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Daily Newsletter, Saturday, 1/8/2011

Table of Contents

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

Market Wrap

Irrational Expectations

by Jim Brown

Click here to email Jim Brown

The ADP induced spike in expectations for the payroll report proved to be a downer for the market when the report failed to measure up.

Market Statistics

When the ADP report on Wednesday forecasted a gain of 297,000 jobs in December that was 2.5 times the prevailing estimates at the time for a gain of +125,000 jobs. The ADP report upset the delicate balance of analyst estimates that ranged from gains of 75,000 to 160,000. Suddenly analysts and investors alike started to become giddy with hopes the ADP report was correct and we were going to see a serious spike in employment that signaled a true acceleration in the recovery process.

Unfortunately those hopes were dashed when the Non-Farm Payroll report showed a net gain of only 103,000 jobs. Private payrolls rose +113,000 jobs but government jobs declined by -10,000. If the ADP report had not muddied the water the +113,000 private jobs compared to expectations for 125,000 would have been right inline and not a problem for the market.

The busted headline expectations depressed the market but some of the report internals were definitely bullish. The unemployment rate declined by 0.4% to 9.4% and well below estimates. That headline got a lot of play in the news and helped to soften the market decline but in reality it was a bogus statistic. The unemployment rate declined because more people joined the ranks of discouraged workers and quit searching for a job. They fell off the unemployment rolls and although unemployed they are no longer counted as part of the workforce. Good headline but a bad reason.

The job gains from the prior two months were also revised higher. October was revised up to 210,000 from 172,000 and November was revised higher to 71,000 from 39,000. That was a total gain of 70,000 jobs from the prior periods. Those kinds of upward revisions never seem to matter to the market but they do count.

Payroll Chart

The Household Employment survey showed jobs there increased by +350,000. That is a strong gain but the household numbers never seem to move the market. This is a different survey than the Payroll Report. The data in the household survey is where we get the unemployment rate. The household survey showed 260,000 people left the workforce in December. That is why the unemployment rate declined.

Over all of 2010 the economy averaged job gains of 112,000 per month in the private sector. After subtracting government job losses the average drops to 94,000 jobs gained per month. State and local governments are facing serious budget shortfalls and the result is a steady stream of job cuts.

The economy needs to create a minimum of 150,000 jobs per month just to cover the increase in workers from legal immigration and students graduating into the workforce. Job creation needs to rise to a minimum of 350,000 per month before making any material dent in the 14.5 million unemployed and 8.9 million underemployed workers. Those underemployed are working part time for economic reasons or because they can't find a full time job. We will never have full employment but just to reduce that 23.4 million total by 50% would require 60 months of job creation at a pace greater than 350,000. The economy will have to be a lot better off than it is today. Some analysts believe we will never reach that goal. They believe we have lost the momentum and the retirement and downsizing of the baby boomers will further complicate the labor problem. Others believe the retirement of the baby boomers will be an employment boom as millions of workers leave the workforce making room for the unemployed. I believe that kind of analysis is way above my pay grade. I just want to get through 2011 with a trading profit and then I will worry about 2012.

Morgan Stanley believes we will see a gain of 200,000 jobs per month for all of 2011 and unemployment will be down to 8.5% by year-end. Morgan Stanley believes there was a blip in the data for December that will be revised higher next month.

Ben Bernanke told the House Banking Committee on Friday the employment rate could remain in the 8% range through 2013. He also said employment could take 4-5 years before a full recovery. Of course that is not factoring in a recession due to energy prices in 2012 but he can't be expected to know everything.

The economic calendar for next week only has one major event and that is the Fed Beige Book due out on Wednesday. This should be positive but like we saw in the payroll report too much optimism is a bad thing.

The PPI and CPI on Thr/Fri provide the monthly update on inflation and the consumer sentiment on Friday could be volatile. We have seen some swings in that survey recently and January could show some post holiday depression thanks to the blizzard.

Economic Calendar

The economic calendar will not be the primary focus next week. Alcoa will kickoff the Q4 earnings cycle with earnings on Monday. Also reporting on Monday will be Apollo Group, homebuilder Lennar, Meade Instruments and Steak & Shake. The earnings schedule grows cold on Tue/Wed but picks up again with Intel on Thursday and JP Morgan on Friday. The following week begins the real parade of reports and I will cover that next Sunday.

Earnings for the S&P are expected to have grown +27% over 2009Q4. That is according to S&P. Thompson Reuters is a little more optimistic with a 32% growth projection. This will be the fifth consecutive quarter of increased earnings after nine strait quarters of declines. According to S&P the financials will lead with a whopping +250% increase in profits, followed by energy at +118%, materials +70%, discretionary at +63%, information technology +52% and industrials at +26%. Rounding out the bottom is healthcare +11%, telecommunications +7%, utilities +7% and consumer staples +6%.

The 27% earnings growth sounds great until you compare it to the prior three quarters. Coming out of the recession in 2010-Q1 earnings rose +92%, Q2 +51% and Q3 +37%. Note the rapid deceleration as the year progressed. This will continue to be a challenge as the comparison quarters become harder to top.

S&P said the boost in earnings came from continued cost cutting, a decent increase in revenues in the low double digits and the increase in stock buybacks. When companies buy back shares there are fewer shares outstanding and that increases the earnings per share even without an increase in the dollar value of earnings. IBM is the all time pro at buying back enough shares in a quarter to meet analyst earnings targets.

As long as the earnings are inline with estimates with at least a small beat in many cases the rally could continue another week or two but I would not expect any material upside given our overbought conditions and the rising problems in Europe.

If the first few companies to confess earnings just report inline with estimates or miss estimates slightly then our overbought conditions could return to oversold very quickly. Investors are willing to bet on their favorite horses into earnings as long as the horses around them are not pulling up lame or collapsing on the track.

The gains in some of these early reporters could present a problem. Alcoa has risen +25% since December 1st and it will take some pretty strong earnings to keep the bulls in their camp. JP Morgan is up +16%.

Senior market strategist at Lind Waldock, Jeffrey Friedman, warned if results are inline or below the S&P could see an 8% pullback. Strong earnings could add another 4% for the S&P but only if earnings beat convincingly. He believes Friday's payroll disappointment has set the tone for next week with a greater chance of weakness. The negative payroll surprise removed some of the bullish sentiment from the market.

The key report for the week will be Intel on Thursday. Intel needs to say PC sales are strong and NOT say they are expecting normal seasonal weakness in Q1. That is a normal problem for this report. When they caution on seasonal weakness it seems to drag down the entire tech sector. The seasonality has to do with the drop off in PC sales after the holidays.

Goldman Sachs raised their 2011 target for the S&P to 1500 based on expected strong earnings. They are expecting record S&P earnings of $96, which tops the previous high of $91 in 2007. They believe the recovery will accelerate and the U.S. economy will be 5% larger at the end of 2011.

For those estimates to come to pass we have to get by the European debt crisis first. Next week will see Portugal, Italy and Spain attempt to auction debt. Portugal sold six-month bills on Wednesday at 3.686% and the high interest rate is causing some serious worries about what those countries will have to pay when they auction their long dated debt next week. Spreads on some European debt against the German bund were at or near record levels. This came after the EU suggested senior bond holders might have to share in the losses of distressed banks. This would be done by regulators writing down debt and converting it to equity in order to rescue the institution. For instance, if a bank had sold $500 million in debt and could not make the debt payments the regulators would write down that debt to something like $200 million and convert the $300 million loss into equity in the bank. If the bank recovered the bondholders might escape with a breakeven. This proposal did not set well with investors who just want to be secured lenders not unsecured stockholders.

There are increasing fears of a new round of problems requiring even more bailouts. China has been considering buying European debt in an effort to prevent a further contamination within the Euro nations. This week would be a good time to take the plunge.

Mark Zandi at Moody's thinks the European debt crisis will continue to pop up and cause trouble until the Eurozone expands their bailout fund and buys some more sovereign debt to force rates lower. "Clearly the first bank stress test did not work and it is time for Stress Test Two."

Another hurdle for the markets is the China trade data that will be reported on Monday. That will be an indication of the health of the global recovery. It will also give us a clue on their progress on stimulating consumer buying inside China. China claims it is trying to move from an export economy to a consumer economy but it continues to place regulations on consumption inside China. As the current driver for the world economy any economic number out of China is a cause for concern and a possible market-moving event.

Here at home we are starting to hear more about the impending muni crisis. States making headlines because of large deficits include Illinois, California, New Jersey, New York and Texas. The lone star state has a budget of $95 billion and a $25 billion deficit. You can't cut that kind of money out of a budget of that size. You can't fire enough people, cancel enough services and turn off enough lights. One proposal they are considering is dropping Medicare to save money. Obviously that would not sit well with Texans but desperate times call for desperate measures. These are the kinds of tough decisions that many states are facing in 2011. Reportedly states are facing a $200 billion deficit in 2011. How do you manage a recovery in jobs when they will be slashing payrolls to the bone?

The problems in Europe pushed the dollar to a +3.6% gain against the euro for the week. That was the biggest move for the dollar since August. The rise in the dollar crushed commodities with silver falling -7% for the week along with gold (-$54), copper and crude falling -3.7% each.

Another problem weighing on commodities is the pending rebalance of commodity index funds. The DJ-UBS Commodity Index and the S&P GSCI Index, with about $200 billion in commodity funds tracking those indexes will be rebalanced between Jan-7th and 13th. Basically the indexes try to maintain a specific ratio of commodities in the index. In a year where a commodity like copper has rallied +50% the indexes have to rebalance to bring copper representation back down to the correct ratio. This means the funds with $200 billion tied to these indexes will have to sell copper, oil, silver, etc in order to match the rebalanced index structure.

As if that was not enough pressure on commodities the CFTC will meet this week to vote on position limits on all commodities. Any funds holding large positions may want to avoid the rush to the exits if the vote passes.

On Friday the big news was a Massachusetts Supreme Court ruling against Bank of America and Wells Fargo. The court ruled against them in a foreclosure case saying they foreclosed illegally because they could not prove they held the mortgage at the time of the foreclosure. The mortgages in question were transferred into two mortgage-backed trusts without the recipients being named. During the mortgage bubble many mortgages were transferred around so much from lender to lender and then into multiple trusts depending on how the loan was sliced and diced the assignee names were left blank. Basically, paper trail was incomplete and the current holders were not the original lenders.

Because the decision was made by the Massachusetts Supreme Court the ruling can be used as a reference in hundreds of court cases already underway and dealing with the same proof of ownership mortgage problem. This ownership suit has proved effective in preventing many foreclosures.

Bank America was quick to point out they had no financial interest in the mortgages in question. BAC is solely as a trustee to a mortgage owned by a securitized trust and had no responsibility for transferring the loans. BAC recovered about half of its original drop in share price after the announcement. JPM lost -2%. Several analysts said this was a big deal because it called into question the entire securitization process of creating mortgage-backed securities. Most disagreed with that idea but worried this would put a cloud over the banks and delay foreclosures that had to occur before the housing sector could truly recover.

Liz Claiborne shares fell -13% after the company warned income would be significantly below prior forecasts. The company said profits from operations and divestitures would be in the neighborhood of $50 million compared to prior forecasts of $80 million. LIZ CEO said bad weather, competitive pricing and picking the wrong fashions all contributed to the drop in profits. Earnings are due out Feb-17th.

LIZ Chart

Dean Foods must have looked appetizing to billionaire David Tepper. His fund Appaloosa Management announced on Friday they had taken a 7.4% stake in the company. This is unusual because Dean Foods has been getting crushed every earnings day for a couple years now. Dean is the largest dairy producer and the worst performer on the S&P in 2010. Could it be that the company has hit bottom? At least one investor believes better times are ahead. Appaloosa bought 13.4 million Dean shares.

Dean Foods Chart

Homebuilder KB Homes (KBH) rallied +6% after posting a surprise profit for Q4. KBH posted profits of $17.4 million or 23-cents per share. The analyst consensus was for a loss of 18.5 cents. The CFO said the profits were due to an aggressive cost cutting program over the last two years and a switch to smaller and more efficient homes. KBH targets first time homebuyers. The company only closed on 1,918 homes, down from 3,042 in the comparison quarter. Net orders were down -25% to 1,085. The fact KBH managed to produce a strong profit on reduced sales prompted Raymond James to rate the stock a strong buy. Once new home sales begin to accelerate they expect even stronger profits from KBH.

KB Homes Chart

Apple recovered from the CES depression to close at a new high. Analysts failed to find an iPad killer among the dozens of new tablets introduced at the show and that provided new support for Apple's rally. With the iPad 2 scheduled to be announced soon most analysts believe the future is still bright for the tablet leader. However, while there was no iPad killer there were so many new models, styles and features that each will chips away at the Apple lead. There may not have been a single killer but Apple can still bleed market share from a thousand tiny cuts. For the time being Apple is still the king of the tablet mountain.

Apple Chart

Verizon has scheduled a press conference for Tuesday with no hint of the topic to be discussed. However, a source told Reuters this weekend they will announce the new iPhone to run on the Verizon network with sales to begin in February. This is just one more reason why Apple is going to remain an investor favorite. However, this has been rumored for the last three months so you wonder how much of the excitement is already priced into Apple/VZ stock? AT&T is preparing for the competition by reducing the price of the iPhone 3GS to $49.

Verizon Chart

Atmel (ATML) closed at another new high after Wedbush initiated coverage with an outperform. The last three brokers to initiate coverage started them with a buy. The reason analysts like Atmel today is their heavy focus on the touch screen technology for smartphones and tablets. That technology is showing up on everything and will continue to spread into everything from autos to refrigerators. Atmel shares really need a cooling off period after more than doubling since August.

Atmel Chart

Murphy Oil (MUR) dropped -4% after disclosing a Q4 charge of $36 million for drilling three dry holes in the Congo. They do have producing wells in the same area. This proves just because you find oil in one well even with advanced seismic data there is still a risk every time you drill. These wells were not expensive as wells go today. Dry holes in deepwater can cost hundreds of millions each. This kind of news should not blunt the excitement in the energy sector but we are due for some profit taking.

Murphy Oil Chart

Chevron (CVX) will give its Q4 interim update after the close on Tuesday. Chevron earnings are Jan-28th. On Tuesday the company will update production volumes and give progress updates on recent projects. This update will be closely watched by energy investors.

Goldman Sachs was positive about the energy sector on Friday and especially the drillers. Goldman upgraded Diamond Offshore to buy from sell and said oil service companies with international exposure could see further gains despite their recent rally. Baker Hughes (BHI) was upgraded to buy from neutral.

Hess Corp (HES) said it planned to spend $5.6 billion in 2011 on capital projects. This was a +44% increase from 2010 levels. The company is going to spend that money in the Bakken shale in North Dakota and the Valhall project in Norway and Shenzi in the Gulf of Mexico.

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AK Steel (AKS) lost -7% after Goldman cut its rating to SELL based on rising imports of electrical steel. The company was the worst performer in the S&P on Friday. Electrical steel is used in high power electrical transformers. This downgrade was another blow to the sector after Schnitzer Steel (SCHN) reported earnings on Thursday of 64-cents that missed estimates of 71-cents. Schnitzer fell -7% on the news.

AKS Chart

The markets struggled after the payroll report but they almost made it back to positive territory before the close. At one point the Dow was down -97 points and ended with only a -22 point loss. I think traders missed the point on the jobs report. The gain of +112,000 private jobs was just enough to confirm the recovery was still progressing but not enough for Bernanke to call off any further QE2.

In fact based on Bernanke's testimony we could see a QE3 or even a QE4 if job creation does not accelerate. He has to keep pouring fuel into the markets to stimulate housing by keeping rates low and rebuilding the wealth effect through the stock market. As investors see the value of their IRAs and 401K grow they become more positive about the future and less restrictive on how they spend their money. The housing sector accounts for about a quarter of our GDP and although it has improved it is still on life support. Continued payroll reports with less than 150,000 new jobs will keep the Fed on the side of investors. Just remember, once the pendulum swings back to the other side of robust growth the Fed is going to be very aggressive in removing all this excess accommodation. We need to make money on the long side in 2011 because 2012 could be very rocky.

After 33 weeks of outflows from equity mutual funds we have had two consecutive weeks of positive fund flows. Obviously that has a lot to do with year-end retirement contributions but sentiment has definitely changed. The major brokers are upgrading estimates and year-end targets for 2011 and investors on the sidelines are starting to feel like they missed the boat by not moving out of cash and bonds in the fall of 2010. Retail investors only account for 25% of the market but that is 25% of a $14 trillion market.

A total of $39 billion flowed out of equity funds in 2010 and whopping $271 billion flowed into bond funds. Investors were putting new cash into the safety of bonds as worries over a second recessionary dip caused unnecessary caution. We have seen in the last two months that some money has begun to flow out of bond funds and back into equities. It has only been a trickle but now we are past the year-end tax period and there is nothing holding that money in bonds. If it were not for the European debt crisis providing uncertainty today I suspect we would be seeing some major money flows back into equities.

Traders want the real recovery to begin but they have had their hand slapped more than once over the last year when they tried to venture into the market in anticipation of the recovery.

The key inflection point for those sitting on the sidelines will be the next market dip. I don't mean an intraday dip but a multi-day or even multi-week dip. When that dip is bought on decent volume it will be the signal to make the switch to equities. Despite the positive bullish sentiment, which declined from 61% to 55% last week there is still a mistrust of this market. The analysts whining about market manipulation by funds, high frequency trading or the Feds juicing the market have an audience but following those analysts is going to be bad for your financial health. A decent dip will give those analysts enough rope to hang themselves before the next leg higher begins.

We are facing a bull market in 2011. S&P earnings are going to be at new record highs. Cost cutting during the recession has made companies leaner and more cost efficient. As spending improves so will their profits. While we know there will be ups and downs in the market in 2011 the prevailing direction will be higher. This is going to be the year of buy the dip. I really wish we could see a dip next week because I get very impatient waiting for entry points. I assume I am not alone.

The S&P declined to 1261 on Friday and failed to hit that support at 1258 before rebounding strongly to close +10 points off the lows. Considering the negative payroll surprise I thought that was a good rebound. After all it was a Friday and traders probably wanted to take some profits before the weekend.

On three days last week the S&P tested the 1275-1278 resistance level and all three tries were rebuffed. Despite the failure at that level the index also failed to give up ground. Considering the profits built up in Q4 there are plenty of reasons to sell if money managers were worried about the future.

The key points to watch are support at 1258 and let's use 1280 on the upside. A break over 1280 would be sure to trigger some serious short covering. A break below 1258 would draw in the bears faster than a salmon run in spawning season.

The bearish view sees a topping process just under 1280 and the potential for a decline. I have no problem with that view as long as support at 1258 holds. It has been six weeks since the S&P visited the bottom of its broader uptrend channel so we are due for a retest any time. The difference between my view and the bears is that I believe the dip will be bought even if we have to retest as far down as 1180. When it is bought the resulting rally could be very strong. What is confusing the bears here is the consolidation back in November. That built a base for the current rally and discounts the need to take profits from the August to November rally. November was significant profit taking and should mean any dip in Q1 will be less intense.

S&P-500 Chart

The Dow is struggling with some serious resistance in the 11700-11750 range from August 2008. It is dealing with the uptrend resistance line (red) and the stronger horizontal resistance but still honoring the uptrend support (blue) from early December. The tone of the Dow changed in December with volatility shrinking. Even the -97 point intraday decline on Friday failed to really penetrate that uptrend support and the news was such a shock it should have had a bigger impact.

This is clearly an example of the bad news bulls climbing that wall of worry. They are hoping for more bad news to keep the Fed in the game and give them a dip to buy. Eventually this period of relative peace on the Dow will end but until it does the trend is your friend.

The dip to 11,600 on Friday was instantly bought and that is a good sign for future support tests.

Dow Chart

The Nasdaq has an ace in the hole for Monday. That ace is the Verizon announcement scheduled for Tuesday. Since the topic has been leaked so thoroughly we can expect Apple to rally strongly on Monday and Tuesday. With Apple's weighting at 20% of the Nasdaq 100 index that will go a long way towards keeping the Nasdaq positive.

The Nasdaq is struggling with prior uptrend support, now resistance at 2700. A move over that level should trigger some short covering and some price chasing by frustrated fence sitters. Support is well back at 2650-2660 followed by 2625.

Nasdaq Chart - Daily

Nasdaq Chart -Weekly

The Russell continues to be our mine canary and it appears to be weakening at round number resistance of 800. However, the intraday dips were instantly bought so there is lingering support just under the bid. We did have a lower high on Thursday and a lower low on Friday. The RSI closed at 58.65 and that is a new six-week low. Those are normally key indicators of potential trouble ahead.

We had the same pattern back in mid October and it ended with a three-week consolidation and a blow-off move higher in early November. There is no guarantee it will happen this way again. We have seen consolidation around the 790 level since Dec-22nd but the volatility has picked up significantly over the last week. Beware a break under 780 as a change in trend. Support is still 760-765.

Russell Chart - Daily

Russell Chart - Weekly

To eliminate some of the noise in the smaller indexes like we will see from Apple in the Nasdaq next week we can use the Dow Total Market Index, formerly called the Wilshire 5000. This index has broken through key resistance at 13,275 and appears to be telegraphing a move higher. This represents market sentiment at its broadest.

Dow Total Market Index Chart - Weekly

In summary nobody is rushing to sell off the market and we successfully survived the first week of January. That is a good sign. Since 1950 there have been 60 first weeks of trading. 37 of those were positive. When there is a positive first week there is an 87% correlation to a positive gain for the entire year. When there is a decline in the first week there is only a 50% correlation to a decline for the rest of the year. Obviously you can twist statistics any way you want and past performance is no guarantee of future results. However, bullish markets create bullish sentiment and that sentiment creates further gains. It is a prime example of a circular feedback loop.

If you remember my January highs table I have shown several times over the last few weeks the average date for a high in January was the 12th. That would be Wednesday. With Intel reporting on Thursday that makes the 13th a likely target unless Intel really blows through estimates and raises guidance. There is no guarantee of a late month decline but the historical patterns are pretty strong.

January Highs Table

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Jim Brown

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Index Wrap

January Effect

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

Stocks, especially key big cap tech stocks in the Nasdaq 100 index (NDX), took off again in the first week of the new year in keeping with the so-called "January effect", a tendency for an up January after a down December. No down December was seen but this month so far sees stocks, especially tech, still on a roll.

The January effect has historically been the tendency for stocks to advance during January. This month's rally has in the past been attributed to an increase in buying following a drop in prices in December when investors sold underperforming stocks in order to create tax losses to offset capital gains.

The January effect has usually affected small cap stocks more than mid or large caps. However, this historical seasonal tendency has been less pronounced in recent years because the markets have adjusted for it. Another reason is that it's now considered less important as more people are using 401k and other tax-sheltered retirement plans for stock investments, giving them little incentive to sell at the end of the year for a tax loss.

I did expect a rally in the short-term but generally assessed the low volume slide in the final week of December as a harbinger for the start of a larger correction. WRONG! So far at least, calling a top is a bit of a fool's errand. It may prove very difficult to correctly forecast a top before it becomes obvious.

A cautionary note is that primarily one index, NDX, is where the really strong gains are coming. The S&P 500 (SPX) had a decent advance in the past week, relative to its prior 4 weeks, but not like NDX which blasted through resistance (at 2236-2240) and achieved a decisive upside penetration of the last major NDX top of late-2007. The Nas 100 is still quite 'overbought' as can be seen below with the longer-term weekly Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) indicators. In a fundamentally strong market, technical considerations helpful in a more 'normal' market cycle, don't guide us as much. It's not that such technical indicator extremes don't have an eventual effect, but the lag time can be considerable before a substantial correction sets in.

You'll see on the daily charts of the Nasdaq Composite (COMP) and the Nasdaq 100 (NDX) charts further on how both indexes held (and regained in the case of NDX) their up trendlines. NDX had a 1-day dip below its bullish trendline but NO second day of 'confirming' type reversal action. My general rule of thumb is to see if a SECOND consecutive day 'confirms' a trendline penetration. This was shown by subsequent market action this past week as NDX regained its up trendline at the week's start. Moreover, NDX never closed below its key 21-day moving average.

Where do we go from here? Higher based on the charts, but I would watch for any further breaks of the aforementioned up trendlines. The S&P and Dow are lagging the hot tech sector, but this was sort of business as usual for the market in 2010. I do have trouble seeing how the Dow is going to sustain a lot of further upside progress in that many of those 30 stocks don't have especially bullish charts. The Russell 2000 (RUT) is going sideways and small cap stocks should be doing better, especially in January; moreover, RUT is showing a bearish price/RSI divergence. Bullish sentiment is quite high again but such extremes, at least since early-November, have not directly led to a downside reversal. Such bullish extremes do suggest caution in counting on a huge further advance.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) index chart is bullish. The index didn't match the gains that key tech stocks had as reflected in the Nas 100, but SPX is tracking upward within its longer-term bullish uptrend channel. There is a bit of waning momentum but every time they knock the index down, stocks rebound from their lows by day's end.

The RSI and my bullish sentiment numbers are showing extremes but so what else is new. I've been saying that these indicators provide a cautionary note in terms of piling in with new bullish strategies and am beginning to feel like the boy who cried wolf too much.

The 1250 area looks like the key near-term support, which then extends down the 1233 area, at the current intersection of the up trendline. A decisive downside penetration of the trendline would suggest potential for a move back to fairly major support beginning around 1200 and extending to 1173.

Near resistance comes in around 1278, with major resistance in the 1320 area, as suggested by the upper end of SPX's uptrend channel.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) index's chart remains bullish with OEX now a bit above the mid point of its uptrend channel. In terms of price action alone, OEX looks like it could reach 600 this month. The only thing, as usual, that makes me cautious in terms of adding bullish positions, is the overbought extremes I see in some of my indicators. Nevertheless, price action is the 'king' indicator so to speak.

Near support is now up to 570, extending to 565. 550 is then a pivotal chart support at the up trendline. 590 is resistance implied by the upper end of its channel, but with close by resistance at 576.

As with all the major indexes I suggest that those with bullish positions keep an eye on the 21-day moving average. A close below this key average would suggest a pivotal next day technically; e.g., a second close below the 21-day average would imply a shift in near-term momentum to down. A break of the up trendline would suggest a more significant change in the current chart picture. However, there's no shift in the intermediate uptrend unless prior lows in the 530 area were pierced.

DOW 30 (INDU) AVERAGE; DAILY CHART:

Further upside progress was made in the Dow 30 (INDU) average as INDU worked its way above 11600 resistance. This level (11600) is of special long-term chart significance in that it represents a 2/3rds or 66% retracement of the major decline from late-2007 to March 2009. A next pivotal technical support is at 11400, at the current intersection of INDU's up trendline.

Immediate overhead resistance is at 11740 currently, then at 11800. I don't have a notation of more major resistance highlighted on the chart but if INDU can continue to climb above 11600, it suggests to me the possibility of an eventual move to the 13000 area; e.g., sometime in 2011. Before such a lofty target is reached, INDU would have to climb above 12000, the next big round number for the Dow.

Stand out to good Dow performers are AA, BA (per action of this past week), CAT (but recently stalled), CSCO (with an emerging rounding bottom), CVX, DD (but stalled recently) GE, HPQ, IBM, (KFT and KO are pulling back), MSFT, VZ and XOM. The 30 stocks are a mixed bag, with some that were in strong uptrends now correcting, but a few others coming on strong. All in all not a negative picture but not quite a stand out either.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) Index chart is tracking higher within its uptrend channel with the latest action being COMP's breakout above the line of resistance I talked about last week at 2675. I've talked in my beginning 'bottom line' commentary and with the S&P commentary that the overbought extremes seen on some of my indicators cause me to shy away from chasing prices here. It's always the case in the strongest trends that technical indicators are of less use in 'timing' a reversal or extension of a rally or decline. What is of use? Trendline breaks for one.

COMP appears to be struggling some to maintain what should now be near support at 2700-2675. My support focus in on the intersection of the up trendline, currently at 2655; next support then noted at 2600.

I've highlighted 2750 as a key resistance. Major resistance is expected at the top end of the bullish uptrend channel, which currently intersects around 2860.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) has one of those remarkable charts where you understand the significance of trendlines. As if the index had 'eyes' it broke below its key up trendline, but then jumped back to claim that same angle of ascent that IS an up trendline when it's 'working'. I suspect that some of the enthusiasm for buying still more of hot tech stocks is/was the CES (Customer Electronic Show) in Las Vegas. It's quite the event in the tech world now. Stocks that might have new 'home run' products as presented at the CES get bid up anticipation.

NDX is the bullish hot ticket item and is getting a fair amount of the action in the market again. The chart pattern is very bullish but it remains to be seen if the index can maintain the same rate of upside momentum it has now; i.e., the current up trendline you see on the daily chart. The index is at the lower end of its current uptrend channel not at the high end, so NDX is maintaining its 'lowest' rate of upside momentum so to speak. Overbought indexes and stocks eventually at least slow their gain rate: hence the pattern of sideways for awhile, then a next breakout, then sideways again, another breakout; or, down.

My next anticipated resistance is 2325. In terms of key support points, there's the trendline of course to look at, but it's such a steep line that I don't want to get unnecessarily alarmed if there's a dip below it. I've noted a first key technical support at the 21-day moving average; note how the 21-day moving average 'held' (supported) NDX on a closing basis. Whether looking at this key average and Fibonacci number on a Closing or intraday basis there's something to be learned. In an uptrend, a SHARP break of the line intraday is usually a sell signal. If there's only a slight penetration, with enough buying also coming in to lift the closing level to above the average, it's a clue that the index isn't ready to reverse even its short-term trend.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) chart naturally reflects the renewed bullish (from near-term 'mixed' last week) chart as the NDX and the Q's could be headed for the 58 area, eventually to 60. The key question is whether they get there in a straight line so to speak or there's a dip, then another sizable rally later.

Will wonders never cease as daily trading volume finally had a significant jump on Friday along with prices. This is likely also another reflection of the strong bullish 'sentiment' readings I'm getting as, at a certain ('believer') stage of a bull market, traders get more prone to buying breakout type moves. Previously, we've mostly seen spikes in volume ONLY on selloffs. This market is reaching another stage of bullishness as the rally just keeps rolling along. Fear diminishes and greed ascends.

Near support: 54.8

Next support: 54.0, then 52

Near resistance: 56-56.2

Next estimated resistance: 57.3

Major resistance: 59.5

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT), recent weeks' stand out index performer, has halted upside momentum after hitting the pivotal 800 level, which I've long held to be a pretty tough resistance. Rather than the usual pattern of more small to mid cap stock buying in the NEW year, a lot was done in the OLD and the Russell here looks like it could be in the beginning stages of a correction. I especially note the declining RSI as prices have slid sideways. This bearish divergence often suggests that there will be further pullback ahead. We should have an idea if this is the case by whether RUT next slides below key near support at 780-773. Support implied by the 50-day moving average comes in at 750; from a chart standpoint 720 is key to hold.

I've noted pivotal near resistance at 800, then at the top end of RUT's uptrend channel, intersecting at 827 currently.



GOOD TRADING SUCCESS!



NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS

CHART MARKINGS:

1. Technical support or areas of likely buying interest and highlighted with green up arrows.

2. Resistance or areas of likely selling interest and notated by the use of red down arrows.

I WRITE ABOUT:

3. Index price areas where I have a bullish bias or interest in buying index calls, selling puts or other bullish strategies.

4. Price levels where I suggest buying index puts or adopting other bearish option strategies.

5. Bullish or Bearish trader sentiment and display the graph of a CBOE daily call to put volume ratio for equities only (CPRATIO) with the S&P 100 (OEX) chart. However, this indicator pertains to the market as a whole, not just OEX. I divide calls BY puts rather than the reverse (i.e., the put/call ratio). In my indicator a LOW reading is bullish and a HIGH reading bearish, consistent with other overbought/oversold indicators.

Trading suggestions are based on Index levels, not a specific option (month and strike price) and entry price for that option. My outlook often focuses on the intermediate-term trend (next few weeks) rather than the next several days of the short-term trend.

Having at least 3-4 weeks to expiration tends to be my guideline for trade entry choice. I attempt to pick only what I consider to be 'high-potential' trades; e.g., a defined risk point would equal in points only 1/3 or less of the index price target.

I tend to favor At The Money (ATM), In The Money (ITM) or only slightly Out of The Money (OTM) strike prices so that premium levels are not as cheap as would otherwise be the case, which helps in not overtrading an account. Exit or stop points, as well as projected profitable index price targets, are based on my technical analysis of the underlying indexes.


New Option Plays

Biotech and Telecom Technology

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Illumina Inc. - ILMN - close: 65.66 change: -1.34

Stop Loss: 63.40
Target(s): 69.50
Current Option Gain/Loss: + 0.0%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description
Illumina is a leading developer, manufacturer, and marketer of life science tools and integrated systems for large-scale analysis of genetic variation and function. We provide innovative sequencing and array-based solutions for genotyping, copy number variation analysis, methylation studies, gene expression profiling, and low-multiplex analysis of DNA, RNA and protein. We also provide tools and services that are fueling advances in consumer genomics and diagnostics. Our technology and products accelerate genetic analysis research and its application, paving the way for molecular medicine and ultimately transforming healthcare. (source: company press release or website)

Why We Like It:
This past week saw shares of ILMN breakout from a three-week consolidation pattern. Friday's pull back toward $65, thanks to the market's widespread dip, is an entry point to buy calls. I like ILMN because it's a biotech company without the normal risk associated with biotechs (like critical clinical trials data that could send the stock gapping sharply one way or the other). If the rally in ILMN continues the stock could see some short covering. The most recent data listed short interest 11% of the 115 million-share float.

I am suggesting bullish positions now. We do want to keep our position size small since we may not be in this trade very long. I'm still expecting a market correction in the second half of January. I'm setting our exit target at $69.50. Keep in mind that ILMN is due to report earnings in early February and we normally do not want to hold over the earnings report.

Open positions now at current levels.

- Suggested Positions -

Buy the 2011 February $70.00 call (ILMN1119B70) current ask $2.20

Annotated Chart:

Entry on January 10th at $ xx.xx
Earnings Date 02/03/11 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on January 8th, 2010


QUALCOMM Inc. - QCOM - close: 51.73 change: -0.94

Stop Loss: 48.75
Target(s): 54.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
Investors reacted positively to news that QCOM was buying Atheros (ATHR). Many times the acquiring company's stock moves lower. Shares of QCOM did not see the normal dip on this acquisition news. The move should help QCOM better compete with rivals BRCM and INTC. This past week saw shares of QCOM breakout past major resistance at the $50.00 level. Now this resistance should be new support.

I am suggesting we buy calls on a dip in the $50.75-50.00 zone. Officially our trigger will be $50.75 but traders could wait for a dip closer to $50.00. there is some support near $49.00 so we'll put our stop loss at $48.75. Our target is $54.75. However, earnings are less than three weeks away and we normally want to avoid holding over an earnings report.
FYI: The Point & Figure chart for QCOM is bullish with an $84 target.

Trigger @ 50.75

- Suggested Positions -

Buy the 2011 February $52.50 calls (QCOM1119B52.5) current ask $1.65

Annotated Chart:

Entry on January xxth at $ xx.xx
Earnings Date 01/26/11 (unconfirmed)
Average Daily Volume = 12.1 million
Listed on January 8th, 2010


In Play Updates and Reviews

Banks Stumble, Stocks React to Jobs Number

by James Brown

Click here to email James Brown

Editor's Note:

Financials were some of the worst performers on Friday. Profit taking, while mild, was widespread. Our railroad candidates did well. I have updated stop losses on CSX, RIG, and UNP. We've adjusted our entry point strategy on XEC and we're cutting EXPE from the play list.

Don't forget that we only have two weeks left before January options expire. The market has been consolidating sideways the past few days. If stocks see a breakdown lower it's going to crush all of our January call values. You may want to start taking some money off the table early. Any time premium is going to decay pretty quickly.

-James

Current Portfolio:


CALL Play Updates

Amazon.com Inc. - AMZN - close: 185.49 change: -0.37

Stop Loss: 176.45
Target(s): 189.90, 199.00
Current Option Gain/Loss: -17.5%, and - 2.5%
Time Frame: 4 to 6 weeks
New Positions: See below

Comments:
01/08 update: Profit taking in AMZN was kept at a minimum on Friday. The stock actually hit a new high Friday morning after shares were upgraded to a buy and given a $225 price target. I remain bullish on AMZN and would look for dips in the $182.50-180.00 zone as a new bullish entry point to buy February calls. More conservative traders might want to raise their stops closer to $180.

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

Chart:

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: 69.38 change: +0.58

Stop Loss: 64.90
Target(s): 69.00, 72.25
Current Option Gain/Loss: +305.0%, and +158.9%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
01/08 update: BA extended its gains to six days in a row. Shares tested round-number resistance at $70.00. The stock is short-term overbought and due for a pull back. We only have two weeks left before January calls expire. I am suggesting we exit the rest of our January calls now. I am not suggesting new bullish positions at this time. Our second target is $72.25.

- Suggested Positions - (small positions only!)

Long the 2011 January 67.50 calls (BA1122a67.5) Entry @ $0.58, exit @ $2.35

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

01/08: Exit the rest of our January calls @ $2.35 (+305%)
01/06: 1st Target Hit @ 69.00. Jan call @ $2.15 (+270%). Feb. call @ $1.80 (+146%)
01/06: New stop loss @ 64.90

Chart:

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


Caterpillar - CAT - close: 93.73 change: +0.19

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

Comments:
01/08 update: With stocks struggling for gains, shares of CAT meandered sideways. Shares have been consolidating sideways under resistance near $95.00 for three weeks now. Wait for the breakout higher. 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

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


Cummins Inc. - CMI - close: 109.78 change: -0.38

Stop Loss: 108.75
Target(s): 114.85 117.50
Current Option Gain/Loss: -50.8% and -13.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
01/08 update: I remain concerned about CMI. The stock produced a bearish reversal pattern on Thursday. Was Friday's move a confirmation of that reversal or just a reaction to the disappointing jobs numbers? CMI found support again near the $109 area. I am not giving up yet but I'm not suggesting new bullish positions either.

(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.

Chart:

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: 67.79 change: +1.56

Stop Loss: 64.45
Target(s): 69.25
Current Option Gain/Loss: +71.4% and +66.6%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
01/08 update: Railroad stocks were some of the best performers on Friday. The Dow Jones railroad index rallied +2.4%. Shares of CSX surged +2.3% to a new two-year high. The stock has potential resistance near $70.00. Our target to exit is $69.25. I am not suggesting new positions at this time. Please note our new stop loss at $64.45.

- 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

01/08: New stop loss @ 64.49
01/05: Adjusted targets to just one at $69.25.
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.

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: 44.81 change: -0.63

Stop Loss: 43.75
Target(s): 44.90, 48.00
Current Option Gain/Loss: +125.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
01/08 update: Warning! There was no follow through on Thursday's intraday bounce. CTL rolled over again. The stock has clearly broken its narrow bullish channel. I will admit this will be extremely frustrating if CTL breaks down further after seeing this option up +800% at one point. I've been suggesting that readers take profits for days now. I would still consider an early exit now. I'm not suggesting new bullish positions. CTL should have stronger support near $44 and its rising 50-dma.

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

Chart:

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: 84.34 change: +0.09

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:
01/08 update: Nothing has changed for us with DE. Currently we're waiting for a dip to $80.50 to buy calls there. Alternatively we might want to consider buying calls on a breakout over resistance near $85.00. The high today was $85.30. I'm going to list a second trigger at $85.55 should DE suddenly surge on us.

If DE hits our trigger at $80.50 we want to use a tight stop loss at $78.95.

If DE hits our new breakout trigger at $85.55 then we want to use a stop loss at $81.49.

I am adjusting our secondary target from $89.00 to $89.75.
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)

- OR - BREAKOUT TRIGGER @ 85.55

Buy the 2011 February $90 calls (DE1119B90)

Chart:

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: 56.25 change: -0.76

Stop Loss: 53.75
Target(s): 53.95, 58.50
Current Option Gain/Loss: + 83.3% and +17.5%
Time Frame: 5 to 6 weeks
New Positions: see below

Comments:
01/08 update: Shares of ESRX were downgraded this morning but the stock bounced from the $55.50 level midday. I would hesitate to launch new bullish positions at this time. If you're holding January calls you will want to seriously consider exiting now to lock in a gain. Currently our final target is $58.50. More aggressive traders may want to aim for $60.00.

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

01/06: New stop loss @ 53.75
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%)

Chart:

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


FedEx Corp. - FDX - close: 93.10 change: -0.77

Stop Loss: 90.90
Target(s): 96.75, 99.75
Current Option Gain/Loss: -83.7% and -22.9%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
01/08 update: Both UPS and FDX got some unwanted attention on Friday. CNBC reported that the U.S. Department of Justice is investigating claims of anticompetitive practices by both FDX and UPS. Both companies have confirmed the investigation. The headlines really didn't have that much of an affect on shares of FDX. The stock bounced around the same $92-94 trading range.

At this point we only have two weeks left for our January calls and odds are really good that these calls will expire worthless. That means we should be looking for any bounce to exit these calls and try to recoup some of our capital. If the calls bounce to 40 cents or more I would exit. I am not suggesting new bullish positions at this time.

- 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

01/08: New exit strategy for January calls. Try to exit at 40 cents or more.
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: 170.69 change: -1.52

Stop Loss: 165.75
Target(s): 171.00, 179.50
Current Option Gain/Loss: + 45.4% and +35.6%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
01/08 update: Financials were some of the worst performers on Friday. Shares of GS pulled back toward prior resistance near $170. If you were looking for a new entry point to buy calls this is probably it but given the tone of trading on Friday you might want to wait and see if GS bounces from this level before initiating positions.

- 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)

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: 147.93 change: -0.73

Stop Loss: 144.75
Target(s): 152.50, 159.50
Current Option Gain/Loss: + 9.6%, and + 4.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
01/08 update: It's hard to see but IBM is building a short-term bullish trend of higher lows. While I find this trend encouraging readers may want to wait for a dip closer to $146.00 before initiating new positions. I would buy February or April calls. Keep in mind that IBM is due to report earnings on January 18th and we do not normally want to hold over an earnings announcement. 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

01/06: New stop loss @ 144.75
01/03: New targets @ $152.50, and $159.50

Chart:

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


Juniper Networks - JNPR - close: 37.59 change: -0.62

Stop Loss: 35.75
Target(s): 39.90, 41.75
Current Option Gain/Loss: -25.6% and + 5.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
01/08 update: JNPR hit some profit taking on Friday. The little afternoon bounce near $37.25 on Friday almost looks like a new bullish entry point. If you do choose to buy calls here I would consider a pretty tight stop loss, maybe near $36.70ish (and I would buy February or later calls).

We want to sell all of our January calls and half of our April calls at $39.90.

- 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
01/06: New stop loss @ 35.75, new 1st target @ 39.90.
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: 73.63 change: +0.45

Stop Loss: 69.80
Target(s): 73.25, 74.90(or 200-dma)
Current Option Gain/Loss: +70.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
01/08 update: LMT extended its gains but failed to breakout over the $74.00 level. I suggested exiting the rest of our January calls on Friday morning (they opened at $3.30). LMT looks short-term overbought and I would expect a pull back toward the $72 area.

We'll keep the remainder of our March calls as we aim for the secondary target at $74.90 or the 200-dma. I am not suggesting new positions at this time.

- Remaining Positions -

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

01/06: New stop loss @ 69.80
01/06: Sell the rest of our January $70 calls now @ $3.30 (+88%)
01/06: Target Hit @ 73.25. Jan. $70 call @ 3.35 (+91%). March $75 call @ 1.65 (+65%)

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


Millicom Intl. Cellular - MICC - close: 95.98 change: -1.08

Stop Loss: 92.49
Target(s): 99.90
Current Option Gain/Loss: -10.8% and +21.2%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
01/08 update: MICC is still consolidating sideways above the $95 level. If you were looking for an entry point I would be tempted to buy calls now but more conservative traders may want to inch up their stop loss (possibly to the $93 or $94 levels). 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

01/06: New stop loss @ 92.49
01/03: New stop loss @ 91.75, New target at $99.90

Chart:

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: 75.04 change: +2.00

Stop Loss: 68.49
Target(s): 72.50, 78.25
Current Option Gain/Loss: +84.7% and +91.6%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
01/08 update: RIG delivered another strong session on Friday with a rally to new multi-month highs. Shares hit $75.95 intraday. The 50-dma has risen to $68.62 so I'm raising our stop loss to $68.49. RIG looks a little bit short-term overbought so I'm not suggesting new bullish positions at this time. Our final target is $78.25 but I'm considering an adjustment toward $79.75 instead.

If you are holding the January calls you will want to strongly consider an early exit now to lock in a gain!

- 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

01/08/11 New stop loss @ 68.49
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%)

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


Research In Motion - RIMM - close: 61.68 change: +0.31

Stop Loss: 57.49
Target(s): 64.75, 67.50
Current Option Gain/Loss: - 3.6%, and + 0.8%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
01/08 update: RIMM was drifting higher on Friday. I would still consider new bullish positions now. However, we might get a better entry point if we wait for a dip near $60.00. Currently our stop loss is 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.

- Suggested Positions -

Long the 2011 February $62.50 calls (RIMM1119B62.5) Entry @ $2.47

- or -

Long the 2011 March $65.00 calls (RIMM1119C65) Entry @ $2.35

Chart:

Entry on January 6th at $61.00
Earnings Date 03/31/11 (unconfirmed)
Average Daily Volume = 9.9 million
Listed on January 5th, 2010


Stanley Black & Decker, Inc. - SWK - close: 65.50 change: -1.03

Stop Loss: 64.75
Target(s): 69.90, 72.45
Current Option Gain/Loss: -92.8%, and -58.6%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
01/08 update: The last couple of days have been a little ugly for SWK. The rally on January 3rd now looks like a bull-trap pattern. If you look at the weekly chart is definitely looks like SWK is forming a reversal. Currently we have a stop loss at $64.75 and if this correction continues on Monday we will likely get stopped out. I am not suggesting new bullish positions at this time. Keep your position size small to limit your risk.

- Suggested Positions -

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

- or -


01/06: New stop loss @ 64.75

Chart:

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: 95.18 change: +2.63

Stop Loss: 91.40
Target(s): 96.25, 99.75
Current Option Gain/Loss: +24.3% and +35.1%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
01/08 update: Friday was a strong day for the railroad stocks and UNP surged +2.8% toward resistance near $95.00. If you're holding the January $95 calls you'll want to seriously consider taking some profits now! While the trend is up UNP is still facing resistance near $95 and we only have two weeks left for January calls. At the moment we're up +24% on that option.

If you're looking for a new bullish entry point I'd wait for a dip near the $93.50 area. The 50-dma has risen to $91.53. I am raising our stop loss to $91.40.

- 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

01/08/11; New stop loss @ 91.40
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

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: 72.15 change: -0.34

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:
01/08 update: We finally saw some movement in shares of UPS on Friday. CNBC reported that the Justice Department is investigating both FDX and UPS for potential anticompetitive behavior. Shares of UPS recovered from their intraday low at $71.00. I still don't see any changes from my prior comments.

We might want to consider a breakout entry point on a move past resistance at $74.00. However, at the moment the plan is to wait for a dip near $70.00 with a trigger to buy calls at $70.25.

Trigger @ 70.25

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

- 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


Cimarex Energy Co. - XEC - close: 89.21 change: -0.96

Stop Loss: 87.25
Target(s): 94.25, 99.50
Current Option Gain/Loss: +0.0%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
01/08 update: The OSX oil services index and shares of XEC both look very overbought given their rally from the October lows. However, they can always grow more overbought. I am going to suggest an aggressive entry point on XEC. Instead of waiting for a dip to $86.50 I am suggesting we open small bullish positions now. We'll raise our stop loss toward the 30-dma and place the stop at $87.25. Our targets to take profits are at $94.25 and $99.50. I want to reiterate that we want to keep our position size pretty small to limit our risk.

I have updated our option strike below.

Launch small positions now.

- Suggested Positions -
Buy the 2011 February $95 calls (XEC1119B95) current ask $2.30

- or -

Buy the 2011 March $95 calls (XEC1119C95) current ask $3.30

Chart:

Entry on January 10th at $ xx.xx
Earnings Date 02/17/11 (unconfirmed)
Average Daily Volume = 907 thousand
Listed on December 1st, 2010


CLOSED BEARISH PLAYS

Expedia Inc. - EXPE - close: 25.62 change: +0.52

Stop Loss: 26.05
Target(s): 25.10, 23.25
Current Option Gain/Loss: -33.3%
Time Frame: 2 to 3 weeks
New Positions: No

Comments:
01/08 update: I am giving up on EXPE. The market's weakness on Friday would have been a good excuse to sell EXPE shares. Instead the stock outperformed with a +2% gain. While this stock might roll over again under resistance at the 100-dma or 50-dma near $26.50 I don't want to wait. Let's exit now and cut our losses. We only have two weeks left on January options.

Exit Early

Closed Position: 2011 January $25 Put (EXPE1122M25) Entry @ $0.60, exit @ 0.40 (-33.3%)

01/08/11 Exit early. EXPE @ 25.62. Option @ 0.40 (-33.3%)
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

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