction as stocks rallied higher. I am closing this play early.

Current Position: Long 2010 December 25.00 calls (VIX1022L25), entry was at $2.25

EXIT early: option bid @ $1.00 (-55.5%)

Annotated Chart:

Entry on November 1, 2010
Earnings Date N/A --/--/--
Average Daily Volume = xxx million
Listed on October 30th, 2010


CLOSED BEARISH PLAYS

PNC Financial - PNC - close 58.41 change +2.48 stop NONE

Target(s): 53.00(hit), 52.10, 51.05 (hit), 50.35
Key Support/Resistance Areas: 54.50, 53.50, 50.50, 49.50, 48.75, 47.00
Current Gain/Loss: -99%
Time Frame: 1 to 2 weeks
New Positions: Neutral

Comments:
11/6 (James): I think it's game over for this bearish position. PNC has rallied sharply with the financials in the last two days. The stock has clearly broken through several layers of resistance. I would much rather look to buy calls on a pull back (maybe near $56.00). I'm closing this play. Closed Position: Long November $48.00 PUT, entry @ $1.26, exit $0.02

Annotated Chart:

Entry on September 30, 2010
Earnings: 10/21/2010 (unconfirmed)
Average Daily Volume: 5 million
Listed on September 29, 2010