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Daily Newsletter, Saturday, 11/13/2010

Table of Contents

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

Market Wrap

China Worries Weigh On Market

by Jim Brown

Click here to email Jim Brown

Rampant inflation in China caused worries about a new round of tightening and crushed commodity prices and equities.

Market Statistics

China was the focus on Friday with inflation at two-year highs and worries over further tightening to slow its rise. China's inflation for October came in at 4.4% and nearly a full point higher than the 3.6% rate in September. Inflation has tripled since January's 1.5% rate. The Shanghai Composite Index plunged more than 5.2% on Friday on fears China would hike rates over the weekend. This dragged down all Asian markets and pushed the U.S. market to a negative open as well.

This was a perfect excuse to sell equities and commodities. You have heard me say it before. When the market wants to go down it will always find an excuse. While China's 4.4% inflation rate might sound terrible it is only because traders don't understand China. From 1994 through 2010 the average inflation rate in China was 4.25%. It went as high as 27.7% in October 1994 and was well over 8% back in May/June 2008. For China's inflation to be 4.4% today it is right inline with the average and not a major problem. Yes, China might hike rates or take some other action to slow its rate of growth but the action will not be crippling to China's 10% growth rate. Growth will continue and even if it declined to 9% it would still be the hottest economy on the planet. Blaming the U.S. market decline on China was easy because the market was already looking for an excuse to take profits the week before option expiration.

The S&P rallied for +188 points from the 1039 low on August 27th. As of Friday's close it has given back only 28 of those points. I understand the worry over a potential bearish decline but you can't really draw that conclusion from the chart. This was the week before expiration after two months of gains and a very heavy news cycle for the last two weeks. Last week is when volatility should have occurred and it came right on schedule. I warned last weekend that we could see some volatility this week so lay off the caffeine and kick back with your choice of adult beverage and don't worry about this market. This is a buying opportunity over S&P 1190 or even 1175.

S&P-500 Chart w/Retracements

The economic calendar was light on Friday with the only material report the Consumer Sentiment for November. Sentiment rose to 69.3 from the prior reading of 67.7. This is the highest level since June and it was led by rise in the present conditions component to 79.7 from 76.6 while the expectations component rose only one point to 62.7.

I was expecting a decent bounce in sentiment and confidence once the elections were over but this report only covered about five days after the election before the cutoff for this reporting period. About three-fifths of the monthly survey data is reflected in the first report of the month. The remaining two-fifths will be reported on Nov-24th. Rising gasoline prices and falling house prices are still a major drag on sentiment.

Consumer Sentiment Chart

For next week there is a busy calendar but only three reports of any specific interest. The PPI on Tuesday and CPI on Wednesday would normally be worrisome because of the inflation component but inflation is currently near zero. That makes them important only if they show a sudden spike in the core rate of inflation.

The Philly Fed Manufacturing Survey on Thursday is seen as a preview of the national ISM two weeks later. The Philly survey this month is notable because of the expected improvement. Consensus estimates are for a jump to 5.0 from 1.0 on the headline number. That would completely reverse the last three months of declines and predict a strong showing for the national ISM. This report could revive U.S. expectations for economic improvement.

Economic Calendar

Cisco's earnings were the only event I highlighted on last week's calendar and it turns out it was the only event that mattered. As you know Cisco significantly lowered guidance for future quarters and shares declined -18% on the news to close at $20.15 on Friday. Cisco is a Dow component and its lost was a major impact on the Dow for the last two days.

Cisco's warning was also a major blow to market sentiment at least in the tech sector. The tech stocks had been leading the markets higher and Cisco turned into a major drag on the networking and PC sub sectors. Cisco said decreased government spending worldwide due to austerity programs and budget cuts would drag on revenues for the next two years. It was a bleak outlook from the normally positive tech giant.

Dell reports earnings next Thursday after the bell and they are expected to report a 22% gain in sales. The spike in sales is expected to be from corporate sales rather than consumer PCs. I would agree with those expectations. A friend from a local ISP here in Denver claims they receive 2-4 Hewlett Packard servers a week, a couple each of EMC and Qlogic and 25-30 of Dell servers. Apparently Dell has found a price point that works and they are selling a lot of servers. The shipping boxes say "Assembled in Mexico" so Dell is benefiting from the cheaper labor. We will know how cheap this labor really is when Dell reports next week. Can Dell, a company that has disappointed far more than Cisco has in the past become a market darling once again? Dell's shares imploded after the Cisco warning so the stage is set for a big rebound if they don’t disappoint. More than 26% of Dell's revenues come from government spending and that is what caused the Cisco warning, a slowdown in government spending.

Dell servers waiting to be installed

Dell Chart

The Fed launched its first purchase under the QE2 program on Friday. The Fed offered to buy $7.2 billion in bonds and dealers offered to sell $29 billion in 3-5 year maturities. The auction had some technical challenges and had to be restarted. After the smoke cleared it was $7 billion done and $593 billion to go. The Fed is expected to buy $105 billion in total on auctions almost every business day for the next month in an effort to push rates lower. That did not work Friday with yields on the 10-year notes jumping +5.17% and the biggest increase since August. Yields on the 2-year jumped +17% and the biggest one day increase since April. Eventually the daily Fed purchases will have the desired effect.

Investors may want to sell their bond positions soon because once the Fed quits buying bonds there will be a disaster of a crash.

With the first QE2 purchase now behind us the QE program is officially old news. The topics grabbing the headlines are China and Ireland. The rise in inflation prompted China to raise reserve limits for banks, which has the effect of removing money from the market since they have to hold more back in reserve. Analysts are "reportedly" concerned that China might take an even harder stand than simply raising rates another quarter point this weekend.

Ireland is the new Greece. All week we have been hearing about the growing debt crisis in Ireland but that eased somewhat on Friday. Irish debt prices rose for the first time in 14 days after Britain, France and Germany issued a joint statement promising to stand behind all of Ireland's debts. Before the pledge Bloomberg surveyed analysts and 51% said they "regard a default as likely." That is triple the number who felt is was likely back in June.

By Friday nearly everyone believed the EU and the IMF would be forced to come to Ireland's rescue. The problem with that is the list of countries behind Ireland with the same problems only less urgent. How many countries can the EU bail out before it goes broke? As one analyst put it, "who will rescue the rescuers?"

Hopefully the pledge by the EU countries to guarantee Ireland's debt will put an end to the current round of debt worries. The Euro gained slightly on the news.

The drop in the Euro over the last week suddenly made the U.S. dollar a safe haven play despite the Fed's QE program. The dollar rebounded to a five-week high and suddenly made those in the "short the dollar, long commodities" trade very uncomfortable. The weak traders raced to the exits and caused an immediate and painful drop in commodity prices.

Gold declined -$35 on Friday for the biggest one day drop in months to close at $1365 and well below the $1424 high Tuesday. Copper fell -$12.60 or -3.1% and the most in four months. Crude prices fell -3.4% to $84.87 after hitting a new two-year high on Thursday at $88.60. Sugar fell -12% in London and the most in 22 years. Corn and Soybeans traded limit down. The CRB Index fell -3.6% and the biggest drop since April 20th 2009. China is the world's leading consumer of many commodities and the combination of possible Chinese tightening and the spike in the dollar crushed prices.

Gold Chart

Commodity Index Chart

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The dollar will reverse as the Fed increases the pace of its bond purchases and the U.S. goes further into debt. It may not rally next week unless the pledge by the Euro nations to guarantee Ireland's debt was enough to placate currency traders.

Dollar Index Chart

Apple (AAPL) lost a big shareholder in September. Ken Heebner, manager of the Capital Growth Management fund sold 90% of his position. That was roughly one million shares or roughly $280 million at September's prices. In the SEC 13F filing the fund said it reduced it's holding to only 100,000 shares. Ken Heebner is widely followed by investors although his gains tend to run in streaks. The news was partly responsible for a $12 intraday drop in Apple shares on Friday. It closed at $308 and well off the $321 high for the week.

Bloomberg ran a story on Friday warning that Apple could see some weaker holiday sales due to lower consumer spending and production problems. The story was written by Ashok Kumar and he has a substantial following. He claims consensus estimates for holiday sales are as high as 3 million units a month but channel checks are not showing much over 2 million units being produced. Therefore street estimates may be over extended in his view. This was also weighing on Apple shares. He also warned that there were also sales or production problems with the Samsung Galaxy tablet, Dell's Tablet and the RIMM Playbook.

Apple Chart

Bucking the market drop was Disney with a +1.82 gain despite missing analyst estimates by a penny. There was some confusion about which analysts included items and which did not and the stock initially declined sharply to nearly $35. Nomura Securities reiterated a buy rating and raised the price target to $43. On the call the CFO said revenue at ESPN was up by +19%. The dip was short lived and Disney closed near the high of the day.

Shares of Nvidia rose +5% after raising sales guidance well over analyst estimates. The company said new products were gaining back market share they had lost to AMD.

Intel rallied after saying it would raise its dividend by 14% and CEO Paul Otellini said the company remained on track to have its best year ever. In August Intel cut its sales forecast citing weaker than expected demand for consumer PCs. In October Intel raised its forecast to levels that met expectations.

Providing support to the market next week will be 10 different IPOs headlined by GM. The GM IPO will raise $10 billion for GM on Nov-18th. Brokers claim it is 600% over subscribed with $60 billion in orders. This one is sure to move higher when it opens. China's SAIC Motor Corp is expected to buy $500 million in shares but rank and file U.S. investors will be blocked from owning them at the IPO price and be forced to buy on the open market. The expected price range is $26-$29.

Other high profile IPOs include Booze Allen Hamilton, LPL Investment Holdings and Aeroflex Holding Corp an electronics manufacturer. This will be the most active week for IPOs since 2007.

Harrah's Entertainment is going to IPO as Caesars Entertainment Corp (CZR) and is expected to raise $532 million. Investor John Paulson will also sell $710 million in shares to cash out most of his stake in the company. Harrah's was taken private in 2008 in a deal worth $27.8 billion by TPG Capital and Apollo Global Management. They piled debt on the company over the last two years but also enacted some severe cost cutting. Harrah's now has $19.8 billion in debt. Shares will price between $15-$17 when it lists on the Nasdaq.

I love Harrah's casinos but I am not sure how fond I would be of buying an IPO on a company with $20 billion in debt. The current owners will keep 82% of the company. If my math is right they are selling 18% of the company for $1.242 billion in the IPO and Paulson share sale. That would appear to value the entire company at $6.9 billion. It has nearly three times that amount in debt and lost money last quarter. This one scares me.

The market drop was the biggest weekly decline in more than three months. The talking heads on TV kept saying the decline was on low volume but I did not see it. Volume over the last four days averaged over eight billion shares per day. That is not heavy but definitely not light.

Volume on Friday was heavily weighted to the downside with down volume 7:1 over advancing volume. New 52-week highs declined to only 110 compared to the 1,320 high back on November 4th.

Those putting money into the market were welcomed with an average drop of -2.3% for the week. The week ended on Wednesday was the fifth consecutive week of inflows into U.S. equity funds after six months of outflows.

I still believe this decline is a buying opportunity. However, the situation has changed slightly with the Cisco warning weighing on investor sentiment, the Irish debt problem, which should be less important next week and the worry over another round of tightening by China. The dollar is the wild card. None of those problems are critical. I view Cisco as the worst because they are a key tech component and a slowdown in their business should mean a slowdown in everyone's high tech business. Hopefully Dell can repair the sentiment damage when they report on Thursday. The worst case would be if they add to it with an earnings miss and lowered guidance of their own.

Even if China does hike rates the country will still continue grow around 10% so the impact to commodities will be minimal at best. This should be just a news blip more than a real change in status.

The S&P declined only 28 points from its highs over the last week. I believe this was a delayed sell the news event from the hyped buildup to the FOMC and Jobs, profit taking and option expiration position shuffling all rolled into one week. The pace of the selling was slow once past the open. Each day had an afternoon rebound. Not closing on the lows is a positive signal. Once the downtrend was set for the week Friday had no chance. The shorts were gaining confidence and the news events just kept coming.

If China or Ireland continues to make headlines over the weekend we could have another dip on Monday. As long as the S&P remains over 1190 or even 1175 I would be a buyer of that dip.

There may be numerous structural problems impacting the economy and the market long term but I believe the short term will be positive. Money is flowing into mutual funds and the Fed plans to keep it that way.

I understand the worry over a potential bearish decline but you can't really draw that conclusion from the chart. The uptrend is still intact. The S&P would have to decline to 1180 just to retrace 25% of the August to November rally. That same 1175-1180 level is also strong support from the pre Fed meeting bullish consolidation period. I seriously doubt it will move below 1175.

If we do see a move below 1175 that would change the game and setup a potential double top at 1225. I am betting that the anticipation of economic improvement in 2011 is going to keep investors motivated and bargain hunting on every dip.

The herd tends to get all bent out of shape when we get a couple of news events appearing at the same time. The gloom and doomers come out of the woodwork and the shorts get all fired up. When the smoke clears and the light of day erases the shadows the true investors begin snapping up all the bargains. The shorts get squeezed and the cycle repeats.

The qualification to this outlook is of course a worsening of Ireland or China or a disaster earnings report from Dell.

S&P-500 Index Chart

S&P-500 Chart - Weekly

The Dow was severely handicapped by the Cisco warning. Cisco is a Dow component and the -18% drop in Cisco would have been catastrophic if it had been a high dollar stock. The Dow is a price-weighted index where the higher the price of the stock accounts for a greater percentage of the Dow. For instance IBM accounts for 9.72% of the Dow because it is a $144 stock. Bank America is only 0.82% of the Dow because it is the lowest priced stock at $12. Cisco is fifth from the bottom at 1.36% of the Dow. If Dell does a face plant on Thursday at least it won't directly tank the Dow.

The Dow would have to move below 11,070 to retrace 25% of the August to November move. There is also strong support at 11,000 so the entire range of support from 11,000 to 11,100 should be substantial. There were only three Dow components that lost more than a dollar on Friday. Boeing -2.28, IBM -1.69 and CAT -1.40. That is far from a rout despite the -90 point headline number.

I would be very surprised to see much more of a decline in the Dow without a worsening of some existing problem.

Dow Components

Dow Chart

Unlike the Dow and S&P the Nasdaq broke uptrend support at 2550 and has already returned to the bullish consolidation area from late October. Thank you Cisco, Google and Apple. The Nasdaq declined -60 points to come to rest just above 2500. The support range from 2470-2500 needs to hold and halt this Cisco generated tech flight. This is why Dell needs to post stunning results instead of following Cisco's lead. Remember, Intel just upgraded guidance so processors are still selling and every processor needs a computer to run. At the same time one Cisco router can handle dozens to hundreds of computers.

I know, I am probably putting too much emphasis on Dell and I have not even liked Dell since it broke below $40 in late 2000. I will forgive them all their past sins and missed earnings estimates if they can pull a rabbit out of the proverbial hat next week. This is Michael Dell's opportunity to redeem himself. A Dell director bought 20,000 shares in the market last week and I doubt he would have done that if they were going to miss earnings.

If the market is going to recover we need to see the Nasdaq hold the line at 2470 for sure and hopefully at 2480 or higher.

Nasdaq Chart

The Russell was my confirming indicator again last week. The Russell lost the same -2.3% as the other indexes but the decline remained above the uptrend and well above strong support at 700. If fund managers were really scared about China and Ireland they would have bailed from the Russell in heavy volume. For me this confirms my bullish bias and gives us a clear line in the sand for confirmation of any market move. As long as the Russell is over 700 I would stick with any weakness in the other indexes. Once support at 700 breaks I become a bear.

Russell Chart

In summary I remain bullish and in buy the dip mode through Thanksgiving and possibly into year-end. Once the market returns to its winning ways we will play it week by week. I believe the news events from last week will fade now that the G20 is not producing a couple dozen sound bites a day and dozens of "currency war" headlines. Ireland should fade because of the EU pledge to stand behind Ireland's debt. And lastly the Cisco stigma should fade if Dell can report earnings that are at least close and end the call without a warning.

Late Saturday the Greece PM said the country might ask for an extension on repayment of the $150 billion loan from the EU and the IMF. It is not a good time for the return of Greece to the headlines. This could heighten the worries over Ireland and Portugal and the ability of the EU to continue bailing out countries that may eventually default.

Don't fight the Fed!

Jim Brown

Money isn't everything but it sure keeps you in touch with your children. - J. Paul Getty


Index Wrap

The Bear Woke up Slightly

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

I've been saying for awhile now that major extremes in bullish sentiment AND high overbought readings suggests extremely high risk for a correction. I suppose I could make a flat 'rule' that 8-week Relative Strength Index (RSI) readings at 80 and above is an opportune time to exit long calls at a minimum and buying puts for the adventuresome. For this rule of thumb to 'work' out there should also be extremes in bullish sentiment AND price action that also suggests a top. In terms of price considerations, the weekly highs of the past two weeks stopped exactly at resistance implied by a Fibonacci 62% retracement of the prior major decline (late'07 to early'09).

In terms of a projected wave 'count' I've been playing with, I wrote that ..." a correction is coming but there should be a rally to higher highs after that. 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."

A background to the foregoing (Elliott) wave forecast/interpretation is seen in my most recent Trader's Corner article. (See the second chart). I don't base short to intermediate-term trading decisions on projected 'wave' counts alone but I do find them of forecasting interest when I see what I think is an 'obvious' wave pattern on daily and weekly charts.

I have the view that whether it takes the form of sideways choppy action or that of a more significant retracement of prior gains, the correction that got underway this past week may take a few weeks to play out. This market got too overbought to suggest that a counter-trend correction will be a very short-lived affair. Sometimes it happens that RSI extremes will be quite early in terms of timing a top based on this indicator extreme alone. However, this most recent 'extremes' in price, RSI and my sentiment indicator, all occurring on 11/5, looks to exactly coincide with an interim top; not in my estimation, a 'final' top for this bull market that began 19 months ago.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

Last week I was thinking that a move in the S&P 500 (SPX) index above 1220 could signal a move to around 1240 or so. NOPE! Instead SPX formed an approximate double top. A difference of 7 points in the two tops isn't particularly significant here. I don't think this a 'final' top for the bull market that began in March of last year, but it's appropriate to pay attention to such prospective tops until the prior highs are pierced. Near-term I look for still lower prices, especially as signaled by a break below the 21-day average.

Resistance as implied by a weekly chart retracement of 62% (at 1228) as seen above in my initial 'bottom line' comments is noteworthy. A sell off was 'signaled' by the first break of SPX's up trendline. The chart is now mixed in its pattern but no intermediate downside chart reversal is suggested unless SPX starts falling below 1130.

Extremes in price, the 13-day RSI AND bullish sentiment were made on (Friday) 11/5. It's unusual for all to coincide on the SAME day but this market was 'due' for a correction and these technical considerations appeared to be spot on in signaling the day of the top. Tough to 'get' in trading sync with that top immediately but some did. I wrote last week 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." Was I short right at the recent top? No, I get caught up in pronounced bullishness to a degree also.

Initial support came in at the 21-day moving average (at 1194 currently) on Friday. Next support is 1180, then at 1150. Major support begins in the 1130 area.

Near resistance is at 1210, with pivotal and key resistance at 1226-1227. Major resistance is at 1253.

Per a query I got on this, I haven't been highlighting this pattern, but the Inverse Head & Shoulder's that formed over the late-May to late-August period (see above SPX chart), followed by an upside breakout above the 1129 'neckline', suggested a 'minimum' SPX upside target to around 1149; i.e., distance from bottom of the middle decline, the Head, to the neckline, ADDED to the neckline (after the upside penetration of it). However, these measuring implications are not hard and fast, but 'rule of thumb' estimates of rally potential in the case of inverse (bottom) H&S patterns and downside decline potential with H&S tops.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart, consistent with it lagging the larger 500 (SPX) index a bit, didn't achieve a robust retest of its prior highs in the 555 area. OEX got into that ballpark, as the prior top saw a cluster of highs in the 553 area and the index touched this level on a few occasions before coming down fairly hard this past week. As with SPX, the S&P 100 has formed a potential double top and pierced its up trendline, so the chart has turned mixed. The short-term hourly chart (not shown) pattern suggests further weakness in the early part of the week.

Very near support is assumed in the area of OEX's 21-day moving average, now at 538, with chart support next suggested around 530. A further and pivotal support is seen in the 524-520 zone.

Immediate resistance is at 543-544, at the previously broken up trendline, now assuming to 'act' as a resistance. Pivotal chart resistance is at 550-553.

DOW 30 (INDU) AVERAGE; DAILY CHART:

In a short-term Dow 30 (INDU) downside reversal, INDU has fallen below its trendline and to below the pivotal 21-day moving average. These are the kind of fluctuations that Charles Dow called not worth paying attention to. However as traders we surf these smaller waves or at least want to know what's breaking.

I anticipate some further weakness in the early part of the week, but a rally by mid-week or so as a likely return volley by the bulls but one not likely to be as robust as before this past week's sell off. This is still a bull market, but this time of year doesn't favor a lot of new investors piling in to keep this rally going as signs come of holidays ahead with a tendency to wind things down. This is a rally that's covered a lot of ground since the late-August lows in the 10,000 area; for this particular group of 30 stocks especially.

Given that INDU is composed of so few current glamor stocks especially in tech. The Dow can't maintain a rally above 11,000 with just IBM firing on all cylinders. Of course there have been some high flying Dow stocks in recent weeks in mainline mature businesses; recent examples are provided by CAT, DD, HD, IBM of course, KO, MCD, T, TRV, UTX and XOM (surprise).

Key support is at 11000, with next support at 10900-10880. Major support begins in the 10725-10700 area.

Immediate overhead resistance is suggested at 11290-11300 and would be a return of the Average to its recently broken up trendline; what was support tends to 'become' subsequent resistance. Pivotal resistance at the prior recent highs is in the 11450 area. If INDU gets back above 11400 anytime quick, it would be showing more strength than I'm anticipating today.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) Index chart turned mixed in its pattern once its steep up trendline was pierced. This is not to say that a reversal in the dominant uptrend is suggested, short of a fall that carried the index below 2350. By the way, the Inverse Head and Shoulder's bottom described for SPX was paralleled in the COMP chart, only the 'minimum' upside objective projected for COMP was fulfilled when the Index got to 2560.

Extremes in price, RSI and my sentiment indicator were made on the same day, Friday 11/5. Unusual for all to coincide on the exact same day but this market was due for a correction and these three technical aspects appear to be spot on in signaling a top to the day. Price resistance was suggested more by the weekly S&P than the weekly COMP chart (not shown). It was true that the weekly COMP had only a single Close above its March peak. I often say to look for a second consecutive close at new highs to 'confirm' a breakout.

Resistance is at 2585, extending to 2600. Major resistance begins around 2700.

Near support is noted at 2475, then at 2400. The 2350 area looks to be the beginning of major support. I look for lower prices ahead; one signal for that would be the 21-day average getting pierced further intraday and especially on a closing basis.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart has given up its highly bullish pattern with the break in the well-defined up trendline. The chart is now mixed in its pattern as the short-term trend has turned down. The index pierced its trendline at 2177 but closed at 2187 above the line. Nevertheless, momentum had started to shift and traders were given time to exit index calls and long stock positions like QQQQ. The Friday close at the 21-day moving average suggests a possible rallying instinct. However, the shorter-term hourly charts (and for all the major indexes) have bear flag patterns, projecting further weakness early in the coming week.

'Overbought' extremes finally caught up with the market but the decline has been measured. It's still a bull market folks! I think the decline will also continue to be measured, without the free fall waterfall type declines more characteristic of bear market periods.

It was insightful to see the 13-day RSI reach a high at about the same reading that occurred with the March top. Any RSI reading for indexes (not for other markets necessarily) over 80/81 can continue but it's a 'black swan' event to do so for more than a day or few days. Look for still lower prices after the weekend, but a bounce by mid-week would be about as expected.

Key/pivotal support is at 2100, then at 2050. Major support begins in the 2000 area.

Pivotal resistance is at 2200 currently as demonstrated by the line of resistance that formed on the hourly chart (not shown) at 2191-2200 and projected as well by the current intersection of the pierced up trendline. Next resistance I've highlighted as expected around 2240.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

There's little to add for the QQQQ tracking stock in terms of cautionary comments made to NDX bulls if they're looking for continued strong rebounds like we've gotten used to seeing in prior weeks. I think instead we're in a price discovery period where it will be found that current tech stock prices may be a bit rich given the still precarious state of the economy, ours and globally, which will directly affect earnings.

While QQQQ has held support at the moving average and could bounce from there, current downside momentum suggests still lower prices ahead.

Volume expanded on the decline as some long holders of the stock, some of whom were ready to lock in significant profits with stock bought well under current levels. To gain 8-10 points in the stock is a very nice move indeed and was doable on this last power move; one having the general characteristics of a 'wave 3' or a power move most often seen in the midpoint of a rally, not the end of it.

Near support: 52.0

Next support: 51.6, then 51.0

Pivotal support: 50.0 Near resistance: 54

Major resistance: 55.0

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) sold off this past week of course in lockstep with the overall market. RUT looks to be coming down to test support at its up trendline, currently intersecting around 715. A break of the trendline, a better than even odds of it happening, suggests a drift to what had been solid support in the 700 area. I anticipate that area to be tested but I see 690, as the key domino support point to watch.

Resistance is at 740 clearly, extending to 746, resistance suggested by RUT's last big top (April 2010).

I wrote last week (11/6) that I didn't have higher upside projections than to the 740-746 area and RUT got to up to 739 this past week which now looks to be the maximum upside for now. I guess it would have triggered too many sell orders if the index got bid at 740. 739-740 is pivotal resistance in the coming week.

Near support anticipated is at 715, extending to 700, with key support at 690. Major support begins in the 660-662 area.



GOOD TRADING SUCCESS!


New Option Plays

Technical Systems and Oil Services

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Ansys, Inc. - ANSS - close: 48.98 change: -0.11

Stop Loss: 44.90
Target(s): 49.50,
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Company Description:
ANSYS, Inc., founded in 1970, develops and globally markets engineering simulation software and technologies widely used by engineers, designers, researchers and students across a broad spectrum of industries and academia. The Company focuses on the development of open and flexible solutions that enable users to analyze designs directly on the desktop, providing a common platform for fast, efficient and cost-conscious product development, from design concept to final-stage testing and validation. The Company and its global network of channel partners provide sales, support and training for customers. Headquartered in Canonsburg, Pennsylvania, U.S.A., with more than 60 strategic sales locations throughout the world, ANSYS, Inc. and its subsidiaries employ over 1,600 people and distribute ANSYS products through a network of channel partners in over 40 countries (source: company press release or website)

Why We Like It:
ANSS has been showing huge relative strength with a breakout past significant resistance last week. The stock is now testing overhead resistance in the $49-50 zone. Odds favor a pull back before ANSS gets much higher. Broken resistance near $46.50 should be support. I am suggesting we buy calls on a dip to $46.75. I'm listing a stop loss at $44.90 but you could probably get away with a stop closer to $46.00.

Buy-the-dip trigger @ 46.75

Suggested Position: Buy the 2011 January $50.00 calls (ANSS1018L50)

Annotated Chart:

Entry on November xxth at $ xx.xx
Earnings Date 02/24/11 (unconfirmed)
Average Daily Volume = 651 thousand
Listed on November 13th, 2010


NEW DIRECTIONAL PUT PLAYS

Oceaneering Intl. Inc. - OII - close: 68.93 change: -2.55

Stop Loss: 72.15
Target(s): 64.50, 62.25
Current Option Gain/Loss: +0.00%
Time Frame: 3 to 4 weeks
New Positions: Yes

Company Description:
Oceaneering is a global oilfield provider of engineered services and products primarily to the offshore oil and gas industry, with a focus on deepwater applications. Through the use of its applied technology expertise, Oceaneering also serves the defense and aerospace industries. (source: company press release or website)

Why We Like It:
Let me start by saying I'm actually bullish on oil service stocks. Unfortunately OII seems to have gone too far too fast. Plus, the OSX oil services index has rallied right to resistance and begun to stall. OII look poised to correct and we want to try and capture some of the pull back. Maybe then we can switch directions and buy calls.

On a short-term basis OII has actually formed a little double top pattern. Plus the weekly chart has a blow-off top pattern. I'm suggesting bearish put positions now. You may want to keep your positions small since this is an aggressive, higher risk trade. Our first target is $64.50. Our second target is $62.25.

Suggested Position: Buy the December $65.00 puts (OII1018x65) current ask $1.65

Annotated Chart:

Entry on November 15th at $ xx.xx
Earnings Date 02/17/11
Average Daily Volume = 1.0 million
Listed on November 13th, 2010


In Play Updates and Reviews

Much Needed Decline

by James Brown

Click here to email James Brown

Editor's Note:

Stocks appear to be correcting after a multi-month rally. This is both healthy and normal. However, the correction may not be over yet. We do want to buy the dip on stocks near support but consider scaling into positions a little at a time and then add to them as stocks rebound.

-James

Current Portfolio:


CALL Play Updates

Baidu, Inc. - BIDU - close: 110.64 change: -3.46

Stop Loss: 106.49 *new*
Target(s): 119.75, 124.50
Current Option Gain/Loss: -16.7% and -14.1%
Time Frame: 4 to 5 weeks
New Positions: Maybe

Comments:
11:13: Uh-oh! BIDU looked so strong on Thursday with the breakout to new highs. Unfortunately, investors overseas were a little panicked that China might raise interest rates to stave off inflation. The Chinese Shanghai stock market sank -5% on Friday. BIDU was pulled lower by declines back home and the stock reversed. Shares of BIDU opened at $112.97 (our entry) and dipped toward its rising 20-dma before paring its losses. The low today was $107.82. Given our lowered entry point I am adjusting our stop loss to $106.49 just to give BIDU some room to move. However, there is no way to know if the Chinese markets will continue to plunge on Monday. Readers may want to wait on launching new positions in BIDU. There is some speculation that the Chinese government could announce a policy change over the weekend. Our risk now is that BIDU actually gaps open lower on any unexpected news.

Current Position: Long the 2010 December $120 calls (BIDU1018L120) Entry @ $2.99
- or -
Current Position: Long the 2011 January $120 calls (BIDU1122A120) Entry @ $5.65

Entry on November 12th at $112.97
Earnings Date 02/09/11
Average Daily Volume = 13 million
Listed on November 11th, 2010


Caterpillar - CAT - close: 81.04 change: -1.40

Stop Loss: 79.40
Target(s): 84.85, 89.50
Current Option Gain/Loss: -16.4%
Time Frame: 3 to 4 weeks
New Positions: Yes

Comments:
11:13: Shares of CAT dipped toward round-number support at $80.00 on Friday. This looks like a new bullish entry point to buy calls. I'm adding a new position for the newsletter at current levels. We have a stop loss at $79.40 so if CAT breaks down from here we should be out quickly.

Earlier Comments
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 tough resistance. FYI: The P&F chart is bullish with a $118 target.

Current Position: Long the December $85 calls (symbol: CAT1018L85)
Entry @ $1.40

Double Down
New Position: Buy the December $85 calls (CAT1018L85), current ask $1.17

Entry on November 9th at $ 81.75
Earnings Date 01/27/11
Average Daily Volume = 7.7 million
Listed on November 6th, 2010


Cliffs Natural Resources - CLF - close: 67.52 change: -2.53

Stop Loss: 64.75
Target(s): 71.50, 74.75
Current Option Gain/Loss: + 6.1%
Time Frame: 4 to 6 weeks
New Positions: Yes

Comments:
11:13: Commodity names were swept up in the market-wide profit taking on Friday. CLF dipped to $67.00 at its low, which happens to be our entry point to buy calls. If you missed the entry point I would still consider positions now or there is a chance we see more market declines on Monday and CLF could dip toward $66.00, which I would use as an entry point.

Earlier Comments
Stop loss is at $64.75. Our upside targets are $72.00 and $74.75.

Current Position: Long the 2010 December $70.00 CALL, Entry @ $2.42

Annotated Chart:

Entry on November 12th @ 67.00
Earnings Date 02/17/11
Average Daily Volume = 4.3 million
Listed on November 1, 2010


Costco Wholesale - COST - close: 65.20 change: -0.15

Stop Loss: 62.90
Target(s): 69.00
Current Option Gain/Loss: +15.3%
Time Frame: 3 to 4 weeks
New Positions: Yes

Comments:
11:13: COST is still holding up pretty well. Shares only lost 15 cents on Friday's market decline. If COST sees another pull back I would use dips near $64.00 as new entry points. Look for technical support at the 40-dma. We want to keep our position size small to limit our risk. FYI: The Point & Figure chart is very bullish with an $88 target.

Current Position: December $65.00 calls (symbol: COST1018L65)
Option Entry @ $1.50

Entry on November 8th at $64.50
Earnings Date 12/09/10
Average Daily Volume = 3.4 million
Listed on November 6th, 2010


Humana Inc. - HUM - close: 59.20 change: -0.77

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

Comments:
11:13: There is no change from my prior comments. HUM's recent bounce from $58 hags reversed and shares look poised to correct lower. I'm suggesting we use a trigger to buy calls at $55.25. More aggressive traders could buy puts now and try to scalp the move lower. If HUM hits our bullish trigger at $55.25 we'll use a stop loss at $51.75.

Suggested Position:

Trigger to buy calls at $55.25

BUY the 2011 January $55 calls.

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 54.21 change -0.87

Stop Loss: 52.90 *new*
Target(s): 57.50, 59.75
Current Option Gain/Loss: -40.0%
Time Frame: 6 to 8 weeks
New Positions: Yes

Comments:
11:13: Financials have been volatile this week. The IYF continues to correct lower and shares stalled near $54.00. The $54 level was prior resistance for several months so it should be decent support. I would use this dip as a new entry point to buy calls. Please note I'm adjusting the stop loss to $52.90.

Current Position: Long the December $55.00 CALLS, entry @ $2.00

Entry on November 9th @ 55.00
Earnings Date N/A (unconfirmed)
Average Daily Volume: 1.0 million
Listed on November 4, 2010


Macerich Co. - MAC - close: 45.73 change: -1.04

Stop Loss: 43.75
Target(s): 49.75, 54.00
Current Option Gain/Loss: -46.1%
Time Frame: 4 to 5 weeks
New Positions: Yes

Comments:
11:13: REIT stocks were not immune to the market's turmoil on Friday. MAC closed under short-term support near $46.00 and the stock could be headed for its 50-dma near $44.40. I am raising the risk on this trade by raising the stop loss to $43.75. Wait for a bounce before considering new positions in MAC.

Earlier Comments
Our first target is $49.75. Our second target is $54.00 but that's probably wishful thinking on my part.

Current Position: Long the December $50 calls (symbol:MAC1018L50) Entry @ $0.65

Entry on November 11th at $ 46.48
Earnings Date 02/10/11 (unconfirmed)
Average Daily Volume = 1.2 million
Listed on November 10th, 2010


Nike Inc. - NKE - close: 82.62 change: -1.05

Stop Loss: 79.90
Target(s): 86.75, 89.50
Current Option Gain/Loss: -21.7%
Time Frame: 4 to 6 weeks
New Positions: Yes

Comments:
11:13: Hmm... looks like I should have stuck to my guns and waited for that dip to $82 like we wanted. NKE slipped toward support near $82 before paring its losses into the close. I would use this dip on Friday as a new entry point to buy calls. Stop loss @ 79.90. More conservative traders may want to use a slightly higher stop.

Current Position: Long the December $85.00 CALLS (symbol:NKE1018L85) Entry @ $1.15

Entry on November 11th at $83.00
Earnings Date 12/21/10
Average Daily Volume = 2.3 million
Listed on November 6th, 2010


VimpelCom Ltd - VIP - close 15.46 change -0.11

Stop Loss: 14.80
Target(s): 16.75, 17.75
Current Option Gain/Loss: -33.3%
Time Frame: 6 to 8 weeks
New Positions: Yes

Comments:
11:13: VIP slipped and is testing support near the $15.20-15.25 zone again. This should be a new bullish entry point but I suspect VIP will hit $15.00 soon. Wait for the dip or buy calls on the bounce. FYI: VIP is due to report earnings around Nov. 24th.

Current Position: December $15.00 CALLS, Entry @ $1.05

Entry on November 8, 2010 @ 15.60
Earnings Date 11/24/2010 (unconfirmed)
Average Daily Volume: 3.5 million
Listed on November 3, 2010


PUT Play Updates

Lubrizol Corp. - LZ - close: 105.40 change: -1.69

Stop Loss: 110.25
Target(s): 100.50
Current Option Gain/Loss: +13.8%
Time Frame: 3 to 4 weeks
New Positions: Maybe

Comments:
11:13: The market's decline was the perfect environment for LZ to continue its correction. Shares are rolling over under resistance at $110. I would consider new bearish positions now. You may want to keep your position size small to limit your risk.

Current Position: Long the December $105 puts (symbol:LZ1018X105)
Entry @ $2.90

Entry on November 10th at $107.68
Earnings Date 02/03/11 (unconfirmed)
Average Daily Volume = 525 thousand
Listed on November 9th, 2010


Millicom Intl. - MICC - close: 92.90 change: -0.22

Stop Loss: 98.25
Target(s): 92.50, 90.25
Current Option Gain/Loss: + 2.0%
Time Frame: 3 to 4 weeks
New Positions: No

Comments:
11:13: Hmmm... the lack of weakness in MICC on Friday is somewhat surprising. The entire market is sinking and yet MICC can't drop through short-term support near $92.00. That's a concern. I'm not suggesting new positions at this time. The path of least resistance still appears to be down.

FYI: Our final target is $90.25.

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

11/08 Target hit @ 92.50, option @ 2.85 (+16.3%)

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