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Daily Newsletter, Saturday, 2/5/2011

Table of Contents

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

Market Wrap

Bad Payroll News But New Highs All Around

by Jim Brown

Click here to email Jim Brown

The Dow, S&P, Nasdaq, Wilshire 5000 and the Semiconductor Index all broke out to new highs despite the weaker than expected Non-Farm Payrolls.

Market Statistics

The big news for Friday was of course the big miss in the Non-Farm Payrolls. The headline number came in with a gain of only +36,000 jobs instead of the consensus estimates of +146,000. I warned on Thursday the weather disruptions could cause the actual number to be dramatically different than estimates. I was glad the number did not come in negative. I am even more excited to see the market shake off the jobs miss and move to new highs before the weekend. Given the weekend risk from Egypt I view the rally into the close as bullish.

The low jobs numbers were directly related to weather with 886,000 workers reporting they were not at work because of the weather. The average for January over the last ten years was 262,000. As a result of the weather there was a decline of -32,000 construction jobs and -40,000 in transportation/utilities.

The report was not all bad news. November job gains were revised higher from 71,000 to 93,000 and December gains rose from 103,000 to 121,000. That was an upward revision of +40,000 jobs.

The unemployment rate fell sharply to 9.0% but not because a lot more people found jobs. The benchmark revisions for 2010, which are released each January, reduced the number of people in the workforce from prior estimates and that changed the unemployment ratio. It is strictly an accounting change not a change in actual employment. However, the household survey did show a significant jump in new jobs of 589,000 (seasonally adjusted) for January. The household survey is different from the establishment survey that showed a gain of +36,000 jobs.

I was glad to see the headline number was not negative. This suggests the job hiring dynamics postponed by the weather will be pushed forward into February and potentially produce a blowout month.

Non-Farm Payroll Chart

The payroll report was the only major report released on Friday. Next week's calendar is VERY light. I could not find anything that was worth a highlight.

Economic Calendar

The earnings schedule is also shrinking. On the list below the only company I felt was really important was Cisco. You may remember they disappointed on earnings back in November and the stock was trashed for a -25% loss. That upset the entire tech sector until many more techs had reported and we found out it was a Cisco problem not a problem with the tech sector.

Cisco shares have not recovered from their November beating but they have been moving higher for the last month. Another earnings disappointment on Wednesday would be painful and I would not be surprised to see some profit taking before earnings.

Earnings Calendar

While on the subject of Cisco they boosted the tech sector last week when they projected Internet traffic over mobile devices to increase 2600% by 2015. Cisco said users are increasing their web surfing and video viewing on their smartphones. Add in the iPad and the 30+ Android tablets heading to market and bandwidth usage is going to explode. That is very good news for Cisco because they make the heavy-duty routers and switches required for that much bandwidth. Cisco is projecting 7.1 billion Internet connected devices by 2015. They also expect tablets to account for 3.5% of all Internet traffic. This study by Cisco suggests any short-term dip would be a good buying opportunity to add some Cisco shares. They WILL be the leading provider of Internet hardware for the foreseeable future.

The conspiracy theorist in me wonders if they released this study the week before earnings in an effort to blunt another stinking earnings release. Enquiring minds want to know!

On the earnings front on Friday the winner was definitely JDS Uniphase. JDSU posted earnings of 29-cents and analysts were expecting 19-cents. Revenue rose +38% and earnings +142%. They raised guidance to $440-$460 million and analysts were expecting $438 million. Shares of JDSU rallied +27% on Friday after closing at a new 52-week high on Thursday. It was definitely celebration time for holders of JDSU shares.

JDSU Chart

Tyson Foods (TSN) also rallied after earnings but not quite as dramatically as JDSU. Tyson earnings jumped +86% on improving sales of chickens and rising prices for beef and pork. Analysts said the sharp increase in consumer spending for meat products and the ability to raise prices indicated the recession was clearly over. Consumers cut back on meat consumption during the recession and forced some severe cutbacks at companies like Tyson. That period of depressed food prices has passed and demand is rising. We keep hearing every day that food inflation is causing problems around the world. Commodity grains are soaring in price and I would have expected that to impact Tyson but they were able to pass on the prices in their meat thanks to the rising demand. Shares of TSN gained +5.7% on Friday.

Tyson Chart

Pulte Homes (PHM) reported earnings on Friday and the homebuilder said they were seeing encouraging levels of traffic from potential buyers. This is a repeat of other guidance in the sector. Apparently homebuyers are still shopping as interest rates begin to rise. The race is on to lock in a cheap mortgage and the normal winter slowing has actually seen some traffic improvement. This suggests the spring selling season could be very strong. That assumes the monster flood of foreclosures doesn't swamp the new home market.

Last year builders got help from the government with a buyer tax credit and they don't have that added stimulus in 2011. If the government really wanted to help Bernanke push the economy forward they would offer another stimulus program of some sort for homebuyers. Unfortunately the term "stimulus" is a four-letter word for voters and lawmakers alike this year.

Homebuilder Standard Pacific said earlier in the week that sales in January were stronger than just a few months ago. The CEO said he did not expect to beat last year's tax credit stimulated sales numbers but they expected to come close even without government help.

Stronger than expected home sales is just one more confirmation the economy is improving. We saw both ISM Manufacturing and ISM Services post outstanding improvements in January with decent numbers from the supporting cast of reports. Employment may have slowed in January with storms as an excuse but the employment components in each of the ISM reports showed dramatic improvement. Those are just surveys of company plans being put into action and it could be several more months before the actual hiring picks up significantly but I believe it is coming. When I say significantly I am not expecting a return to full hiring speed but monthly numbers in the 200,000 range or better. It takes 150,000 new jobs per month just to absorb immigrants and newly graduated workers into the job market.

The Nasdaq reported on Saturday that hackers had infiltrated the Nasdaq network used to provide confidential communications to some 300 corporations. The intrusions did not impact the Nasdaq stock trading systems and no customer data was compromised. The Nasdaq network service called Directors Desk, helps companies communicate with their boards in a timely and secure manner by hosting documents and communications between board members online. Apparently it was not as secure as they thought. Hackers had penetrated the network multiple times over the last year and left behind zombie programs intended to provide remote access and data. The FBI and Secret Service have been investigating for months and asked the Nasdaq not to go public for fear of losing the trail of the intruders if they abandoned the hack. Unfortunately the Wall Street Journal got the story and immediately went public. Having access to secret communication between board members of top corporations would be invaluable for placing trades ahead of events like mergers and takeovers.

Crude oil prices declined -$1.42 on expectations for a Mubarak exit in Egypt. At one point on Friday he was rumored to be resigning and leaving Egypt to live in Montenegro. The problem with Mubarak stepping down and leaving Egypt is how to keep the fortune he amassed as president of Egypt for 30 years. Not only his fortune but that of his family and primarily his son Gamal. All have amassed huge fortunes and many believe they were made through government corruption.

Countries who evict their leaders have a good track record of recovering the money. Once the leader is out of power and cannot wreak havoc on those trying to prove corruption the leader is an easy target for all manner of financial seizures. Mubarak must get his fortune out of Egypt and then vacate the country quickly to another country without extradition treaties.

This is why analysts believe Mubarak has not yet run for cover. He is probably trying to structure an orderly exit with guarantees from the succeeding government that they will not chase him to whatever country he chooses.

Saturday afternoon update: Gamal Mubarak, Hosni Mubarak's son, resigned from the leadership of Egypt's ruling party on Saturday and vowed not to run for election in September. Reportedly Gamal fled to London last Sunday along with Hosni Mubarak's wife, Suzanne, and daughter and over 100 suitcases. Since then Gamal and his wife have been reported in the U.K. where they reportedly have a home. Gosh, 100 suitcases. I wonder how many were packed with cash?

There are rumors circulating this weekend that the newly appointed Vice President, Omar Suleiman, survived an assassination attempt last week but two of his bodyguards were killed. That would have been one of the shortest tenures on record even in the Middle East.

A gas pipeline from Egypt that delivers gas to Jordan and Israel exploded suspiciously on Saturday. Officially they claim it was a gas leak that caught fire. Unofficially and from several sources the pipeline was targeted by anti-government demonstrators to punctuate the risk to Mubarak of not stepping down. Gas to Jordan and Israel will be offline for at least a week while repairs are made.

When the demonstrators label Friday as "departure day" it was a guarantee he would not leave on Friday. He would never appear to give demonstrators the satisfaction of pushing him out according to their calendar. That does not mean has hasn't already picked a destination and is packing his financial bags. After watching president Obama speaking publicly about his administration suggesting Mubarak leave immediately I believe he would not be making so many public statements if he did not already have assurances Mubarak was on the way out. Politicians, in any party, always want to make it appear they were instrumental in the eventual outcome. If the exit never came they would be seen as ineffectual and that is not the picture president Obama would want as he heads into the election cycle.

When the announcement is finally made the price of crude will likely plunge without any geopolitical security premium to keep prices afloat. Crude inventories in the U.S. are at multi-year highs and inventory levels at Cushing Oklahoma, the delivery point for U.S. crude futures are nearly maxed out. The current March contract expires on Feb-22nd so the odds of some expiration volatility pushing prices lower are pretty high.

Crude Oil Chart

The plan for Egypt is for business owners to reopen their businesses on Sunday. Banks will also open. The stock market thinks it will open on Monday. The Egyptian equivalent of the SEC has relaxed the rules for stock buybacks in hopes companies will take advantage of the -20% drop of the last two weeks to buy back stocks and support the market.

I believe the rally into the close on Friday was based on the expectations of a significant improvement in the Egyptian situation before our markets open on Monday. The worst was priced into our market a week ago and now investors are buying the rumor the crisis is nearly over.

The VIX seems to be saying the crisis is over or at least will be over soon. The VIX closed at 15.93 on Friday after spiking to 20 the prior Friday. The VIX under 16 is very close to the 52-week low of 15.23 back in April. That was just before the Greek debt crisis pushed it to a high of 48 only three weeks later. This is a clear indicator investors no longer fear any news out of Egypt.

VIX Chart

The S&P closed at a new high at 1310 on Friday. Each intraday dip was shorter as the week drew to a close and the index seems to be pointing to higher highs ahead.

One analyst on Friday reported on some research covering the last 30 years. Whenever the S&P holds over its 50-day average for 100 days the trend continues for the next two months 80% of the time. Of course this has only happened five times in the last 30 years. The S&P last closed under its 50-day average on September 1st. That made this week the 100th day over the average and only the sixth time in 30 years.

They say the trend is your friend until the bend at the end. The trend in everything appears to be improving. The stock market is rising. Economic activity is rising. Employment, ignoring the blizzard impact, is rising. Even home sales and traffic are rising. Profits are rising. The trend is solidly higher in nearly every metric we examine.

Earnings estimates for Q1 have jumped from +13% growth to +21% growth since January 1st. That is a huge increase and it means analysts will have to upgrade target prices on stocks once again. Combined earnings for Q4 are now up to +37% with 70% of companies already reported. Fund flows into equity funds are increasing. For the first three weeks of January $8.3 billion flowed into U.S. equity funds and $7.7 billion into global equity funds. We have had negative outflows from equity funds since April and in quite a few months before that. Money market assets dropped -$21 billion last week as investors began to shift money back into risk assets like equities. All of the brokers reported with their earnings that the retail investor was returning to the market. Ameritrade reported this week that daily trades were up +21% in January alone to 432,000 per day. E-Trade saw a +23% improvement.

The market gains are broad based. The Wilshire 5000 had its best week since Dec-3rd with a +2.7% gain. It has closed higher on nine of the past 11 days.

The current bull market is closing in on its second birthday. On March 9th 2009 the Dow hit a closing low of 6,547 and the S&P 677. Friday's close represents an 84.2% rebound for the Dow and a +93% rebound on the S&P. There have been 27 bull markets since the early 1900s. The average length of a bull market over that period was 1.9 years. Compared to the average valuation of those 27 bull markets on their second birthday the current bull is between 20% and 32% over valued depending on which PE metric you use. In fact there have only been two other bull markets in the last 100 years that reached this level of overvaluation. Once was just before the 1929 crash and the other one was in the mid 1960s just before the lost decade for the Dow where it went nowhere for more than 10 years.

Obviously prior performance is no guarantee of future results. Bull markets of any length can continue far longer than most traders expect. Picking the top in a bull market is an art that most bears fail to master. It is like the Energizer Bunny. It just keeps going and going and going. Eventually there will be a day of reckoning but I don't think it will be soon. All the external factors I listed earlier are too positive and pointing to a much better economy 6-9 months from now. We should not have to worry until after the April earnings peak and just before the QE2 program comes to a close.

One primary reason the market should have farther to run is the vocal majority betting against it. The current rally has gotten no respect. Calls for market tops have been so prevalent that retail investors and quite a few funds are still biding their time on the sidelines. The volume over the last week has averaged only 7.6 million shares and Friday barely broke 7 billion. The S&P and Nasdaq rallied +3% but quite a few traders were still on the sidelines. Fear of buying a market top kept them from a 3% gain. As long as that many traders continue to worry about buying a top the more likely those same traders will end up chasing prices higher.

Despite what some analysts will tell you it is very hard to predict a market. I know that for a fact because I have tried it in this commentary 2-3 times a week for the last 14 years. I have learned the lesson more than I care to remember that the market leads and we should follow. In September 2006 I started listening to the bears and I was convinced we were going to have a sell off and I went negative on the market. The S&P rallied +300 points in 12 months for a 27% gain and I missed much of it because I had been seduced into joining the dark side. I swore never again to be wrong for more than a couple weeks. Actually it is fairly easy to be right more than your wrong if you just follow two basic rules. 1) The trend is your friend. 2) Don't fight the Fed.

The reason the bears are so adamant a top is near is the market statistics I quoted earlier. They will tell you no market rebounds +90% without a significant correction. What they forget is markets rebound much stronger and longer when coming out of significant recessionary events. The Great Recession we just exited primed the pump for a massive rebound that that rebound is still in progress. Yes, it will eventually end badly and it could be 20 S&P points from now or 200 points from now. Are you willing to bet against it for the next 200 points?

The S&P close over 1310 sets up another ten-point move to the next resistance level at 1320. The move over 1300 on bad news was another bad news bulls confirmation point so I expect that 1320 level to be tested and probably next week. In order to get there without a dip the S&P will have to test the top of its current uptrend channel. That would be bullish and trigger even more traders to get off the bench and into the game if that uptrend resistance was broken. Until the S&P does start that new leg higher we will have to remain content to buy the dips. This plan has worked like a charm for many weeks and I see no reason to change now.

S&P-500 Chart

S&P-500 Chart - Weekly

The pace of the rally is far from a bullish stampede. The S&P has gained +50 points since Jan 1st but the gains have been anything but peaceful. The index traded in an uptrending 30-point range with repeated dips to support giving bulls plenty of dips to buy but more importantly providing for a rolling consolidation of each major gain. The consolidating uptrend may be confusing the bears because every dip is seen as the start of the "big one" but in reality it is just an orderly market flow with temporary pauses for profit taking and dip buying. This type of market action could actually continue quite a while since each minor dip becomes a pressure release and allows new investors to join the party.

S&P-500 Chart - 60 min

The Dow has already moved over its uptrend resistance and closed at a new high on Friday. While over resistance it still can't seem to break free. We need one good move to bust out and trigger a new leg up. After Thursday's intraday dip it appears support is now 12,000. That prior resistance turned support is a bullish indicator. A move past 12,150 targets 12,500.

Dow Chart

The Nasdaq pushed through 2760 and a level that had been resistance for two weeks. It also surpassed the 2766 high from January 18th. In theory this new high at 2769 is a breakout but it is still in the grip of that resistance. We need one more decent day for a confirmed breakout to target the next resistance at 2800. The Nasdaq had been the laggard for the last week as the various big cap stocks rested. That appears to be over but we need that breakout move to confirm. Current support appears to be the 30-day average at 2711.

Nasdaq Chart

The small caps rallied for a 3% gain last week but stopped dead on resistance at 800 on Friday. The three levels of converging resistance in red could make for a rocky week without an end to the Egyptian crisis. Russell 800-807 will be one last wall of worry for the bulls. Support is the 50-day at 780.

Russell Chart

The Wilshire 5000 also closed at a new high over resistance at 13,800 and actually has some room to run if it can hold its gains. This is evidence of broad based bullish sentiment. The Wilshire can't be gamed by fund managers so it is a valid representation of broader market sentiment.

Wilshire 5000 - Total Stock Market Index Chart

In summary I believe the trend is still our friend. We should be patient and buy the dips rather than buying the breakouts. However, as we saw last week the dips are becoming shallower and could require some quick thinking to make the play. It is not important to buy the exact bottom of a dip. It is often better to buy the rebound rather than trying to catch the falling knife.

The economic calendar is boring next week and earnings are starting to wind down. This will focus more interest on geopolitical events like Egypt. Have you noticed how quiet Europe has been since the holidays? There are rumors they are going to expand the Financial Stability Fund (FSF) to prevent any future problems. If that happens it would be bullish for the market but some of that news is already priced in.

Don't fight the Fed, buy the dips instead!

Jim Brown

Send Jim an email

"Live as if you were to die tomorrow. Learn as if you were to live forever." Mahatma Gandhi

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Index Wrap

The Downside Reversal That Wasn't

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

A week ago Friday (1/29) saw a downside reversal pattern that suggested a further decline to follow. But there was no downside follow through on Monday and the S&P closed back above the key 21-day moving average; game (still) on!

Other stand out technical aspects to this past week's market action in the major indexes included a better than average performance of the Dow 30 (INDU). INDU found support in the area of its 21-day moving average, whereas the two main S&P indexes pierced this average, for a day anyway. Chevron and Exxon contributed to Dow strength on Mideast oil supply concerns, as did 7-8 other INDU stocks that were strong. This market just keeps rolling along.

The Nasdaq had been in congestion or resistance zone defined by several highs in the same area in the Composite and the Nasdaq 100. By Friday, however strength in the S&P and Dow helped pull up the tech heavy Nasdaq which broke out above this line of resistance.

I'm downplaying for now the bearish price/RSI divergences, seen with all the major indexes; i.e., prices have gone to new highs but not the RSI which has had a series of lower lows. While there is this bearish technical divergence , this is no 'timing' indicator. And it seems that this market has the wind behind its back still and market fundamentals are driving stocks higher. I would respect the strong up trend in the major indices and avoid trying to pick tops. Which I have to admit, I sometimes try to do!

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) index chart had what looked like a key downside reversal coming into this past week, but that pattern was negated, as far as any short-term bearish implications, by the rebound that followed. SPX continued this past week to close above its 21-day moving average and is tracking higher in the middle area of its broad uptrend price channel. Unless the index starts falling under its 21-day average and its up trendline, I would anticipate still higher prices.

Support is at 1400-1289, next around 1270 and then in the 1240 area. I thought last week that we might see a test of SPX's up trendline (then intersecting around 1260) but my thought on that didn't pan out.

Near resistance looks like 1320, with fairly major resistance anticipated at the upper boundary of SPX's uptrend channel; this trendline intersects in the 1360 area currently.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) index continues to track higher within its longer-term uptrend channel. I also noted last time that: "the break below the 21-day average is bearish but one more day below the average is needed to confirm." My rule of thumb when prices penetrate a key moving average or trendline is to look for 'confirmation' of that break by what happens the NEXT day and whether there's a further move in the same direction (as the break). In this case the sharp 1-day decline was followed by a rebound Monday which continued this past week.

Given the continued buying interest on dips, I think OEX is headed to the 600 area. I've noted what I think will be fairly major resistance just above the 600 level (604), at the upper channel line.

The 21-day average at 580.8 represents a first area of support, with a next area being Monday's intersection of the up trendline, currently at 566.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) average held up well on its recent one day break, with a rebound the following day as INDU held above the key 21-day moving average. The fact that the Dow didn't pierce this key trading average on the Friday (1/28) decline, unlike the S&P indexes, was a predictor for the S&P rebound the next day. Sometimes price action in the Dow is the top bellwether of the trend in the other major indexes. I wrote last week that: "More weakness is suggested if INDU starts falling below its 21-day moving average." This didn't happen of course so any alarm to the bulls was short-lived. Dow stocks contributing the most to the advance this past week were AA, CAT, CSCO, CVX, DD, DIS, GE, IBM, XOM.

Near technical support is again figured as in the area of the current 21-day moving average; at 11866 coming into Monday. Next support should come in around the Dos' up trendline, suggesting support in the 11666 area.

I'm not predicting any very near-term 'resistance' as I don't have much to work from in terms of the chart. In terms of the upper boundary of my highlighted uptrend price channel, potential resistance there comes in around 12367 currently.

Checking in on the weekly charts (not shown), there's no obvious major resistance suggested until/unless INDU again hits the 13000 area. INDU has to date retraced more than 66% of the 2007-2009 bear market decline. This bodes well for an eventual retest of the 2007 July-October highs in the 14000 region. Often when a stock or stock index retraces an amount greater than 2/3rds of the prior price swing, there's an eventual 100% retracement of that move and there's a retest of the major prior high or low.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) rebounded after falling some after it hit some technical resistance. By Friday, COMP went on to pierce a line formed by several prior intraday highs around 2766. I've redrawn COMP's up trendline this week reflecting my latest interpretations suggesting more upside. The break below 2700 which had looked like the start of something (more downside) was instead the END of something, as COMP quickly came back. My '2-day' rule relating to two consecutive closes above/below a key moving average or a trendline as tending to offer 'confirmation' of at least a short-term trend reversal wasn't relevant here.

We could be seeing the start of new up leg in COMP. The potential for a substantial further advance depends on what happens in this coming week as to how much more buying comes in.

I didn't highlight it on the chart but 2700 now looks like immediate technical support, followed by support implied by the 50-day moving average at 2667; next support then comes in around 2600.

I've highlighted potential next resistance at 2800. Above that a gauge of possible next resistance is provided by the November 2007 top in COMP; the highest intraday peak of that top was 2862.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) had formed a line of resistance comprised of several intraday highs that formed around 2330-2331. I had been saying for awhile that 2330 was important as a next potential resistance as it represented a Fibonacci 38% retracement of the March 2000-October 2002 bear market decline. Sure enough this area was a stopping point for a while but with Friday's breakout above this 'congestion' zone, NDX may be embarking on another up leg.

I'm downplaying for now the bearish price/RSI divergence, as prices have gone to new highs but not the RSI which has had a series of lower lows. Such a divergence does give me pause in adding much new in the way of bullish strategies.

Support is highlighted at the up trendline, currently intersecting at 2280. Next support comes in around 2250, the level of the current 50-day moving average.

Resistance is anticipated at 2350, then next in the 2400 area.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The chart remains bullish in its pattern after the beginning of the week brought in buying that checked the decline of the prior Friday (1/28). I anticipated that the break below 56.0 was the start of a further correction. WRONG!

Near resistance looks like 58.0-58.1; a broad uptrend channel on the weekly chart (not shown) suggests major resistance coming in around 63.0. Between 58 and 63 - well, I'd be hard pressed to figure resistance levels within that zone.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) has been either 'leading' the Nasdaq or at least keeping up with it. Not so lately, as the index has not yet cleared ITS prior highs. It seems that the index will pierce 807 and move still higher. By my analysis major resistance begins in the 850 area.

Support is at 780, extending to the prior swing low at 772. Major support begins in the 740 area.



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

Resistance, Ranges, and Rebounds

by James Brown

Click here to email James Brown

Editor's Note:

We've got three new candidates tonight. They all offer a different entry point strategy.

- James


NEW DIRECTIONAL CALL PLAYS

Caterpillar Inc. - CAT - close: 99.59 change: +0.66

Stop Loss: 93.90
Target(s): 99.75, 104.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
The $100 level is traditionally round-number, psychological resistance. Shares of CAT are quickly approaching this level. I would expect a little pull back and we want to be ready to buy the dip near the bottom of CAT's rising bullish channel. I'm suggesting a trigger at $96.50 with a stop at $93.90. Our targets are $99.75 and $104.00.


The Point & Figure chart for CAT is bullish with a $112 target.

Trigger @ 96.50

Buy the March $100 calls (CAT1119C100) current ask $2.92

Annotated Chart:

Entry on February xxth at $ xx.xx
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume = 6.2 million
Listed on February 5th, 2010


Donaldson Company, Inc. - DCI - close: 59.43 change: +0.71

Stop Loss: 57.40
Target(s): 62.50, 64.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Comments:
02/05 update: We have had DCI on our newsletter as a put candidate with the expectation that when the market corrects shares of DCI would breakdown from its trading range. Now it looks like the market is not going to correct any time soon and DCI is poised to breakout higher from its trading range. We are switching directions. Instead of puts we want to buy calls.

I am suggesting a trigger to buy calls at $60.35. If triggered we'll use a stop at $57.40. Our targets are $62.50 and $64.75. We will plan to exit ahead of the late February earnings report.

Trigger @ 60.35 (Small Positions)

- Suggested Positions -

Buy the 2011 March $60 calls (DCI1119C60) Current ask $1.75

02/05 Switched from puts to calls. Trigger @ 60.35

Annotated Chart:

Entry on February xxth at $ xx.xx
Earnings Date 02/23/11 (unconfirmed)
Average Daily Volume = 208 thousand
Listed on January 31st, 2011


PACCAR Inc. - PCAR - close: 50.60 change: +0.10

Stop Loss: 49.45
Target(s): 53.85
Current Option Gain/Loss: + 0.0%
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of PCAR were crushed after only reporting earnings results that were inline with expectations. The stock has been hammered from the $56 level toward round-number, psychological support near $50 in just days. It would seem the sell-off might be overdone. PCAR seems to have found some support. I think we can catch a short-term bounce from $50 toward resistance near $54.

I'm suggesting small bullish positions now. Buy calls at current levels. The low on Thursday was $49.70. We'll use a stop at $49.45. Our exit target is $53.85. This should be a short-term trade. Aggressive traders could use February calls. I'm listing both February and March. Just remember that Februarys expire in two weeks.

Note: A lot of the option strikes are odd. PCAR must have had some sort of dividend.

Open Small Positions Now

Buy the February $49.70 call (PCAR1119B49.7) current ask $1.60

- or -

Buy the March $55 call (PCAR 1119C55) current ask $0.40 (small positions)

Annotated Chart:

Entry on February 7th at $ xx.xx
Earnings Date 04/20/11 (unconfirmed)
Average Daily Volume = 2.9 million
Listed on February 5th, 2010


In Play Updates and Reviews

Another Two-Year High

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 index is once again at new two-year highs. In spite of the geopolitical unrest and a lousy jobs report, investors continue to push stocks higher.

-James

Current Portfolio:


CALL Play Updates

Compass Minerals - CMP - close: 93.87 change: +0.05

Stop Loss: 89.85
Target(s): 94.75, 99.00
Current Option Gain/Loss: + 52.0%, and +40.0%
Time Frame: a few days
New Positions: See below

Comments:
02/05 update: CMP initially dipped lower at the open on Friday but shares spent the day drifting sideways on either side of $94. We have just two days left. We will plan to exit on Tuesday, Feb. 8th at the closing bell to avoid holding over CMP's earnings report. More conservative traders will want to seriously consider exiting now since any drop is going to hurt our fragile gains in this trade. I am not suggesting new bullish positions at this time.

- Suggested Positions -

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

- or -

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

02/05 Two days left. Plan to exit on Feb. 8th at the close
02/03 New stop loss @ 89.90
02/01 Target Hit @ 94.75. Feb. call @ $2.50 (+100%)
Mar. call @ $3.30 (+65%)
02/01 New stop loss @ 89.85

chart:

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


Coach Inc. - COH - close: 54.59 change: +0.39

Stop Loss: 52.49
Target(s): 58.50, 62.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Comments:
02/05 update: The coil continues for COH. The consolidation under resistance near $55 is narrowing and would suggest a bullish breakout higher is just around the corner. I don't see any changes from my prior comments.

I am suggesting a trigger to buy calls at $55.35. If triggered we'll target a move to $58.50 and $62.00 but keep in mind that the $60.00 level could end up being round-number, psychological resistance.

Trigger @ $55.35

- Suggested Positions -

Buy the 2011 March $55.00 calls (COH1119C55)

- or -

Buy the 2011 March $57.50 calls (COH1119C57.5)

chart:

Entry on February xxth at $ xx.xx
Earnings Date 04/20/11 (unconfirmed)
Average Daily Volume = 4.1 million
Listed on January 31st, 2011


FactSet Research Systems - FDS - close: 101.91 change: +0.55

Stop Loss: 95.75
Target(s): 99.90, 103.50
Current Option Gain/Loss: +127.5%, and +242.8%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
02/05 update: FDS is holding up pretty well. After the action on Feb. 2nd I thought we might see a pull back. Shares are drifting higher. The stock is somewhat short-term overbought so we should expect a dip sooner rather than later. I am not suggesting new positions at this time but another dip or bounce near the $98 level could be an entry point. Right now our final exit 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

02/02 Consider locking in gains now (Options @ +124% and +242%)
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


Perrigo Co. - PRGO - close: 71.67 change: +0.09

Stop Loss: 69.90
Target(s): 79.00
Current Option Gain/Loss: -42.6%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
02/05 update: PRGO's trading on Friday doesn't offer us any clues. Shares traded in a very narrow range struggling with the $72 level. I would still consider new positions in the $71-70 zone but would keep the position size very small. More conservative traders may want to wait for some sign of strength first before considering new positions. We've got a stop loss at $69.90. The $68.00 level should actually be a lot more support than the $70.00 level but I don't want to risk that much of a move. More aggressive traders might want to consider a stop under $68. The initial plan was to use small positions to limit our risk. Our target is $79.00.
The Point & Figure chart for PRGO is bullish with an $85 target.

- Small Positions to Limit our Risk -

Long the March $75 calls (PRGO1119C75) Entry @ $2.18

chart:

Entry on February 2nd at $73.61
Earnings Date 02/01/11 (confirmed)
Average Daily Volume = 915 thousand
Listed on February 1st, 2010


CBOE Market Volatility Index - VIX - close: 15.93 change: -0.76

Stop Loss: N/A
Target(s): 24.00, 28.00
Current Option Gain/Loss: -39.3%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
02/05 update: Volatility is plunging. This index has fallen five days in a row since the big spike higher on January 28th. The 2011 lows are near 15.40 and the 2010 low was near 15.20. I would consider new bullish positions on a dip anywhere near the 15.50 area. Just because the VIX bounced above the 15.00 level doesn't mean it can go crashing through it but that would be a good area to speculate on a rebound. I will point out that between 2005 and 2006 the VIX was pretty much dead, limping along the 10.00 area for two years.

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


Wynn Resorts - WYNN - close: 118.06 change: -1.34

Stop Loss: 117.40
Target(s): 129.00, 135.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see TRIGGER

Comments:
02/05 update: The combination of LVS' post-earnings sell-off and the disappointing jobs number on Friday morning could have had a much bigger affect on shares of WYNN. Yet shares of WYNN just hovered sideways in the $118-119 zone. It's rival LVS lost -8.4%. I don't see any changes from my Thursday night comments. I am suggesting a trigger to launch bullish positions at $122.00. If triggered our targets are $129.00 and $134.50.

Trigger @ $122.00

- Suggested Positions -

Buy the March $130 calls (WYNN1119C130)

chart:

Entry on February xxth at $ xx.xx
Earnings Date 02/24/11 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on February 3rd, 2010


PUT Play Updates

Advance Auto Parts Inc. - AAP - close: 63.98 change: +1.50

Stop Loss: 65.05
Target(s): 60.25, 58.00
Current Option Gain/Loss: - 10.0%
Time Frame: 6 trading days
New Positions: see below

Comments:
02/05 update: Bears can't seem to catch a break. AAP's recent breakdown has reversed higher. Now the stock is testing resistance in the $64-65 zone again. More conservative traders may want to cut their losses now with the option down -10%. I am not suggesting new positions at this time. We plan to exit this trade on Wednesday, Feb. 9th at the closing bell to avoid holding over AAP's earnings report. That's assuming we don't get stopped out first. Our stop is at $65.05.

- Suggested Small Positions -

Long the 2011 Feb. $60.00 puts (AAP11N60) Entry @ $0.50

02/02 New stop loss @ 65.05

chart:

Entry on February 1st at $64.22
Earnings Date 02/09/11 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on January 31st, 2011


BorgWarner Inc. - BWA - close: 67.03 change: +1.31

Stop Loss: 70.10
Target(s): 63.50, 60.25
Current Option Gain/Loss: -11.9%, and + 0.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
02/05 update: Warning! Over the last couple of trading days BWA has produced what appears to be a bullish reversal pattern. The intermediate trend is still down but BWA looks poised to bounce. Shares should see resistance in the $67.50-68.00 zone and again near the $69.00-70.00 zone due to various trendlines and prior support. Yet more conservative traders may want to abandon ship right now while the February put is only down -12% and the March put is back to breakeven. We only have three trading days left and will plan to exit ahead of BWA's earnings report. I am not suggesting new bearish positions at this time. Our targets are $63.50 and $60.25. FYI: The Point & Figure chart for BWA has turned bearish.

Use small positions to limit our risk.

- (small positions) -

Long the Feb. $65 PUTs (BWA1119N65) Entry @ $1.42

- or -

Long the Mar. $65 PUTs (BWA1119O65) Entry @ $2.25

02/02 New stop loss @ 70.10

chart:

Entry on January 31st at $67.77
Earnings Date 02/10/11 (confirmed)
Average Daily Volume = 2.0 million
Listed on January 29th, 2010


Citrix Systems - CTXS - close: 66.40 change: +1.22

Stop Loss: 68.05
Target(s): 60.10, 58.00
Current Option Gain/Loss: -78.9%, and -52.5%
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Comments:
02/05 update: CTXS is just not cooperating. The stock is slowly working its way higher and outperformed the major averages on Friday with a +1.8% gain. Yet the stock is still trading under what looks like significant resistance near the $67.50 area. I did seriously consider an early exit for this trade and more cautious traders may want to exit now. I am not suggesting new positions at this time. Please note that I'm adjusting our stop loss to $68.05. Our initial plan was to start with small (half-sized) positions to limit our risk.

- (small positions) -

Long the Feb. $60 PUTs (CTXS1119N60) Entry @ $0.95

- or -

Long the Mar. $60 PUTs (CTXS1119O60) Entry @ $2.00

02/05 Adjusted stop loss to $68.05

chart:

Entry on January 31st at $63.43
Earnings Date 01/26/11
Average Daily Volume = 3.2 million
Listed on January 29th, 2010


Donaldson Company, Inc. - DCI - close: 59.43 change: +0.71

Stop Loss: 60.35
Target(s): 52.75, 50.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Comments:
02/05 update: Given that the market refuses to relinquish its up trend I am switching our DCI play from a put play (which never opened) to a call play. Look for DCI in the new plays section as a call in tonight's newsletter. We'll wait for a breakout from this trading range.

Our trigger to buy puts was never hit.

02/05 Switched to a call play.

(No chart, see tonight's new plays)

Entry on February xxth at $ xx.xx
Earnings Date 02/23/11 (unconfirmed)
Average Daily Volume = 208 thousand
Listed on January 31st, 2011


Google Inc. - GOOG - close: 610.98 change: + 0.83

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:
02/05 update: The lack of any real movement in GOOG has crushed our strangle trade. The options are just evaporating toward the zero line. We've got two weeks left before February options expire? What are the odds that GOOG is going to move more than +/- 7% in the next two weeks?

No new strangle positions at this time.

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

STRANGLE #2 (February) initial cost $15.10, currently: $1.85 (-87.7%)

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

- AND -

2011 February $580 put (GOOG1119N580) 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: 79.87 change: +0.14

Stop Loss: --.--
Target(s): 75.00
Current Option Gain/Loss: -100.0%
Time Frame: 1 to 2 weeks
New Positions: see below

Comments:
02/05 update: The IWM is still consolidating sideways under resistance at the $80.00 level. Given the market's overall trend odds are good that this trade is not going to pan out. Nimble traders will want to consider buying calls on a breakout over resistance. I am not suggesting new bearish plays at this time.

Small Position only

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

02/03 Remove the stop loss
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


Kohl's Corp. - KSS - close: 51.18 change: +0.12

Stop Loss: 52.25
Target(s): 47.00, 45.50
Current Option Gain/Loss: Unopened
Time Frame: 3 weeks
New Positions: Yes, see trigger

Comments:
02/05 update: KSS continues to underperform its peers in the retail sector and is still stuck under its 200-dma. Yet I would not buy puts yet. Wait for the breakdown under the $50.00 mark.

I am suggesting a trigger to buy puts at $49.75. If triggered we'll use a stop loss at $52.25. Our exit targets are $47.00 and $45.50. We want to close this trade before KSS reports earnings in late February. I'm suggesting March puts but more aggressive traders could use February puts. Let's keep our position size small.

Trigger @ 49.75

- Suggested Small Positions -

Buy the March $50 PUT (KSS1119O50) current ask $1.40

chart:

Entry on February xxth at $ xx.xx
Earnings Date 02/24/11 (confirmed)
Average Daily Volume = 4.9 million
Listed on February 2nd, 2010


CLOSED BEARISH PLAYS

Panera Bread Co. - PNRA - close: 98.87 change: -0.06

Stop Loss: 100.05
Target(s): 95.15, 91.00
Current Option Gain/Loss: -56.1%
Time Frame: 3 weeks
New Positions: see below

Comments:
02/05 update: As I feared PNRA briefly traded over resistance at $100.00 and reversed. Shares hit our stop loss at $100.05 closing this trade. The move looks like another failed rally and a potential entry point to buy puts again. However, PNRA is due to report earnings in just a few days and we do not want to hold over the announcement.

- Suggested Positions - (small positions)

2011 February $95 PUTS (PNRA1119N95) Entry @ $2.85, exit $1.25 (-56%)

02/04: Stopped out @ 100.05
02/04: Option @ $1.25 (-56.1%)
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