Option Investor
Newsletter

Daily Newsletter, Saturday, 2/12/2011

Table of Contents

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

Market Wrap

Market Needs A New Excuse To Worry

by Jim Brown

Click here to email Jim Brown

The crisis in Egypt ended and the markets moved higher. With no crisis left the bears are going to need to find a new excuse to sell the market.

Market Statistics

Obviously the worst events that tank the markets are the ones we don't expect. If we know the event is coming the market can price it in and the damage is spread over days or weeks instead of all at once. When the unexpected appears it has the greater ability to tank the markets because everyone immediately goes into reaction mode. With nothing on the event horizon we should be especially wary in the days ahead.

With Egypt and Cisco behind us there is nothing in view to cause trouble other than possibly the FOMC minutes on Wednesday. The markets actually don't like it when there are no problems ahead. The market needs a wall of worry to climb because worry and uncertainty produces intraday dips and gives the buyers something to buy. When there is no news the markets tend to move sideways because there is nothing powering the markets higher.

We may complain when something like Egypt knocked -160 points off the Dow two weeks ago but it provided another entry point and washed out the weak holders. The Dow has rebounded +475 points from that Egyptian event low.

The economic events on Friday provided no excitement but all eyes were on Egypt anyway. The Consumer Sentiment Survey for February came in at 75.1 and a gain of a point over the 74.2 in January. The gains overcame higher gasoline prices, the problem in Egypt, drop in home prices and some serious winter storms. The gains came from the present conditions component, which rose from 81.8 to 86.8. The expectations component declined nearly -2 points to 67.6.

The rise in the headline number confounded analysts because February normally sees a decline in sentiment as the cold weather and holiday bills weigh on consumers. If the gains in the headline number hold through the revision on Feb-25th it will be the first gain in February since 1999.

Consumer Sentiment Chart

The International Trade deficit rose to $40.6 billion in December from $38.3 billion in November. Imports and exports both rose. This suggests the U.S. and global economic recovery is gaining speed. Exports rose +1.8% to $163 billion and imports rose +2.6% to $203.5 billion. Auto exports rose +6.2% to $9.7 billion and imports of autos rose by less than 1% to $19.1 billion. As a lagging report this data was ignored.

For next week the economic calendar starts to pick up again with the inflation indexes, Industrial Production, Business Inventories and of course the FOMC minutes of the January meeting. The minutes will be the most important scheduled event of the week. The last couple meetings have had considerably more conversation and disagreement over the state of the economy, QE2 and inflation. We obviously don't know what these will say but Kevin Warsh did resign last week and he disagreed with Bernanke on QE2. There may be something in the minutes that is reflected in that resignation. We know there were dissenters to continuing the QE2 program but Kansas Fed President Hoenig was the only voting dissenter. At the prior meeting members were more positive on the economy and they lowered inflation forecasts based on recent data. If this trend holds in the January meeting the market should continue higher. With Warsh gone there is a slightly greater chance there will be some form of additional policy accommodation after QE2 ends. Warsh was a close advisor to Bernanke and without his negative view on future policy actions Bernanke could be considering a new program.

Philly Fed President Charles Plosser said on Saturday the U.S. deflation risk is gone. Preventing deflation was a major reason for entering the QE2 program. Plosser has also been a skeptic over the need for the QE2 program but he stopped short of saying it should be halted. He said that although the economy appeared to be getting stronger "it would be unwise for the Fed to suddenly shift course." He said the only reason for continuing the QE2 program today was the high unemployment BUT "monetary policy can't retrain people. Monetary policy can't fix those problems." Plosser is a voting member of the FOMC and did vote to continue the QE2 program in January. Explaining his decision he said credibility demand that the Fed not "stomp on the brakes and floor the accelerator at the same time. Why would we want to signal something ($600B through June and extended period) and then yank it out from under the market? That is just not a good way to conduct policy."

Economic Calendar

The Egypt crisis is over, or is it? Mubarak may be gone but the army is now in charge. Steps have already been taken to freeze his assets both inside Egypt and around the world. Obviously those will be the assets he was unable to hide over the last 18 days in preparation for his exit. The country will be run by a council of generals until constitutional reforms can be enacted and elections scheduled in September. There are quite a few analysts that believe these things won't happen or at least won't happen in the quoted timeframe. The military has been in charge behind the scenes in Egypt for the last 60 years but they always had a front man to take the heat. The civilian population is currently happy with the military but they do want a democratic government. The military may not want a truly democratic government because it would restrict their power.

Without a war in decades the Egyptian military has branched out into the private sector and created hundreds of businesses some of which are very profitable. The military leaders enjoy the fruits of these businesses. Under a truly democratic government that process would likely be halted. This means the military may not want to just charge into the next generation of government without having it structured so they can continue to profit from their businesses. Mubarak pocketed $70 billion over the last 30 years so there are plenty of reasons to suspect the military may lay low for a couple months then slowly divert the democracy effort. Egyptian TV said the military would soon dismiss the cabinet and suspend parliament.

This is not our direct problem as investors in the USA. The immediate crisis has been resolved and the 24-hour news cameras on Tahrir square will eventually be turned off. The next worry is the possibility of contagion across the Middle East. People everywhere have witnessed on TV the overthrow of a government in only 18 days by 250,000 demonstrators out of a country of 80 million. The oppressed and poverty stricken people in places like Iran, Saudi Arabia, Libya, Bahrain, Algeria etc are already texting messages back and forth wondering if they could topple their governments as well. A demonstration is planned for Bahrain on Monday demanding increased political representation. Bahrain is governed by a Sunni led autocracy (king) but the population is Shiite. The demonstration is being led by the al-Wefaq National Islamic Society. Activists in the Gulf region known as the Fifth Fence on Twitter have called for demonstrations in Kuwait to protest "undemocratic practices by the state." In Saudi there have already been demonstrations calling for more jobs. There are 26 million people in Saudi Arabia and 70% of those under 30 are unemployed.

Iran has already issued a warning to its citizens not to congregate for any form of protest. It has blocked reformist websites and arrested several opposition supporters and activists. This came after two leading opposition figures called for a rally on Monday in support of demonstrators in other countries. Iran officials said "We definitely see them (protestors) as enemies of the revolution and spies and we will confront them with force."

Protests in Algeria were banned but demonstrators showed up anyway on Saturday and were confronted by 10,000 heavily armed police. Some reports claim as many as 1,000 were arrested. Barricades were erected on all major highways into the city and police turned back busloads of demonstrators and allowed nobody to enter without valid business.

It remains to be seen if any of the planned demonstrations will gain any traction in any Middle Eastern country but the potential for another country to flare up is definitely there. These demonstrations could be new bricks in the bull's wall of worry but I don't see them having the same impact as the revolution in Egypt. Investors will have to find something else to worry about.

Oil prices plunged on news the Egypt crisis had ended. The U.S. WTI contract fell to $85.28 at the close. Meanwhile the Brent contract rallied +56 cents to $101.43. The difference reflects the buildup of supplies at the WTI delivery point at Cushing Oklahoma. The WTI contract expires in seven days. The Brent contract has become the global standard for crude since it is not impacted by storage issues.

WTI Crude Oil Chart

Brent Crude Chart

Now that Egypt is winding down we could expect to see Greece flare up again. Over the weekend Greek officials slammed the EU and IMF inspectors after their recent compliance inspection ended in hostility. On Friday the inspectors approved more aid for Greece but warned the country was not on track for the required reforms and demanded they sell more assets to raise 50 billion euros by 2015 instead of the 7 billion currently targeted. Many labor groups have been holding short-term strikes for weeks over the reforms and causing massive traffic jams. The financial problems in Greece are far from over despite their disappearance from the daily headlines.

In stock news Nokia (NOK) was crushed for a -14% loss after the company announced it was switching to the Windows Phone OS from Microsoft for all its smart phones. Nokia also said it would continue working on its own OS called MeeGo, which would support Symbian. The switch by Nokia is an effort to stop the bleeding of market share to phones using the Google Android operating system.

Microsoft and Nokia are losing the smart phone war and teaming up together to develop some competition to Google must have sounded like a good idea. The concept of Nokia teaming with Microsoft was thought to be a good idea by analysts since both have piles of money to throw at developing a really competitive OS. Unfortunately Android is surging ahead and the new team may never really be in the race. Nokia said the transition to the Windows OS would not be complete until late 2012. That is a huge window of opportunity for Android. As the biggest manufacturer of phones but losing market share to Android it would have seemed logical to me to team with Android. If you can't beat a winner, join the winner's team.

Investors evidently did not like the plan either and the stock was sold hard on seven times normal volume.

Nokia Chart

Clorox (CLX) shares spiked +7% late Friday after Carl Icahn said he had taken a 9.08% stake in the company. He said shares were undervalued given the company's big brands that are number one in their categories. Analysts said the various Clorox brands are loosely linked and maybe Icahn was thinking about splitting off some of those brands to generate shareholder value. Some of the brands other than Clorox are Hidden Valley salad dressing, Burt's Bees and Brita water filters. Last year Clorox sold off its STP and Armor All brands for $780 million.

Clorox Chart

First Solar (FSLR) rallied +8.64 after signing a 20-year contract with Edison International (EIX) to sell 250 megawatts of solar power to Edison. The 2500-acre generation plant will be located in Nevada and begin generating electricity in 2014. This is in addition to a 50 MW plant under construction adjacent to the new site. That plant will sell power to NV Energy on a 25-year contract.

First Solar Chart

Panera Bread Co. (PNRA) reported earnings that beat the street and raised its guidance higher than analysts expected and the stock surged +15% to $114.80. Earnings rose +23% to $1.21 per share and three cents over estimates. Revenue rose +17% on higher customer traffic. This is another sign the economy is recovering. Panera menu items are not cheap and rising sales shows consumers are spending money.

Panera Chart

Not all stocks rose on Friday. Expedia (EXPE) was knocked for a -17% loss after posting earnings of 32-cents. Analysts had expected 36-cents. Expedia was slammed with multiple downgrades even though sales rose +16%. Expedia's fight with American Airlines hurt profits after the company took American flights off its website.

Expedia Chart

PC maker Dell will report earnings after the bell on Tuesday. This is a wild card in the earnings game. Dell has been suffering for years as Hewlett Packard and others stole market share and the Dell brand went through some identification issues. Michael Dell returned to run the company and business has been improving. For this quarter Dell should have benefited from lower component costs but suffered from slower PC sales. Intel gave us the heads up that PC sales were below normal. The tablet computer boom will also slow Dell's laptop sales. Dell's data storage sales are also under pressure from the dozens of startups and established companies expanding in the space.

I wrote several months ago about the resurgence of Dell in the server space. I checked with a local ISP and their incoming stream of Dell servers has not slowed so the enterprise customer is alive and well. Earnings are expected to be 36-cents, more than double last year, on $15.75 billion in revenue.

Dell Chart

Borders Group (BGP) could file for bankruptcy as early as Monday. Borders will likely close 200 of its 674 stores. Borders did get a commitment from GE for $550 million in financing but it was contingent on getting other creditors to agree to provide financing or modify agreements. Borders has been unsuccessful in those negotiations. Bank of America has reportedly been in talks on providing a $450 million loan. Borders received a delisting warning from the NYSE because its stock has not traded over $1 for 30 consecutive days.

Borders Chart

Conoco Phillips (COP) announced on Friday it was upping its capital expenditure program to $13.5 billion in 2011 with $12 billion going towards exploration and production projects. About $6 billion of that will be spent in North America and liquids-rich areas in the shale plays and on oil sands projects and development of oil fields in Alaska. Another $6 billion will be spent in Africa, Asia and Europe. In addition to the aggressive capex budget Conoco will buy back $10 billion in stock and raise the quarterly dividend by 20% to 66-cents. Conoco bought back $4 billion in stock in 2010 and still has $1 billion left on an earlier program. Giving money back to shareholders seems to be the rage with Occidental (OXY) announcing a 21% dividend hike on Thursday. Conoco has been selling assets in order to reduce debt and focus on exploration. The company has raised $15.4 billion through asset sales last year.

Conoco Chart

Laszlo Birinyi made the news a couple weeks ago when he predicted the S&P would rise to 2850 by Sept 4th 2013. That would be better than a 100% gain from here and we are already up nearly 100% from the 2009 lows. He has rethought that prediction over the last couple weeks but still believes it is possible. He is calling it the best case. The worst case is 1750 and the most likely scenario would be 2100 by 2013.

Birinyi is a market historian. He makes his predictions based on historical norms for prior bull markets. He said every bull market consists of four stages. His first phase is "reluctance or denial" followed by "consolidation" then "acceptance" and finally "exuberance." He says the first and fourth stages are the strongest. The second quartile, the current phase is normally the weakest. This phase normally rises only about 6.4%. So far this phase has seen an 8.8% gain. This phase should continue until midsummer according to Birinyi with the possibility of a correction to bring it back into the average range.

Birinyi has no doubt this is a real bull market. He cites the excessive negative attitudes, low multiples and strong start as the key indicators. He claims this is a secular bull market that should last around 1640 days based on the strength of the start and the length of the first quartile.

We definitely have the excessive negative attitudes. There are so many traders who refuse to believe in the rally that we have plenty of shorts to keep feeding the future gains. One article this weekend said one of the top three national activities last week was calling a top in the stock market. The other two were talking about Egypt and buying the dips.

Ralph Acampora is back in the predicting game with a potential 2011 upside target of 14,402 for the Dow and 1,563 for the S&P. Ralph now works for Altaira Securities in Switzerland. Evidently his many missed calls in the U.S. prevented him from getting any real employment here.

Sam Stoval, chief investment strategist for S&P, is predicting 1,587 by 2013 based on 5% earnings growth and a PE of 15 for the S&P.

Fund managers claim they are forced to buy stocks because of the largest fund inflows in over two years. An estimated $16 billion flowed into equity funds in January and those flows are still in progress. Bond funds have now seen three consecutive months of outflows for the longest streak in more than two years. Over $32 billion has flowed out of bond funds. The S&P closed at 1329 and another new high. The S&P consolidated at 1320 for four days before spiking higher on the Mubarak news. That should have built a decent base at 1320 but resistance is just overhead now at 1332. A break over that level would be bullish. The Dow accomplished this breakout earlier in the week so the S&P as a lagging indicator should follow next week. A move to 1333 would be a 100% rebound from the 666.79 S&P low in March of 2000. Gann says this 100% rebound point should be strong resistance.

If we get a bout of weakness that breaks below 1320 I think 1309 would be next level support.

S&P-500 Chart - 120 Min

S&P-500 Chart - Daily

The Dow is on a mission. That mission is to bankrupt the bears. This slow and steady move higher is like a freight train. It is not moving fast but there is no way to stop it. The Dow added +44 points on Friday to close at a new 2.5 year high and well above any recent resistance. The next material resistance level is 13,000 but I am sure there will be plenty of dips to support along the way. Despite this solid move there is still a lack of conviction in the market. Once that conviction arrives we could be in for an exciting ride.

Dow Chart - 120 Min

Dow Chart - Daily

Dow Chart - Weekly

The Nasdaq broke out to a new high and well over resistance at 2800. The index did it without help from Microsoft, Intel, F5 Networks, Expedia, Blue Nile or Cephalon, all of which finished negative. The big gainers helping to push it higher were PNRA, WYNN, FSLR, ISRG, GOOG, NFLX, AMZN, BIDU and OPEN. I was encouraged so many momentum stocks were contributing to the party.

Overhead resistance is now 2830 and the highs from late 2007. This run has been a little rougher than the S&P and Dow but it is gaining conviction.

Nasdaq Chart - Daily

Nasdaq Chart - 120 Min

The Russell was the strongest general equity index on Friday and it exploded past uptrend resistance. The Dow Transports sector index was the only index with a larger gain. For both of these indexes to be posting solid gains is a very strong sentiment indicator for the markets. Russell's next material resistance is well above in the 850 range. There is nothing bearish about this chart.

Russell Chart - Daily

Dow Transports Chart - Daily

I see nothing in those charts above that says bear market. I only see positive indicators and the potential for a continued move higher. If the Dow Transports breaks out to a new high the Dow Industrials should be firmly entrenched in rally mode.

This is option expiration week and the lack of volatility last week while we waited for the Egypt crisis to end suggests we could see some option related volatility early in the week.

The FOMC minutes are the biggest event on the calendar on Wednesday and we could see some weakness ahead of that release.

I see no reason to change the game plan. With the flow of money into equity funds accelerating those fund managers will have to buy stocks. Very few funds have the luxury of being able to sit on the cash. Those that do don't want to be accused of missing the rally if stocks continue their relentless march higher. The vast majority of funds are either long only funds or track the various indexes. Fund managers have to put the money to work. Continue to buy the dips until the rally stops.

Jim Brown

Send Jim an email

"Any people anywhere, being inclined and having the power, have the right to rise up, and shake off the existing government, and form a new one that suits them better. This is a most valuable - a most sacred right - a right, which we hope and believe, is to liberate the world." Abraham Lincoln


New Option Plays

Full Speed Ahead

by James Brown

Click here to email James Brown

Editor's Note:

The major U.S. indices have broken out past resistance. The bulls are still firmly in control. I am sure that the very act of me giving up my reluctant bullish stance and embracing the rally will be the final straw that turns the market around. However, until the trend changes we need to go with the flow.

In addition to tonight's new candidates there were several additional stocks that caught my attention. Be sure to check for potential earnings dates. Some of these need to see a breakout past resistance while other need to see a pull back. On my watch list tonight are: AAPL, CKH, PX, EMN, CMP, PPG, WYNN, ILMN, ESRX, OXY, MMM, UPS, and MCD.

- James


NEW DIRECTIONAL CALL PLAYS

Ashland Inc. - ASH - close: 58.41 change: +0.50

Stop Loss: 54.95
Target(s): 63.00
Current Option Gain/Loss: +0.0%, and +0.0%
Time Frame: 6 to 8 weeks
New Positions: Yes

Company Description

Why We Like It:
The big pop higher in late January was a reaction to ASH's much better than expected Q4 earnings news. The stock has spent the last couple of weeks digesting those gains. Now shares look ready to bounce again. I am suggesting bullish positions now at current levels. We'll use a stop loss at $54.95 but more conservative traders could probably get away with a tighter stop loss. Our first target is the $63.00 level.

The Point & Figure chart for ASH is bullish with a $83 target.

Open Positions Now

- Suggested Positions -

Buy the March $60 calls (ASH1119C60) current ask $1.45

- or -

Buy the April $60 calls (ASH1116D60) current ask $2.20

Annotated Chart:

Entry on February 14th at $ xx.xx
Earnings Date 04/27/11 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on February 12th, 2010


Fluor Corp. - FLR - close: 73.52 change: +2.11

Stop Loss: 69.25
Target(s): 77.25, 79.75
Current Option Gain/Loss: Unopened
Time Frame: 7 trading days
New Positions: Yes, see trigger

Company Description

Why We Like It:
The market's strength on Friday was enough to lift FLR out of its trading range. This stock has broken out to new two-year highs after four weeks of consolidating sideways. Aggressive traders may want to buy calls now. I am suggesting we wait for a dip and use a trigger at $72.00 to launch bullish positions.

Please note that this is a short-term trade. We only have a few days. FLR is due to report earnings on Wednesday, Feb. 23rd before the opening bell. Therefore we will plan to exit on Tuesday, Feb. 22nd at the closing bell, if FLR hasn't hit our exit target before then.

The Point & Figure chart for FLR is bullish with an $84 target.

Trigger @ $72.00

- Suggested Positions -

Buy the March $75.00 calls (FLR1119C75) current ask $2.50

Annotated Chart:

Entry on February xxth at $ xx.xx
Earnings Date 02/23/11 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on February 12th, 2010


Proshares Ultra(long) Russell 2000 - UWM - close: 46.87 change: +1.03

Stop Loss: 42.99
Target(s): 49.75, 54.00
Current Option Gain/Loss: +0.0%
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

iShares Russell 2000 - IWM - close: 82.07 change: +0.88

Stop Loss: 78.65
Target(s): 84.95, 87.25
Current Option Gain/Loss: +0.0%
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Why We Like It:
A few days ago, when the market looked like it was going to roll over and breakdown, we added a bearish put play on the IWM to try and capture a drop in the small cap Russell 2000 index. That trade did not work out (you can see it in the puts section of our updates). When the Russell 2000 index started to move higher I started talking about buying calls on a breakout in the IWM (Russell 2000) for a few days now. Instead of talking about it we want to follow up on that trading idea. In addition to buying calls on the IWM I am also listing the UWM, which is the double long (2x) ETF on the Russell 2000 index, which has the symbol UWM.

Since these are both ETFs on the Russell 2000 index I am listing them together. More conservative traders will want to trade the IWM, which has less volatility.

I am suggesting we add small bullish positions now on this breakout higher. Then if we see a dip back toward short-term support we can add to positions.

Small Positions Now at current levels

- UWM Position -

Buy the April $48 calls (UWM1116D48) current ask $2.75

UWM Chart:

- or -

- IWM Position -

Buy the April $84 calls (IWM1116D84) current ask $1.84

IWM Chart:

UWM Entry on February 14th at $ xx.xx
IWM Entry on February 14th at $ xx.xx
Listed on February 12th, 2010


Joy Global Inc. - JOYG - close: 93.89 change: +1.24

Stop Loss: 87.40
Target(s): 97.25, 99.85
Current Option Gain/Loss: +0.0%
Time Frame: 3 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
JOYG makes mining equipment and the stock has been a consistent winner thanks to the rising price of commodities. The stock now looks poised to breakout to another round of new all-time highs. I am suggesting small bullish positions now at current levels but we should be prepared for a dip back toward the $91.50-90.00 zone. A dip in this area could be used to add to positions.

I do consider this a more aggressive, higher-risk trade because our stop loss is a little wide. You could try a tighter (more conservative) stop loss but JOYG can see sudden bouts of volatility. Our upside targets are $97.25 and $99.85.

The Point & Figure chart for JOYG is bullish with a $113 target.

Small Bullish Positions Now.

- Suggested Positions -

Buy the March $95 calls (JOYG1119C95) current ask $3.85

- or -

Buy the April $100 calls (JOYG1116D100) current ask $3.15

Annotated Chart:

Entry on February 14th at $ xx.xx
Earnings Date 03/02/11 (unconfirmed)
Average Daily Volume = 1.4 million
Listed on February 12th, 2010


Quality Systems Inc. - QSII - close: 80.80 change: +1.15

Stop Loss: 77.95
Target(s): 84.90, 89.00
Current Option Gain/Loss: +0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
QSII is a short squeeze candidate. Look at the daily chart. Those sudden moves higher were helped by short covering. The most recent data listed short interest at more than 29% of the very small 17 million share float. That is definitely a recipe for a short squeeze. Now the stock has been consolidating sideways under the $81.00 level. Normally, I would suggest we wait for a breakout (past $81.00) and use a trigger to open positions (maybe a trigger at $81.25). More conservative traders may want to follow that route. Tonight I am suggesting a more aggressive entry point to go ahead and buy calls now. Don't go overboard just because the March $85 calls look cheap.

The Point & Figure chart for QSII is bullish with a $119 target.

Open Positions Now at current levels

- Suggested Positions -

Buy the March $85 calls (QSII1119C85) current ask $0.90

Annotated Chart:

Entry on February 14th at $ xx.xx
Earnings Date 05/31/11 (unconfirmed)
Average Daily Volume = 202 thousand
Listed on February 12th, 2010


In Play Updates and Reviews

Stocks Rise on Resignation

by James Brown

Click here to email James Brown

Editor's Note:

News that Egyptian President Mubarak agreed to step down on Friday helped spur stocks to another new two-year high. Our CLH trade has been opened. I've adjusted the entry point strategy on CAT and FAST. Meanwhile COH and DCI have new stop losses.

-James

Current Portfolio:


CALL Play Updates

Caterpillar Inc. - CAT - close: 103.54 change: +2.94

Stop Loss: 97.90
Target(s): 104.75, 107.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Comments:
02/12 update: Wow! CAT really outperformed on Friday. On Thursday night I mentioned we might want to buy a breakout past $101. Now I'm wishing we did. It's not a good idea to chase it now but broken resistance near $100.75-101.00 should be new short-term support. Let's raise our buy-the-dip trigger to $101.00 and raise our stop loss to $97.90. We'll adjust our targets to $104.75 and $107.50.

Trigger @ 101.00

Buy the March $105 calls (CAT1119C105) current ask $2.92

02/12 Adjusted our trigger, targets, stop loss and strike price.

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


Clean Harbors, Inc. - CLH - close: 92.70 change: +1.32

Stop Loss: 87.95
Target(s): 94.95, 99.00
Current Option Gain/Loss: + 8.3%
Time Frame: 12 days
New Positions: see below

Comments:
02/12 update: Our new play in CLH is off to a good start. Shares broke out from their trading range and above resistance near $92.00. Our trigger to buy calls was hit at $92.25. We have a stop loss at $87.95. I would still consider new positions now on the breakout.

Investors should note that the most recent data lists short interest at 11.3% of the very small 23.1 million-share float. That is a good recipe for a short squeeze higher. Please note that we'll plan on exiting ahead of the earnings on Feb. 23rd (still an unconfirmed date).

- Suggested Positions -

Long the March $95.00 call (CLH1119C95) Entry @ $1.80

chart:

Entry on February 11th at $92.25
Earnings Date 02/23/11 (unconfirmed)
Average Daily Volume = 181 thousand
Listed on February 10th, 2010


Coach Inc. - COH - close: 57.86 change: +0.25

Stop Loss: 54.40
Target(s): 58.25, 62.00
Current Option Gain/Loss: +66.6%, and +123.5%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
02/12 update: COH is still inching its way higher. The stock does look a little bit overbought here with the stock up seven days in a row. I am adjusting our first exit target from $58.50 down to $58.25. We'll move our stop loss higher to $54.40. Odds are pretty good that COH will see a pull back after hitting resistance near $58.50 and we could see another entry point on the dip. No new positions at this time. Keep in mind that the $60.00 level could end up being round-number, psychological resistance.

- Suggested Positions -

Long the 2011 March $55.00 calls (COH1119C55) Entry @ $2.10

- or -

Long the 2011 March $57.50 calls (COH1119C57.5) Entry @ $0.85

02/12: Adjusted 1st target to $58.25
02/12: New stop loss @ 54.40
02/08: New stop loss @ 53.49

chart:

Entry on February 7th at $55.35
Earnings Date 04/20/11 (unconfirmed)
Average Daily Volume = 4.1 million
Listed on January 31st, 2011


Costco Wholesale Corp. - COST - close: 75.04 change: +0.49

Stop Loss: 72.95
Target(s): 79.75
Current Option Gain/Loss: Unopened
Time Frame: 3+ weeks
New Positions: Yes, see Trigger

Comments:
02/12 update: I am a little surprised that COST did not see more strength today. Shares dipped to short-term support near $74 Friday morning but eventually worked its way higher and closed above round-number resistance at $75.00. This looks like a new bullish entry point right here. However, the current all-time high is $75.23. Aggressive traders could buy calls now. I am suggesting we stick to our plan and use a trigger at $75.50. If triggered our target is $79.75. We will plan to exit ahead of COST's early March earnings report. That gives us three or four weeks.

The Point & Figure chart for COST is bullish with an $88 target.

Trigger @ 75.50

- Suggested Positions -

Buy the March $75 calls (COST1119C75) current ask $1.71

chart:

Entry on February xxth at $ xx.xx
Earnings Date 03/02/11 (confirmed)
Average Daily Volume = 5.8 million
Listed on February 7th, 2010


Donaldson Company, Inc. - DCI - close: 60.70 change: +0.79

Stop Loss: 58.45
Target(s): 62.50, 64.75
Current Option Gain/Loss: +11.1%
Time Frame: just a few days
New Positions: see below

Comments:
02/12 update: Bingo! This is the sort of move we have been looking for out of DCI. Shares rallied past resistance at $60.00 and held it. If you missed the entry point on Thursday we got another entry on Friday. Unfortunately we don't have much time. DCI is due to report earnings on Wednesday, Feb. 16th before the opening bell. That only gives us two days. Now lately we've been seeing a lot of earnings-fueled rallies (think WFMI and WYNN) but there have also been some post-earnings disasters (think CSCO). The newsletter will exit ahead of the report.

Please note I'm raising the stop loss to $58.45.

(Small Positions) - Suggested Positions -

Long the 2011 March $60 calls (DCI1119C60) Entry @ $1.80

02/12 New stop loss @ 58.45
02/10 Time frame for this trade has changed!
02/10 Bullish Trigger hit @ 60.35
02/05 Switched from puts to calls. Trigger @ 60.35

chart:

Entry on February 10th at $60.35
Earnings Date 02/23/11 (unconfirmed)
Average Daily Volume = 208 thousand
Listed on January 31st, 2011


Fastenal Co. - FAST - close: 63.36 change: +0.45

Stop Loss: 58.70
Target(s): 64.75, 67.25
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see Trigger

Comments:
02/12 update: I checked two different sources and both said that FAST was up +45 cents on Friday. Yet if you look at the charts, the stock closed at $63.41 on Thursday, saw a gap down Friday morning, and did not make it back into positive territory. The stock should be down -5 cents. At any rate FAST remains short-term overbought and due for some profit taking. We've been waiting for a dip to $61.00. I will raise that trigger to $61.55 and raise our stop loss to $59.40. Our targets are $64.75 and $67.25. FYI: The Point & Figure chart for FAST is bullish with a $73 target. Readers may want to keep in mind that the most recent data listed short interest at 11.4% of the 132 million-share float.

Trigger @ 61.55

- Suggested Positions -

Buy the March $60 calls (FAST1119C60) current ask $3.30

- or -

Buy the March $65 calls (FAST1119C65) current ask $0.75

02/12 New trigger @ 61.55, new stop loss @ 59.40

chart:

Entry on February xxth at $ xx.xx
Earnings Date 04/12/11 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on February 8th, 2010


Nike Inc. - NKE - close: 86.21 change: -0.58

Stop Loss: 83.85
Target(s): 88.00, 89.90
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see Trigger

Comments:
02/12 update: We have been looking for a dip in shares of NKE but when it happens against the grain and the market is climbing that's when NKE's relative weakness is worrisome. I would still buy calls on a dip at $85.25 but we should keep our position size small to limit our risk. If triggered we'll use a stop loss at $83.85. Our targets are $88.00 and $89.90.

Trigger @ $85.25

- Suggested Positions - (Small Positions Only!)

Buy the March $85 calls (NKE1119C85) current ask $3.70

- or -

Buy the April $90 calls (NKE1116D90) current ask $1.76

chart:

Entry on February xxth at $ xx.xx
Earnings Date 03/17/11 (unconfirmed)
Average Daily Volume = 2.2 million
Listed on February 9th, 2010


PACCAR Inc. - PCAR - close: 52.52 change: +1.05

Stop Loss: 49.45
Target(s): 53.45
Current Option Gain/Loss: +83.3%, and +57.1%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
02/12 update: As expected the oversold bounce in PCAR continues. The stock outperformed today with a +2.0% gain. Shares produced a small victory with a close over the 10-dma. Currently the 100-dma is at $53.50 so I am adjusting our final exit target to $53.45. More aggressive traders could aim higher and aim for the 30 or 50-dma instead. I am not suggesting new positions at this time.

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

Open Small Positions Now

Long the February $49.70 call (PCAR1119B49.7) Entry @ $1.50

- or -

Long the March $55 call (PCAR 1119C55) Entry @ $0.35

02/12 Adjusted our final exit target to $53.45

chart:

Entry on February 7th at $50.60
Earnings Date 04/20/11 (unconfirmed)
Average Daily Volume = 2.9 million
Listed on February 5th, 2010


The Toronoto-Dominion Bank - TD - close: 79.65 change: +0.92

Stop Loss: 75.90
Target(s): 84.00, 89.00
Current Option Gain/Loss: +18.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
02/12 update: Financial stocks were showing relative strength on Friday. Shares of TD opened at $78.89 and rallied toward round-number resistance at $80.00. I would still consider new positions here or you could wait for a dip toward $78. Our targets are $84 and $89. We will plan to exit ahead of the early March earnings report (unconfirmed date).

FYI: The Point & Figure chart for TD is bullish with a $98 target.

- Suggested Positions -

Long the March $80.00 call (TD1119C80) Entry @ $1.35

chart:

Entry on February 11th at $78.89
Earnings Date 03/03/11 (unconfirmed)
Average Daily Volume = 583 thousand
Listed on February 10th, 2010


CBOE Market Volatility Index - VIX - close: 15.69 change: -0.40

Stop Loss: N/A
Target(s): 24.00, 28.00
Current Option Gain/Loss: -53.1%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
02/12 update: Our VIX play is not looking too hot. Egyptian President Mubarak's decision to step down should cool emotions in the Mideast and relieve some concern in the markets. Of course the VIX has been trading very low so U.S. investors have not been concerned for days. The VIX is nearing its 52-week low and could breakdown into another leg lower.

Once again I am suggesting that more conservative traders consider an early exit. Or you could keep this trade as some sort of hedge against a sudden market decline but bear in mind that this option expires on March 16th. I am not suggesting new positions at this time.

Earlier Comments:
Just because the VIX bounced near the 15.00-15.50 level in the past doesn't mean it can go crashing through it but this 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.

- Suggested Positions -

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

chart:

Weekly chart:

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


PUT Play Updates

Google Inc. - GOOG - close: 624.50 change: + 8.06

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:
02/12 update: GOOG has broken out over resistance near the $620 level. The next obstacle for the bulls is the $640 area. There is no change from my prior comments. Our strangle trade is dead in the water and has very little hope before February expiration.

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: $0.25 (-98.3%)

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: 82.07 change: +0.88

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

Comments:
02/12 update: I've been talking about buying calls on the IWM for the past few days. I think it's time to follow up on that suggestion. Our put play has been dead for a while now and we're just riding it out through February expiration. I'm not going to bother with a chart since we'll add a chart to the bullish IWM play. No new bearish positions 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

No Chart necessary

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