Option Investor
Newsletter

Daily Newsletter, Wednesday, 1/5/2011

Table of Contents

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

Market Wrap

Stock and Commodity Markets Have Their Turn Signals On But Waiting for Traffic

by Keene Little

Click here to email Keene Little
Market Stats

Today had some bad news/good news to deal with and good news won the day. While today's trading volume was a little less than yesterday's selling it was respectable. The bulls are doing an excellent job thwarting the bear's attempt to take over the market. There are a couple of indexes showing their intent to turn but so far traffic is not allowing them to make the turn. The caution to the bears is to wait for the right opportunity and don't cross in front of traffic. The bulls can still stampede you.

Overnight futures got hit with selling in Europe over more concerns about the sovereign debt issues. The European indexes recovered in their afternoon sessions once the U.S. markets started rallying on some favorable economic news. The U.S. markets gapped down at the start but did an immediate recovery and went on to rally to new highs (DOW, SPX and NDX but not many of the other indexes, including the NYSE and Wilshire 5000).

But has been the way of this market for the last week or two, rallies are getting sold into (lift the market, sell into, rinse and repeat) as more stock is distributed from fund managers to the late-to-the-party Mom and Pop retail crowd. The good news we're hearing about the economy convinces many that everything is getting better (and it is, for now) and that it's time to get back in the market. We hear every financial firm's pundits declaring we're headed for the moon this year and it gets the bullish juices flowing. Meanwhile the distribution of stocks continues by the same firms declaring we're heading for the moon. Grr...

Please make note that tops in stock market rallies occur on great economic news just as bottoms occur on the worst economic news. Don't fall into the trap believing that the two are always in synch.

But this morning's economic reports were good and it got the stock market rallying in the morning and into the afternoon. The first report out was the Challenger Job Cuts and employers announced plans in December to eliminate 32K positions for December, which was down -29% from December 2009. It was also a 34% decline from November. For all of 2010 employers announced plans to eliminate about 530K positions, closing out the month and year with the lowest number of job eliminations since 2000.

The ADP Employment report, out at 8:15 this morning, gave us a very nice positive surprise, showing the private-sector employment increased by 297K, with the service sector getting the bulk of that (270K). This makes for the largest monthly increase on record and while much of it (most?) may have been due to holiday temporary hiring, which will be reversed in January, it's still an outstanding report. The only surprise was why the stock market didn't rally even more, especially if the belief is that this report portends good things for the nonfarm payroll report on Friday. The nonfarm payrolls report includes government hiring/firing and current estimates are for a gain of 143K and a steady unemployment rate of 9.8%.

The positive ADP report continues a string of improvements since September's addition of 29K jobs. We've since seen October adding 79K, November adding 92K and then December's addition of 297K. No complaints there.

According to the ADP report, the manufacturing sector added 27K jobs, the largest increase since February 2006 and that's very positive. I'd sure like to see the unemployment rate start coming down instead of increasing. Whether that would have a positive effect on the stock market is debatable (there are many previous cases of the bear market returning in the face of improving economic conditions) it would be nice to hear about more people getting off unemployment.

The next report was the ISM Services report which was also positive, coming it at 57.1 for December, up from 55 in November and better than expectations. There were parts of the report showing some concerns (non-manufacturing employment) but overall it continued to show growth rather than contraction. Again, with all of the positive economic reports I was a little surprised we didn't see a stronger rally effort. Is it possible the market might be a little tired? It has run a marathon, or more like a triathlon, since July and I think it could use a rest.

Tonight I want to start with the big index, the Wilshire 5000. While it could be said the smaller big cap indexes might be more easily manipulated (futures, ETFs, index options) it's a little harder to manipulate the DWC without buying all 5000 stocks. So we'll see what this index is telling us. The weekly chart below shows price is up against potential resistance near 13500, which is price-level resistance based on price highs and lows going back to 2000, 2006 and 2008. It has also been pushing up underneath a trend line along the highs since the end of July. As noted on the chart, it's interesting that the 5-wave move up from July (indicating we should be looking for an end to the rally rather than an extension of it) has formed a rising wedge pattern, the same as it did for the 1st rally leg from March 2009. It's a fractal and we'll likely see a quick breakdown from it similar to what we saw from the April high (another flash crash perhaps?).

Wilshire 5000 index, DWC, Weekly chart

The daily chart below shows the leg up from July and the 5-wave count. The 5th wave of the rally from July would equal the 1st wave at 13557.60, the most common relationship between these two waves. That projection crosses the top trend line tomorrow so a quick pop higher on Thursday would do a perfect job finishing off the rally. At least that's the setup for a reversal but as we well know, there have been more than a few previous bearish setups that simply morphed into another rally leg. All I can do is show you the setups and watch for confirmation from there (with a break below 13265, which is last Friday's low). Notice too that the move up from November is another smaller rising wedge. A rising wedge to finish a rising wedge? Look out below if it's the correct pattern since the break is likely to happen fast (a retracement of the rally from November faster than the time the rally took).

Wilshire 5000 index, DWC, Daily chart

Next, because the small caps might be giving us a heads up (the first turn signal) I want to review this index. The parallel up-channel on the weekly chart is a bit unorthodox because it doesn't catch all the highs that poke out the top of it but the mid line of the channel shows it was in play and therefore the top could be a good guide for price action (channels show the "rhythm" of the market). The fact that the top of the channel is at previous price-level resistance near 800 could also be important. A break of the uptrend line from August near 778 would be a signal that the leg up from August has completed.

Russell-2000, RUT, Weekly chart

The leg up from August is shown more clearly on the daily chart below and price action has formed another rising wedge within a larger rising wedge. The bottom of the smaller wedge is the uptrend line from November and it was broken yesterday but price climbed back above it today so there's still hope for the bulls. A break below 778, near yesterday's low and the uptrend line from August, would be a much more significant breakdown. Back above Monday's high near 801 would be bullish (not sure for how much more but it clearly would not be bearish).

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 800
- bearish below 778

Since the DOW is watched by so many, let's drill down from a weekly chart to the 15-min chart to see what the setup looks like and why I think we're looking for a top near the current level (coinciding with what I see in the charts above). There is a resistance band of about 11650-11850 based on previous price support/resistance going back to 2006 and 2008. We have a 5-wave move up from July and therefore should be looking for a top rather than an expectation for a further rally. As labeled on the chart, the coming high could be the completion of an A-B-C bounce off the 2009 low which calls for at least a very deep retracement of the 2009-2010 rally. But first things first, we need to figure out where the current rally is headed or where it will make a turn.

Dow Industrials, INDU, Weekly chart

The daily chart is a bit messy but I'm trying to show the trend lines, as well as the resistance band, that should show us where price may stall out. We're there but as shown with the dashed line there remains the possibility for a final fling up to 11860 or so. It's a little bit of a stretch to get up there but a final little blow-off move could do it. Maybe after Friday's jobs report? It takes a break below 11530 on the daily chart to declare we've seen the high.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 11,860
- bearish below 11,530

The small parallel up-channel shown on the daily chart above, in December, is shown more clearly on the 120-min chart below. It has done a good job catching the highs and lows of the move, including the high on Monday and today. Will it break up or down? The answer to that question will tell us what direction to trade. The wave count says we might get a small pop higher tomorrow morning but that we should be looking for the end of the rally. The end will not be confirmed until it breaks below 11635 and the up-channel. It may be shallow but it's still an uptrend so know what you're dealing with if you want to try the short side from here--it's a good play since your stop can be kept very close (just above the top of the channel).

Dow Industrials, INDU, 120-min chart

Now we'll look at the move up from the end of December, which should be the 5th of the 5th wave as labeled above. It too needs to be a 5-wave move and while it's a little ugly (with a much larger 4th wave than 2nd wave) no EW rules have been violated (the 4th can't overlap the 1st). The very last 5th of the 5th of the 5th is the move up from Tuesday's low and as shown on the chart we'll ideally get one more leg up to finish off the rally. Upside targets are 11755-11779 as shown on the chart. The top of the channel in the chart above is near 11750 tomorrow morning. A break below 11700 would be your first heads up that the high got put in.

Dow Industrials, INDU, 15-min chart

On Monday SPX stopped just shy of the 127% extension of the April-July decline, a common Fib reversal level, at 1276.62. Today it poked marginally above it and essentially closed at it. There is upside potential to about 1292 to hit the price projection for the 5th wave of the rally from July where it would equal the 1st wave, maybe even 1300 to tag the trend line along the highs from August, so it remains bullish until it breaks below last Friday's low near 1254 (with a bearish heads up if it breaks below 1262.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1277 to 1292
- bearish below 1254

NDX has also returned to a price level that could be resistance to any further advances--the 162% extension of the November decline at 2271.16. Only slightly higher, at 2281.82, is the 162% extension of the April-July decline. That's very close Fib correlation between the two moves since it's the extension of the last decline before each up leg--the April-July decline leading to what could be the last leg of the rally from March and the November decline leading to the last leg (5th wave) of the rally from July, both coinciding near the same level. It might be nothing, or it could be very important, especially if it turns back down here. Bullish above 2282, bearish below 2237.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2282
- bearish below 2237

Speaking of tight Fib correlation, I've been watching the BKX to see if price would rally up to the 153 area where there are multiple price projections based on the wave relationships of the move up from August and November. It has created a potential resistance zone between 152.96 and 153.65. Today's high was 153.38. It has also tagged a trend line along the highs from November and December 22nd (not sure yet whether this trend line is important). With a wave count that can now be called complete it makes for a very good setup for a reversal. Now all the bears have to do is pounce on it and take advantage of it. If the A-B-C pattern is correct for the rally off the August low, it will be completely retraced.

Banking index, BIX, Daily chart

Following up on the debt concerns in Europe that I mentioned at the beginning of tonight's report, there is increased worry about how the governments are going to be able to sell more debt, including the ECB (European Central Bank). Governments have been able to slow down the process of dealing with the debt crisis but they have not been able to make it go away. Eventually the can that keeps getting kicked down the street will have to be picked up and thrown away. The issuance of new, or different, debt is still debt and it needs to be funded through the sale of bonds, just as the U.S. Treasury must fund the government through the sale of Treasury bonds (which the Fed is currently buying but even that will have a limit).

The concern therefore is the amount of debt that must be funded and eventually there will not be enough buyers of all the debt. That's when you will see failed auctions, which then results in a collapse in bond prices and yields climb rapidly higher (to attract buyers who want to be compensated for their risk with higher yields). And of course higher yields means more difficulty for countries to pay off their existing debt, never mind the additional debt that continues to accumulate. This second crisis in banking will be much more difficult to solve because at that time the market will not view the central banks' efforts to create more money to sell more debt as the solution but in fact the problem.

Europe is looking at refinancing about 400B euros ($500B) of its debt within the first six months of this year. In addition it will need to replace another 500B euros during the same period. And then it must replace/refinance hundreds of billions of euros of mortgage-backed securities. Italy and Spain alone could require another 400B euros this spring. It's simply an overwhelming amount of debt that must be funded and the concern is that there will be chaos in the credit markets soon. Most economists say not to worry but that's what they said about the coming crisis due to the subprime slime that was spreading in early 2007. In its latest financial stability review the ECB warned that there is a risk of "increasing competition for funding". Ya think? The problems have not gone away with all the credit/debt issues we've been facing--the can has only been kicked down the road. This goes for the U.S. as well.

Bonds sold off today and one reason is because many are very concerned about the coming credit crisis, which will result in a collapse of bond prices. Many fund managers are likely to begin shedding bonds from their holdings in an attempt to get out ahead of the pack. This could help the stock and commodity markets if money rotates out of bonds and into stocks. In fact that's been one hope of the Fed--they want to see the stock market rise so that the "wealth effect" will get more people freely spending their money and helping the economy. Their other effort of course is to hold down yields which requires buying, not selling, of bonds. Needless to say, the Fed wants it all and I'm thinking they're going to lose it all instead.

Because of the potential problems in the debt department Credit Suisse analysts have pointed out the fact that European banks have seen deterioration in the 2nd half of 2010. This is putting even more pressure on them to sell more bonds in the 1st half of 2011, adding to the supply of bonds coming to the market (competing with governments). Credit Suisse feels it's going to become increasingly expensive for banks to seek additional funding and for this reason they believe large retail banks in particular are going to have a rough time.

And that brings me to a recommendation I posted on the Market Monitor last night. I was looking through the bank indexes and individual bank stocks and I noticed a particularly interesting setup on Bank of America (BAC) that I felt would be worth watching today. It has rallied up into resistance and could be ready for a reversal, which provides for a low-risk short play. I don't get much into individual stock plays but every once in a while I see one that's worth passing along as an idea to try.

BAC has resistance in the 14.33-14.55 area, based on a price projection at 14.33 where the 2nd leg of the rally from October is twice the 1st leg, a 38% retracement of the decline from September 2008, a downtrend line from September 2008 and the 50-week moving average at 14.55. I suggested a put play with April 14 puts (closed today at .86 x .87) for a downside target of 12.75 (the November high) and a stop at 14.60. For those who tried the play today you were unfortunately stopped out to the penny with a high today of 14.60. Care to try it again? Clearly the stock must decline tomorrow otherwise the setup is busted so keep an eye on how it's doing in the morning. With a profit objective of +1.75 on the underlying, a stop at 14.70 (above that the setup would clearly be busted) you'd be risking maybe 0.30 to make 1.75 which is much better than a 3:1 reward:risk ratio, a requirement in my trading rules. Anyway, just an idea to consider.

Bank of America, BAC, Daily chart

Another index showing the potential to be finishing its rally is the broker index. It has a 5-wave move up from the end of August, which fits as the conclusion of an A-B-C bounce off the July low. The c-wave for this move is 162% of the a-wave (common relationship) at 123.90. It's there. The top of the parallel up-channel for the c-wave is currently near 125. So the pieces fit for a top here or just slightly higher and a break below 121 would confirm the high is in--wait for it if you're tired of picking tops that aren't tops.

Broker index, XBD, Daily chart

On the TRAN's chart below I've labeled the wave count that I think fits price action the best and it looks good for a finish at Monday's high when it tagged the top of its rising wedge pattern from August (common pattern, eh?). After doing that it broke the bottom of the wedge yesterday but recovered back inside the wedge today. It was either a head-fake break on Tuesday or just a high bounce today. Another break of Tuesday's low near 5097 would confirm the rally is toast, with better confirmation by breaking below 5018. The TRAN and RUT look very similar.

Transportation Index, TRAN, Daily chart

I thought the pullback in the dollar would get down to about 78.45 for two equal legs down in its pullback but the 50-dma near 79 held it up and now the strong rally from last Friday indicates to me that the pullback has finished and the dollar has started its next rally leg. The coming rally should be strong--lots of dollar bears will be covering their short positions and lots of carry trades will get unwound. Look for more pressure on commodities (and the stock market).

U.S. Dollar contract, DX, Daily chart

As part of the "all-the-same" market, where most asset classes trade in tandem, we could see commodities lead us lower and when they move they tend to move fast. Yesterday saw the worst decline in 6 months so it should be an attention getter at the moment. At least keep the commodity index on your radar.

The commodities index, CRB, has so far failed just shy of the upside target area I've been watching--at 337-341--since Monday's high was 335.32. But it was a slight poke above the top of its parallel up-channel from February 2009 so that looks to be having more of an influence on price action. The current high has left a bearish divergence on RSI which has curled over. If the dollar continues to rally I expect this index to start down and it could be a fast decline.

Commodities index, CRB, Weekly chart

Gold also failed to make it up to a target that I thought it would reach--in the 1440-1450 area. But Monday's high of 1424.40 looks like the high since the break of the bottom of its wedge pattern has been broken with a 5-wave move down from Monday. The 5-wave move says we have a trend change so until proven otherwise (with a new high) it's time to short the bounces in gold, which it should get tomorrow.

Gold continuous contract, GC, Daily chart

Oil also has a clean 5-wave move down from Monday and that tells us a new downtrend has started. How far down is of course the big question and we'll just have to take it one leg at a time but for now look for a bounce to then roll over to new lows. The first real test will be the uptrend line from February 2009, currently near 85 (log price scale, whereas it's closer to its 200-dma when using the arithmetic price scale).

Oil continuous contract, CL, Daily chart

Tomorrow will be a quiet day for economic reports. If the unemployment claims number comes in good (or really bad), supporting (or not supporting) the expected jobs numbers on Friday it could move the market otherwise I expect to see no effect. Friday is the big day with all the jobs reports. The way the charts are set up at the moment I predict a disappointing reaction to the reports. Either that or we'll blow through resistance and scream to the upside in a blow-off move (I don't see it happening but hey, I'm been known to be wrong before, wink). Of course if it does neither then the market will go sideways. Now that I've covered my bases I can't be wrong.

Economic reports, summary and Key Trading Levels

Summarizing tonight's charts, there's some solid agreement between the indexes and sectors that's showing us a top either has been made (RUT, TRAN) or is about to be made this week. Unless the RUT and TRAN blow out the top tomorrow or Friday, those two are the ones who have turned their blinkers on, signaling their intent to turn across traffic. The others look like they could be a day, or just hours, away from following.

That's the setup so we'll see how the market behaves tomorrow and especially Friday morning. It will certainly be interesting to see if the new moon on Tuesday will mark an important high. Not all new moons have been associated with market highs but all important highs have occurred on or near new moons.

SPX daily chart with MPTS

The ISEE call/put ratio closed over 200 today (205) which is simply a warning that too many are speculating about the long side (anything over 150 is excessive call buying and over 200 is frothy). The market pundits are doing a very good job getting the public believing the stock market will continue its rally and who knows they could be right. But that's not what I'm seeing in the charts, with the loss of momentum while seeing excessive bullish sentiment but as we all know, waning momentum and excessive bullish sentiment can both continue a lot longer than bears can survive turning in front of traffic. It's simply a caution flag on the race track.

Keep in mind though that an uptrend is still firmly intact. My attempt to call a top is just that--there are very few indicators (other than the RUT and TRAN) that are telling us the trend could be over. I'm looking at probable resistance levels coinciding with possible EW count conclusions to set up a reversal. The market will decide whether it wants to turn or not. The key levels to the downside are key (get it?) to the success of short plays. Without a break of those levels there is no confirmed reversal which means any short plays entered prior to confirmation must be strictly managed--short a rollover or against resistance and stop out if the rally continues to push through resistance. Then set up for the next level of resistance and we'll try it again. I don't like the risk:reward to the upside from here so it's either flat or trying the short side. Just be sure you understand the risk and manage it appropriately.

Good luck and I'll be back with you next Wednesday.

Key Levels for SPX:
- bullish above 1277 to 1292
- bearish below 1254

Key Levels for DOW:
- bullish above 11,860
- bearish below 11,530

Key Levels for NDX:
- bullish above 2282
- bearish below 2237

Key Levels for RUT:
- bullish above 800
- bearish below 778

Keene H. Little, CMT

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New Option Plays

Industrials and Technology

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Caterpillar - CAT - close: 94.52 change: +0.81

Stop Loss: 92.25
Target(s): 99.80
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
Investors love the industrial sector as they look ahead with optimistic eyes for 2011. CAT is currently trading near all-time highs under resistance at the $95.00 level. If shares can breakout past $95.00 it should be a quick run toward round-number, psychological resistance at $100.00.

I am suggesting a trigger to buy calls at $95.15. If triggered our exit target is $99.80. More aggressive traders could try the January calls instead.
The Point & Figure chart for CAT is bullish with a $118 target.

Trigger @ 95.15

- Suggested Positions -

Buy the 2011 February $100 calls (CAT1119B100) current ask $1.31

Annotated Chart:

Entry on January xxth at $ xx.xx
Earnings Date 01/27/11 (unconfirmed)
Average Daily Volume = 4.2 million
Listed on January 5th, 2010


Research In Motion - RIMM - close: 61.92 change: +2.82

Stop Loss: 57.49
Target(s): 64.75, 67.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
RIMM was a strong outperformer today with a bullish breakout over resistance at the $60.00 mark. The stock has been consolidating the last few days near its rising 50-dma. Speaking of the 50-dma, its cross up and over above the 200-dma is normally a bullish signal. I don't want to chase today's move in RIMM. Wait for a dip. I am suggesting a trigger at $61.00. We'll use a stop loss at $57.49. More conservative traders could use a stop closer to $59.00 instead. There is some short-term resistance at $64.00 but I'm setting our first target at $64.75.

Trigger @61.00

- Suggested Positions -

Buy the 2011 February $62.50 calls (RIMM1119B62.5) current ask $2.87

- or -

Buy the 2011 March $65.00 calls (RIMM1119C65) current as $2.69

Annotated Chart:

Entry on January xxth at $ xx.xx
Earnings Date 03/31/11 (unconfirmed)
Average Daily Volume = 9.9 million
Listed on January 5th, 2010


In Play Updates and Reviews

Another Widespread Rally

by James Brown

Click here to email James Brown

Editor's Note:

Stocks continued to rebound higher on Wednesday. Banks helped lead the way. We saw big gains in LMT and RIG. SPW hit our stop loss this morning before bouncing. I am removing CTSH and UTX from the play list.

-James

Current Portfolio:


CALL Play Updates

Amazon.com Inc. - AMZN - close: 185.01 change: +0.79

Stop Loss: 176.45
Target(s): 189.50, 199.00
Current Option Gain/Loss: +36.1%, and +19.4%
Time Frame: 4 to 6 weeks
New Positions: See below

Comments:
01/05 update: AMZN benefitted from another day of positive analyst comments. Shares rallied from short-term support near $184 and closed near its highs with a +1.3% gain. I am adjusting our first target to take profits from $189.50 to $189.90. Traders could buy calls on this bounce but consider a tighter stop loss (and aim for the $200 level).

We want to keep our position size small. AMZN can be a volatile stock. Our upside targets are $189.50 and $199.00.

- Suggested (SMALL) positions -

Long the 2011 January $190 calls (AMZN1122A190) Entry @ $2.35

- or -

Long the 2011 February $200 calls (AMZN1119B200) Entry @ $3.85

Entry on December 28th at $182.10
Earnings Date 01/27/11 (unconfirmed)
Average Daily Volume = 5.0 million
Listed on December 27th, 2010


Boeing Co. - BA - close: 67.48 change: +0.54

Stop Loss: 62.75
Target(s): 69.00, 72.25
Current Option Gain/Loss: +98.2%, and +56.1%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
01/05 update: Shares of BA were downgraded today but that didn't stop the stock from posting a gain and closing over technical resistance at its 200-dma. I am not suggesting new bullish positions at this time. Our first target to take some money off the table is $69.00. We wanted to keep our position size small to limit our risk. We should consider this a higher-risk aggressive trade. Our first target is $69.00. Our second target is $72.25.

- Suggested Positions - (small positions only!)

Long the 2011 January 67.50 calls (BA1122a67.5) Entry @ $0.58

Long the 2011 February $70.00 calls (BA1119B70) Entry @ $0.73

Entry on January 3rd at $66.15
Earnings Date 01/26/11 (unconfirmed)
Average Daily Volume = 5.3 million
Listed on December 25th, 2010


Cummins Inc. - CMI - close: 112.99 change: +1.39

Stop Loss: 108.75
Target(s): 114.50 117.50
Current Option Gain/Loss: +47.3% and +14.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
01/05 update: CMI's bounce from yesterday afternoon continued. Shares rallied to a new high. I am inching up our first profit target from $114.50 to $114.85. I'm not suggesting new positions here but aggressive traders could buy calls.

(small positions only to limit our risk)

- Suggested Positions -
Buy the 2011 January $115 calls (CMI1122A115) Entry @ $1.12

- or -

Buy the 2011 March $115 calls (CMI1119C115) Entry @ $4.73

01/04: New entry point on afternoon bounce.
01/01: Adjusted targets to $114.50, 117.50
12/27: CMI opens at $110.18
12/25: Buy calls now at current levels (small positions)
12/21: New entry point @ $110.25, New stop @ 108.75, New option strikes.

Entry on December 27th at $110.18
Earnings Date 02/02/11 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on December 11th, 2010


CSX Corp. - CSX - close: 65.89 change: +0.48

Stop Loss: 62.75
Target(s): 69.25
Current Option Gain/Loss: - 2.2% and +17.6%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
01/05 update: The rebound in CSX continues. I don't see any changes from my prior comments. Yesterday's dip near $65 was an entry point. You could chase it here. Please note I am removing the $67.0 target. We'll reduce our targets to just one at $69.25.

- 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

01/04: New stop loss @ 62.75
01/04: New entry point on afternoon bounce near $65
12/25: new stop loss @ 61.75
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.

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: 46.39 change: -0.34

Stop Loss: 43.75
Target(s): 44.90, 48.00
Current Option Gain/Loss: +675.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
01/05 update: Wednesday was another quiet day for CTL. Shares are still drifting sideways. There is no change from my prior comments. Our final target is $48.00. More aggressive traders may want to aim near the $50.00 level. Just remember we have less than three weeks left. I am not suggesting new positions at this time.

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

12/21: Adjusted final target to $48.00
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

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


Deere & Co - DE - close: 84.24 change: +1.22

Stop Loss: 78.95
Target(s): 84.50, 89.00
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
01/05 update: Hmmm.... we have been waiting for a dip toward support near $80.00. I'm starting to think if we should consider buying calls on a breakout past resistance near $85.00. Right now the $80.50 entry point is obviously much more attractive so we'll leave our trigger there for the moment. If triggered we'll use a stop loss at $78.95, just under the 50-dma.
FYI: The Point & Figure chart for DE is pretty bullish with a $100 target.

Buy-the-Dip Trigger @ 80.50

- Suggested Positions -

Buy the 2011 February $80 calls (DE1119B80)

- or -

Buy the 2011 February $85 calls (DE1119B85)

Entry on December xxth at $ xx.xx
Earnings Date 02/16/11 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on December 30th, 2010


Express Scripts - ESRX - close: 55.88 change: -0.24

Stop Loss: 51.49
Target(s): 53.95, 58.50
Current Option Gain/Loss: +66.6% and + 5.4%
Time Frame: 5 to 6 weeks
New Positions: see below

Comments:
01/05 update: ESRX is still consolidating its gains from Monday. There is no change from my prior comments. Broken resistance near $55 should offer some support. Our final exit target is $58.50 but if you're holding the February calls you might want to consider aiming for $60.

We currently only have half a position open.

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

- or -

Second Position (small position):

Long the 2011 February $55.00 calls (ESRX1119B55) current ask $2.22

12/25: new stop loss @ 51.49
12/20: Suggested new positions with Feb. 55 calls.
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%)

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: 93.87 change: +0.75

Stop Loss: 90.90
Target(s): 96.75, 99.75
Current Option Gain/Loss: -77.5% and -16.5%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
01/05 update: FDX managed to outperform the transportation index and the S&P 500 today. Yet shares are still trading under short-term resistance near the 94.25-94.50 zone. I'd rather wait for a move over $94.50 or even the $95.00 mark before considering new positions. Or you could buy calls now and just move your stop closer to the $92.00 level. If you do launch positions I would buy February or April calls.

- 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)

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: 174.00 change: +0.92

Stop Loss: 165.75
Target(s): 171.00, 179.50
Current Option Gain/Loss: +121.8% and +66.9%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
01/05 update: For the third time this month GS had its earnings estimates downgraded. Yet that didn't stop GS from closing at a new relative high. There is no change from my prior comments. The $171-170 zone should offer some short-term support. I am not suggesting new bullish positions at this time but nimble traders could look to buy an intraday bounce near the $170 level.

- 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

01/03: New stop loss @ 165.75
12/28: 1st Target Hit @ 171.00, Jan. call @ $4.75 (+72.7%), April call @ $7.35 (+39.4%)
12/22: New stop loss @ 162.95
12/17: GS opened at $163.92
12/16: Adjusted Entry - initiate small positions now (@ Friday's open)

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: 147.05 change: -0.59

Stop Loss: 142.99
Target(s): 152.50, 159.50
Current Option Gain/Loss: -13.3%, and - 8.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
01/05 update: The action in IBM today was disappointing. The market's widespread rally failed to have any influence on IBM. I didn't see any specific news behind today's weakness. Readers can still buy positions here but keep your position size small. FYI: The Point & Figure chart on IBM is forecasting a long-term target of $196.

- Suggested Positions -

Long the 2011 January $150 calls (IBM1122A150) Entry @ $1.35

- or -

Long the 2011 April $155 calls (IBM1116D155) Entry @ $2.25

01/03: New targets @ $152.50, and $159.50

Entry on December 29th at $146.75
Earnings Date 01/18/11 (unconfirmed)
Average Daily Volume = 4.7 million
Listed on December 14th, 2010


Juniper Networks - JNPR - close: 37.88 change: +0.72

Stop Loss: 34.90
Target(s): 39.75
Current Option Gain/Loss: + 1.2% and +15.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
01/05 update: Positive analyst comments helped JNPR outperform today with a +1.9% gain. The rally stalled under resistance at its highs near $38.00. I am not suggesting new bullish positions at this time. 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)

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


Kohl's Corp. - KSS - close: 53.90 change: -0.44

Stop Loss: 53.75
Target(s): 57.90, 59.95
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see trigger

Comments:
01/05 update: Wow! I'm surprised by the weakness in KSS today. You would have thought that the strongly positive ADP employment report this morning would have been good news for retailers. More jobs means more spending money in the stores by consumers. Instead KSS drifted lower.

I am suggesting a trigger to buy calls at $55.05. If triggered we'll start the play with a stop loss at $53.75. Our targets are $57.90 and $59.95.
FYI: The Point & Figure chart for KSS is bullish with a $73 target.

Trigger @ 55.05

- Suggested Positions -

Buy the 2011 February $55.00 calls (KSS1119B55)

- or -

Buy the 2011 April $57.50 calls (KSS1116D57.5)

Entry on January xxth at $ xx.xx
Earnings Date 02/24/11 (unconfirmed)
Average Daily Volume = 4.1 million
Listed on January 4th, 2010


Lockheed Martin Corp. - LMT - close: 71.92 change: +1.61

Stop Loss: 67.95
Target(s): 73.25, 74.90(or 200-dma)
Current Option Gain/Loss: +25.7% and + 5.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
01/05 update: Defense stocks participated in the widespread rally today but I couldn't see any specific news to account for LMT's outperformance. The stock surged past resistance at its 100-dma and closed with a +2.2% gain. Volume was strong on the rally as well, which is normally a healthy sign. I am not suggesting new positions at this time.

- 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

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


Millicom Intl. Cellular - MICC - close: 96.65 change: +0.55

Stop Loss: 91.75
Target(s): 99.90
Current Option Gain/Loss: +21.7% and +27.2%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
01/05 update: Wednesday was a mild day for MICC. Shares faded towrad the $96.00 level before bouncing. Gains were mild. Broken resistance near $94 should offer stronger support. No new positions at this time. Aggressive traders could aim for the 2010 highs near $102.50.

FYI: It looks like MICC must have had a special dividend because several of the options have odd strike prices ending in .40.

- Suggested Positions -

Long the 2011 January 95.40 calls (MICC1122A95.4) Entry @ $2.30

- or -

Long the 2011 April $100.00 calls (MICC1116D100) Entry @ $3.30

01/03: New stop loss @ 91.75, New target at $99.90

Entry on December 23rd at $94.23
Earnings Date 02/09/11 (unconfirmed)
Average Daily Volume = 518 thousand
Listed on December 22nd, 2010


Transocean Ltd. - RIG - close: 73.25 change: +3.60

Stop Loss: 67.85
Target(s): 72.50, 78.25
Current Option Gain/Loss: +33.8% and +41.6%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
01/05 update: Yesterday the oil service stocks were some of the worst performers. Today they are some of the best performers. RIG outperformed its peers and the broader market with a big +5% gain on healthy volume. I am raising our stop loss to $67.85. If you're looking for a bullish entry point I would wait for a dip near $71.00. Our final target is $78.25 but I'm considering an adjustment toward $79.75 instead.

- 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

01/05/11 New stop loss @ 67.85
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%)

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


Stanley Black & Decker, Inc. - SWK - close: 67.26 change: -0.55

Stop Loss: 65.75
Target(s): 69.90, 72.45
Current Option Gain/Loss: -57.1%, and -20.6%
Time Frame: 4 to 6 weeks
New Positions: Yes

Comments:
01/05 update: All right. Now I'm a little bit worried about SWK. The market sees a big rally and SWK does not participate. Readers may want to hold off on initiating new positions. Keep your position size small to limit your risk. Just because these call options look cheap do not go overboard. Repeat - small positions only. FYI: The Point & Figure chart for SWK is bullish with a $77 target.

- Suggested Positions -

Long the 2011 January $70 calls (SWK1122A70) Entry @ $0.70

- or -


Entry on January 4th at $68.15
Earnings Date 01/27/11 (confirmed)
Average Daily Volume = 1.6 million
Listed on January xxth, 2010


Union Pacific - UNP - close: 92.96 change: -0.12

Stop Loss: 89.75
Target(s): 96.25, 99.75
Current Option Gain/Loss: -40.1% and - 9.8%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
01/05 update: The underperformance in UNP today is also a little disappointing but the transports took a back seat to other sectors on Wednesday. I would still consider buying February calls here.

- 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

01/04/11: New entry point on afternoon bounce.
01/01/11: UNP is giving us another entry point.
12/21/10: UNP provides another entry point.
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

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: 72.90 change: +0.11

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:
01/05 update: We are still waiting for a dip near support at $70.00. An alternative entry point would be to wait for a breakout over resistance near $74.00. Currently, I'm suggesting a trigger to buy calls at $70.25. More aggressive traders could consider a move over $74.00 as a potential entry point. I'm considering raising our buy-the-dip trigger toward $72.25.

Trigger @ 70.25

Suggested Position:
Buy the 2011 February$70.00 call (UPS1119B70)

- or -

Buy the 2011 April $75.00 call (UPS1116D75)

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


Cimarex Energy Co. - XEC - close: 90.17 change: +1.32

Stop Loss: 84.75
Target(s): 89.90, 94.25
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
01/05 update: XEC reversed yesterday's losses and closed back above the $90.00 mark. We might want to consider buying a breakout past the $92.00 level. Currently we're waiting for a dip to buy calls at $86.50. More conservative traders could wait for a dip closer to $85.00. We want to keep our position size pretty small to limit our risk.

Trigger @ 86.50

- Suggested Positions -
Buy the 2011 January $90 calls (XEC1122A90)

- or - Buy the 2011 February $90 calls (XEC1119B90)

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: 25.43 change: +1.01

Stop Loss: 26.05
Target(s): 25.10, 23.25
Current Option Gain/Loss: - 8.3%
Time Frame: 2 to 3 weeks
New Positions: No

Comments:
01/05 update: It looks like the market's widespread rally sparked some short covering in EXPE. The stock erased almost four days of losses with today's +4% gain. More conservative traders may want to exit early now. We have a stop loss at $26.05. No new positions at this time. Our first target has already been hit. We're currently aiming for $23.25.

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

01/03/11 New stop loss @ $26.05
12/30/10 Target hit @ 25.10, option @ 0.80 (+25%)
12/30/10 new stop loss at $26.51

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

Cognizant Technology Solutions - CTSH - close: 76.19 change: +2.03

Stop Loss: 71.75
Target(s): 74.70, 79.00
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
01/05 update: I am giving up on CTSH. The stock continues to perform well but we don't want to chase it here at new highs. Shares never hit our trigger to open bullish positions. I would keep CTSH on your watch list should this stock see a correction (and it will).

(no chart, play never opened)

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


SPX Corp. - SPW - close: 71.04 change: +0.47

Stop Loss: 69.95
Target(s): 76.50, 79.75
Current Option Gain/Loss: -50.0%, and -38.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
01/05 update: Sometimes the stock market does not want to cooperate. Shares of SPW broke down under $70.00 just enough to hit $69.90. Our stop loss was at $69.95 so the play was closed before shares of SPW rebounded higher this afternoon. You might want to keep SPW on your watch list for another breakout past $72.50. NOTE: The options didn't trade much today so our exit is an estimate.

- Suggested Positions -

Long the 2011 January $75 calls (SPW1122A75) Entry @ $0.50, Exit @ $0.25 (-50%)

- or -

Long the 2011 February $75 calls (SPW1119B75) Entry @ $1.80, Exit @ $1.10 (-38.8%)
01/05 Stopped out @ 69.95. Jan. call @ 0.25 (-50%), Feb. call @ $1.10 (-38.8%)
01/04 Triggered @ 72.60

Chart:

Entry on January 4th at $72.60
Earnings Date 02/24/11 (unconfirmed)
Average Daily Volume = 346 thousand
Listed on January 1st, 2010


United Technology Corp. - UTX - close: 79.23 change: +0.11

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:
01/05 update: I am giving up on UTX as a bullish candidate. More aggressive traders may want to consider buying calls on a move over $80.00. Keep in mind that UTX could have resistance at its highs near $82.50. The stock never hit our trigger to buy calls.

(no chart, play never opened)

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