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Daily Newsletter, Saturday, 12/4/2010

Table of Contents

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

Market Wrap

Bulls Ignore Excuse To Sell

by Jim Brown

Click here to email Jim Brown

The bulls ignored the much weaker than expected payroll report and managed to push the markets back into the green before the close.

Market Statistics

The Non-Farm Payroll report on Friday surprised everyone. Unfortunately it was not an upside surprise as most expected. Jobs grew by only 39,000 in November and down from +172,000 in October. The number for October was revised higher to 172,000 from 151,000. September's job losses of -41,000 were revised upward to a loss of only -24,000. The consensus estimate for November was for a gain of +150,000. Moody's was expecting 160,000 and I was expecting closer to 180,000. Everybody was wrong this time around.

The private sector created 50,000 jobs but the public sector cut 11,000 leaving us with a minimal 39,000 gain. Unemployment rose to 9.8% from 9.6% because of workers who had previously dropped off the rolls coming back into the job market. Officially the BLS claims there are 15.1 million people currently unemployed. Those jobless for 27 weeks or longer stood at 6.3 million and 41.9% of the unemployed total. Those underemployed and working part time stood at slightly more than nine million. There were also 2.5 million "marginally" attached to the work force and 1.3 million "discouraged" workers. Those are not included in the unemployment rolls.

In the Household Employment survey the number of jobs rose by +114,000. This is a different survey conducted by the BLS. The Non-Farm Payroll numbers are produced from a survey of businesses. The household survey is produced by asking individual families about the employment status of their members.

Non-Farm Payroll Chart

Other than the payroll report the better than expected economics continued. The ISM Non-Manufacturing report for November rose to a six month high at 55.0 and slightly better than the 54.5 analysts expected. New orders did not increase significantly, gaining only a point to 57.7 but the uptrend stretched to 15 months.

The employment component rose to 52.7 from 50.9 and that was a significant increase. The sharp rise in the employment components from all the regional reports was the cause for the increased expectations in the nonfarm payroll report.

One really positive component was the new export orders, which rose to 59.5 from 55.5. That was the third consecutive month of gains. A negative component was the decline in the prices received component to 63.2 from 68.3. With raw materials prices rising and prices received declining there could be profit troubles ahead for the service sector.

ISM Non-Manufacturing Chart

October Factory Orders declined by -0.9% but still better than the -1.5% decline analysts expected. Orders fell to $420 billion in October. The decline came after an upwardly revised +3% gain in September. The decline in October was led by a -5.2% drop in transportation equipment. That was not surprising after the +16.5% jump in September. Excluding transportation orders the overall number showed only a -0.2% decline.

The Factory Orders report was lackluster at best but it is a lagging report and few investors paid attention. The real focus was still the payroll report.

Last week was a very busy economic calendar but next week has hardly anything worth noting. I believe the Bernanke interview on Sunday's 60 Minutes program is going to be the most important event for the week. Bernanke will attempt to explain why the Fed plans to spend $600 billion on quantitative easing and why it might be necessary for them to spend up to $2 trillion more. Goldman said a couple weeks ago that as much as $4 trillion might be needed but they have since backed off of that number because of the improving economic reports. Will we see QE3 or even QE4? Tune into 60 Minutes and read between the lines because you know Bernanke will not say it directly.

The next bump in the economic road is the FOMC meeting on the following Tuesday. With Bullard, Hoenig and Lacker making the rounds on the speaking circuit with comments critical of QE2 you can bet the FOMC meeting will be eventful.

Economic Calendar

Spain took steps to head off speculators and prevent a run on its debt like the ones that forced Greece, Ireland and Portugal to take loans from the IMF. The government approved new austerity measures and a limited economic stimulus package to ease investor fears. The equity market responded positively to the tax cuts for small businesses, increase in the tobacco tax and cutbacks to a key jobless benefit. Spain also discussed plans to sell 30% ownership in its national lottery. You know they are hurting if they are going to give up ownership in that cash cow.

Spanish and Portuguese stock markets rose for the third consecutive day and reversed severe losses from the prior week. Borrowing costs for EU countries also declined amid speculation the ECB was quietly buying the bonds for the troubles countries to put an artificial floor under the debt.

The markets shook off the weaker than expected jobs report and the strong potential for profit taking after two days of strong gains. This is extremely bullish and even more bullish because the indexes are breaking out to new highs. It appears the November selling is over and the Santa Claus rally has begun.

After Friday's surprise in the payrolls it appears the bad news bulls came back to the market. You would have thought a decrease in new jobs from 172,000 to 39,000 would have been a reason to take profits and find the nearest open bar. Instead the bad news is good news sentiment returned. If the country is growing slower than previously expected then the Fed will continue its QE2 program and possibly implement a new program.

In one of the teaser sound bites for Ben Bernanke's 60 Minutes interview this weekend has him saying the Fed could implement even more stimulus to make sure the economic recovery gains speed. Since the interest rates have gone up despite the QE2 it appears the market is not listening to his pledge to buy $600 billion in treasuries. In order to get the markets attention he may have to take more drastic action thus the teaser comment.

Bernanke is facing a crisis of confidence. He warned QE2 was coming and then announced it would be $600 billion. A tidy sum to be sure. However, instead of rates going down and the dollar shrinking everything went in the opposite direction. Rates went up along with the dollar because of events overseas that just happened to transpire at the same time as QE2. Now Bernanke has to talk even tougher and potentially announce a new stimulus program to get the market focused back on the Fed. Hence the 60 Minutes interview this weekend. The Fed Chief does not normally do interviews so expectations for this one are all over the place. Will it be a puff piece or a hardball in your face interview? Will Bernanke talk about the improving economy or the need for another jolt of the stimulus drug to shrink unemployment?

Whatever the tone of the interview the analysts will all be watching and you can bet his remarks will be dissected all day on Monday.

The Federal Open Markets Committee (FOMC) has been criticized lately as the Federal Open Mouth Committee because of the apparent chaos inside the group. I can't remember when there has ever been such disagreement and public venting of that disagreement. Analysts believe this is also weakening their QE2 efforts. If the Fed is believed to be going through the motions only half-heartedly then the market will not take them serious. That appears to be what is happening now. The market doubts the Fed will complete the $600 billion program because of the dissension in the ranks. The dollar fell another 1.15% on the weaker than expected jobs and the Spanish austerity program. That was a 1.5% drop for the week. The decline in the dollar pushed commodities higher with gold closing the after hours session at $1413. Crude prices rallied again to the highest level since Oct-2008 to close at $89.44. Silver closed at a new 30-year high at $29.14.

Dollar vs Gold Chart

Crude Oil Chart

Bank of America (BAC) has recovered from the initial beating it took when WikiLeaks founder Julian Assange told Forbes it would release thousands of documents related to a U.S. bank that would bring the bank down for good. Through a little research on his claim analysts immediately pinned the label on BAC as the bank in question. Reportedly WikiLeaks had acquired a hard drive from a BAC executive's computer. Since Assange is not above hyping his big reveals the worry over BAC's fate has already faded. His charges on rape and various other sex crimes have him in hiding but he claims he has given copies of all the data in encrypted form and should anything happen to him the passwords will be released by a third party and all the data will immediately go public. That is obviously a plan to protect himself from an assassination attempt. Various governments and agencies are exploring criminal charges for his various leaks and his servers are under constant denial of service attacks. I would not want to be in his shoes today.

Bank of America Chart

Discount dealer Groupon has apparently turned its back on a $6 billion offer from Google. Reportedly the founders of Groupon were hesitant to become part of the global dominance machine and the Google lifestyle. Really I think they just wanted more money and did not want to have Larry Page and Sergey Brin for bosses. Groupon CEO Andrew Mason had the biggest vote as the largest shareholder and he had concerns about the strategic direction the company would take under Google management. Groupon is contemplating an IPO in 2011.

Reportedly the deal had some additional incentives if performance targets were met. Google wants to get into the local advertising markets and they thought Groupon would be an easy way to accomplish that feat. Google has $33 billion in cash so it is not like they are hurting for money. They announced an acquisition of Widevine on Friday. That is the 42nd acquisition for the year.

Comscore announced the Q3 winners in the U.S. cellular handset market on Friday. Of the 234 million Americans age 13 and up, Samsung was the top device maker with a 24.2% share of all mobile subscribers. That was a +1% increase from Q2. LG was number two with 21%. Motorola fell 2 points to 17.7% and RIMM gained slightly to 9.3%. Nokia brought up the rear with 7.1%.

In the smartphone market the breakdown was significantly different. RIMM fell -3.5% to 35.8%. Apple gained nearly a point to 24.6%. Android jumped +6.5% to 23.5% and Microsoft fell 2% to 9.7%. Palm was the also ran candidate with 3.9%. Android is coming on strong thanks to all the different phones using that operating system.

Goldman was pounding the table on the equity markets and commodities on Friday. Goldman issued its forecast for 2011 and it was pretty bullish. They said the U.S. was on the verge of a "very strong recovery." They believe the S&P will end 2011 at 1,450 for a +23% gain. Gold is expected to hit a high of $1,750 but close the year at $1,690. The U.S. GDP is expected to clock in at +2.7% for the full year.

Last year Goldman predicted the S&P would close 2010 at 1250 and they are going to be very close. It was in the 1100 range when they made the prediction. They guessed gold would rise to $1350. It was also in the $1100 range when they released the 2010 predictions. They guessed the GDP for 2010 to be 2.1%. So far in 2010 it was 1.7% in Q2 and 2.5% in Q3 with a YTD average of +2.6%.

Goldman is bullish on technology, energy and financial stocks for 2011. They expect financial earnings to rise +24% in 2011 compared to +12% for the S&P. Goldman expects oil prices to "average" $110 in 2011, up from a prior forecast of $100. The company said, "the stage is set for a return to a structural bull market in oil." Goldman expects a two million barrel per day increase in demand in both 2011 and 2012 and require OPEC to tap the majority of its "reported" 5.64 mbpd of spare capacity. I wrote last week in OilSlick that the "real" spare capacity is probably more in the 3.5 mbpd range. If Goldman's demand predictions are accurate we are going to be in real trouble in about two years.

Register for the OilSlick.com newsletter and receive free daily updates and commentary on the energy sector. Register here

Jeff Saut, Chief Investment Strategist for Raymond James, said last week's rally will continue through year-end. He believes the pros will continue to buy stocks as they attempt to make up for the "worst year of underperformance by active managers" in his 40 years in the business. "Professional money managers are underinvested and underperforming." They are facing "performance risk, bonus risk and ultimately job risk." He recommended buying momentum stocks that have done well and making new highs. These are the stocks managers will want to own at year-end.

When the clock struck midnight on November 30th the market suddenly awakened from its month long nightmare and charged off to new highs. The motivating factors were the apparent bailouts of Ireland, Portugal and positive austerity moves in Spain. The U.S. economics were improving and the U.S. administration was talking about supporting an even bigger bailout program in Europe through the IMF. China's manufacturing was booming and the dollar finally lost its momentum and headed lower with a -1.5% decline for the week.

All of these factors were positive for stocks and another monster short squeeze began. On Tuesday night with the S&P closing on critical support at 1180 for what looked like the preview to Nightmare on Wall Street, I was ready to throw in the towel on my bullish bias. If that support broke I could easily have rationalized a drop back to 1125. Fortunately for the bulls every short with a dollar left had loaded up on positions in anticipation of that impending drop.

They were really surprised on Wednesday morning. Another perfect setup for the shorts had turned into the perfect short squeeze. This time it was different. In a normal short squeeze the market gaps higher and then flat lines for the rest of the day. On Wednesday the S&P gapped open to 1202 and just a hair over strong resistance and then held there for two hours. A buy program appeared and shorts were greeted with another +5 point gain to 1207. Now it was not just a token breakout but now some real points were starting to pile up on the board.

Thursday opened with another gap higher and real fear was beginning to overcome the shorts. Actually it was not just the shorts but everyone who was waiting for a move over 1200 to confirm a breakout. Now the train was leaving the station and everyone wanted to be on it. The market moved steadily higher all day.

When Friday's payroll report surprised so negatively I "knew" it was all over but the crying. The market gapped lower as it should have after two days of very strong gains. I am sure the shorts thought their prayers had been answered but the bad news bulls stampeded into the gap and the initial market drop began to improve almost immediately. Shorts were dumbfounded again when the market did not dive and began to gain strength towards the close.

The S&P gained +44 points in three days and overcame very troubling news on the way. The S&P is now on the verge of a significant breakout over 1228 and a new high for the year. We could easily see that year-end 1250 prediction by Goldman Sachs as a real possibility. Actually a breakout over 1228 could move a lot higher by year-end. This is the proverbial line in the sand that once crossed there should be no turning back.

The bad news bulls are back. The Payroll news did not faze them. The weaker Factory Orders were ignored. The ISM Manufacturing was being whispered at 60 and only came in at 55. Nothing seemed to matter to the bulls.

This lends credence to the quote above from Jeff Saut. Money managers have been in such denial and under performance they are now forced to chase stocks higher before year-end.

Can this continue through Dec-31st? Definitely! Can this bullishness evaporate we quickly as it appeared? Absolutely! However, assuming Bernanke avoids a bad case of foot-in-mouth on Sunday I believe we are going higher.

It will be Bernanke's job on Sunday to talk the market into a froth. He is going to threaten billions more in QE and talk about the improving economy. This is a perfect opportunity for him to pump up the markets and grow that wealth effect he is trying to create. He will be a cheerleader for the economy with a pep rally on the night before the big game. At the 9:30 kickoff on Monday we will know if he was successful.

For Monday the critical number is 1228 on the S&P. The index touched 1227 twice in early November and then fell off the ladder. The high back in April was 1220. That makes a move to 1228 a new high for the year and the highest level since September 22, 2008. This would be a Kodak moment! If Bernanke does his job right on Sunday night we should be well over that level at Monday's open. Initial support is 1217 but critical support is well below at 1175. Let's hope he does not come down with a severe case of foot in mouth disease.

S&P-500 Chart - Daily

S&P-500 Chart - Weekly

The Dow chart looks like it stepped on a tack. The velocity of the spike after two weeks of painful and very volatile consolidation gives the appearance of a very overbought index. However, the Dow consolidated for the entire month of November so the index had some serious pressure to release.

I am not as bullish on the Dow as the S&P but I believe it will follow the S&P higher. Once over the November high of 11,444 it should accelerate on its own and not require the S&P for a power boost. Support is well below at 11,000. I hope we don't have to test that level again in 2010.

Dow Chart - Daily

Dow Chart - Weekly

The Nasdaq bested its intraday high for the year at 2592 by one point on Friday but slipped at the close to just under that level at 2591. I know that is splitting hairs but the bears were struggling to defend that resistance high and they were marginally successful at least on Friday. Friday's close was the highest close since January 3rd 2008. That is a major victory all by itself.

Considering the Nasdaq was hampered by some major losses in some key stocks any gain should be appreciated. NFLX lost -8. Apple, Amazon, Panera, Broadcom, FirstSolar and Ebay were all negative. Those losses were overcome by strong gains in PCLN, UHAL, NILE, DECK, SOHU, BIDU and FFIV.

Like the other indexes I expect the techs to breakout if Bernanke does not make a major mistake on Sunday. Once over the resistance high we should see some short covering and some funds chasing performance in the big cap techs. It could be explosive.

Support is 2520 and resistance 2592.

Nasdaq Chart - Daily

Nasdaq Chart - Weekly

The Russell was the clear leader last week. Actually it has been the leader since that one-day drop to support at 700. The uptrend confounded the skeptics and even last Tuesday's market negativity barely registered on the chart.

If the Russell is in rally mode the other indexes will follow. That truism is as certain as day following night. However, the Russell has some serious resistance at 760 dating back to 2008. A breakout there would really light those rocket engines. Support is so far back at 720 it is not relative.

Russell Chart - Daily

Russell Chart - Weekly

The Dow Transports chart is the most bullish chart I have. This breakout over 2010 highs is confirming the improving economy and the better outlook for 2011. The next material resistance is the all time highs at 5500-5536.

When the transports are moving this strongly the Dow Industrials almost always follow. This breakout is a strong bull signal.

Dow Transports Chart - Daily

Dow Transports Chart - Weekly

In summary I believe the markets will move higher next week. However, it depends on Bernanke's interview and the continuing problems in Europe. You never know when the debt crisis will come back to bite us in the back. However, I think the U.S. economy has suddenly taken a decisive turn higher despite the payroll report. As this uptick in activity is confirmed with the December economic reports I believe the market will celebrate. If Bernanke is successful with QE2 in crushing the dollar the market has no place to go but higher.

Warren Buffett has been quoted many times about the reasons behind the last bull market.

"The great bull market from 1982 to 2000 was due primarily to four things. Those were low interest rates, low inflation, lower taxes and less government intrusion into business."

We have low rates, low inflation, low taxes and we are moving towards lower government intrusion into business. Add to that recipe an accelerating recovery out of the Great Recession and there is no reason to not expect a new bull market.

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Don't fight the Fed!

Jim Brown


Index Wrap

Strong Rally Preceded by VIX 'Extreme'

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

As I noted last week, when the VIX is 5% or more above its 10-day moving average, surprises then tend to follow on the upside. Such a strong rally was a surprise. Based on other technical and fundamental considerations, I was anticipating a further dip.

However, the S&P 500 (SPX) was resisting getting pulled below its 1180 support and the Nasdaq Composite (COMP) was mostly holding the pivotal 2500 level. It's also true that a narrow sideways trend after a strong prior advance, tends more often than not to be a consolidation of the dominant trend. Still, I was thinking that we were going to see a more 'normal' pullback; e.g., one that retraced a bigger portion of the last upswing.

About the VIX, it's turning out to be a pretty useful indicator when there are certain extremes that occur relative to the daily number relative to key moving average envelope lines. As I noted last week: "Of the last nine (now 10!) instances (since 4/16/10) of VIX trading 5% or more above its 10-day moving average, 6 (now 7) have preceded rallies."

CHART OF THE WEEK:

The updated VIX daily chart is seen below. This chart consists 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've analyzed the chart in a little more detail than last week. The pattern I'm noticing is that 'extremes' of the daily VIX below the 5 percent envelope band, which are theoretically bearish (low volatility), do not reliably forecast a top. There were a couple of instances where downside VIX extremes did lead to sell offs.

As with many indicators, some 'confirmation' should come from other related technical indicators or chart patterns (e.g., upside penetration of a down trendline). In the case of the early November minor top, the 13-day RSI was showing an overbought extreme. Top or bottom 'signals' are the reverse of the RSI, as a HIGH reading tends to suggest a possible next rally, a LOW reading, a possible top.

As highlighted above, there have been three instances (circled) where daily VIX readings that were 5 percent or more above its 10-day moving average and which preceded bottoming action and subsequent rallies. All in all, a pretty useful indicator when used per the 'model' shown here; i.e., use of the daily VIX in conjunction with a 10-day moving average, with moves above/below 5 percent (moving average) envelope lines.

So much for the past, what about the future? I anticipate that the major indexes will pierce their prior highs. It seems unlikely to me that this recent strong snap back rally will only lead to double tops. That said, the market is nearing a longer-term overbought condition, so I'm not banking on a major further up leg. SPX could advance into the 1270 to 1300 zone in December, but that's about the best upside I see before a correction sets in, most likely in January.

The Russell 2000 (RUT) is leading the way as it broke out to a decisive new high. RUT has a seasonal tendency to rally in the later part of year.

I've re-drawn uptrend channels on all my major index charts. (Trendlines often need to be redrawn as price action unfolds.) Recent lows made third points on which to draw internal up trendlines; i.e., ones connecting the most number of lows. The upper channel lines are then simply parallel lines that connect to the highest high(s) for the period shown.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) index closed within a hair's breath of the prior 1226 (closing) high. Assuming there's not a second top in this area, the chart will be fully back on its bullish track. My redrawn uptrend channel is highlighted below.

Based on the line of support that developed at 1173-1175 based on 4 different intraday lows and given the dominant uptrend of the past few months, it wasn't too surprising technically to see a rally set up. Fundamentally, for all the unemployment, the reality seems to be those record corporate earnings.

I thought there was a better than even chance for SPX going below its prior 1173 low, but the basing action in this area on Monday-Tuesday of this past week suggested otherwise. Key resistance was at 1200 and SPX knifed through this area, suggesting at least a re-test of the prior high. Based on a possible move to the top end of SPX's uptrend channel, resistance doesn't come into play before the 1270 area. Interestingly, 1272 represents a 2/3rds, 66% retracement of the 2007-2009 decline.

Near support is at 1200-1202, extending to 1180-1173. Near resistance is 1227, then well above, at 1270-1272.

In terms of my technical indicators seen above, RSI remained mostly around a 'neutral' 50. In a bull market trend, if RSI resists falling below its mid-point between an oversold 30 and overbought 70, there's rally potential. Daily bullish/bearish sentiment readings stayed mostly in a similar neutral range, between its 1.2 and 1.9 'extremes'. In a bull market, fully oversold readings are few and far between.

S&P 100 (OEX) INDEX; DAILY CHART

The big cap S&P 100 (OEX) is lagging a bit relative to the S&P 500, since OEX hasn't quite closed in on its prior high. The index needs to clear its prior highs in the 553 area to suggest a further up leg. A rally back to this area, followed by a stall would suggest the formation of bearish double top. However, if the Nasdaq 100 continues its strong advance, OEX should also be pulled higher; maybe it lags, but still advances.

I've revised an uptrend line that 'works' as an internal/best fit trendline and suggests support around 530 currently. The 21-day moving average is also an expected support at 540.

Pivotal resistance is suggested by the prior 553 high. Next resistance is well above this, coming in around 570-571 currently as suggested by the upper end of the highlighted uptrend channel seen below. 574 is potential resistance implied by a Fibonacci 62% retracement of the October 2007 to March 2009 decline.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) Average also broke out above a line of resistance at 11200. Like OEX, INDU hasn't quite challenged its prior highs, which in the Dow is seen in the 11450 area. It should continue higher if the other major indexes continue their march higher. December has some investment crosscurrents that tend to favor the smaller companies (witness the very strong Russell 2000), but the Dow should continue to follow the leaders. This assumes that the prior highs will be exceeded. We have to watch for a possible double top of course.

About a third of the Dow 30 looks fully in gear to take INDU higher. I'd be more sure if it was 15 but strength or potential further strength in AA, CAT, DD, DIS (possibly), HD, INTC, KO, MCD (possibly), UTX and XOM look like they could pull INDU at least through its prior highs.

Key near support is at 11200, then in the 11000 area. Pivotal near resistance is in the 11450 area, then well above, at 11800. I should also mention the highs made in the 11760-11850 area in August 2008 as a potential resistance zone.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

I was speculating last week that the Nasdaq Composite (COMP) Index might still sink below its last low at 2460. NOT! Instead the Composite hung in around 2500 and then popped back above its 21-day moving average, which is usually a bullish plus. COMP went on to make a new Closing high this past week and has at least equaled its prior intraday high on its latest rally. I'd look for COMP to clear 2600 to stay on a bullish track.

In terms of a prior COMP top to look to as a means of projecting a possible next resistance, the intraday high going back nearly a decade to the 2001 top, is well above current levels at 2862; the prior high Close was at 2810 in the week ending 11/2/07. Resistance implied by the top end of COMP's daily chart uptrend channel currently intersects just over 2700.

Key near support is at 2500-2485, extending to 2460. Major support begins at 2400.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart is bullish and NDX made a new Closing high. It hasn't yet cleared its prior 2200 intraday high but it looks like the index will pierce that high also. The index only had a limited sell off to support in the 2100 area, with just one close below 2100 that lacked downside follow through the following day. A good reason to always look for 'confirmation' of a technical breakout/breakdown on that key SECOND day! Also, RSI stayed pretty much in the 'neutral' 50 area.

The dip to below the up trendline I was working with last week was short-lived. NDX would have had to fall below the prior downswing low at 2085 to suggest much further downside objectives. Big tech stocks remain kingmakers in this market.

Near technical resistance is suggested by the prior 2200 high. 2239 is a pivotal resistance as being the top reached for NDX in nearly a decade, since 2001. I've also highlighted possible resistance around 2250. Resistance beginning in the 2325 area is suggested by the upper end of NDX's uptrend channel.

Near technical support is at 2153, at the 21-day moving average, with pivotal support around 2100.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

As usual and so contrary to company stocks, QQQQ prices went up, up, up, while volume went down, down, down. Makes it look like a lot of short-covering was going on. I suggested last week that I'd short rallies to the 54 area (with an exiting stop at 54.5) and the Q's almost got there. Shorting recommendation withdrawn for now!

With a re-drawn up trendline and uptrend channel, the chart has a bullish pattern again. It is true that if the stock couldn't get above 54 again, it would set up a potential double top, but I'm no longer assuming that this is a likely outcome. The prior high in the 54 area remains a significant test for the stock certainly; and, which should help explain why volume was falling off as QQQQ approached its prior high.

Near support: 52.9

Next support: 52.2, extending to 50.8

Near resistance: 54.0

Next estimated resistance: 55.0

As I said in my initial 'bottom line' comments, the Russell 2000 (RUT) index has been leading the market. I should have redrawn my up trendline sooner, as the mid-November low in the 700 area made a forth point for an up trendline. The subsequent late-November lows made a 5th point, making it clear that RUT remained in a well-defined uptrend, albeit one that had a lower slope. Meanwhile I was still too focused at the previously broken, steeper, up trendline that kept me focused on possible resistance. WRONG! You snooze, you lose, with trendlines.

For example, I wrote last week 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." TRUE, but the pullbacks to 700, then to the 720 area, were good spots to buy calls, as opposed to buying a 'breakout' above 747 when the call premiums had shot up! When I started trading index options, after trading index futures, I learned NOT to buy technical 'breakouts'. My fills on 'market' orders were horrible. It was sure way to NOT make money on calls bought this way. But I digress.

RUT looks headed still higher, possibly next to 780, at the high end of its uptrend channel. 800 should offer fairly tough resistance, with major resistance in the 850 area, where the June 2007 top formed.

Near support is at 728, extending to 720. Fairly major support begins in the 700 area.



GOOD TRADING SUCCESS!


New Option Plays

Oil Service & Industrials

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidates there are plenty of stocks fighting to be on my watch list. Several caught my eye this weekend but most of these need to see some sort of pull back before I would consider new bullish positions. On my watch list is: UPS, SRCL, MCK, SLB, MD, plus I would watch MCD for a breakout higher!

- James


NEW DIRECTIONAL CALL PLAYS

Oceaneering International - OII - close: 72.87 change: -0.37

Stop Loss: 66.90
Target(s): 74.80, 79.75
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
This past week has been very bullish for the oil services sector. The OSX index broke out from a nearly month long consolidation pattern and past significant resistance at the 230 level. This could herald a new leg higher for the industry. OII is a great way to trade this sector with the stock's recent breakout from its consolidation. I am suggesting we use a trigger at $70.55. We'll start the play with a stop loss at $66.90. Our first target is $74.80. Our final target is $79.75. More aggressive traders could aim for the all-time highs near $85.

Trigger to buy @ $70.25

Suggested Position: Buy the 2011 January $75 calls (OII1122A75) current ask $2.90

- or -

Suggested Position: Buy the 2011 April $75 calls (OII1116D75) current ask $6.00

Annotated Chart:

Entry on December xxth at $ xx.xx
Earnings Date 02/17/11 (unconfirmed)
Average Daily Volume = 584 thousand
Listed on December 4th, 2010


United Technology Corp. - UTX - close: 78.74 change: +0.04

Stop Loss: 73.90
Target(s): 81.50, 84.75
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
Industrial names have been one of the strongest groups in the market. Investors are optimistic for the U.S. and global recovery to pick up speed next year. Shares of UTX have broken out over key resistance in the $77 area. I am suggesting readers wait for a dip back into the $77-76 zone for an entry point to buy calls. I'll set our trigger at $77.10. Cautious traders could wait for a pull back closer to $76 or even $75. We will begin the play with a stop loss at $73.90, just under the rising 50-dma. Our first target is $81.50. UTX's all-time high is $82.50.
FYI: The Point & Figure chart is bullish with a $91 target for UTX.

Trigger to buy calls @ $77.10

Suggested Position: Buy the 2011 January $80 calls (UTX1122A80) current ask $1.63

- or -

Suggested Position: Buy the 2011 February $80 calls (UTX1119B80) current ask $2.45

Annotated Chart:

Entry on December xxth at $ xx.xx
Earnings Date 01/26/11 (unconfirmed)
Average Daily Volume = 3.2 million
Listed on December 4th, 2010


In Play Updates and Reviews

Take The Money

by James Brown

Click here to email James Brown

Editor's Note:

December options expire in two weeks so we want to go ahead and exit early in two of our bullish candidates. I'm suggesting readers take profits in CAT and COST. RIG also hit a bullish target on Friday.

-James

Current Portfolio:


CALL Play Updates

CH Robinson Worldwide Inc. - CHRW - close: 76.35 change: +0.54

Stop Loss: 71.90
Target(s): 74.90, 79.00
Current Option Gain/Loss: +130.4%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/04 update: Transports are still rolling higher and CHRW extended its gains to four days in a row. Shares look a little short-term overbought. I would expect a pull back toward the $75-74 zone. If you're looking for a new entry point I would prefer to buy calls on a dip near $74-73. Our final target is $79.00.

Current Position:
Long the January $75.00 calls (CHRW1122A75) Entry @ $1.15

12/01: New Stop loss @ 71.90
12/01: First target hit @ $74.90 Exit all December calls: $0.95 (+111.1%)
12/01: First target hit, take profits on January calls: $ $2.00 (+73.9%)
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: 73.58 change: +1.37

Stop Loss: 67.75
Target(s): 71.50, 74.75
Current Option Gain/Loss: +81.8%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/04 update: CLF extended its gains with a sharp rebound off Friday's morning low. The stock closed at new seven-month highs (again). Shares are nearing potential resistance near the $74-75 zone. I'm not suggesting new positions at this time. More conservative traders will want to strongly consider an early exit right now for our remaining December calls. Officially our final target is $74.75. December options expire in about two weeks. Look for a dip back toward $70.00 as our next entry point to buy January calls (or later). I am moving our stop loss to $67.75.

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

12/04 New stop loss $67.75
12/02 Target hit @ 71.50, option @ $3.25 (+34.2%)
12/02 New Stop loss @ 65.75

Chart:

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


CSX Corp. - CSX - close: 64.41 change: +0.38

Stop Loss: 59.75
Target(s): 64.25, 67.25
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Comments:
12/04 update: Hmm... the disappointing jobs report on Friday morning would have been the perfect excuse to send CSX back toward support near $62.00. Yet shares only dipped to $63.56 before bouncing sharply. CSX has yet to breakout past its November highs (and 52-week highs) near $64.50. There is still a good chance this stock will correct before moving much higher. We have a trigger to buy the dip at $62.50. I'm adjusting the stop to $59.75.

Trigger to buy-the-dip @ $62.50

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

- or -

Suggested Position: Buy the 2011 February $65 calls (CSX1119B65)

12/02: New trigger @ 62.50.
12/01: New trigger @ 62.25, New stop @ 59.90, New targets.

Chart:

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


CenturyLink, Inc. - CTL - close: 43.43 change: +0.18

Stop Loss: 41.45
Target(s): 44.90, 47.25
Current Option Gain/Loss: +50.0%
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
12/04 update: CTL gained +0.4% even though it looks like shares posted a loss on the chart. The gap down was due to CTL's 1.7% dividend it paid out on Friday. The stock opened at support near prior resistance near $43.00. I would use this "dip" as a new entry point to buy calls. However, if you're feeling cautious you could look for a dip closer to $42.00 since the market looks a tiny bit overbought here.

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.

Current Position:
Long the 2011 January $45.00 calls (CTL1122A45) Entry @ 0.20

12/01: Adjusted secondary target to $49.00

Chart:

Entry on November 29th at $42x55
Earnings Date 02/22/11
Average Daily Volume = 3.0 million
Listed on November 27th, 2010


Express Scripts - ESRX - close: 54.20 change: +0.12

Stop Loss: 49.65
Target(s): 53.95, 57.25
Current Option Gain/Loss: +72.1%, and +42.8%
Time Frame: 5 to 6 weeks
New Positions: Yes, see below

Comments:
12/04 update: Traders quickly bought the dip in ESRX near $53.00 but the stock did not see much follow through higher until late in the session. Previously I suggested readers use a dip near $53 as an entry point. I would still focus on decline in the $53-52 zone as possible entry points to buy calls (Januarys or later).

We currently only have half a position open.

Don't forget - December options expire in less than 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

12/01: First Target Hit @ $53.95. Dec's @ $2.20 (+80.3%). Jan's @ $3.10 (+47.6%)

Chart:

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


FedEx Corp. - FDX - close: 95.00 change: -0.21

Stop Loss: 88.45
Target(s): 94.75, 99.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/04 update: FDX held up pretty well on Friday. The stock was already short-term overbought but shares saw almost no profit taking on Friday morning. The gap down and decline quickly stalled at $94.36 and FDX spent the day drifting sideways. Meanwhile the company said they were raising prices. Next month FDX will raise their ground shipping by an average of +4.9%.

There is no change from my previous comments. I would not want to chase it here. Wait for a dip. We have a buy-the-dip trigger at $91.00.

FYI: FDX is due to report earnings on Dec. 16th. Holding over earnings is risky. More conservative traders will want to exit ahead of the announcement.

Suggested Position: TRIGGER @ $91.00

Buy the 2011 January $90.00 call (FDX1122A90) current ask $4.85

- or

Buy the 2011 April $95 call (FDX1116D95) current ask $5.00

Chart:

Entry on December xxth at $ xx.xx
Earnings Date 12/16/10 (confirmed)
Average Daily Volume = 2.1 million
Listed on November 29th, 2010


Goldman Sachs - GS - close: 162.31 change: -0.19

Stop Loss: 152.75
Target(s): 169.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Comments:
12/04 update: Wow! The jobs report on Friday morning was a HUGE miss and yet stocks were barely fazed and recovered to close in positive territory. The banking indices actually outperformed the major market averages. Oddly enough GS underperformed. Shares did trend higher from their Friday morning decline but never made it back to positive territory.

I would still consider buying calls on a dip and our plan remains unchanged. Wait for a decline to $160.25 to launch positions. More conservative traders could wait for a dip closer to $158.00.

Trigger @ 160.25

Suggested Position: Buy the 2011 January $165 calls (GS1122A165) current ask $5.25

Chart:

Entry on December xxth at $ xx.xx
Earnings Date 01/18/11 (unconfirmed)
Average Daily Volume = 7.2 million
Listed on December 2nd, 2010


W.W. Grainger Inc. - GWW - close: 131.59 change: +0.43

Stop Loss: 124.75
Target(s): 129.90, 138.50
Current Option Gain/Loss: +80.0%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/04 update: GWW extended its gains and hit another new all-time high ($131.93). Shares do look a little bit overbought here. I would expect a dip soon. If you're looking for a new entry point I would consider buying calls on a dip near $128.00.

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

12/02: First target hit @ 129.90, option @ $4.10 (+64%)
12/02: New stop loss @ 124.75, New final target at $138.50

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: 57.04 change: -0.43

Stop Loss: 53.75
Target(s): 59.75, 64.00
Current Option Gain/Loss: - 7.8%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/04 update: Friday was a disappointing session for HUM and the healthcare sector in general. Both ended the day in negative territory. A sideways consolidation would be normal but the relative weakness versus the market these last two days is somewhat worrisome. If you're looking for a new entry point I would wait for dips near the rising 50-dma. 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.

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

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

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


Nike Inc. - NKE - close: 87.53 change: -0.30

Stop Loss: 82.45
Target(s): 86.75, 89.50
Current Option Gain/Loss: +156.5%, and +56.4%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
12/04 update: NKE's relative strength has gone missing. The stock has been underperforming these last two sessions. While the long-term trend is up this recent action is a caution signal. I don't see any changes from my previous comments. I would be very tempted to exit the remaining December calls on any move over $88.00 again. The high on Friday was $87.98.

If you're looking for a new entry point wait for the next dip or bounce near $84.00. Our final target for the December position remains $89.50. We still want to take profits (sell half) of our January calls at $89.50. Just remember that December options expire in about two weeks.

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

- or -

(Second position)
Current Position:
Long the January $85.00 CALLS (symbol:NKE1122A85) Entry @ $2.78

12/01/10 New stop loss @ 82.45
11/30/10 Readers may want to exit December options early for a gain
11/30/10 Entry on January calls @ $2.78
11/29/10 Buy the bounce from $84.00
11/24/10 Target hit @ 86.75, Dec. 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


Transocean Ltd. - RIG - close: 70.51 change: -0.42

Stop Loss: 64.75
Target(s): 72.50, 74.90
Current Option Gain/Loss: +27.1%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/04 update: Target achieved. Some positive analyst comments helped send shares of RIG higher on Friday morning. The stock opened at $71.25 and actually hit $72.50 before paring its gains. Our first target to take profits was at $72.50. The option hit I would not be surprised to see RIG retrace back to the $68.50-68.00 zone and we can use a decline into this area as a new entry point to buy calls.

- Current Position -
Long the 2011 January $70.00 calls (RIG1122A70) Entry @ $2.95

12/03/10 Target hit @ $72.50, option @ $4.95 (+67.7%)

Chart:

Entry on November 30th at $68.18
Earnings Date 02/24/11 (unconfirmed)
Average Daily Volume = 6.3 million
Listed on November 29th, 2010


Union Pacific - UNP - close: 94.55 change: +0.89

Stop Loss: 87.90
Target(s): 96.25, 99.75
Current Option Gain/Loss: +100.6%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/04 update: Railroad stocks continued to climb and UNP managed to outpace its peers. The stock hit new all-time highs again. Shares are arguably short-term overbought. I would expect a pull back toward $92.00. We can use a dip in the $92.50-92.00 zone as another bullish entry point.

- Current position -
Suggested Position:
Buy the 2011 January $95 calls (UNP1122A95) Entry @ $1.52

Chart:

Entry on November 30th at $89.83
Earnings Date 01/20/11
Average Daily Volume = 2.9 million
Listed on November 20th, 2010


VimpelCom Ltd - VIP - close 15.06 change -0.44

Stop Loss: 14.90
Target(s): 16.75
Current Option Gain/Loss: -61.9%
Time Frame: 6 to 8 weeks
New Positions: No

Comments:
12/04 update: Warning! It could be game over for our bullish play on VIP. More conservative traders will want to exit now to salvage any remaining value. VIP underperformed on Friday with a drop toward support near $15.00 and its 50-dma. If there is any follow through lower on Monday we will likely be stopped out at $14.90. I am not suggesting new positions.

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 12/02/2010 (unconfirmed)
Average Daily Volume: 3.5 million
Listed on November 3, 2010


Cimarex Energy Co. - XEC - close: 86.83 change: +1.00

Stop Loss: 79.85
Target(s): 87.40, 89.90
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/04 update: Naturally it is very frustrating to see a bullish candidate like XEC rally without us. Yet I would not chase it. I'm suggesting readers wait for a dip to $84.00. Cautious traders could wait for a dip closer to $82 instead.

Trigger @ 84.00

Suggested Position:
Buy the 2011 January $85 calls (XEC1122A85) current ask $4.90

Chart:

Entry on December xxth at $ xx.xx
Earnings Date 02/17/11 (unconfirmed)
Average Daily Volume = 907 thousand
Listed on December 1st, 2010


CLOSED BULLISH PLAYS

Caterpillar - CAT - close: 89.38 change: +0.76

Stop Loss: 83.75
Target(s): 84.85, 89.50
Current Option Gain/Loss: +235.7% & +301%
Time Frame: 3 to 4 weeks
New Positions: No

Comments:
12/04 update: That's close enough for me! We have been aiming for $89.50 CAT managed to recover from its Friday morning lows and hit $89.49 before the weekend. While CAT did not officially hit our exit I'm suggesting an early exit immediately. Close our December call positions now. We can look to buy calls again on a dip near $85-84. FYI: CAT has delivered the best performance in the Dow Jones Industrial Average with a +56% gain for 2010.

Take Profits now!

Closed Position:
Long the December $85 calls (symbol: CAT1018L85)
Entry @ $1.40, exit @ $4.70 (+235.7%0

Double Down New Position:
Buy the December $85 calls (CAT1018L85), current ask $1.17, exit @ $4.70 (+301%)

12/04 Exit Positions: option bid @ $4.70 (+235.7% and +301.7%)
12/02 Consider exiting for a profit now, options are up +200%
12/02 New stop loss @ 83.75
12/01 New stop loss @ 81.90
11/30 Target hit @ 84.85. Option @ $1.85 (+32.1% and +58.1%)

Chart:

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


Costco Wholesale - COST - close: 68.39 change: -0.62

Stop Loss: 64.90
Target(s): 69.50
Current Option Gain/Loss: +180.0%
Time Frame: 3 to 4 weeks
New Positions: No

Comments:
12/04 update: Whoops! COST slipped on Friday. The rest of the market managed to extend their gains. COST spiked to $69.26 and rolled over. That's too bad since our final target is $69.50. I am suggesting we go ahead and exit now just to be safe. If we had January or later calls I'd consider holding our position but we have Decembers.

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.

Closed Position:
December $65.00 calls (symbol: COST1018L65)
Option Entry @ $1.50 , exit @ $3.50 (+136.6%)
12/04/10: Exit early: option bid @ $3.50 (+136.6%)
12/01/10: New stop loss @ 64.90
11/30/10: Take Profits Early, Sell half. Option @ $3.40 (+126%)

Chart:

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