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Newsletter

Daily Newsletter, Saturday, 1/29/2011

Table of Contents

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

Market Wrap

Egypt and Earnings Push Markets Lower

by Jim Brown

Click here to email Jim Brown

The Dow snapped an eight-week winning streak and suffered its worst one-day loss in more than two months. The Nasdaq lost -2.5% for the biggest daily loss in five months.

Market Statistics

When markets want to go down they will find a reason. On Friday they had no trouble finding a reason with the three Es of Egypt, earnings and economics all providing an excuse to sell. The biggest blame was placed on Egypt and the civil unrest currently attempting to force changes in the government. The turnover in Tunisia a couple weeks ago was seen as a trigger for the riots in Egypt. Protestors seeking reform turned out in force and were greeted by police and military and the protests turned ugly.

Egypt has been an ally of the U.S. and helped to provide security for Israel for 30 years. It receives the second largest amount of foreign aid on an annual basis from the USA. The U.S has supplied F16s, tanks, personnel carriers, advanced missile systems and many other forms of military equipment. If the country was to fall under jihadist rule and it would be a very bad thing for Israel and for the U.S. since we have treaties with other Middle East countries. Egypt is the big dog on the block and should the country move in the wrong political direction it could be a serious challenge. If Egypt was forced into a government turnover like Tunisia, analysts fear it could lead to similar events in other Middle East countries and throw the entire area into a morass of instability that could ferment terrorist activity.

Egyptian leaders normally come out of the military and have the support of the military, which is strong and capable. A new leader to replace Mubarak would likely come from a military background and not result in too much change in administration. Late Friday Mubarak dismissed the entire Egyptian government and promised to rebuild with some changes wanted by demonstrators. Dismissing the government was not what the protestors wanted. They wanted Mubarak to step down and let someone else take over.

The Egyptian uprising had a serious impact on the market not specifically because of the possibility of a government turnover in Egypt but the possibility of the contagion spreading to other countries. Regardless of the outcome in Egypt there is the risk of another uprising elsewhere in the region. Saudi Arabia already has a lot of civilian unrest that is always bubbling just under the surface. If this kind of problem rose in Saudi Arabia the U.S. would be drawn into the picture in order to protect Saudi from outside influences, protect the royal family and protect the oil fields and facilities. This worry over Saudi being drawn into the fray is the real problem for the U.S. markets.

Egypt has 80 million people and more than 30% are illiterate. Inflation is over 11% and inflation in food is over 17%. The Egyptian markets had fallen -18% in the last week and -11% on Thursday alone as the unrest began to spread.

(Saturday afternoon update) Egyptian president Mubarak named 74-yr old Omar Suleiman as vice president, a position that has been vacant for 30 years. Analysts claim this is purely a figurative move given the man's age. Suleiman was planned to be successor for Mubarak and then pass the title to Mubarak's son Gamal as a method of keeping the presidency in the family. This was not received well when it was in the planning stages. The crisis appears to have interrupted those plans permanently. Gamal was seen as a continuation of policies associated with his father. Citizens believe the country has been looted by the ruling family and its inner circle while inflation rockets out of control and pushes them farther into poverty.

Mubarak also appointed Ahmed Shafiq as the new prime minister. Shafiq was in the air force and worked directly under Mubarak in the past. He was named head of civilian aviation in 2002 so his name is known to the public. He has been tasked with rebuilding the government.

According to Stratfor Mubarak is no longer in charge despite his title as president. Apparently the military has taken over and is choreographing the change in command so that it still looks like Mubarak is in control and ceding power gracefully according to the will of the people. The military has gone to great pains not to engage with the protestors but to show force and let the police handle the actual confrontations. The military does not want any negative publicity as their manipulation of the command structure is completed. The police force is severely hated because of its historical brutality. Eighteen police stations were burned on Friday.

Stratfor is also reporting the Egyptian Muslim Brotherhood (MB) appears to be working with Hamas to increase the level of violence in an attempt to seize control or manipulate the change in government to give the MB a greater say in the future. The Egyptian police are no longer patrolling the border with Gaza and large numbers of armed Hamas men have been crossing the border into Egypt. The MB has fully involved itself in the demonstrations and they are insisting on a new cabinet that does not include any members of the ruling National Democratic Party. Security forces in plainclothes are reportedly engaged in destroying public property in order to give the impression that many protestors represent a public menace. The MB is forming people's committees to protect public property and to coordinate demonstrators activities including supplying them with food, beverages and first aid.

The situation as of late Saturday appears to be worsening although demonstrations in Egypt have calmed. Protests flared up in Yemen and quickly turned violent. With Egypt on one side of Saudi Arabia and Yemen bordering on the south the odds are good some of this revolutionary feeling could blossom in Saudi. King Abdullah of Saudi Arabia strongly criticized the demonstrations in Egypt and Yemen and voiced support for Mubarak. I believe betting on a lame horse like Mubarak and making comments critical of the demonstrations is risky business. Saudi's stock market fell -6.4% on Saturday.

With the outbreak of violence in Yemen and the rapid influx of Hamas supporters from Gaza I fear this story has farther to run and the odds of a Saudi infection are growing. That would be VERY market negative in the USA.

Another event in this rapidly moving story was news China had blocked any searches for "Egypt" on its twitter-like service on Sina.com. Reportedly the news agencies have been told not to cover the protests and news of the event has been given only a couple paragraphs buried inside a few websites. China reportedly has a high level of unrest because of the rapidly rising inflation and citizen exposure with the free world thanks to the Internet and smartphones. If demonstrations begin to form in China our markets could be in a world of trouble.

Back home in the U.S. the GDP report for Q4 came in lower than expected and put a damper on trader spirits. The headline number showed growth of +3.2% compared to estimates of +3.6%. This was still an improvement over the +2.6% growth in Q3. The biggest drag on growth was a giant decline in inventories that removed -3.7% from the GDP number.

Without the drag from inventories the GDP number would have been a blowout. Ex-inventory or final sales of domestic products the GPD would have come in at 7.1%. This is the largest gain since 1984 when the economy was coming out of the early 80s economic distress. Personal consumption expenditures rose at a 4.4% rate after a 2.4% growth in Q3. Business investment rose +4.2% in Q4 compared to only a 1.5% gain in Q3. This was the sixth consecutive quarter of positive GDP growth.

Despite the lower than expected headline number this was a VERY strong GDP report. Unfortunately traders focus on the headlines rather than the internals. The internals in this report suggest we could see something in the low 4% range for Q1 and that would be much stronger than analysts previously thought. The payroll tax cut will stimulate additional spending and businesses are already ramping up capital spending because of the 100% depreciation available as a result of the tax deal. Corporations are going to be unable to keep up with the spike in business without hiring additional employees. Those new paychecks will be immediately spent and that will further stimulate the economy.

GDP Chart

The final update for January Consumer Sentiment showed a +1.5 point increase to 74.2 from the preliminary reading of 72.7. This was still a -0.03 decline from December but was seen as a non-event by traders. Sentiment rebounded as consumers started seeing a smaller tax bite in their January paychecks.

Consumer Sentiment Chart

The economic calendar for next week is dominated by manufacturing reports and payroll news. There are four ISM reports with the national ISM for manufacturing on Tuesday. That is the most important of the ISM releases.

The payroll reports are led by the ADP report on Wednesday that will predict the jobs added in the Non-Farm Payroll report on Friday. The Non-Farm Payrolls is the biggest report of the week and estimates are for a gain of 146,000 jobs. Recent economic reports have shown an increase in the employment components so the whisper numbers are higher than the 146K. The spike in the jobless claims last week will not impact this report because the survey period ended before that layoff week. Could there be some limited impact? Yes, but analysts believe the broader trend in hiring will offset the temporary declines.

Economic Calendar

The earnings calendar slows significantly in frequency and importance next week as we begin the decline from last week's earnings peak. The ones I believe are the most important are Visa, MasterCard, UPS and YRCW. Visa and MC will give us a consumer update by releasing the latest delinquency numbers. UPS and YRC Worldwide will tell us how the shipping business is growing or declining. This is the last week for material earnings other than HPQ, Cisco and Dell.

Earnings Calendar

Friday's decline was not all based on Egypt. Some high profile earnings misses were also creating havoc. Amazon reported earnings on Thursday night and declined 9% intraday to $166 before ending the day with a 7% loss. Amazon represents 2.1% of the Nasdaq 100 and while that is far less than Apple's 18% the big drop in Amazon was a major hit to sentiment for tech stocks.

Another highflying tech stock that crashed was SanDisk (SNDK). SanDisk reported earnings of $1.27 per share and analysts were only expecting $1.09. SanDisk raised guidance to $5.44 per share for the full year compared to estimates of $4.83. However, SNDK shares fell -9% to $46.79 on worries profit margins were shrinking as competition increases. SanDisk is benefiting from the rise in smartphones and tablets. The race to lower prices on the end user products is forcing manufacturers to pressure suppliers for lower prices.

Microsoft has a 4.5% weighting in the Nasdaq and the stock lost -4% on Friday after posting earnings that left many traders uninspired. The fall off in Windows Seven sales was a worry since a new release won't be coming down the chute until late 2012.

NetFlix was one of the few companies bucking the -68 point slide in the Nasdaq. NFLX shares rose strongly for the second day after earnings and posted a $7 gain. The worries over an early demise of NetFlix due to increased content costs seem to have been premature.

Commodities, especially gold, silver and oil, rallied strongly on the Egyptian violence. Gold and silver rallied on the safe haven play so common whenever a geopolitical event unfolds. Gold had declined to 1310 but rebounded +20 on Friday. Silver was a big winner with a +3.4% spike.

Crude oil had plunged to just over $85 on worsening supply fundamentals on Wednesday but rebounded +4.5% or +3.85 on Friday to close at $89.31. Egypt is an oil producer with daily production of 662,000 barrels but that was not the problem. Egypt is in control of the Suez Canal and 1.8 mbpd of oil flows through that canal. If the unrest grew and the crowds of protestors somehow halted the flow of ships through the canal it would be a major problem for world oil supplies. If ships cannot use the canal it adds 6,200 miles and several weeks to the journey by going around the coast of Africa. It would require more tankers and take significantly longer to deliver the same production. The cost would also be significantly higher.

I personally don't see the canal being blocked. The Egyptian military would not let it happen. They may be going easy on the hundreds of thousands of protestors in the streets but should they head for the canal I am sure they have orders to prevent that at all costs. It could escalate the violence significantly. Since unarmed protestors don't do well against troops with live ammunition I seriously doubt the canal is in danger.

Crude prices spiked so sharply because the short interest was very high going into Thursday's close. Prices were dipping to $85.15 and threatening to go lower when suddenly the news broke and triggered the rebound and massive short squeeze. Once the situation cools I believe we will see $85 again.

Crude Oil Chart

When I started writing this commentary on Friday afternoon I thought the Egypt story was something that would blow over and the markets would rebound after a follow through dip on Monday. I am far less certain of that on Saturday afternoon. There are some serious risks of other countries going down the same path and the consequences would be negative for the global economy. If it spreads to Saudi Arabia with production of 10 million barrels of oil per day there would be an opportunity for production to slow. Al Qaeda has been targeting Saudi oil facilities for years and a general uprising would give Al Qaeda cover to mount new attacks. Saudi Arabia's ruling family would not go down as passively as Tunisia or Egypt. There would be a much more hard line response against protestors. That may actually work in Saudi's favor because the people know the demonstrations would be dealt with harshly.

The entire Middle East region is on alert this weekend. There is no telling if, when or where this contagion will spread. For that reason I am cautious about the market for next week.

The S&P declined -23 points to secondary support at 1275. A break there threatens to retest 1265. Followed by the 50-day average at 1250. The S&P was due for a correction and the source of the event is immaterial in the long run. The market will always find an excuse when it is ready to decline.

S&P-500 Chart

The Dow declined to initial uptrend support at 11800 as the news flow became a constant stream of Egypt protest video late in the day. This was a reactionary decline that triggered stop losses all along the way. After two months in rally mode and eight consecutive weeks of Dow gains I am surprised the damage was not worse.

If the Dow breaks below 11800 the next logical target is 11600. This is where I would expect investors to step back and reconsider why they are selling. Does this really impact me? Do I really care if Mubarak steps down? Should I be buying this dip? The answers to those questions should be evident by late Monday morning and the reaction selling will morph into whatever follows, be it up or down.

Resistance remains 12000 but I seriously doubt we will be worrying about that again next week.

Dow Chart

The Nasdaq was crushed by major declines in big name stocks including MSFT, AMZN, GOOG, PCLN, AAPL and ISRG. The -68 point decline was the biggest one-day drop in five months. The index came close to testing support at 2675. It also posted a lower high and a lower low since the mid January high. Obviously this was event driven by multiple events but it is still technically bearish. A break below 2675 targets 2640 and the 50-day average. If the events get out of hand in the Middle East we could easily see 2500 very quickly.

It is not that the Middle East is that material to tech stocks but those stocks are what investors just acquired to add risk to their portfolios. This may be more risk than they bargained for. If the violence continues or worse spreads then investors will be looking to shed risk rather than embrace it.

Nasdaq Chart

We should be encouraged the Russell did not fall any further than it did. The Russell stocks have more risk than the Nasdaq stock so the Russell could have easily declined significantly more. I believe the news caught fund managers off guard and most of them were still in buy the dip mode. We really did not have the full picture on Egypt until late in the day. By then many managers may have been hoping for an end of day rally to sell into.

The Russell has critical support at 773 and 765 and assuming we don't gap below that on Monday I think managers will be thinking twice about buying or selling a touch of those levels.

Russell Chart

For three days last week the market tried to breakout to new highs without success. Each failed attempt increased the bears aggressiveness and conviction. The Amazon earnings miss and the Egypt event was what they had been waiting for over the last six weeks. They piled on the shorts and longs were getting blown out of positions as stop losses were hit.

Monday will be different. Traders and investors alike will have had the entire weekend to decide if the Egypt event is material to our markets and whether or not it might spread to Saudi Arabia or others. The market will open with an informed trading public rather than a Friday surprise.

Given a sudden market event there was a very strong urge to exit positions before the weekend simply because of the rising unknowns and the need to take profits in a suddenly volatile market. For those who were either not paying attention, away from the market or were in a state of massive confusion there will probably be another sell cycle at the open on Monday. It will be a knee jerk reaction to Friday's market loss and the events of the weekend.

Is that dip going to be a buying opportunity or a prelude to the next flash crash? Unfortunately I can't answer that today because we don't know what events will transpire before Monday's open. However, I do know the Fed's Plunge Protection Team (PPT) is alive and well and they could easily decide to enter the market on the dip to avoid having their carefully orchestrated rally since September destroyed like the crash of a Jinga tower.

Jinga Collapse

Volume was heavy at 9.9 billion shares on Friday with down volume 6:1 over up volume. That is NOT a capitulation statistic. A capitulation day is typically 10:1 or higher. Yes, stocks sold off but the internals were not as bad as the talking heads would have you believe.

We never know in advance what event will pop up to cause a serious market decline. We do know that these declines are not permanent and a quick resolution in Egypt could fade from the headlines just as quickly.

Nothing has changed with QE2. The Fed is still going to pour additional hundreds of billions of dollars into the market over the next five months. The market will recover from any short-term event related decline. The only question is how long before that recovery begins?

As investors we should always be ready to take advantage of events in the market rather than run from them like our hair is on fire.

I believe we should take a careful look at the market about 10:AM on Monday and make a rational decision on whether we should be buying puts or buying the dip.

Jim Brown

Send Jim an email

An eye for eye only ends up making the whole world blind. - M.K. Gandhi


Index Wrap

Key Reversal after Nasdaq Trendline Break

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

Last week I was forecasting technical trouble ahead for the S&P after the Nasdaq broke below long-standing up trendlines. A sharp decline then came on Friday in the form of key downside reversals. Such downside type reversals have also been termed 'bull trap' reversals, as described in my most recent (1/19) Trader's Corner article. A 'bull trap' or KEY downside reversal is a move to new high followed by a sharp decline in the same trading period; e.g., daily or weekly. I define a 'key' daily downside reversal even more specifically as a move to new high followed by a Close that is below the prior 1-2 day Low. A reason to pay attention to a key reversal pattern is that it's so often followed by a further substantial move in the same direction.

There was a bearish price/RSI divergence that developed this past week in both the S&P and Nasdaq that is highlighted on my SPX and COMP charts. This divergence served as a warning of a potential reversal; it was more pronounced in the S&P, but also appeared with the Composite.

What also developed technically in the Nasdaq Composite (COMP) and Nas 100 (NDX) this past week was that each rebounded to touch the previously broken up trendline on Thursday, which then proved to have 'become' strong resistance. The Friday breakdown then occurred after this rebound to what an early Wall Street mentor of mine used to call the 'kiss of death' trendline.

The aforementioned technical patterns were ones that gave some warnings of what came on Friday. I have so many experiences of technical patterns warning of future reversals that I no longer believe in straight line cause and effect relationships in some piece of data or news coming out of the blue to 'cause' a reversal. Technical action warns of impending reversals ahead of time quite often. Of course, all of this came within the backdrop of the market being quite overbought on both a shorter-term daily and long-term weekly, chart basis. Something was going to happen sooner or later in the way of a correction and which would be explained in terms of a precipitating event(s).

Where do we go from here? This is the big question of course and I can't say that I can predict where the major indexes are heading; we'll have to see how the market acts in the coming week(s). At a minimum, the S&P and Dow may at least test support implied by the lower end of their uptrend channels as highlighted on those charts. I doubt we'll see a rout here, just sideways to lower (and probably choppy) price action for the near to intermediate-term; e.g., a few days to 2-3 weeks.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) index chart turned short-term bearish as Friday's price action technically consisted of a key downside reversal; i.e., a higher high, especially after a prolonged move, followed by a later sharp price collapse during the same trading period (e.g. daily) and a Close under the prior 1-2 days' Lows.

As mentioned in my 'bottom line' comments above about a bearish price/RSI divergence that set up prior to Friday, the recent advance (into Thursday) was not also accompanied by a similar move higher in the RSI. To confirm the trend so to speak, its helpful to see any new relative high also accompanied by a higher relative RSI reading. When the slopes of the trend of prices and the slope of a line connecting RSI peaks, are in opposite directions as seen below, it should not surprise (and we should be prepared) to see a Friday style reversal.

As to the downside potential for SPX, I anticipate at least a test of support in the 1260 area and perhaps 1220 will be seen again. Major support is anticipated at 1200-1175.

Near resistance is at 1300-1305 with major resistance in the 1350-1355 area currently.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) index is still within its longer-term uptrend channel and wouldn't get knocked below it unless OEX fell to below 562 currently and also potential support implied by the 50-day moving average. The break below the 21-day average is bearish but one more day below the average is needed to confirm.

I've highlighted the key downside reversal pattern of a new high or the same high, followed by a plunge in prices such that the Close is not only under the prior 1-2 days' Closes, but that Close is below, often WELL below, prior Lows. The main characteristic is the collapse of prices within the same trading period. Key downside reversals have a good record when it comes to forecasting enough further weakness to suggest executing bearish trading strategies like buying puts on a rebound.

Resistance in the 586 area is quite apparent by 3 days in a row when OEX intraday high was 586 something. Major resistance is likely in the 600-601 area.

The 21-day average at 576.9 could still represent near-term support if the index rebounds on Monday. Next support looks like 570, then at 562, which is where the up trendline, and also the 50-day moving average, intersect. Major support is anticipated for the 530 area.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) average has fallen back to near support in the 11800 area. After hitting nearly the same highs for 3 days running and given the falling (prior to Friday) Relative Strength Index (RSI), it wasn't too surprising to have the Friday price break. You couldn't hardly pick the day it would happen but 'overbought' markets tend to see sharp selloffs.

When stocks stalled this past week, some traders saw it as a good sign to sell. So far, INDU has the kind of dip that, relative to its trend, is not that big of a deal correction wise. More weakness is suggested if INDU starts falling below its 21-day moving average. Two consecutive closes below this key trading average is usually suggesting more than just a fluke shift in short-term momentum.

11600 is a key technical support implied by the current intersection there of INDU's up trendline. A break of 11600 makes the Average vulnerable to a further 200 point drop. Major support comes in around 11000.

Resistance is seen in the 12000-1220 area. 12000 is what I highlighted last week. 12280-12300 should offer fairly major resistance.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

I did a not too out on a limb prediction last week that: "The likelihood of a further decline is now high." Boom, the return of the Nasdaq Composite (COMP) Index back to its previously broken up trendline marked the kiss of death to the 3-day rebound. A mention above how Michael Jenkins who was a minor mentor of mine in Wall Street days, called such a return to that trendline, the 'kiss of death' trendline. I've seen this pattern so many times I couldn't count them up.

Of course Thursday's High was NOT ONLY at the trendline but hit the same peak as its two prior highs in the current move. All the way around, the index looked vulnerable. Friday's close so well under the range of the prior 6 days, also provides a bearish chart outlook on a short to possibly intermediate term basis.

Very near resistance may be found on rebounds to the area of the 21-day moving average (currently at 2712); further resistance is at 2766-2770, extending to 2800.

Key support comes in at 2650, then at 2600. I'd rate the chart now as mixed, but more definitely bearish if COMP closed below its 50-day moving average (currently: 2643) for a couple of days running.

NASDAQ 100 (NDX) DAILY CHART:

I've been commenting for awhile now on the potential for selling to cap the prior strong advance in NDX once the 2330 area was reached. I saw it as potential longer-term resistance as it represented a 38% retracement of the 2000-2002 major bear market. Not an unlikely place for a pause and stumble.

After the Nasdaq 100 (NDX) lost its strong upside momentum of prior weeks and dropped below its up trendline, an attempt to regain its prior rate of upside momentum (what a trendline shows), resulted in a point where the rally was stopped, followed by a downside reversal. Resistance at an extension of the trendline that had been previously pierced was seen on Thursday. I've shorted such returns to this 'kiss of death' trendline on the basis of risk being 'small' (exit/stop out on a move to just above the trendline), relative to the reward potential of a sharp break. Given the way that RSI was already trending lower, it was reasonable bet or in a textbook way, a favorable risk to reward evaluation.

Prices looked headed still lower, but I'd also anticipate a short-term rally coming up. Support could well develop and buying come in on a fall to the area of the 50-day moving average; currently: 2228. I'm anticipating support at 2228-2237. 2200 represents a pivotal support. A decline to there would retrace more than half of the prior advance; specifically, it would represent a fibonacci 62% retracement.

Resistance may first show up on a rebound to the 21-day average currently at 2285. 2285-2300 is probably the key near term resistance area. The prior highs around 2330 on up to the current trendline intersection around 2345, suggests this zone as current major technical resistance.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

I'm anticipating lower levels consistent with the bearish chart. It's so often the case that a new up trendline is established at a lower angle or 'rate of ascent' and it's unlikely that this has been reached before another say 2 point drop.

Near support: 54.9-55.0

Next support: 54.0 Major support: 50.8-52.0

Near resistance: 56.1

Next key resistance: 57.5

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) follows the Nasdaq and its rally failure was as the index neared resistance implied by RUT's previously broken up trendline. It's been clear for awhile that the 800 area was going to offer selling resistance. Pivotal resistance in terms of reversing the short-term trend (to up), is at 800-805.

The structure of a decline would be 'complete' (i.e., by being symmetrical) in my mind if the index got back down to the 740 area. 772 is immediate support.



GOOD TRADING SUCCESS!


New Option Plays

Auto Parts and Software

by James Brown

Click here to email James Brown

Editor's Note:

It looks like the stock market has finally found a top with Friday's bearish reversal. Volume was very strong on the sell-off, which is bearish. This move does need to see some follow through to confirm it but if the correction has begun it could be sharp and fast!

In addition to tonight's new candidates here's a list of stocks on my watch list. Be sure to check for upcoming earnings before initiating any trades. I still don't want to hold over a report. My list of potential bearish plays: PCAR, NTAP, MA, OXY, V, MTD, MD, and AAP

Instead of stocks you could try and capture this pull back in the market with options on ultra-ETFs that move twice as fast. Of course that probably doubles the risk on these trades! For example, you could buy calls on the QID (NASDAQ-100 ultra-short), DXD (DJIA ultra-short), SDS (S&P 500 ultra-short), or the TWM (Russell 2000 ultra-short). You could buy puts on the QLD (NASDAQ-100 ultra-long), DDM (DJIA ultra-long), SSO (S&P 500 ultra-long), and UWM (Russell 2000 ultra-long).

- James


NEW DIRECTIONAL PUT PLAYS

BorgWarner Inc. - BWA - close: 67.63 change: -2.92

Stop Loss: 71.25
Target(s): 63.50, 60.25
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
BWA was a HUGE winner for the bulls last year. Now the rally appears to have run out of fuel. Shares were already starting to consolidate lower prior to Friday's decline. When the market rally starts to correct this stock could see an accelerated move down as traders rush to lock in profits.

I am suggesting bearish put positions now. More conservative traders could wait for a drop under $67 instead. Thursday's high was near $71.00 so we'll set our stop at $71.25. Our targets are $63.50 and $60.25. I'd probably start looking at potential bullish positions in the $60-55 zone. FYI: The Point & Figure chart for BWA has turned bearish.

Use small positions to limit our risk.

- Suggested Positions (small positions) -

Buy the Feb. $65 PUTs (BWA1119N65) current ask $1.50

- or -

Buy the Mar. $65 PUTs (BWA1119O65) current ask $2.40

Annotated Chart:

Entry on January 31st at $ xx.xx
Earnings Date 02/10/11 (confirmed)
Average Daily Volume = 2.0 million
Listed on January 29th, 2010


Citrix Systems - CTXS - close: 63.76 change: -1.07

Stop Loss: 67.65
Target(s): 60.10, 58.00
Current Option Gain/Loss: + 0.0%
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
CTXS recently reported better than expected earnings but the post-earnings rally failed at old support near $67.50 and its 50-dma. The stock has broken down and if the earnings news can't lift it then shares look doomed to correct lower. There is potential support at $60.00 and at the 200-dma. I am suggesting put positions now. My biggest challenge with this play is the stop loss since CTXS has been so volatile in the last week. We'll start the play with a wide (aggressive, higher-risk) stop loss at $67.75. Readers might want to buy half their position now and if we see another failed rally near $66 then we can buy our second half. Our targets are $60.10 and $58.00.

- Suggested Positions (small positions) -

Buy the Feb. $60 PUTs (CTXS1119N60) current ask $0.90

- or -

Buy the Mar. $60 PUTs (CTXS1119O60) current ask $2.00

Annotated Chart:

Entry on January 31st at $ xx.xx
Earnings Date 01/26/11
Average Daily Volume = 3.2 million
Listed on January 29th, 2010


In Play Updates and Reviews

Bearish Reversal Alert

by James Brown

Click here to email James Brown

Editor's Note:

The stock market has reversed lower on big volume. We had two bullish plays get stopped out. One bullish play was triggered. One of our bearish trades hit an exit target.

-James

Current Portfolio:


CALL Play Updates

Compass Minerals - CMP - close: 90.92 change: -1.29

Stop Loss: 87.75
Target(s): 94.75, 99.00
Current Option Gain/Loss: -12.0%, and -14.2%
Time Frame: 3 to 4 weeks
New Positions: See below

Comments:
01/29 update: Our new bullish play in CMP is now open. Shares hit our trigger to buy calls on the dip at $91.00 on Friday but I'm not sure we want to be bullish anymore. The stock market appears to have created a significant bearish reversal on Friday, sparked by the unrest in Egypt.

Technically CMP still looks like a bullish candidate here but I would be very reluctant to launch new positions. Even the strongest stocks can decline if the market is correcting lower. We have a stop loss at $87.75. More conservative traders might want to consider a stop closer to $90.00 instead. Our targets are $94.75 and $99.00.

- Suggested Positions -

Long the 2011 February $95.00 calls (CMP1119B95) Entry @ $1.25

- or -

Long the 2011 March $95 calls (CMP1119C95) Entry @ $2.00

Chart:

Entry on January 28th at $91.00
Earnings Date 02/08/11 (confirmed)
Average Daily Volume = 210 thousand
Listed on January 27th, 2010


FactSet Research Systems - FDS - close: 99.66 change: -0.12

Stop Loss: 95.75
Target(s): 99.90, 103.50
Current Option Gain/Loss: +41.3%, and +107.1%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
01/29 update: Shares of FDS held up pretty well on Friday. The stock just hovered near the $100 level while the rest of the market turned lower. This relative strength is encouraging but I would not open new positions at this time. As a matter of fact more conservative traders will want to seriously consider a complete exit of bullish positions.

We can look for FDS to find short-term support at $98 and $96. Our final target is $103.50.

Small Positions

Long the 2011 February $95 call (FDS1119B95) Entry @ $2.90

- or -

Long the 2011 February $100 call (FDS1119B100) Entry @ $0.70

01/29 Consider an Early Exit now!
01/27 New stop loss @ 95.75
01/27 1st Target Hit @ 99.90. Feb. $95 call @ $4.25 (+46.5%)
01/27 1st Target Hit @ 99.90. Feb. $100 call @ $1.45 (+107%)

chart:

Entry on January 25th at $96.64
Earnings Date 03/16/11 (unconfirmed)
Average Daily Volume = 181 thousand
Listed on January 24th, 2010


CBOE Market Volatility Index - VIX - close: 20.04 change: +3.89

Stop Loss: N/A
Target(s): 24.00, 28.00
Current Option Gain/Loss: + 9.3%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
01/29 update: The unrest in Egypt sparked a sell-off across the market and the volatility index soared to a +24% gain. If the situation doesn't calm down before Monday we could easily see the VIX spiked toward the 200-dma near 23. I'm somewhat reluctant to open new positions after such a big move but our first target is the 24.00 level.

Officially we're listing this play without a stop loss but more conservative traders may want to consider a stop loss under the recent lows near $15.30. We have two targets to take profits at 24.00 and at 28.00.

- Suggested Positions -

Long the 2011 March $22.50 calls (VIX1116C22.5) Entry @ $1.60

chart:

Entry on January 26th at $17.00
Earnings Date --/--/--
Average Daily Volume =
Listed on January 25th, 2010


PUT Play Updates

Cognizant Technology Solutions - CTSH - close: 71.63 change: -1.54

Stop Loss: 75.25
Target(s): 70.25, 68.00
Current Option Gain/Loss: +23.0%
Time Frame: exit ahead of earnings
New Positions: see below

Comments:
01/29 update: CTSH broke down under short-term support and briefly traded under its simple 50-dma before paring its losses. The stock closed with a -2.1% loss. More conservative traders may want to lower their stop loss. I would wait for a new failed rally in the $73 area before considering new bearish positions. The low on Friday was $70.63. Our first target is $70.25. Our secondary target is $68.00. We still want to avoid holding over earnings. That only gives us a few trading days (earnings are Feb. 7th).

- Suggested Positions (very small positions only!) -

Long the 2011 February $70.00 PUT (CTSH1119N70) Entry @ $1.30

01/24 CTSH opened at $73.13. Put option opened at $1.30 01/22 Moved from call candidate to put play.

chart:

Entry on January 24th at $73.13
Earnings Date 02/07/11 (confirmed)
Average Daily Volume = 1.8 million
Listed as a PUT on January 22nd, 2010


Decker's Outdoor Corp. - DECK - close: 74.41 change: -2.21

Stop Loss: 80.25
Target(s): 70.50, 65.50
Current Option Gain/Loss: +20.7%, and +12.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/29 update: Bingo! Right on cue DECK rolled over. Of course the civil unrest in Egypt inspire market sell-off may have had something to do with it. I would still consider new positions here.

Our targets are $70.50 and $65.50. The Point & Figure chart for DECK is bearish with a $65 target.

- Suggested Positions -

Long the 2011 February $75.00 PUTS (DECK1119N75) Entry @ $2.65

- or -

Long the 2011 March $75.00 PUTS (DECK1119O75) Entry @ $4.80

01/27 DECK hit our trigger to buy puts at $77.00

chart:

Entry on January 27th at $77.00
Earnings Date 02/24/11 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on January 20th, 2010


Google Inc. - GOOG - close: 600.99 change: -15.80

Stop Loss: n/a
Target(s): n/a
Current Option Gain/Loss: see below
Time Frame: 1 month
New Positions: No

THIS IS A STRANGLE TRADE (not a simple put play)

Comments:
01/29 update: The bounce in GOOG has failed at resistance near $620. Now shares are testing round-number, psychological support near the $600 mark. A breakdown from here could accelerate the profit taking. If you look at the weekly chart GOOG has definitely formed a failed rally/bearish reversal pattern. The good news is that stocks normally fall faster than they climb. I am not suggesting new strangle trades at this time but aggressive traders might consider buying puts.

STRANGLE TRADE: Buy an out of the money CALL and PUT

STRANGLE #2 (February) initial cost $15.10, currently: $2.45 (-83.7%)

2011 February $680 call (GOOG1119B680) Entry @ $6.20

- AND -

2011 February $580 put (GOOG1122N580) Entry @ $8.90

01/22: Exit the January strangle at the open.

chart:

Entry on January 20th at $626.77
Earnings Date 01/20/11 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on January 19th, 2010


iShares Russell 2000 Index - IWM - close: 77.41 change: -1.94

Stop Loss: 80.25
Target(s): 75.00
Current Option Gain/Loss: -47.8%
Time Frame: 1 to 2 weeks
New Positions: see below

Comments:
01/29 update: The bounce in the small cap index is rolling over. This looks like a new entry point to buy puts. I am lowering our stop loss to $80.25. Right now our target is $75.00 but I'm tempted to move the target down to $74.00.

Small Position only

Long the 2011 February $77 puts (IWM1119N77) Entry @ $1.65

01/29 New stop loss @ 80.25

chart:

Entry on January 20th at $78.14
Earnings Date --/--/--
Average Daily Volume = 38 million
Listed on January 19th, 2010


Monsanto Co. - MON - close: 71.54 change: -2.14

Stop Loss: 75.51
Target(s): 69.00, 66.00
Current Option Gain/Loss: +46.0%, and +36.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/29 update: The unrest in Egypt and many parts of the world has been fed by rising food costs and inflation in food prices. There was talk this weekend that investors should look at fertilizer names as potential bullish investments as governments try to relieve food price pressures. Of course this is probably a longer-term phenomenon. Short-term MON is likely to trade lower with the broader market.

I would use today's move as a new entry point to buy puts. Our targets are $69.00 and $66.00.

- Suggested Positions -

Long the 2011 February $70 PUT (FDS1119N70) Entry @ $1.00

- or -

Long the 2011 March $70 PUT (FDS1119O70) Entry @ $1.85

01/29 MON is offering a new entry point to buy puts.

chart:

Entry on January 26th at $73.00
Earnings Date 03/31/11 (unconfirmed)
Average Daily Volume = 6.2 million
Listed on January 24th, 2010


Panera Bread Co. - PNRA - close: 94.86 change: -2.28

Stop Loss: 100.05
Target(s): 95.15, 91.00
Current Option Gain/Loss: +19.2%
Time Frame: 3 weeks
New Positions: see below

Comments:
01/29 update: Target achieved. PNRA broke down to new multi-week lows and closed under potential support at its 100-dma and the $95.00 mark. Our first target to take profits was hit at $95.15. Our final target is the $91.00 level but more aggressive traders might want to consider aiming for the 200-dma. I am adjusting our stop loss lower to $100.05. I am not suggesting new positions at this time. We'll wait for the next failed rally.

- Suggested Positions - (small positions)

Long the 2011 February $95 PUTS (PNRA1119N95) Entry @ $2.85

01/29 New stop loss @ 100.05
01/28 1st Target Hit @ 95.15, option @ $3.20 (+12.2%)
01/26 New stop loss @ 100.55, target adjusted from 95.50 to 95.15

chart:

Entry on January 24th at $97.96
Earnings Date 02/10/11 (unconfirmed)
Average Daily Volume = 364 thousand
Listed on January 22nd, 2010


CLOSED BULLISH PLAYS

Deere & Co. - DE - close: 88.91 change: -2.07

Stop Loss: 87.99
Target(s): 94.75, 99.50
Current Option Gain/Loss: Unopened
Time Frame: 2 to 3 weeks
New Positions: Yes, see trigger

Comments:
01/29 update: The market's morning spike higher on Friday pushed DE to $91.89 but shares quickly rolled over. The market appears to have finally reversed. I am dropping DE as a bullish candidate. Shares never hit our trigger to open positions at $92.10.

Trade never opened!

chart:

Entry on January xxth at $ xx.xx
Earnings Date 02/16/11 (confirmed)
Average Daily Volume = 3.3 million
Listed on January 26th, 2010


FedEx Corp. - FDX - close: 90.48 change: -3.88

Stop Loss: 91.75
Target(s): 99.90, 104.75
Current Option Gain/Loss: -42.9%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
01/29 update: Ouch! I've been warning readers that a breakdown or a rally in FDX was imminent. The market sell-off on Friday produced a -4.1% decline in FDX and the stock broke through several layers of support. Our stop loss was hit at $91.75. Our call was trading near $1.25. Our plan was to keep our positions small to limit our risk.

- Suggested Positions (only small positions so far) -

2011 April $100 call (FDX1116D100) Entry @ $2.96, exit @ $1.25 (-57.7%)

01/28: Stopped out. Option @ $1.25 (-57.7%)
01/22: January options have expired (-100%)
01/13: New targets for the April calls (99.90 and 104.75)
01/12: New stop loss @ 91.75
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


Research In Motion - RIMM - close: 60.15 change: -1.83

Stop Loss: 59.90
Target(s): 64.75, 67.50
Current Option Gain/Loss: -63.5%, and -48.9%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
01/29 update: The market-wide profit taking was too much for RIMM. Shares eventually broke down under the $60.00 level before the closing bell and hit our stop loss at $59.90. Shares also closed under technical support at their 50-dma.

- Suggested Positions -

2011 Feb. $62.50 calls (RIMM1119B62.5) Entry @ $2.47, exit $0.90 (-63.5%)

- or -

2011 March $65.00 calls (RIMM1119C65) Entry @ $2.35, exit $1.20 (-48.9%)

01/28: Stopped out. Feb call @ 0.90 (-63.5%), Mar call @ 1.20 (-48.5%)
01/13: New stop @ 59.90
01/13: 1st Target Hit @ 64.75. Feb. call @ $4.00 (+61.9%) Mar. call @ $3.75 (+59.5%)
01/12: New stop loss @ 58.45

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