Option Investor
Newsletter

Daily Newsletter, Saturday, 12/18/2010

Table of Contents

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

Market Wrap

Europe Debt Keeps Lid On Market

by Jim Brown

Click here to email Jim Brown
President Obama signed the tax compromise into law on Friday but European debt fears kept the bulls from celebrating.

Market Statistics

Friday started off with Moody's slashing Ireland's debt rating by five notches to Baa1 from Aa2 and they continued their negative outlook and warned about further downgrades if the country cannot stabilize its debt situation. This followed the move by Fitch last week to cut the debt to BBB+, a three-notch downgrade. S&P is the only ratings agency left with Ireland still in the A rated band but you can bet they will follow suit soon.

The downgrade had been expected but the severity of the downgrade was unsettling to the markets. Moody's put Spain on review for a possible downgrade on Wednesday on worries about a similar credit crisis in 2011. S&P put Belgium's debt rating on credit watch because of worries over the government and the debt reduction goals.

These downgrades continued to keep the market off balance despite some decent economic news.

The Conference Board index of leading economic indicators rose by a very sharp +1.1 points for November. That was the biggest gain since March. Nine of the survey's ten components increased. The only drag on the index was a decline in building permits. The three-month annualized rate accelerated to 8.6%. That is the fastest growth since March.

The internal components point to a 3.0% rate of GDP growth in Q4. The odds of a double dip recession are decreasing sharply. Hiring is improving at least on a temporary basis and it is expected to accelerate in the spring of 2011.

Jobless Claims declined only slightly last week but it was enough to push the four-week moving average to 423,000 and the lowest level in two years. Using the four-week average filters out the week-to-week volatility.

The regional employment report on Friday showed nonfarm payroll employment declined in 28 states but only three were statistically significant. This continues to improve although very slowly. The tax deal signed on Friday should improve employment fairly quickly because of the accelerated write offs for business.

For next week the only material report will be the final GDP revision for Q3 on Wednesday. Estimates are for a small rise to +2.6% growth.

We will also have the normal weekly reports plus the November housing data. I don't think the housing reports will interest the markets because it is not a selling season. We know sales have declined but that is old news.

Economic Calendar

The FDIC closed six banks on Friday. Three in Georgia and one each in Florida, Arkansas and Minnesota. That raises the total for the year to 157. Florida has been hard hit with 29 banks closed and Georgia has seen 21 banks closed. The number of banks on the FDIC "problem" list rose to 860 in Q3 from 829 in Q2.

The two companies who reported earnings after the close on Thursday held their gains in Friday's lackluster trading. Research in Motion (RIMM) manage to hold on to a buck of its after hour spike. Oracle duplicated that gain with a +1.19 close.

Take Two Interactive (TTWO) beat the street and also gained a buck but that was an 8% gain for the low dollar stock. The video game maker managed to tack on earnings even without a new version of the Grand Theft Auto title. Their winner for 2010 was the NBA 2011 sports hit.

Accenture (ACN) reported earnings of 81 cents and easily beat street estimates of 75-cents. Their earnings beat was not the big news that powered their stock to an 8% gain. Their new bookings for the quarter were $6.31 billion. CEO William Green said business clients were boosting spending and the business volume from the public sector was not falling as many had expected. He said clients were starting to commit to projects in order to position themselves for an economic recovery. "There is less hesitation than there was previously and there are a lot of things companies want to do."

Accenture Chart

I think we are seeing a solid trend develop. Earnings guidance from RIMM, ORCL, ACN and others has been positive and the comments are growing stronger. Cisco was the only major tech with an earnings problem and after a month of earnings reports from others it appears that problem was strictly related to Cisco and not generic to the tech sector.

Collins Stewart's analyst said, "Enterprise demand is not only holding up well through the year-end, which has been our expectation and prior view, but is actually improving above our expectations." A Stifel Nicholas analyst said, "We believe the Accenture report is another data point validating the recovery of enterprise IT spending."

Everyone will be focused on the holidays starting this weekend but the next cycle for the markets will be the Q4 earnings, which begin in three weeks. Alcoa is the first Dow component to report on January 10th. That may sound like a long way off but it will be here before you know it.

Over the next couple weeks I expect some major companies to preannounce some earnings guidance that will be higher than previously expected. This should set the tone for the earnings cycle and possibly for all of 2011 since conditions are only expected to improve.

There was a lot of talk about commodities last week. Gold is more than $60 off its high. Silver is holding just under $30 as the poor man's gold. Copper is also holding near its highs. The CME is so concerned about speculation in copper and silver they raised the margin requirements for future contracts by 19% at the close on Friday.

We know why gold is going up because it is seen as an inflation hedge and alternate currency among its other uses. Copper and silver are more a pure commodity play on the global recovery. Silver demand is rising in electronics and manufacturing of all types and its gains have been on the back of China's manufacturing boom. Copper has the same fundamentals but also widens out into building and home construction. There are some that feel we could run short of copper in 2011 if the recovery continues to accelerate.

In order to capitalize on this trend there are two new ETFs in the approval process that will hold the physical metal like the GLD ETF holds gold. Unfortunately for those that use copper there is not enough available supplies to have these ETFs gobble up several thousand tons and then sit on it. Copper prices have risen +50% since June as speculators added to positions. One major speculator is a client of JP Morgan. They have bought $1.5 billion in copper in December alone. Analysts believe they are front running the two ETFs currently in the application process. One of those ETFs will be sponsored by JPM. The bank claims it has not bought any copper for its own account but I have a hard time believing they are not related to that single investor in some way.

The JJC ETF is one way for an investor to capitalize on the price move in copper. It is an ETF that holds copper futures instead of actual copper ingots. I would probably look at one of the physical metal ETFs when they are approved but we need to give them time to mature once they start trading. If that single investor has cornered the market on copper but the demand from the ETFs is less than he expected then dumping a billion dollars in copper futures is going to put quite a dent in the market. That would be a buying opportunity in my opinion. China is going to continue to grow and India is accelerating right behind China. Actual copper supplies are dwindling because all the good deposits have already been mined. Current ore is far less dense than that mined just a few years ago. I heard two analysts debating the price of copper in 2011 and they said we could see $10,000 a ton or higher, a 25% increase from current levels.

Chart of JJC ETF

Chart of Copper Futures

CRB Commodity Index

AT&T announced on Friday it was buying back 300 million of its shares. This represents 5% of the outstanding shares and roughly $9 billion at today's prices. They also raised their dividend a penny to 43-cents and said capex expectations were in the $19 billion range. Hopefully they will spend a lot of that money on upgrading their network. AT&T shares ended the day flat.

The lawyer suing all of Bernie Madoff's clients recovered $7.2 billion from the estate of insider Jeffrey Picower. The billionaire investor died six months ago from a heart attack. The U.S. Attorney pursuing the case said Picower's wife had agreed to the settlement. This represents every dollar Picower received from the Madoff investment. The SEC, DOJ and NY will receive $2.2 billion of the money and $5 billion will go to investors. The attorney had previously recovered $2.6 billion in other cases and has many billions more in active suits. The $7.2 billion was the largest forfeiture in U.S. history. The Picower Foundation, a charitable organization, was the 71st largest in the U.S. at the time the Madoff scheme was discovered. The foundation was forced to close its doors because its endowment was managed by Madoff.

The trustee believes the amount he can eventually collect could be close to $20 billion. He also believes that is the true amount of everyone's initial investment. The $50-$65 billion commonly quoted includes the payouts and reinvestments for the decade or more the scheme was in place. If he is successful in recovering the entire $20 billion investors could see some of their initial investment returned. Unfortunately for many they received 12% per year on their funds for more than a decade and that money earned over the last six years has to be returned to the trustee in the form of a clawback.

The S&P-500 did its quarterly rebalance after the close on Friday and that helped boost volume to nearly nine billion shares. Stocks added to the index included NetFlix, F5 Networks, Newfield Exploration and Cablevision. Being kicked out for shrinking to the point they were no longer considered eligible for the big cap index were Eastman Kodak, Office Depot and the New York Times. Those companies had shrunk to a market cap of only $1 billion and the companies replacing them had an average market cap of $10 billion.

The market volatility on Friday sank to an eight month low with the VIX dropping to 15.46 intraday. Nobody appears to be worried about buying puts to protect positions so premium values are declining sharply. Those shrinking premiums negatively impact the VIX. This was also a quadruple witching cycle, which should have had increased volatility so the lack of it was surprising.

You don't need the VIX to tell you there is no volatility. The Dow has gone for eleven days without a 100-point range. Since November 30th the Dow is up +6% and most of that came in the first two days of the month. You have to go back to 1996 to find a longer streak of narrow range days. The Nasdaq and S&P have been down only two days in December.

The AAII Investor Sentiment survey for the week ended on Wednesday showed 50.2% of investors were bullish compared to 27.1% bearish. The bullish number declined -2.8% from the prior week but the bearish investors spiked nearly +5 points from 22.56.

Sentiment is running very bullish and for good reasons but bullish numbers over 50% typically indicate overconfidence and potential trouble ahead. The VIX at 15 is also a warning sign.

However, sometimes there are good reasons for investors to be bullish and the VIX can remain low for a long time before disaster strikes. Back in April the VIX hovered around 15 for nearly a month before spiking to 48 in mid May.

When the fundamental outlook for stocks is positive and improving daily the technical indicators tend to be less important. There are still days or weeks where the markets can move lower but the long-term direction remains higher. I believe that is where we are today.

I am becoming concerned we could see a decent dip in early January but I think it will be from funds shuffling their portfolios rather than a change in sentiment. If a fund bought Apple at the $82 lows in 2009 they eventually have to sell it in order to capture that $240 profit. They will either do this in October for their fiscal year-end or in January. Taking profits in January allows them to invest those profits with an entire year ahead of them before having to deal with bonuses and taxes again. For a stock like Apple they have to wonder how much higher it could go. Is holding out for $350 worth risking the $240 in gains they already have? Do they have any better stocks they would like to own? Lots of funds will be asking themselves those questions and dealing with the answers in January. In reality most have probably already made the decisions and they are just waiting for January to put them into action.

If the markets remain positive and they are seeing positive flows into funds they may hold their positions to see if they can get a bounce on earnings. In years when conditions for an earnings rally are right the January decline is normally postponed until mid February.

Rarely does this happen. Only once in the last ten years has the early year high been in February. In every year there was a decent decline early in the year. In 2005-2006 those declines were early and shallow but this is a factor of the market at the end of the year as well. If the last couple months/weeks were down then the January damage could be minimal while strong Q4 gains could lead to more profit taking. There is no perfect formula.

S&P-500 January High Table

The most likely scenario would be a repeat of the 2004-2005 transition. The S&P gained +15% from August 2004 to end the year at 1,217. The January decline started the first trading day of 2005 and lasted for three weeks but the damage was minimal with a loss of 54 points. In 2010 the S&P has gained +19.6% since the end of August and could very easily be setting up for an early January decline. If it does happen I don't expect a disaster but only a decent bout of profit taking that allows funds to shuffle their portfolios for what should be a good year in 2011.

SPX 2004-2005

For instance we have seen a very strong rally out of the August lows but we had a decent bout of profit taking in November. That could mean the funds rotated positions in November and we will only see a minimal dose of profit capture in January. In fact the entire May through August period was pretty volatile and could have forced that portfolio reallocation.

Regardless of what we may experience in January I think the rest of this year could be tame. Once into 2011 we need to protect any profits and be prepared to buy any January dip. The economy is recovering. Businesses are starting to spend money and the next year should produce decent gains in the market. We need to put aside our macroeconomic views (country, economy, GDP, etc) and focus on the microeconomics of individual companies. (Earnings, revenue, market share, etc)

The Fed is in control of the macroeconomics. They will continue pouring money into QE2 and other stimulus to insure a recovery. If history is any indicator they will eventually succeed in creating hyperinflation but that is another problem for 2012. In the short term they will be forcing positive growth in 2011.

Our job will be to invest into those companies that are capitalizing on the business cycle by investing and growing their businesses and expanding profits and their stock price.

If we spend all of our efforts worrying about the next market crash we will not be able to successfully profit from the individual companies growing their businesses. 2011 should be a stock pickers market. I plan on picking some winners and I hope you will as well.

On Friday the markets were lackluster despite the approval of the tax compromise. That was already priced in and traders were more focused on leaving early to hit the malls than watching charts. The S&P closed up one point. A golf clap please!

The range on the S&P was a measly five points and it was a quadruple witching Friday. That gives you some idea on how boring it was to watch. None of the support and resistance levels changed or were even tested. Support is 1235 and resistance 1250. However, the boys have maneuvered the S&P to within 6 points of the most predicted year-end closing level on the S&P at 1250. They are really close to adding that accomplishment to their resume for 2010. It will be interesting to see if they can hold the S&P at this level for the next nine days.

S&P-500 Chart

The Dow really needs a positive news event and soon. For a week now the index has wandered in a narrow range with traders showing an obvious lack of interest. If it was any other week of the year I would be seriously worried about an impending crash. However, with fundamentals improving and holiday sentiment normally bullish they may be able to keep it hanging here for another few days. If we could get a news event like a couple strong guidance upgrades, a major acquisition or some resolution in Europe we might be able to manage a short squeeze to a new high.

I am not holding out much hope and I will be very happy just to see it hold in the range until the end of December. Initial support is 11,445 followed by 11,335. Resistance is 11,500.

Dow Chart

The Nasdaq managed to punch through the short-term downtrend resistance (red line) but was immediately repelled after making a new three-year high at 2650. Apple, Google and NetFlix were all negative for the day and exerting a significant drag on the index. The breakout was only slightly bullish because it was slapped back so quickly.

With the lack of material volume and general lack of interest by traders ahead of the holiday we should be grateful for any gain at all but I was disappointed. Support is now 2640 and resistance 2650. That is a very narrow range.

Nasdaq Chart

The Russell is no help this weekend. The index did close positive but right at new resistance at 780. As I stare at the chart through my rose colored glasses I am imagining a breakout next week. Whether that will come true is of course is the $64 question.

Since most funds shut down for the year on Friday, except for a token crew to mind the store, I seriously wonder how much more additional buying we could see. I believe it will be up to the retail investor and I am not sure they are really on board. I think they are waiting in line for a parking spot at the mall instead of watching resistance levels.

"IF" the Russell can breakout next week the positive sentiment should drag the big cap indexes along for the ride. Support is 770, resistance 780.

Back on December 9th I pointed out the late day range squeeze as a potential breakout the following day. The intraday spike followed by the minimal range is evidence of buyers and sellers meeting on the field of battle and buyers pressing resistance. On the 10th we got the breakout and it was very strong as shorts were forced to cover. On Friday we saw an almost identical signal. There was a spike in the middle of the day followed by a hard stop right at resistance but the buyers were not repelled. They remained locked in battle and closed right below the high for the day. If conditions play out as they did last time and there is no geopolitical news over the weekend we could have a move higher on Monday.

Russell Chart

In summary, I would like to see the markets continue to creep slowly higher because eventually a short squeeze would be triggered. The Nasdaq attempted a jailbreak on Friday but was knocked back for a minimal gain. However, we can't apply too much importance to any of the indexes on Friday because of the low volume and lack of interest by traders.

While bullish sentiment may be over 50% in survey terms it is not translating into market gains. Unless something happens to get traders fired up over the holidays I fear it is going to be a boring two weeks. This is normally a bullish period but the bulls are nowhere to be seen.

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Don't fight the Fed!

Jim Brown


Index Wrap

Marking Time

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

All the major indexes have been consolidating in the area of recent highs, probably ahead of a further run up. While price action looks OK for the bulls, some technical indicators are flashing caution due to being at overbought extremes. The 13-14 day Relative Strength Index (RSI) is back up into its overbought zone and my Market sentiment model reached a level associated with bullish overbought extremes this past week. These readings don't imply that a downside reversal is about to happen and that is a problem for anyone expecting such indicators alone to suggest taking on bearish options strategies.

A characteristic of a bull trend of substantial strength and staying power is that the major indices can stay overbought for extended periods. Something I call (loosely) my 'rule of 3' is that RSI extremes often occur three times, with the third being an actionable bearish 'signal' IF price action concurs; e.g., an up trendline is pierced, etc. What a so-called 'overbought' conditions suggests more than anything is that there's increasing risk of a correction. So, there's risk of a sell off, but don't be surprised to see the rally continue.

The charts remain bullish in their patterns and price action is the 'king' indicator. An up trendline being pierced, a key downside reversal or taking out a prior low is another story. I give the benefit of any doubt as to a further extension of this rally to the fact that the Market's in a major uptrend and until price action suggests otherwise, it's premature to adopt bearish strategies. Putting on NEW bullish strategies, even absent a downside chart/price reversal, is also playing with fire.

Dow Theory is suggesting that a primary bull market is 'confirmed' (again) by the Dow (INDU) and the Dow Transports (TRAN) both going to new weekly closing highs in late-Oct which, after a brief pullback, was repeated in the week ending 12/3.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) index is bullish in its pattern as is the picture presented by all the major index charts. There has been a pause in the trend as seen by the minor line of resistance around 1246 as highlighted on the daily chart below. I am assuming that this recent sideways move is only a consolidation of the up trend unless there's a significant dip and a close below 1220 support. 1200 is a key technical support implied by SPX's up trendline. There's no actual reversal of the intermediate trend unless prior lows at 1173 got pierced.

Immediate overhead resistance is at 1246 as mentioned, then at 1260 (not highlighted), and finally at the top of SPX's uptrend channel currently intersecting around 1288.

RSI AND SENTIMENT INDICATORS:

As discussed in my initial 'bottom line' comments above, the 13-day RSI is back into my overbought zone as seen above. While this indicator alone doesn't suggest that the Market is making or has made a top, high extremes do suggest that the risk of a correction is greater than if RSI was a 'neutral' 45-50 or lower. Sometimes, it's not until the 3rd/4th time of RSI getting into this zone that this indicator concurs with a top.

Bullish sentiment got quite extreme this past week in terms of the somewhat 'lagging' 5-day average. Such readings often precede a top but this is also not a trend reversal event, like formation of a double top would be; also, events such as a key downside reversal, piercing an up trendline or a prior (down) swing low.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) index's chart is bullish also although we didn't see any headway to speak of above 560. I look for higher levels but am also cautious about getting too bullish here given what I see is an increased risk of a pullback; i.e., as suggested by the minor stall in the context of an overbought RSI.

Immediate overhead resistance is at 560-561, then around 570-571 (not highlighted), and finally at the top end of the uptrend channel, currently intersecting around 577.

Near support is at 546-547, then at the up trendline, currently intersecting at 538. The prior downswing low at 527 is the most pivotal technical support, as a break of this level would suggest a reversal of the intermediate-term trend.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) Average has exceeded and then stayed above its prior high, which is bullish; the consolidation after a new high has kept prices above the prior 11451 top and a characteristic of a strong (up) trend. INDU will maintain the most bullish chart pattern by the Average continuing to trade above its prior high.

No trend reversal is signaled short of a move below 11000 but there are suggested supports at the 21-day average and at the intersection of the up trendline as highlighted below.

I've estimated next resistance coming in around 11570, then at 11730.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) Index chart remains bullish as it has been trading above its prior 2593 high for the past two weeks. COMP ended the week only slightly higher (5 points) than the 12/10 Friday Close. Still, there's nothing yet in the pattern to suggest that COMP can't/won't go higher still. I've pegged next resistance at 2700, then at 2775.

Near and quite pivotal support is at 2600, extending to 2570. The support zone implied by two prior (down) swing lows is at 2488-2460. A close below 2488 (or 2460) would be bearish, especially if weakness continued into the following trading session.

RSI AND SENTIMENT INDICATORS:

As discussed in my initial 'bottom line' comments, the 13-day RSI is back into my overbought zone as seen above. While this indicator alone doesn't suggest that the Market is making or has made a top, high extremes do suggest that the risk of a correction is greater than if RSI was a 'neutral' 45-50 or lower. Sometimes, it's not until the 3rd/4th time of RSI getting into this zone that this indicator concurs with a top.

Bullish sentiment got quite extreme this past week in terms of the somewhat 'lagging' 5-day average. Such readings often precede a top but this is also not a trend reversal event, like formation of a double top would be; also, events such as a key downside reversal, piercing an up trendline or a prior (down) swing low.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart is bullish. NDX has seen some resistance form in the 2227 area. The recent sideways move is interpreted as a bullish consolidation ahead of a continued move higher. This bullish view is prefaced on NDX holding above key near support at 2200-2183. Major support is expected in the 2210-2085 zone.

I've projected next resistance above 2227 at 2260 and then up at 2330. 2330 represents a fibonacci 38% retracement of the entire March 2000-October 2002 decline.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) has a bullish chart with its recent consolidation holding above the prior key high at 54.0 and always a good sign for a continued bull move; i.e., highs once exceeded 'become' a subsequent support.

Daily trading volume picked up some this past week. On Balance Volume (OBV) is trending sideways. There has often been a correction after a sizable run up that's followed by this type OBV pattern. I'm not predicting a sell off based on this volume indicator but am alert to a reversal given this plus an overbought situation in the Nasdaq Composite. However, NDX is about 10/10+ points shy of a major overbought extreme in terms of the Relative Strength Index/RSI.

Near support: 53.6

Next support: 52.0, then 50.8

Near resistance: 54.6

Next estimated resistance: 56.0

Major resistance: 58.0

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) index continues to lead even the Nasdaq higher. RUT has a strong seasonal tendency to move higher toward the end of the year as money managers tend to rotate out of some of their big cap holding and put some money to work in the small to medium cap stocks represented in the Russell 2000. This is especially true when the big cap stocks have racked up strong yearly gains, and investors and fund managers look to the smaller cap stocks for some further diversification in terms of company size.

My "next target" mentioned last week for 780 has been reached. There is now only what I would consider as 'major' resistance around 800 to be challenged. Given the overbought readings in RSI and by the length of time without a correction, I'm leery of holding call positions beyond 800 (if reached).

Near support is at 746, then at the 50-day moving average, currently at 727. The 700-701 area is a major support as implied by the mid-November low and a strong renewed advance.



GOOD TRADING SUCCESS!


New Option Plays

IT Services & Agriculture

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Cognizant Technology Solutions - CTSH - close: 72.40 change: +1.99

Stop Loss: 68.49
Target(s): 74.50, 79.00
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
Technology stocks continue to show relative strength. CTSH is a big cap tech company that has broken out to new all-time highs after consolidating sideways for two weeks in the $69-71 zone. Friday's rally was fueled by very strong volume. Aggressive traders may want to go ahead and buy calls now. Naturally I want to wait for a little dip. Broken resistance near $71.00 should be new short-term support. Let's use a trigger to buy calls at $71.50 and we'll initiate the play with a stop loss at $68.49 on the under side of its recent range. Our first target is $74.50. Our longer-term target is $79.00.
FYI: The Point & Figure chart for CTSH is forecasting a $93 price target.

Trigger to buy calls on the dip @ $71.50

- Suggested Positions -

Buy the 2011 January $75.00 calls (CTSH1122A75) current ask $1.10

- or -

Buy the 2011 April $75.00 calls (CTSH1116D75) current ask $3.70

Annotated Chart:

Entry on December xxth at $ xx.xx
Earnings Date 02/09/11 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on December 18th, 2010


Monsanto Co. - MON - close: 64.60 change: +1.60

Stop Loss: 59.89
Target(s): 67.25, 69.85
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
As investors look ahead into 2011 the commodity space continues to draw bullish buying interest. Shares of MON are breaking out from a two-month consolidation. Friday's rally to new eight-month highs was fueled by strong volume. Aggressive traders may want to consider new positions now. I am suggesting we wait for a dip and use a trigger to buy calls at $63.25. Cautious traders could wait and hope for a dip closer to $62 as their entry point. Thursday's low was $59.93 so I'm suggesting a stop loss at $59.89. If triggered our first target is $67.25. Our second target is $69.85.
FYI: The Point & Figure chart for MON just broke out past descending resistance and is forecasting a $74 price target.

Buy-the-dip Trigger @ 63.25

- Suggested Positions -

Buy the 2011 January $65.00 calls (MON1122A65) current ask $2.22

- or -

Buy the 2011 April $65.00 calls (MON1116D65) current ask $4.65

Annotated Chart:

Entry on December xxth at $ xx.xx
Earnings Date 01/06/11 (confirmed)
Average Daily Volume = 4.9 million
Listed on December 18th, 2010


In Play Updates and Reviews

Another Quiet Expiration

by James Brown

Click here to email James Brown

Editor's Note:

December's option expiration Friday was a relatively quiet affair. I removed SHW as a bullish candidate. Our only put, EXPE, could be a drop following Friday's relative strength.

-James

Current Portfolio:


CALL Play Updates

Cummins Inc. - CMI - close: 107.96 change: -0.55

Stop Loss: 98.40
Target(s): 108.25 114.00
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
12/18 update: CMI has spent the last couple of days churning sideways. Shares remain short-term overbought with the rally from $95 to $110 over the last four weeks. The stock should find some support near $105 and near $100. I'm suggesting we wait to buy calls on a dip at $102.50.

We want to start with small positions! Consider only buying half your normal position size. Just in case the correction pulls CMI toward the 50-dma we want to have some cash on the sidelines to double down near the 50-dma.

Trigger @ $102.50

- Suggested Position -
Buy the 2011 January $105 calls (CMI1122A105)

- or -

Buy the 2011 March $110 calls (CMI1119C110)

Chart:

Entry on December xxth at $ xx.xx
Earnings Date 02/02/11 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on December 11th, 2010


CSX Corp. - CSX - close: 63.66 change: -0.29

Stop Loss: 59.75
Target(s): 67.00, 69.50
Current Option Gain/Loss: -23.4% and -14.9%
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
12/18 update: It was a quiet expiration Friday. CSX bounced from its rising 20-dma again but failed to breakout from this two-week consolidation sideways. This is starting to look like a bull-flag consolidation pattern. Depending on your risk tolerance you could wait for the breakout or wait to buy the next dip near $63.00-62.00. I would suggest, if starting new positions, that you start small.

- Current Positions - (We only have a small position open)

Buy the 2011 January $65 calls (CSX1122A65) Entry @ $1.75

- or -

Buy the 2011 February $65 calls (CSX1119B65) Entry @ $2.49

12/13: CSX opened at $64.39
12/11: New Entry Point Strategy. Buy half now.
12/11: New targets: 67.00, 69.50
12/02: New trigger @ 62.50.
12/01: New trigger @ 62.25, New stop @ 59.90, New targets.

Chart:

Entry on December 13th at $64.39
Earnings Date 01/18/11 (unconfirmed)
Average Daily Volume = 5.9 million
Listed on November 23rd, 2010


CenturyLink, Inc. - CTL - close: 45.13 change: -0.31

Stop Loss: 43.75
Target(s): 44.90, 47.25
Current Option Gain/Loss: +325.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
12/18 update: CTL continues to see a very normal correction after its mid-December gains. The stock seems to have found some short-term support near $45.00 but the $44.00 level should offer stronger support. If you're looking for new positions I would be tempted to buy calls on another dip or bounce from the $44 area. We have a stop loss at $43.75. Our final target to exit is $47.25.

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.

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

12/14: New stop loss @ 43.75
12/13: First Target Hit @ $44.90, option @ $0.85 (+325%)
12/01: Adjusted secondary target to $49.00

Chart:

Entry on November 29th at $42.55
Earnings Date 02/22/11
Average Daily Volume = 3.0 million
Listed on November 27th, 2010


Express Scripts - ESRX - close: 54.91 change: +0.30

Stop Loss: 51.25
Target(s): 53.95, 58.50
Current Option Gain/Loss: +50.0%
Time Frame: 5 to 6 weeks
New Positions: see below

Comments:
12/18 update: ESRX has spent most of the last two weeks in the $54-55 zone. After closing near the $55 strike price on expiration Friday the stock looks sufficiently rested for another leg higher. ESRX did manage to tag new all-time highs intraday at $55.18. If you're looking for new positions I would be tempted to buy calls (small positions only) on a move over $55.20. Please note that I am moving our final exit target from $57.25 to $58.50.

FYI: The point & figure chart for ESRX is forecasting a very bullish, long-term target of $80.

We currently only have half a position open.

Current Position:
Long the 2011 January $52.50 calls (ESRX1122A52.5) Entry @ $2.10

12/18: Adjusted final exit target to $58.50
12/16: New stop loss @ 51.25
12/07: Exit the December calls. option @ $2.01 (+64.7%)
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


Fastenal Co. - FAST - close: 59.54 change: +0.36

Stop Loss: 53.75
Target(s): 59.75, 62.50
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
12/18 update: FAST drifted higher but failed to breakout past round-number resistance (and strike price) at $60.00. Shares remain very short-term overbought given the December rally from $54. We are still waiting for a correction and want to buy calls on a dip at $56.00. Conservative traders could wait for a dip closer to $55 or $54 before launching positions.

FYI: FAST announced a special, one-time cash dividend of 42-cents on November 18th and all of the option strikes have been adjusted for this 42-cent dividend.

Trigger @ 56.00

Suggested Positions:
Buy the 2011 January $54.58 calls (FAST1122A54.58)

- or -

Buy the 2011 February $59.58 calls (FAST1119B59.58)

Chart:

Entry on December xxth at $ xx.xx
Earnings Date 01/19/11 (unconfirmed)
Average Daily Volume = 880 thousand
Listed on December 8th, 2010


FedEx Corp. - FDX - close: 93.07 change: -1.15

Stop Loss: 90.90
Target(s): 96.75, 99.75
Current Option Gain/Loss: -31.2% and -9.7%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/18 update: The lack of follow through on Thursday's rally is a little bit disappointing but not super surprising. Shares of FDX continues to consolidate sideways inside the bull-flag pattern. The stock opened at $94.23 and then faded toward its 20-dma. One Wall Street firm raised their price target to $105. Another raised their target to $120. Coincidentally the P&F chart is forecasting a $119 target.

On Thursday night I suggested we open calls positions but only use small positions to limit our risk. I would still consider (small) positions now. My preferred entry point would be a dip or bounce near $90 but FDX may not provide one this year. Our first target to take profits is $96.75. Our second target is $99.75.

- Suggested Positions (only small positions so far) -

Buy the 2011 January $100 call (FDX1122A100) Entry @ $0.80

- or

Buy the 2011 April $100 call (FDX1116D100) Entry @ $2.96

12/17: FDX opens at $94.23 - our entry point.
12/16: Adjusted Entry - initiate small positions now (@ Friday's open)

Chart:

Entry on December 17th at $94.23
Earnings Date 12/16/10 (confirmed)
Average Daily Volume = 2.1 million
Listed on November 29th, 2010


Goldman Sachs - GS - close: 164.04 change: -0.42

Stop Loss: 159.75
Target(s): 171.00, 179.50
Current Option Gain/Loss: - 9.4% and - 2.2%
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
12/18 update: I am surprised at the relative weakness in GS on Friday. Most of the financial sector trended higher. Shares of GS opened lower at $163.92 and settled with a very minor loss. Overall I don't see any changes from my prior comments. On Thursday night I suggested readers open small positions instead of waiting for a dip toward $163 or lower. Shares happened to trade near $163 anyway. If the market happens to reverse lower then GS should find some support near $162 and $160. However, the banking stocks actually look poised to bounce. I would still consider small bullish positions at current levels. Our first target is $171.00. Our second, longer-term target is $179.50.
FYI: The Point & Figure chart for GS is forecasting a very bulilsh $224 long-term target.

- Suggested Positions (only small positions so far) -

Buy the 2011 January $170 calls (GS1122A170) Entry @ $2.75

- or -

Buy the 2011 April $175 calls (GS1116D175) Entry @ $5.27

12/17: GS opened at $163.92
12/16: Adjusted Entry - initiate small positions now (@ Friday's open)

Chart:

Entry on December 17th at $163.92
Earnings Date 01/18/11 (unconfirmed)
Average Daily Volume = 7.2 million
Listed on December 2nd, 2010


International Business Machines - IBM - close: 145.00 change: +0.45

Stop Loss: 142.99
Target(s): 149.90, 157.50
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
12/18 update: Friday was another quiet day for IBM. Shares hovered sideways and closed right on the $145.00 strike price. You could say IBM was "pinned" to $145.00 for expiration. Now that December expiration is over IBM should be free to move and I'm expecting a breakout higher. I'm suggesting a trigger to buy calls at $146.75. FYI: The Point & Figure chart on IBM is forecasting a long-term target of $196.

Breakout Trigger @ $146.75

- Suggested Positions -

Buy the 2011 January $150 calls (IBM1122A150)

- or -

Buy the 2011 April $155 calls (IBM1116D155)

Chart:

Entry on December xxth at $ xx.xx
Earnings Date 01/18/11 (unconfirmed)
Average Daily Volume = 4.7 million
Listed on December 14th, 2010


Juniper Networks - JNPR - close: 36.49 change: -0.21

Stop Loss: 34.90
Target(s): 39.75
Current Option Gain/Loss: -16.6% and -12.0%
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
12/18 update: JNPR did not see a lot of action on Friday. Shares gapped open at $36.91 only to reverse and shares closed down -0.5%. On Thursday I suggested readers go ahead and start small bullish positions at current levels instead of waiting for a dip back toward $35.00. I would still consider small positions today although if you're patient we might get a better entry point this coming week. Our first target is $39.75.

- Suggested Positions (only small positions so far) -

Buy the 2011 January $38.00 calls (JNPR1122A38) Entry @ $0.78

- or -

Buy the 2011 April $40.00 calls (JNPR1116D40) Entry @ $1.50
12/17: JNPR opens at $36.91
12/16: Adjusted Entry - initiate small positions now (@ Friday's open)

Chart:

Entry on December 17th at $36.91
Earnings Date 01/25/11 (unconfirmed)
Average Daily Volume = 5.5 million
Listed on December 11th, 2010


Lockheed Martin Corp. - LMT - close: 70.07 change: -0.30

Stop Loss: 67.95
Target(s): 73.25
Current Option Gain/Loss: -17.1% and -20.0%
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
12/18 update: LMT opened at $70.28 and dipped toward its 30-dma before paring its losses. I would still consider new bullish positions in the $69.00-70.50 zone. The stock is in the process of breaking out from a five-week consolidation range. We'll use a stop loss at $67.95. More conservative traders might be able to get away with a stop closer to $69.00. Our exit target is $73.25. Readers may want to keep their position size small to limit their risk.

- Suggested Positions -

Buy the 2011 January $70.00 calls (LMT1122A70) Entry @ $1.75

- or -

Buy the 2011 March $75.00 calls (LMT1119C75) Entry @ $1.00

Chart:

Entry on December 17th at $70.28
Earnings Date 01/27/11 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on December 16th, 2010


Nike Inc. - NKE - close: 90.05 change: +0.82

Stop Loss: 87.40
Target(s): 89.50, 92.50
Current Option Gain/Loss: +108.6%
Time Frame: 4 to 6 weeks
New Positions: no

Comments:
12/18 update: NKE continues to show relative strength. The stock climbed toward $90 and then hovered there at this strike price for December's expiration. The company is due to report earnings on Tuesday, Dec. 21st after the closing bell. Shares are trading at all-time highs so the risk of some post-earnings profit taking is very real. I am suggesting that we exit positions on Tuesday at the closing bell to avoid holding over the announcement. With just two days left we will raise our stop loss to $87.40. If by some stroke of luck that NKE spikes higher in the next two days we will lower our final exit target to $92.50.

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

12/18/10 New stop loss @ $87.40, New exit target @ 92.50
12/16/10 New stop loss $85.75
12/13/10 Target Hit @ $89.64 (gap higher), option @ $5.51 (+98.2%)
12/13/10 New stop loss $83.90
12/11/10 New stop loss $83.49
12/07/10 Exit the December calls, option @ $2.25 (+95.6%)
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


Oceaneering International - OII - close: 74.12 change: +0.32

Stop Loss: 67.75
Target(s): 74.80, 79.75
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
12/18 update: I remain bullish on the oil services sector but neither the OSX oil services index or shares of OII have been moving much. Looking at OII it seems that traders have been selling into strength. The stock is developing a short-term trend of lower highs. Friday is a new two-year closing high I remain somewhat cautious. We will keep our trigger at $70.25 to buy the dip. However, I am leaning more towards a breakout entry point higher. If OII can close over $75.00 we will reconsider our entry point strategy.

Trigger to buy @ $70.25

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

- or -

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

Chart:

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


Transocean Ltd. - RIG - close: 69.34 change: +0.03

Stop Loss: 66.25
Target(s): 72.50, 78.25
Current Option Gain/Loss: -28.8% and -17.2%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
12/18 update: Hmm... the lack of strength in RIG on Friday is somewhat concerning. Investors may be feeling cautious after a U.S. judge ordered RIG to turn over its safety records for the Deepwater Horizon oil rig that exploded and sank in the Gulf of Mexico this past April. This is the rig that was under contract by BP and started the Gulf oil spill. Legally RIG's liability seems pretty limited given its contracts with BP but the U.S. wants to examine the safety records to see if what happened on the Horizon is an isolated event or a system-wide problem. Personally, I'm still bullish on RIG and would use this dip this past week as an entry point but cautious traders could decide to keep their position size limited. I've got our stop loss at $66.25. You could raise yours closer to the 50-dma currently at $67.24. Our final target is $78.25.

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

- Second Position -
Long the 2011 February $75.00 calls (RIG1119B75) Entry @ $1.80

12/17/10 Entry on Feb. calls @ $1.80
12/16/10 New Entry Point (buy February calls) - buy the dip.
12/11/10 New target 78.25, new stop loss $66.25
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: 91.18 change: -1.11

Stop Loss: 89.75
Target(s): 96.25, 99.75
Current Option Gain/Loss: + 0.0% and +0.0%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/18 update: UNP dipped to its rising 40-dma again and once again traders bought the dip but the rebound wasn't very convincing. On Thursday I suggested we open new positions on the bounce but there wasn't any follow through. I do think we are at risk of getting stopped out if the market sees any significant sell-off. Cautious traders may want to wait for UNP to break the short-term trend of lower highs before considering new bullish positions (look for a move over $92.25).

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

Second Position
Buy the 2011 February $95 calls (UNP1119B95) Entry @ $2.33

12/17/10: Entry on Feb. calls @ $2.33
12/16/10: New Entry point: buy February calls
12/16/10: New stop loss @ 89.75

Chart:

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


United Parcel Service - UPS - close: 73.06 change: -0.70

Stop Loss: 66.85
Target(s): 74.75, 78.50
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
12/18 update: There was no follow through on the rally from Thursday. We are still waiting for a dip in UPS. For the moment we'll leave our trigger at $70.25 but I'm looking at raising our buy-the-dip trigger toward $72.25.

Trigger @ 70.25

Suggested Position:
Buy the 2011 January $70.00 call (UPS1122A70)

- or -

Buy the 2011 April $75.00 call (UPS1116D75)

Chart:

Entry on December xxth at $ xx.xx
Earnings Date 02/01/10 (unconfirmed)
Average Daily Volume = 3.9 million
Listed on December 6th, 2010


United Technology Corp. - UTX - close: 78.80 change: -0.22

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

Comments:
12/18 update: Currently we have a buy the dip entry point at $77.10 on UTX. Aggressive traders may want to consider a breakout trigger to buy calls above $79.50 or the $80.00 mark. Look for support near $76.00 and its 50-dma.
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)

- or -

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

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


Vulcan Materials Co. - VMC - close: 46.06 change: -1.27

Stop Loss: 39.95
Target(s): 47.75
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
12/18 update: VMC surged to new six-month highs this past week. Yet at the same time the stock appears to have formed a short-term top. Currently we're expecting a correction. Right now our trigger is to buy a dip at $43.75 but readers may want to bump that to above the $44.00 level and its simple 200-dma.

Trigger @ $43.75

Suggested Position: Buy the 2011 January $45 calls (VMC1122A45)

- or -

Buy the 2011 February $45 calls (VMC1119B45)

Chart:

Entry on December xxth at $ xx.xx
Earnings Date 02/07/11 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on December 13th, 2010


Cimarex Energy Co. - XEC - close: 88.22 change: -0.18

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:
12/18 update: XEC spiked to a new all-time high of $88.49 on Friday morning but failed to hold these gains. While I'm bullish on oil service stocks we want to be patient when it comes to new positions. Currently our buy the dip entry point is at $84.00 but we might want to adjust that higher. Shares found support near $85.00 last week. Wait to see if XEC bounces at $85.00 again before we re-evaluate our entry point strategy.

Trigger @ 84.00

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

- or - Buy the 2011

Chart:

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


PUT Play Updates

Expedia Inc. - EXPE - close: 26.83 change: +0.85

Stop Loss: 27.75
Target(s): 25.10, 24.25
Current Option Gain/Loss: -16.6%
Time Frame: 2 to 3 weeks
New Positions: No

Comments:
12/18 update: Warning! EXPE was showing way too much relative strength on Friday. The stock broke out above its 100-dma again. While there is overhead resistance at the 50-dma and the $27.60 level I am suggesting that more conservative traders go ahead and exit now. We do not want to open new bearish positions.

Current Position: Buy the 2011 January $25 Put (EXPE1122M25) Entry @ $0.60

Chart:

Entry on December 8th at $26.88
Earnings Date 02/10/11 (unconfirmed)
Average Daily Volume = 2.5 million
Listed on December 7th, 2010


CLOSED BULLISH PLAYS

Sherwin-Williams Co. - SHW - close: 82.02 change: +0.05

Stop Loss: 74.85
Target(s): 79.90, 84.00
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
12/18 update: Sadly I think we missed the bullish entry point in SHW. The stock looks way too overbought to buy calls but given its relative strength I don't want to buy puts either. I'm removing SHW as a candidate but will keep it on my watch list. Broken resistance near $80 and the $78-77 zone could offer some support. Our trade never opened.

Chart:

Entry on December xxth at $ xx.xx
Earnings Date 01/26/11 (unconfirmed)
Average Daily Volume = 675 thousand
Listed on December 9th, 2010