Option Investor
Newsletter

Daily Newsletter, Saturday, 11/27/2010

Table of Contents

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

Market Wrap

Different Day, Different Country, Same Result

by Jim Brown

Click here to email Jim Brown

With Ireland now old news the world turned its attention to Portugal as EU finance ministers pressured the country to ask for a bailout in order to head off an even bigger contagion problem with Spain.

Market Statistics

The markets shook off the short squeeze rally from Wednesday and the Dow dropped -95 points as worries increased over the falling dominos in the Eurozone. Greece, Ireland and now Portugal have fallen prey to speculators. Next up would be Spain and the largest economy to be targeted. Eurozone finance ministers are pressuring Portugal to apply for a bailout quickly in order to prevent the damage to the financial markets that would come from a protracted delay. They also believe a quick deal could breakup the wolf pack of speculators once Portugal is no longer vulnerable.

Spain is seen to be at risk from a Portuguese default so shoring up Portugal would relieve pressure on Spain. Spain's banks have more than 100 billion euros at risk to Portugal's debt. Publicly traded banks in Spain have lost as much as 20% of their value in the last month on worries over Portugal. However, even if a bailout worked on a temporary basis there are rumors starting to surface about increasing the one trillion euro aid package that the ECB and IMF and healthy EU countries put in place when Greece was about to fail. Existing bailouts are expected to increase in size and the next countries to need help are growing progressively larger.

If Portugal quickly accepts aid, which has been projected to be in the 50 billion euro range, we could see a pause in the debt parade. It would take speculators a little more time to build a decent case against Spain and they might lose interest if the EU appears to be united about supporting any country. However, Portugal is a long way from accepting a bailout and the attached economic strings. On Friday Portugal's parliament passed a hotly contested austerity budget that contained tough spending cuts in an effort to avoid even harsher cuts mandated by a forced bailout.

Portugal's Prime Minister, Jose Socrates, said the budget's passage, which concluded many months of political bickering that at one point threatened the government's survival, removed Portugal from the crosshairs of the euro zone crisis. "I have good expectations that approval of the budget will reinforce confidence in the markets." Spreads on Portugal's debt did narrow after the budget's passage. Portugal does not have the same banking crisis as Ireland. Portugal's banks are still sound. The crisis in Portugal was in the size of the deficit and an economy about to fall back into recession. More than 50% of Portugal's GDP comes from the public sector, which means the private sector is bearing a heavy load. The crisis was not a severe problem until speculators began focusing on the debt and pushing it to levels where Portugal could not pay or continue to sell debt to finance the country. The interest rates on their debt have ballooned to over 9% for Portugal and 10% for Spain.

The real problem in the EU is not Ireland, Portugal or Spain but the credibility of the Eurozone and the Euro. As the euro plunges with every new country crisis it produces worries of a Eurozone breakup and a devaluation of the euro itself. The euro concept was sold as a strong currency backed by rigid financial rules and investors have now found out that all the rules were violated and the zone is fragmented. Greece is taking money from the ECB and IMF but they are still expected to default in Q2 and potentially withdraw from the union. By forcing the other weaker countries to accept bailouts it also forces them to live up to a new set of more stringent economic rules. If further bailouts are halted by quick action on Portugal then the union will eventually regain its financial strength even if Greece decides to secede from the union. The ECB and IMF will have stopped the deficit bleeding and put the patient on the road to recovery. If it requires amputating an appendage called Greece then that will be considered preventive medicine.

I have one question. Which EU country is going to be their Lehman Brothers? Which country failure will be the one that collapses the EU house of cards?

The worry over Portugal caused the U.S. futures to sell off overnight on Thursday and the cash markets to open sharply lower. They recovered somewhat intraday but fear of darkness brought the sellers back at the close. I would not read too much into this because volume was the lowest I have seen in years. Volume across all exchanges was only 2.7 billion shares and that was significantly lower than the 4.5 billion shares on Black Friday 2009. It was only 400 million shares above the 2.3 billion share volume for Christmas eve 2009. There was no confirmation of selling conviction on Friday but just a few stop losses getting hit by the news from Portugal.

There were no economic reports on Friday due to the holiday. Next week there is a large list of reports and some of them are critical. The regional ISM reports on Tuesday preview the national version on Wednesday. The official consensus estimates for the national ISM is for a decline to 56.2 from 56.9. I am betting we see an upside surprise instead and that would be bullish for the markets.

The Fed Beige Book also on Wednesday could be another volatility event. The FOMC appears to be in turmoil over the need for the current QE program and a positive uptick in sentiment from the Beige Book survey would increase that internal strife. Conversely if the Beige Book shows a decline in conditions Mr. Bernanke would be vindicated for his position. After a few days off for the holiday the Fed will be back in action on Monday with two different QE purchase programs. I expect them to ratchet up purchases this week in an attempt to bring rates back down and take some of the steam off the dollar rebound.

The biggest report for the week is the Non-Farm Payrolls on Friday. The official consensus is for a gain of 133,000 jobs but I am betting on an upside surprise there as well to as much as 175,000 new jobs. Last month saw a 151,000 gain in jobs. The ISM Non-Manufacturing report closes out the very busy week later Friday morning.

Economic Calendar

Stock news was pretty scarce on Friday's abbreviated trading day. There were the obligatory reports from the crowded malls where shoppers were fighting for the last "Elmo Knows Your Name Doll" and standing in long lines to be one of the first 100 shoppers and gain special discounts. By all accounts this weekend is expected to be significantly better than the same weekend in 2009. Unfortunately shares of most retailers were down in what could be a sell the news event. It is hard to tell since the market was tanking as well. Most believe the good retail news is already priced in but with four weeks to go in the shopping season I am not convinced. I believe we could still see some upside for retailers when the weekend tally is reported next week.

Del Monte Foods confirmed it was in a deal to be acquired by a group led by KKR for $4 billion. This will be the largest leveraged buyout since the collapse of Lehman Brothers. Back in 2009 the private equity guys were still gun shy and financing was hard to get. The deal was rumored the prior Friday and the stock shot up so there was only a minor gain when it was finally announced. Pre rumor DLM was trading at $14.51 and it closed on Friday at $18.83.

Rio Tinto (RIO) held an analyst meeting on Friday and announced plans to increase capex spending from $4 billion to around $11 billion in 2011. This giant increase in spending is an attempt to boost iron ore production by more than 50% over the next five years. Prices for iron ore have more than doubled from $60 a ton last year to $133 per ton today. Producers like RIO have switched from annual contracts to quarterly contracts in order to capture the higher spot prices and not get locked into a low delivery price for a long term. Rio said is was also investing more than $2 billion to grow existing copper production. They warned that worsening grades of copper ore would cause total production to decline -18% to 661,000 tons in 2010 and 2011 but it would rebound in 2012 and increase sharply in 2013-2014. RIO shares declined slightly on the downward revision on copper production. This could be a buying opportunity since lower production will mean higher prices for copper.

RIO Chart

Aflac (AFL) dropped nearly -5% on news their duck had died. Actually I am just kidding about the duck but I could find no reason for the sudden decline in the shares. A couple of writers blamed the drop on the news from Portugal but I don't see where the two are related. Insurers in general are weak but the drop in AFL was out of character with the rest of the group.

Aflac Chart

The U.S. dollar was still a safe haven play on Friday as it surged to new two-month highs. The problems in Europe is depressing the euro and investors are fleeing to the short-term safety of the dollar. This depressed commodities and was partly responsible for the decline in equities. The positive economics of the past week also helped push the dollar higher. This rally is only temporary because the QE2 chickens will eventually come home to roost.

Dollar Index Chart

FDIC Chairman Sheila Bair had an op-ed piece in the Washington Post on Friday that warned "urgent action" was needed to lower government debt and forestall the next financial crisis. Bair said the sharp increase in Federal debt, now nearing $14 trillion, "directly threatens our financial stability." She also blamed the "relentless federal borrowing" on the "unwillingness over many years to make the hard choices necessary to rein in the long-term structural deficit." She warned that U.S. Treasuries could be in danger of losing their status as a safe-haven investment in troubled times with "dire implications" for the financial system as a whole. If overseas investors eventually tire of buying our debt it could send the country into an economic death spiral since we depend on their insatiable appetite for our debt to pay our bills.

We are essentially paying our bills with our government credit card and pretty soon we are going to reach that card's limit. She said, "most of the needed changes will be unpopular, and they are likely to affect every interest group in some way." What she said is very true. We are always only one debt auction away from disaster. If the world tires of the debt stories in Europe they could just as easily decide there is no way for us to pay down that $14 trillion since we are adding to it by about $1 trillion per year. We have seen how quickly the vultures begin circling the smaller economies once some imaginary threshold is reached. How much more will they circle our obese debt in expectations of a feast once they decide enough is enough?

The only difference between Greece, Ireland, Portugal and the U.S. is we can still borrow money in the open market at a reasonable rate. That will change within the next two years according to many analysts.

North Korea warned that the U.S. and South Korea were risking war if they went ahead with their joint naval exercises beginning on Sunday. The exercises are scheduled to last four days and includes the U.S.S. George Washington carrier battle group. The exercises were planned long before the attack on the South Korean island last week. President Obama is likely to speak with China's president this weekend in an effort to have him reign in the North Korean leader's wild warnings. China wants to keep North Korea between its country and the democratic South Korea.

If north and south were joined under one democratic government supported by the U.S. it would cause China problems. Instead of Koreans trying to escape North Korea into China it would be Chinese trying to escape into a free Korea. South Korean citizens and many in the military are growing tired of the North's constant attacks without any retaliation by the South. Protests calling the government weak and lazy are being held in the South in the wake of last week's attack.

With the military exercises scheduled to begin on Sunday I would be surprised if the North takes any action. With the U.S. assisting the South any attack by the North could lead to some serious retaliation. However, attacking an irrational egotistical madman even if retaliation is justified could prompt dire results for South Korea. It is best for everyone that they give North Korea a wide berth.

The markets recoiled from the news about Portugal and the Dow lost 95 points. I warned you on Tuesday the Portugal story was coming soon. You would think the markets would have reacted better to the news since the EU story progression was so predictable. Maybe in reality Friday's -95 point decline was a minor drop compared to what it would have been several weeks ago. After all we only retraced just over half of Wednesday's point swing and ended right in the middle of our recent range.

When you compare the Russell and the Semiconductor Index the moves there were miniscule compared to the Dow. That is what you like to see in market sentiment. Bullish small cap strength is a positive sentiment indicator for the market as a whole. Having the chips stocks holding their gains and on the verge of a breakout is another plus. That makes the S&P more of a confirmation of the trend when it follows the small caps.

The range on the S&P has been 1175-1200 for nearly two weeks. Every time the shorts get squeezed to take us back to 1200 there is a news story overnight to knock us back down. Considering the frequency and severity of the stories I am surprised we have not plunged through support. I believe we still have the perfect setup for trade signals. Buying a breakout over 1200 or shorting a breakdown under 1175 makes perfect sense. For those a little more reactive you can also trade inside the trend by selling resistance and buying support.

S&P-500 Chart

The Dow has gapped open on six of the last trading days with a triple digit reversal. Despite this extreme volatility the VIX is only 22. You would think it should be pressing 30. The Dow has respected resistance and support as if they were high voltage wires. As of last week that support has been strengthened by the addition of the 50-day average.

Like the S&P the Dow has given us two clear trading signals at 11,000 and 11,200. A breakout in either direction is actionable. Unfortunately I think traders have been so burned by news reversals over the last several weeks they will be hesitant to enter new positions until we can go several days without any new headline.

Dow Chart

The Nasdaq is in stealth rally mode. If you look hard at the last six candles there is an almost imperceptible upward trend to the green candles. The close just under 2535 was right at resistance and it traded over 2540 both of the last two days. The Nasdaq is being led by the chip stocks, Internet stocks and retailers. Historically when Black Friday sales are good the retailers (9% of the Nasdaq 100) do well in the week that follows. The fascination for all things electronic this holiday season is powering the chips stocks higher despite some recent negative guidance.

This stealth rally may be about ready to go public. All Amazon has to do is report record sales over the weekend and have Google claim shopping sites were heavily trafficked and we could have an explosion higher. But, there is always the chance that the news is priced in with Amazon's +17 point gain over the last six days. How good can Kindle sales really be?

Personally my daughter and I tried to buy some of the Amazon door buster specials this weekend and were unsuccessful because they sold out within minutes of becoming available. Even though I did not get the specials I wanted I still purchased about $300 of merchandise from Amazon on Friday. Multiply that by their 70 million customer visits per month. While on the subject of holiday shopping I stopped by a Home Depot on Saturday for a $15 trash can and left with $115 of merchandise. They had so many specials stacked in the isles there was hardly any place for customers to walk. Plus there was a sales person every 20 feet asking if they could help. I bet I said, "No thank you I am just browsing" 20 times. Two weeks ago I was at the same store and could not find a salesperson to help me. The store was packed and carts were full so their advertising must be paying off.

If you are a glass half full person the Nasdaq chart looks like a stealth breakout in progress or a likely failure at resistance if you see the glass half empty. Today I am expecting a move higher if the news events would give us a rest.

Support should be 2500 and resistance 2540.

Nasdaq Chart

The Semiconductor Index has had the same volatility but the up days have been significantly stronger than the down days. Compare the last seven candles on the SOX chart to the Dow or S&P. There is no doubt that the SOX is shaking off the bad news and gaining ground on the good news. This is a strongly bullish indicator for the Nasdaq and for the broader market. The resistance line at 400 dates back to April's highs.

Semiconductor Index

The Russell lost -4 points on Friday but gained +8 for the week making the Friday decline meaningless. The Russell is testing its highs from April and early November. Compared to the lethargic Dow and S&P charts the Russell is clearly leading and that is bullish for sentiment. A break over 740 would be a strong signal that mutual funds are buying for a year-end rally and for a growth position into 2011. Support is well back at 715.

Russell Chart

In summary the SOX, Russell and Nasdaq, in that order, are suggesting there are buyers and the news is not scaring them away. By contrast the big cap indexes are locked in a trading range primarily by the drag from financial stocks and the impact of the dollar on commodities.

I don't believe a resolution of Portugal's problems through a bailout will solve the European debt crisis. I think the speculators still have to take a run at Spain just because they can. They have been so successful with Greece, Ireland and Portugal there is no reason for them not to try. I doubt it will happen immediately. I think they will have to build up some momentum before they can gather enough courage and resources to take on a larger country with a GDP of $1.5 trillion. This compares to $228 billion for Portugal, $227 billion for Ireland and $329 billion for Greece. It will take a lot more effort to run Spain into the ground than it did for the smaller countries.

For that reason I believe the immediate problems will dissipate with some resolution in Portugal. Hopefully the investing public has grown tired of reacting to these pop-up debt problems and will ignore a lingering resolution on Ireland and Portugal. After all they really don't have any material impact on our financial system. To put things in perspective the Fed will spend more on QE2 this week than the entire EU will spend on Ireland's bailout.

While I think the market impact of the continued debt crisis news should fade I also believe traders have been burned so much in recent weeks they will be gun shy about entering new positions. It may take several days of dwindling debt news before traders come back into the market. I am still bullish based on the accelerating economy but I would not add to longs without a dip to 1175 or a breakout over 1200.

Don't fight the Fed!

Jim Brown

Never worry about the size of your Christmas tree. In the eyes of children, they are all 30 feet tall. - Larry Wilde


Index Wrap

Prices Little Changed, but Volatility is Up

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

This past week's price action saw little change in prices but price action was more volatile. When the VIX is 5% or more above it's 10-day moving average (as it was on Friday's close) surprises tend to come on the upside. However, a troubled Europe is a wild card, as well as the Korean situation.

Of the last nine instances (since 4/16/10) of VIX trading 5% or more above its 10-day moving average, 6 have preceded rallies. The 3 instances of VIX readings that did not lead to even much of a short-term bounce came within an overall topping process. Three of the 9 upside extremes led to just short-term minor rallies and three occasions preceded substantial advances, but often with some lag time. This pattern suggests a better than even chance of a further rally but not necessarily one having a lot of immediate upside potential.

CHART OF THE WEEK:

Continuing to feature a chart not usually seen in the mix of my major index daily charts, a VIX daily chart is seen below. Consisting of the daily VIX levels, a 10-day VIX moving average and 5 percent bands or trading 'envelopes' above and below the 10-day VIX average.

I can't say that the VIX pattern described above is a lot to go on. In terms of price action, the S&P 500 (SPX) has been resisting declines much below 1180; the Nas Composite had just one dip to 2460 support. While this past holiday-shortened week saw low volume, the sellers were not able to take this market down much.

This coming week should better tell the directional story. I've been looking for lower lows after any short-term rally attempts run their course; e.g., a further decline that would take COMP below 2160 (e.g., to 2100 or lower) and SPX to below 1180, possibly to the 1130 area.

On a weekly chart (not shown), longer-term, basis COMP and SPX are coming off overbought extremes from early-November and are showing either downside or flat momentum in terms of the weekly RSI and MACD. Another way of looking at declining momentum is to see that the S&P and Dow are trading below their 21-day moving averages; not so with the Nasdaq as COMP and NDX closed just above this key trading average on Wednesday and Friday.

There may be further rally attempts but I don't envision moves above current key resistance levels, such as to above 2200 in the Nasdaq 100 (NDX) and 550-553 in the S&P 100 (OEX).

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The short-term trend in the S&P 500 (SPX) index remains down or at best sideways, making the overall chart picture mixed; the intermediate and long-term trends remain up. My expectation remains for a new down leg that carries to below the recent downswing low at 1173. If SPX follows the common corrective a-b-c (down-up-down) pattern, the next down leg would exceed in points the first (peak to low) sell off of 54 points. Later on there are some seasonal influences that tend bullish, especially in December's second half; e.g., a 'Santa Claus rally'.

If an SPX rebound can't make it back above 1200 resistance, it would seem to point to another sell off, one that could end up in the 1130 area. If however there's a rally above 1200 and this become a new support, then the 1227 high could be re-tested; if 1227 is exceeded, the upside might then be back up to the previously broken up trendline, which could then slow down or stop a rally.

Near support is at 1180, then 1160, with fairly solid support in the 1130 area. Near resistance is at 1200, with the most pivotal resistance at the prior 1127 intraday high; above the prior top, resistance is seen around 1240 in the coming week.

In terms of my technical indicators seen above, RSI again finished the week at a 'neutral' reading. My sentiment indicator popped up with Wednesday's rally, which seemed to reflect an overly bullish expectation. However, Tuesday's down day saw CPRATIO dip lower. Recent trader sentiment is currently reflecting the ups and downs in price we've been seeing. I don't think there's all that much conviction out there; if the market rallies, there are willing buyers and on sell offs traders beat a hasty retreat. Sentiment is also neutral here.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart is mixed in the same way as with the larger SPX (500) index. Prices are of course no longer advancing above the prior up trendline that was pierced at 540. Subsequently, prices ended the week under my revised up trendline highlighted on the OEX daily chart. OEX at 533.6 on Friday was under the line of resistance seen at 540, which also equals its current 21-day average.

As with SPX, I don't believe that we've seen the end of the recent downside correction. Corrections can be sideways for a time, but when it's a 'pause' to prior selling pressure, the next move after is often lower and my expectation is for another down leg ahead. Conversely, a move back above 540, with rallies setting up from this area, would suggest potential to retest the prior high.

Near support remains the 530 area, then at 520. Near resistance is at 540, then in the 550-553 area. A close above the prior 553 intraday and closing high, especially if not just a single day's event, would regain previous upside momentum.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) Average has been finding resistance repeatedly around 11200. I take this as a consolidation before another downswing. This pattern is not cut and dried bearish, as the same consolidation could be viewed as a prelude to a rally. I've found with INDU that a sideways move after a first decline (and this after a long run up) is more often an interlude before a second down leg. Stay tuned on the outcome ahead.

Key chart resistance is at 11200 and then comes in around 11285, with the most pivotal resistance in the 11410-11450 area. Pivotal support remains 11000, then at 10917-10880.

I noted last week that "Stocks in the Average looking capable of strong further upside are few in number; i.e., CAT, IBM, KO, MCD, and maybe XOM." No changes to this 'list'. There are a number of Dow stocks that are trading below their 50-day averages, some relatively recently, like CSCO (a bellwether that's a definite drag on INDU), CVX, GE (another S&P/Dow bellwether), HD, JPM, MMM, MSFT, PG, T, VZ and WMT. All in all, from this bottoms up approach, INDU is not looking like it's poised to resume its prior rally.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) Index chart remains mixed, although COMP was up on the week and has closed the week above the 21-day average. The mostly sideways trend, coming on the heels of COMP's first significant correction in some months, is more suggestive of a pattern that would complete itself with a second sell off ahead; as opposed to a consolidation that's only a pause before a strong uptrend resumes. The kind of price action we're seeing with the Composite is not uncommon when a market gets significantly 'overbought' on a longer-term weekly chart basis; e.g., volatility increases but the bulls can't push prices back up as easily anymore.

The Composite is hanging in above 2500 for longer than I thought it would which has also meant the Index is back above its 21-day moving average. If COMP re-tested its prior high that could be short-lived and set up a possible interim double top. I should balance any short-term bearish view here with the longer-term bullish outlook justified by not only technical considerations, but with the fundamental reality of record corporate profits.

On the bullish side, a move that pierced the prior 2593 high with further consolidation above 2593-2600 would demonstrate renewed bullish momentum. Major resistance would then look like 2700.

Key support is in the 2460 area, with a break of this level suggesting another down leg was underway which still seems more likely than an immediate resumption of the strong upside momentum seen before November, a seasonally mixed month. Next lower support looks to come in at 2400.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart remains somewhat mixed. I can't call this chart bearish by any stretch but the recent break suggests at least slowing of upside momentum. I've redraw an up trendline and we'll see if prices break under this also as occurred with the previous up trendline; a very steep up trendline.

Again this week, I'm hesitant to suggest that the current short-term rebound has run its course. It's wait and see on price action. If NDX starts falling below trendline support at 2140 and of course certainly below the prior (down) swing low at 2085, a move to 2050, even 2000 wouldn't be an unusual correction given the extent of the major advance from lows in the 1700-1750 area.

Technical resistance begins around 2180, extending to 2200. A close above 2200 that wasn't reversed in the following day's trade would put the strong bullish trend back on track.

I'll repeat my note of last week that I'm "bearish to the extent that the typical corrective pattern is a sell off, a rally that retraces half to (even) all of the prior decline, followed by a bigger point decline than the first sell off." We'll see how 'typical' NDX is in this regard as tech stocks have been on such a roll!

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

Buyers of the NDX tracking stock weren't quite as enthusiastic as the big fund managers who were buying key individual Nas 100 stocks on their last dip. On Balance Volume (OBV) didn't surge higher but it was a choppy low volume holiday week. This coming week should tell the story. If my redrawn current up trendline is pierced, the Q's could fall below 52, then the prior low as well (50.8). Tech stocks depend on global sales and Europe worries seem bound to cause at least some adjustment in earnings prospects and projections. Cisco Systems (CSCO) is a prime example on their lowered guidance with the stock really getting whacked.

My view is toward QQQQ setting up for another decline from the 53 area or even 54 (and a possible interim double top), with a second down leg that might be a steeper decline than the first sell off from 54 to 50.8.

I indicated last week I'd be a seller on further rallies. A rally to the 54 area would be a candidate. If the trade was doable, a liquidating buy stop could be entered at 54.5. Risk, relative to a second decline that retested 51 support or carried to 50, would be a favorable risk to reward speculation.

Near support: 52.3, then 51.8

Next support: 50.8, extending to 50.0

Near resistance: 53.2

Major resistance: 54.0

RUSSELL 2000 (RUT) DAILY CHART:

We should be able to test a 'double top' theory the way that the Russell 2000 (RUT) index is tearing its way back toward its prior 739 top. Is RUT a harbinger of the Nasdaq continuing to snap back in the coming week? Stay tuned on that.

RUT's previously broken up trendline seems to be offering a rising line of resistance. Prices could just continue to rise along this steep line and go pretty far that way. The key to whether the prior trendline has bullish or bearish significance is seen by which side prices are on. If the index trades above the line again, it suggests that the prior strong uptrend is back on track. Conversely, if highs keep hitting this line AND the index can't exceed its prior top, I'd want to be in puts. Such a quick renewal of strong upside momentum would make it foolish to consider such a play. I trade against the dominate trend sometimes but I consider when to do that quite carefully.

Key resistance is at 739-740, then is projected in the 757-760 zone for the week ahead. Near support is at 715, then in the 701-700 area and extending to 690.



GOOD TRADING SUCCESS!


New Option Plays

Communications & Recycling

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

CenturyLink, Inc. - CTL - close: 43.04 change: +0.38

Stop Loss: 41.45
Target(s): 44.90, 47.25
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Company Description:
CenturyLink is a leading provider of high-quality broadband, entertainment and voice services over its advanced communications networks to consumers and businesses in 33 states. CenturyLink, headquartered in Monroe, La., is an S&P 500 company and is included among the Fortune 500 list of America's largest corporations. (source: company press release or website)

Why We Like It:
Shares of CTL have managed to hold on to their gains in spite of management's disappointing fourth quarter guidance. Now the stock looks poised to breakout higher after four weeks of consolidating sideways and digesting its September-October gains. If CTL does rally to new relative highs it could see another short squeeze since CTL has above average short interest. Aggressive traders may want to buy calls on CTL now. I am suggesting we use a trigger to buy a dip at $42.55. If triggered we'll use a stop at $41.45. Our first target is $44.90. Our second target is $47.25. An alternative entry point would be to buy calls on a breakout past $43.25.

FYI: Investors should know that CTL is currently involved with a $10.6 billion stock-swap merger with Qwest Communications (Q). The merger isn't supposed to be completed until the first half of 2011. The trend for both stocks is up and naturally looks very similar following the M&A announcement.

Trigger @ $42.55

Suggested Position: Buy the 2011 January $45.00 calls (CTL1122A45) current ask $0.25

Annotated Chart:

Entry on November xxth at $ xx.xx
Earnings Date 02/22/11
Average Daily Volume = 3.0 million
Listed on November 27th, 2010


Nucor Corp. - NUE - close: 37.54 change: -0.42

Stop Loss: 36.85
Target(s): 40.00
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes

Company Description:
Nucor and affiliates are manufacturers of steel products, with operating facilities primarily in the U.S. and Canada. Products produced include: carbon and alloy steel -- in bars, beams, sheet and plate; steel joists and joist girders; steel deck; fabricated concrete reinforcing steel; cold finished steel; steel fasteners; metal building systems; light gauge steel framing; steel grating and expanded metal; and wire and wire mesh. Nucor, through The David J. Joseph Company, also brokers ferrous and nonferrous metals, pig iron and HBI/DRI; supplies ferro-alloys; and processes ferrous and nonferrous scrap. Nucor is North America's largest recycler (source: company press release or website)

Why We Like It:
Investors seem a bit confused over the future of NUE. The company's latest earnings report back in October was not very impressive. This is more of a technical play than a play on NUE's business. The stock was trading in a range before its earnings report and it continues to trade in a range now. You might call this a channeling stock. Right now NUE is near the bottom of its channel. If we were going to make a bullish bet on NUE this is the spot. There is support near $37.00 so I'm suggesting a stop loss at $36.85. I am suggesting we buy calls at current levels. Our target is the $40.00 level. More aggressive traders could aim for the $41 region.

Suggested Position:
Buy the 2011 January $37.00 calls (NUE1122A37) current ask $1.88
- or -
Buy the 2011 January $40.00 calls (NUE1122A40) current ask $0.70

Annotated Chart:

Entry on November 29th at $ xx.xx
Earnings Date 01/26/11
Average Daily Volume = 3.5 million
Listed on November 27th, 2010


In Play Updates and Reviews

Mild Pullback

by James Brown

Click here to email James Brown

Editor's Note:

The stock market slipped on European debt woes this Friday but overall the declines were pretty mild. I have adjusted our entry point on CSX and updated a few stop losses tonight.

-James

Current Portfolio:


CALL Play Updates

Ansys, Inc. - ANSS - close: 48.88 change: -0.11

Stop Loss: 47.25
Target(s): 52.45, 54.90
Current Option Gain/Loss: -13.3%
Time Frame: 4 to 6 weeks
New Positions: Yes

Comments:
11/27 update: ANSS is holding up well. Shares gapped open lower on Friday morning but quickly recovered and closed with a mild loss. Shares still look poised to breakout past its 2010 highs near $49.35. I would still consider new positions here at current levels or you could wait for a dip near $48.00 or a close over potential resistance at $50.00.

Current Position: Long the 2011 January $50.00 calls (ANSS1018L50) Entry @ $1.50

Chart:

Entry on November 24th at $48.75
Earnings Date 02/24/11 (unconfirmed)
Average Daily Volume = 651 thousand
Listed on November 13th, 2010


Caterpillar - CAT - close: 84.13 change: -0.56

Stop Loss: 79.90
Target(s): 84.85, 89.50
Current Option Gain/Loss: +11.4% & +33.3%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
11/27 update: CAT did not see much profit taking on Friday, which I view as a show of relative strength. If the pull back does continue we can use dips near $82.00 as a new entry point. Keep in mind that we do want to take some money off the table at our first target of $84.85 especially since we only have three weeks left before December options expire. If you do launch new positions I would buy January calls.

Note - I'm raising the stop loss to $79.90.

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.

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

Chart:

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


CH Robinson Worldwide Inc. - CHRW - close: 74.11 change: -0.11

Stop Loss: 70.75
Target(s): 74.90, 79.00
Current Option Gain/Loss: +55.5%, and +39.1%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
11/27 update: We only have three weeks left on our December calls. Therefore need to plan an exit soon. More conservative traders may want to take some money off the table now. I am adjusting our first target from $74.75 to $74.90 but when CHRW hits $74.90 we'll exit all of our December calls. We also want to sell part of our January calls at $74.90 but keep a position open for our $79 target. I want to point out that technical support at the 50-dma has risen to $71.03 so we will raise our stop loss to $70.75.

If you're looking for a new entry point I would wait for a dip into the $73-72 area and buy January calls.

Current Position: Long the December $75.00 calls (CHRW1018L75) Entry @ $0.45

- or -

Current Position: Long the January $75.00 calls (CHRW1122A75) Entry @ $1.15
11/27: New stop @ 70.75, new first target at $74.90

Chart:

Entry on November 22nd at $72.44
Earnings Date 02/03/11
Average Daily Volume = 1.1 million
Listed on November 18th, 2010


Cliffs Natural Resources - CLF - close: 69.01 change: -0.65

Stop Loss: 64.75
Target(s): 71.50, 74.75
Current Option Gain/Loss: - 2.8%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
11/27 update: A bounce in the U.S. dollar and a dip in commodities sapped any strength in CLF but shares of this stock really didn't see that much profit taking. The trend is still bullish but if you're looking for new positions I would wait for another dip into the $66-65 zone. Our first target is $71.50.

Keep in mind that December options expire in three weeks!

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

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: 67.22 change: -0.32

Stop Loss: 63.90
Target(s): 69.50
Current Option Gain/Loss: + 90.0%
Time Frame: 3 to 4 weeks
New Positions: No

Comments:
11/27 update: Unlike COST's parking lot, trading in this stock proved to be very quiet on Friday. Shares of COST spent most of the session in a 25-cent range. I don't see any changes from my prior comments. I'm not suggesting new positions at this time but another rebound in the $65 zone might change my mind on new entries. Our target to exit is $69.50. Keep in mind that December options expire in three weeks.

I also want to remind readers that COST is due to report earnings on December 9th and cautious traders do not want to hold over this event.

Earlier Comments
We want to keep our position size small to limit our risk.

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

Chart:

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


CSX Corp. - CSX - close: 61.67 change: +0.03

Stop Loss: 59.75
Target(s): 64.25
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Comments:
11/27 update: CSX displayed some relative strength on Friday. Bulls quickly bought the dip on Friday morning and shares closed in positive territory. I am adjusting our strategy here. CSX has support near $60.00 and short-term resistance near $62.50 and then $64.50. I am suggesting we buy calls on a dip at $60.75 with a new stop loss at $59.75. If triggered at $60.75 our target to take profits will be at $64.25 and $67.25 (sell half at each target).

Trigger to buy-the-dip @ $60.75

Suggested Position: Buy the 2011 January $60 calls (CSX1122A60)

Chart:

Entry on November xxth at $ xx.xx
Earnings Date 01/18/11 (unconfirmed)
Average Daily Volume = 5.9 million
Listed on November 23rd, 2010


Express Scripts - ESRX - close: 52.51 change: -0.43

Stop Loss: 49.65
Target(s): 53.95, 57.25
Current Option Gain/Loss: + 4.0%, and + 3.3%
Time Frame: 5 to 6 weeks
New Positions: Yes, wait for a dip

Comments:
11/27 update: ESRX is still consolidating sideways. The stock is nearing potential short-term support near $52.00. I would consider new bullish positions on a dip into the $52-51 zone but readers may want to wait to buy a bounce first. Keep your position size small. Our first target to take profits is at $53.95. I'm setting a secondary target at $57.25.

We currently only have half a position open.

Don't forget - December options expire in three weeks.

Current Position: Long the 2010 December $52.50 calls (ESRX1018L52.5) Entry @ $1.22
- or -
Current Position: Long the 2011 January $52.50 calls (ESRX1122A52.5) Entry @ $2.10

Chart:

Entry on November 18th at $51.81
Earnings Date 02/24/11
Average Daily Volume = 4.3 million
Listed on November 17th, 2010


W.W. Grainger Inc. - GWW - close: 125.75 change: -0.95

Stop Loss: 122.95
Target(s): 129.90, 134.00
Current Option Gain/Loss: -18.0%
Time Frame: 4 to 6 weeks
New Positions: Yes

Comments:
11/27 update: GWW turned in a quiet session. Shares gapped open lower and drifted sideways the rest of the shortened session. I would still launch positions in the $126-125.00 zone.
FYI: The stock could see a little short squeeze since the most recent data listed short interest at more than 5% of the 58.5 million share float (which isn't very big as far as floats go). FYI: The Point & Figure chart is bullish with a $140 target.

Current Position: Long the 2011 January $130 calls (GWW1122A130) Entry @ $2.50

Chart:

Entry on November 24th at $126.75
Earnings Date 01/25/11 (unconfirmed)
Average Daily Volume = 567 thousand
Listed on November 22nd, 2010


Humana Inc. - HUM - close: 56.79 change: -0.18

Stop Loss: 53.75
Target(s): 59.75, 64.00
Current Option Gain/Loss: - 5.2%
Time Frame: 4 to 6 weeks
New Positions: Yes, look for another dip

Comments:
11/27 update: HUM hasn't seen a lot of movement in the past week. Shares have essentially churned sideways near the $57.00 level. Overall I don't see any changes from my prior comments. I would look for dips in the $56-55 zone as a new entry point. I am suggesting we sell half of our position at $59.75 and then plan on selling the rest with a target at $64.00.

11/22/10 New stop @ 53.75
11/22/10 New (2nd) target at $64.00

Current Position: Long the 2011 January $55 calls (HUM1122A55) Entry @ $3.80

Chart:

Entry on November 18th at $55.05
Earnings Date 11/01/10 (confirmed)
Average Daily Volume = 2.1 million
Listed on October 16th, 2010


McKesson Corp. - MCK - close: 64.51 change: -0.29

Stop Loss: 63.75
Target(s): 67.95, 70.75
Current Option Gain/Loss: -32.2%
Time Frame: 6 to 8 weeks
New Positions: No

Comments:
11/27 update: I remain concerned about our MCK play. Shares tested and bounced from support near $64 again on Friday morning. The low was actually $63.83, which was almost enough to stop us out. While support is holding, MCK is developing a trend of lower highs. I'm not suggesting new positions at this time. FYI: The P&F chart is bullish with an $85 target.

Current Position: Long the 2011 January $65 calls (MCK1122A65) Entry @ $3.10

Chart:

Entry on November 22nd at $65.95
Earnings Date 01/26/11
Average Daily Volume = 2.7 million
Listed on November 20th, 2010


Nike Inc. - NKE - close: 85.96 change: -0.57

Stop Loss: 81.45
Target(s): 86.75, 89.50
Current Option Gain/Loss: + 75.6%
Time Frame: 4 to 6 weeks
New Positions: Wait for a dip, see below

Comments:
11/27 update: After a strong first part of the week NKE gave back less than 1% on Friday. Shares are arguably short-term overbought here. I would wait for a dip or bounce near $84.00 before considering new bullish positions. Use January calls if you launch new positions. Our final target remains $89.50.

December options only have three weeks left.

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

11/24/10 Target hit @ 86.75, option @ $2.60 (+126%)

Chart:

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


Union Pacific - UNP - close: 90.10 change: -0.27

Stop Loss: 88.99
Target(s): 96.25, 99.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Comments:
11/27 update: I don't see any changes to my prior comments on UNP. The stock is still consolidating sideways. Aggressive traders could buy another dip or bounce near the rising 30-dma. I am suggesting readers wait for a breakout and use a trigger at $92.85 to launch positions.

Trigger @ 92.85

Suggested Position: Buy the 2011 January $95 calls (UNP1122A95)

Chart:

Entry on November xxth at $ xx.xx
Earnings Date 01/20/11
Average Daily Volume = 2.9 million
Listed on November 20th, 2010


VimpelCom Ltd - VIP - close 15.40 change +0.01

Stop Loss: 14.90
Target(s): 16.75, 17.75
Current Option Gain/Loss: -42.8%
Time Frame: 6 to 8 weeks
New Positions: Yes, on dips

Comments:
11/27 update: VIP provided us another entry point with the Friday morning dip to $15.16. Unfortunately the ensuing rally failed at the new trend of lower highs. I am not expecting a lot of action in VIP this week until the earnings report on December 2nd. More conservative traders do not want to hold over this report. I am raising the risk on this play by holding over the announcement.

If you choose to launch positions be sure to keep your position size small to limit your risk (and consider January options). I am inching up our stop loss to $14.90.

I want to emphasize that holding over VIP's earnings is higher-risk. If the stock crashes on its earnings report our position could get wiped out since December options only have three weeks left!

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

11/27/10 new stop @ 14.90

Chart:

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