Option Investor
Newsletter

Daily Newsletter, Tuesday, 3/1/2011

Table of Contents

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

Market Wrap

Market Sticker Shock on $116 Oil

by Jim Brown

Click here to email Jim Brown
An escalation of Middle East tensions, a bogus rumor and a comment about high oil prices by Bernanke in congressional testimony was a toxic witches brew for today's market.

Market Statistics

The multiple news items from the Middle East, Northern Africa (MENA) countries was a rapid-fire barrage of negative events that sent oil prices soaring and stocks plunging. New allegations about insider trading information leaked by a Goldman Board member added to the sudden decline in sentiment. Sentiment plunged so quickly that near record improvements in various economic reports was unable to stop the bleeding.

The ISM Manufacturing Index spiked to 61.4 for February from 60.8 in January. This was the sixth month of gains and the highest level of activity since 2004. New orders at 68.0 were the highest since early 2004. The employment component was the fastest rising component and rose to 64.5 from 61.7. This is the highest level of hiring in this report since the 1970s. All the other components rose as well except for inventories, which fell to 48.8 from 52.4. The gap between new orders and inventories widened from 15.4 to 19.2 and the widest since January 2010. New orders and falling inventories suggest the manufacturing sector will have to increase production to keep up.

ISM Manufacturing Chart

On Monday the ISM Chicago rose to 71.2 from 68.6 and that was the highest level of activity since the late 1980s.

The ISM New York also surged by +13.7 points to a new high at 513.4 and the employment component spiked from 54.3 to 62.5. Current business conditions rose to 77.5 from 71.2 and this is the fourth highest reading since the report began in 1993.

Not only the U.S. but Germany, France, the United Kingdom and the broader Eurozone ALL posted solid PMI data this week.

Despite the market decline today the economic recovery is accelerating into high gear.

U.S. automobile sales exploded higher in February to 13.4 million units (annualized) from 12.6 million in January. Those numbers are seasonally adjusted but the unadjusted numbers showed a sales gain of +27%. This is a huge gain and most of it was thanks to a sales surge by GM and Toyota. Sales at GM rose by 49.1%, Toyota +41.8%, Chrysler +12.6% and Ford +13.8%. Rising gasoline prices have had little impact on sales with the share of light truck sales declining only slightly from 51.6% to 49.1%.

With economic indicators literally exploding higher the market decline could easily be related to worries by hedge funds the Fed will change their FOMC statement on March 15th. If the Fed believes the economy is beginning to rebound too fast they could actually slow QE2 or end it early and funds may be expressing that worry with profit taking.

I warned last week that this worry could end our rally as we approached that March 12th meeting. It is entirely possible hedge fund managers are reacting to the employment in the economic reports and suddenly expecting a blowout in the Non-Farm payrolls on Friday that could change the Fed position on QE2.

The economic calendar for the rest of the week is mostly payroll related with the ADP, Monster and Non-Farm Payroll reports. The Fed Beige Book on Wednesday afternoon should be bullish for the market if it upgrades the outlook for each Fed region as expected.

Economic Calendar

The big drag on the market today was oil prices OR probably more specifically the threat of higher oil prices. Early this morning there was a report of an estimated 30 tanks being moved into Bahrain from Saudi Arabia. You may remember last week when Saudi said they were "prepared to intervene" if the Bahrain government needed help with the demonstrators. The news prompted an immediate spike in crude prices and worries about an increase in violence in Bahrain. However, the report proved to be false and was made by a Syrian reporter on Iranian TV.

There is a mass protest scheduled for Wednesday in Bahrain and it will be the first since the arrival of controversial opposition leader Hassan Mosheima returned from self imposed exile. His first speech after his return called for national unity and for protestors to increase demands for the ouster of the current prime minister of 40 years, Sheikh Khalifa al Khalifa. Eighteen members of Bahrain's largest party officially submitted their resignations from the lower house of parliament.

Finding out the Bahrain tank news was bogus and just an attempt by Iran to stir up trouble did little to slow the price of oil. News of an Iranian crackdown on protestors produced worries that increasing civil unrest could result in attacks on the Iranian oil infrastructure in order to cripple government funding. Iran produces about 3.8 million barrels per day of oil. A halt in production there could be serious but not fatal. Saudi Arabia has about 4 mbpd of the same kind of sour crude Iran exports so it would be painful but not a global disaster.

We also learned that Saudi Arabia arrested a high profile Shiite cleric, Tawfiq al-Amir, after he made a high profile sermon calling for a conversion to a constitutional monarchy. Saudi has zero tolerance for political dissent. The arrest was likely preemptive ahead of the scheduled March 11th day of rage protest. Saudi is also reeling from an open letter by 119 high profile educators, economists and business people supporting the March 11th protest. Arresting the cleric could have serious implications. Some believe the cleric publicized his planned sermon so he would be arrested and therefore further inflame tensions. Sort of a martyr in prison for the cause. If citizens were to increase protests and Saudi relented and released him then Saudi officials would appear weak and demands for change would grow. If Saudi keeps him in jail despite the growing protests then he becomes even a bigger focal point for the demonstrations. Either way it is a winning play by the protestors.

Security forces in Oman injured several protestors in a clash and caused new worries the unrest there would escalate. Oman produces just under one million barrels per day.

Of course Libya is still a sore spot and Gadhafi forces reportedly took back a couple towns on Tuesday. That suggests the battle has a long way to go and full production will not be returning any time soon.

The bottom line here is that you can't conclude two centuries of unrest and a half a century of rule by dictators in a peaceful manner. The old leaders are not going to leave quietly and the new leaders are inheriting a basket of snakes because of the various tribes and factions all wanting a place at the table.

All the MENA tensions sent oil spiking higher on short covering and worries about further production outages. U.S. WTI rose to $100.64 and Brent crude hit $116.76. Since the majority of our gasoline is made from oil indexed to Brent prices this means our gasoline prices are going sharply higher. The average U.S. price today is $3.38 but it should be over $3.50 by the weekend. At $116 Brent we could see prices in some areas hit $4 if the spike in crude holds.

Brent Crude Chart

U.S. WTI Crude Chart

Analysts on TV were blaming oil prices for the decline in the markets. While there is some correlation between oil price spikes and declines in the stock market I don't think that was the reason for the decline. The stock market and the oil market have been getting along fine until last week. Oil has been rising steadily since November and so has the market. The spike over $100 may have produced a little more economic risk but nothing immediate. It takes many months for the impact of higher oil prices to weigh on the economy.

Comparison chart - Brent & S&P

Normally when oil prices spike the price of energy shares rally. There was no rally in energy stocks today. There was serious selling. Oil over $100 but energy stocks getting hammered? Something does not compute. These companies are going to be printing money in Q1 thanks to the high prices so it is not a fundamental reason for the decline.

Energy Stock Losers

Many of those stocks listed above are the momentum stocks in the sector. Those were getting hit the hardest and that suggests a concentrated bout of profit taking. I suspect there was at least one large hedge fund that found themselves wishing they had taken profits when oil was $100 last week. However, the market sell off caught them off guard. Energy stocks were in strong rally mode on Monday and when oil prices returned to $100 today they were ready to pull the trigger.

I think the TV reporters attach too much importance to the surface events making the news and don't dig down to the real story. Of course a hedge fund sell off would be off their radar anyway.

In a news related sell off there is normally a sharp drop at the open to a plateau where the market tries to consolidate for a couple hours and decide direction. Today's selling was dramatic and constant. There was barely any letup other than a weak buy the dip bounce at 10:30 that was immediately sold. This smells exactly like a portfolio allocation move where a big fund decides to exit winning sectors at the top and roll over into sectors expected to do well in the future.

Nobody expects $100 oil to last. There is simply too much oil in storage and these MENA countries need to export oil to survive. There may be a few blips along the way but it would take a long time for excess supplies in storage to decline to a point where $100 is permanent in 2011. Next year, yes, this year no.

Even Bernanke said in testimony that $100 oil is not an economic killer because it is expected to be temporary. He said only a prolonged move over $100 would be a problem because of the impact on the consumer.

I spent a lot of time today trying to make sense of the market and oil and the bottom line is it did not make sense. I really think this was a fund liquidation/rotation event and not specifically related to the fears $100 oil will tank the economy. On the flip side, if we did see prices remain at this level or higher, there would be a drag on the economy long term. This is consistent with my Energy Recession expectations for 2012.

The fund liquidation theory fits nicely with my comments in recent weeks about funds anticipating a change in the Fed bias soon and the potential for QE2 to end early. Funds began buying the market two months before QE2 was formerly announced and I expected them to begin selling the market two months before the end of QE2 in June. When the economic reports began accelerating over the last several weeks many analysts began predicting an early end to QE2. No less than seven Fed heads talked about QE2 in some manner last week and the potential for an early termination or ending it on schedule. That much Fed press is not lost on the people who make trading decisions at the big hedge funds.

You have to look at it from their perspective. If they were planning on holding their positions for a few more weeks before lightening the load and then suddenly the economic picture changed and Fed speak is all over the news, they have to be thinking, "what do we have to gain by remaining long?" The market is at its highs and beginning to show the increased volatility of a market that could be topping. "Why should we risk our millions in profits by sticking it out until April?" Take profits now and take the risk off the table.

Once the persistent selling began the nervous traders who bought the dip from last week are suddenly rethinking their positions. When the market began diving again after lunch and sell stops getting hit it pretty much guaranteed a negative close.

Now that brings us to an interesting point. Without any attempt at short covering at the close it suggests the decline will continue. The S&P futures closed dead on 1300 and they are below that level overnight. Technically speaking a break below 1295 on the futures is a lower low and a strong sell signal. Note the absolutely vertical decline on Tuesday. That is NOT normal market activity. This is a serious sell program(s) by funds.

S&P Futures Chart

Have you looked at the calendar lately? March 6th is the two-year anniversary of the market low in 2009 at 666.79 on the S&P. Markets love anniversaries of major market events. It reminds them of how long the trend has been in play and the odds of it continuing. Is this anniversary a factor this week? Who knows but you can bet more than a few fund managers are looking at those two years of gains and making decisions about the future.

Gold made a new high today at $1435 and silver at $34.72 on inflation worries and geopolitical risk. The prices paid components of the various ISM reports are spiking sharply and that is another reason analysts are speculating about the Fed ending QE2 early. However, Bernanke gave no indications of an early end in his congressional testimony today. Like Bullard said last week, the Fed has to tell the market what it is going to do long before it makes the change. That makes the March 15th FOMC meeting even more critical.

For Wednesday there is only one thing important for traders. That is watching to see if support holds at Dow 12,000, S&P 1,295-1,300, Nasdaq 2,700 and Russell 795. These were the support levels from last week. A break of those levels is sure to trigger some major sell programs and stop losses and the drop could be dramatic. Last week's decline was written off as minor profit taking and traders bought the dip and the good economics for two days. Those gains are now gone and traders will be looking for a double bottom to appear at support so they can buy again. If that support provides a bounce then I expect an even stronger rebound because it will be a confirmation retest of the earlier support. However, if that support fails the bulls better run for cover.

Tuesday's sell off produced a lower high on the indexes and a break below last week's support would be a lower low and invite even stronger selling.

The S&P declined to uptrend support today but I am not expecting it to hold. I think we are almost guaranteed a retest of last week's lows at 1295.

S&P-500 Chart

The Dow declined -168 points at the close but that was more than -210 points from its opening high at 12,261. I don't see any way the Dow will not test 12,000 again on Wednesday. The decline was too dramatic and margin selling at the open is sure to pressure support. A break of 12,000 would be psychologically bearish and while it would target 11,800 I think the eventual damage could be worse than that. A break below 12,000 will have traders expecting a full -10% correction and sometime those expectations become self-fulfilling because everyone is waiting for the correction to end before they will buy again.

Dow Chart

The Nasdaq declined to close right on the support from the 50-day average and uptrend resistance. However, there was very little bounce at the close on the big cap techs. Big losses in GOOG -12, PCLN -8, CEDC -8, ISRG -8, FFIV -4, DECK -4, AAPL -4 suggested there was more to come when there was very little short covering in the final few minutes.

The Nasdaq led the charge on Friday and today's close is below Friday's lows. This is bearish. However, as long as support at 2700-2710 holds the bulls might come back reenergized.

Nasdaq Chart

The Russell declined by -2% for the biggest loss other than the Dow Transports at -2.5%. Obviously the transports declined on higher oil prices. The Russell closed at 808 and well above the support at 795 from last week. In theory the accelerating economics should be especially good for the small caps. However, they are the first to be impacted by rising fuel prices.

Russell Chart

In summary bull market selling is normally short, sharp and scary and that is exactly what we got today. Each index has decent padding between today's close and the support from last week but another day like today would obliterate that safety zone. I explained last week that we should buy the dips and remain bullish as long as those key levels of Dow 12,000, S&P 1300, Nasdaq 2700 and Russell 800 were not broken. Several were penetrated but the rebound was quick. The same is true for this week. As long as those levels are not broken the drop would be considered a successful retest of support and the rebound could be even stronger. A break below those levels turns me into a cautious bear until the market finds a bottom. We have to trade the trend until the trend changes then reevaluate. Blindly sticking to a confirmed bias will make you frustrated and broke.

Jim Brown

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New Option Plays

All Eyes On Support

by James Brown

Click here to email James Brown

Editor's Note:

Stocks experienced some widespread profit taking on Tuesday. Is it the start of something bigger? Or just a one-day reaction to rising oil prices? That's what investors want to know. The 1300-1295 area on the S&P 500 index will be key. If the S&P 500 breaks down under this level it could spark a serious correction lower. If not, then traders will probably be encouraged to buy the dip again. This could be a pivotal point in the market's advance.

We already have a very big play list and we are leaning heavily on the bullish side given the market's trend. A breakdown would likely see several of our current positions get stopped out. Nimble traders looking for bearish plays might want to focus on small caps, which are likely to underperform their large-cap rivals. Plus, consumer-related stocks might underperform if oil continues to climb.

I am not adding any new plays tonight. Let's wait and see if the major averages bounce from support or breakdown. I've attached a chart of the S&P 500 below.

- James



In Play Updates and Reviews

What A Difference!

by James Brown

Click here to email James Brown

Editor's Note:

My oh my what a different a day can make. The tone of trading on Wall Street took a nasty turn. False rumors that Saudi Arabia had sent tanks into neighboring Bahrain to help the local government deter protestors started the day off on a bad note. The positive PMI data both here in the U.S. and abroad could not stop the bearish shadow cast by rising oil prices. Brent crude oil futures rose $3.60 to over $115 a barrel. Even energy stocks failed to rally on the commodity's strength. Gold broke out to new all-time highs and silver surged to new 30+ year highs as investors sought safe havens for their money.

I heard a lot of bearish comments and worries that the stock market had started a new correction lower and how small caps and consumer-related stocks would likely underperform. Yet when I look at the stock market's major averages the trend is still up. Yes, today was a bad day for the bulls and yes we should be cautious and on our guard. Until the S&P 500 breaks down under support near 1300 I'm going to remain cautiously bullish.

Tonight I would hesitate to launch new positions. Let's wait and see if stocks bounce from recent support. If they do then traders will likely rush into to buy this second dip. If not, well, readers may want to tighten their stop losses tonight just in case.

-James

Current Portfolio:


CALL Play Updates

Baker Hughes Inc. - BHI - close: 69.21 change: -1.84

Stop Loss: 67.90
Target(s): 74.75, 79.00
Current Option Gain/Loss: -60.7% and -40.8%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/01 update: Energy stocks were not immune to the ugliness on Wall Street and BHI gave up -2.5%. Shares should have short-term support near their rising 20-dma (near 68.85). If that fails there is short-term support near $68.00 and we have a stop loss at $67.90. No new positions tonight. Let's wait and see if BHI can bounce. Our targets are $74.75 and $79.00.

- Suggested Positions -

Long the March $75 calls (BHI1119C75) Entry @ $1.02

- or -

Long the April $75 calls (BHI1116D75) Entry @ $2.13

Entry on February 28th at $71.74
Earnings Date 05/04/11 (unconfirmed)
Average Daily Volume = 5.3 million
Listed on February 26th, 2010


Peabody Energy Corp. - BTU - close: 65.17 change: -0.32

Stop Loss: 61.75
Target(s): 69.75, 74.00
Current Option Gain/Loss: -56.0%, and -12.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/01 update: Coal stocks initially rallied this morning but quickly reversed with the broader market. Shares of BTU spiked to $67.57 intraday but eventually settled with a -0.5% decline The move looks like another failed rally attempt with the two-month trendline of higher highs. I would expect a dip back toward the $63-62 zone. I am not suggesting new positions at this time.

FYI: With less than three weeks left our out of the money March calls are going to evaporate pretty quickly. More conservative traders may want to exit these early right now.

Our first exit target is $69.75. Our second target is $74.00. The Point & Figure chart for BTU is bullish with an $80 target.

- Suggested Positions -

Long the March $70 calls (BTU1119C70) Entry @ $1.07

- or -

Long the June $70 calls (BTU1118F70) Entry @ $3.60

Entry on February 17th at $66.30
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume = 4.6 million
Listed on February 16th, 2010


BorgWarner - BWA - close: 75.85 change: -1.76

Stop Loss: 73.75
Target(s): 79.75, 84.50
Current Option Gain/Loss: -27.2%, and -27.1%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/01 update: It was not a pretty day for BWA. Shares failed near short-term resistance at $78.00 and its 10-dma. I would expect this stock to retest recent support near $74.00. Nimble traders may want to try and buy calls on a dip or bounce near this level. Our targets are $79.75 and $84.50. Our plan was to use small positions to limit our risk.

SMALL bullish positions

- Suggested Positions -

Long the March $80 calls (BWA1119C80) Entry @ $1.10

- or -

Long the April $80 calls (BWA1116D80) Entry @ $2.47

Entry on February 25th at $76.06
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on February 24th, 2010


Caterpillar Inc. - CAT - close: 99.86 change: -3.07

Stop Loss: 97.90
Target(s): 104.75, 107.50
Current Option Gain/Loss: -44.4%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/01 update: I have to issue a potential bearish reversal warning on CAT. The stock produced a bearish engulfing candlestick pattern but these patterns normally need to see confirmation. The selling paused near recent support at the rising 30-dma. If that fails then CAT should have some short-term support near $98.00. Of course we have a stop loss at $97.90. I am not suggesting new positions at this time. More aggressive traders may want to move their stop loss lower, just underneath the 50-dma near $97.15 instead.

- Suggested Positions -

Long the March $105 calls (CAT1119C105) Entry @ $1.35

02/23 Triggered @ $101.00. Option @ $1.35
02/22 Still waiting for a dip to $101.00
02/12 Adjusted our trigger, targets, stop loss and strike price.

Entry on February 23 at $101.00
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume = 6.2 million
Listed on February 5th, 2010


Check Point Software - CHKP - close: 48.62 change: -1.22

Stop Loss: 47.90
Target(s): 54.50
Current Option Gain/Loss: -53.8%, and -35.2%
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
03/01 update: CHKP appears to be rolling over and headed for short-term support near $48.00. If $48 fails there might be additional support at the 50-dma but our stop loss is at $47.90. I am not suggesting new positions at this time. Let's wait and see if CHKP bounces at $48 first. Our target is $54.50.

- Suggested Positions -

Long the March $50 calls (CHKP1119C50) Entry @ $1.30

- or -

Long the April $52.50 calls (CHKP1116D52.5) Entry @ $0.85

Entry on February 28th at $50.28
Earnings Date 04/26/11 (unconfirmed)
Average Daily Volume = 3.0 million
Listed on February 26th, 2010


Fastenal Co. - FAST - close: 60.57 change: -1.56

Stop Loss: 59.90
Target(s): 67.25
Current Option Gain/Loss: -88.2%, and -46.6%
2nd Position Option Gain/Loss: -50.0%, and -29.2%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/01 update: FAST just erased a three-day bounce with today's -2.5% decline. The stock tested support near 60.00 and its 50-dma. Normally I would be inclined to buy calls on this dip but let's wait and see if the S&P 500 bounces at 1300 again and if the NASDAQ bounces near 2700 again. We do have a stop loss on FAST at $59.90 so it wouldn't take much to stop us out.

Readers may want to keep in mind that the most recent data listed short interest at 13.6% of the 132 million-share float.

- Suggested Positions -

Long the March $65 calls (FAST1119C65) Entry @ $0.85

- or -

Long the May $65 calls (FAST1121E65) Entry @ $2.25

-2nd Entry as of listed 2/24, Entered 2/25-

Long the March $65 calls (FAST1119C65) Entry @ $0.20

- or -

Long the APRIL $65 calls (FAST1121D65) Entry @ $0.99

02/24 Buy the dip. New Entry (2nd position).
02/23 New entry point @ 60.96. March $65 call @ 0.25, May $65 call @ $1.45
02/22 Entry @ 62.99, NEW STOP @ $59.90
02/19 Adjusted entry point. Buy calls now. Very small positions
02/12 New trigger @ 61.55, new stop loss @ 59.40

Entry on February 22nd at $62.99
Earnings Date 04/12/11 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on February 8th, 2010


FactSet Research Systems - FDS - close: 102.38 change: -2.50

Stop Loss: 99.95
Target(s): 109.50
Current Option Gain/Loss: -39.5%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
03/01 update: It looks like we could have waited after all. FDS did pull back to the $102 level and its 30-dma. Yesterday I suggested that more conservative traders may want to wait for a dip into the $103-103 zone to initiate positions. If you're still waiting you might get an even better entry point in the $101.00-100.00 zone tomorrow. I would still consider buying calls near $100 but you might want to wait for the bounce before initiating positions. Our stop is at $99.95.

FDS is due to report earnings in mid March but we don't have a confirmed date yet. Given our wide stop loss I would consider this a slightly more aggressive trade so keep your positions small!

small positions - Suggested Positions -

Long the March $105 calls (FDS1119C105) Entry @ $2.15

Entry on March 1st at $105.01
Earnings Date 03/15/11 (unconfirmed)
Average Daily Volume = 213 thousand
Listed on February 26th, 2010


F5 Networks Inc. - FFIV - close: 113.38 change: -4.63

Stop Loss: 109.90
Target(s): 129.00
Current Option Gain/Loss: -61.1%, and -52.9%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/01 update: The action in FFIV is getting pretty ugly. Shares lost -3.9% on almost normal volume. Shares seem destined to hit recent support near $110. I would probably wait for a bounce from the $110 level before considering new bullish positions. If you do buy the bounce consider the March $110 or $115 calls instead of the $120 or better yet buy Aprils.

The plan was to use small positions to limit our risk. Our target is $129.00.

SMALL bullish positions

- Suggested Positions -

Long the March $120 calls (FFIV1119C120) Entry @ $5.40

- or -

Long the April $125 calls (FFIV1116D125) Entry @ $6.80

02/28 Buy the dip, New Entry point.
02/25 FFIV gapped open higher on an upgrade.

Entry on February 25th at $121.00
Earnings Date 04/20/11 (unconfirmed)
Average Daily Volume = 3.7 million
Listed on February 24th, 2010


Fossil, Inc. - FOSL - close: 75.11 change: -1.63

Stop Loss: 72.49
Target(s): 82.00, 88.00
Current Option Gain/Loss: -32.1%, and -21.1%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/01 update: The bounce in FOSL has failed at its 10-dma. This is naturally short-term bearish but shares should have support near the 50-dma (around $73.50) and its recent low $72.57. Wait for FOSL to test these levels or bounce from these levels before considering new bullish positions. Our exit targets are $82.00 and $88.00.

- Suggested Positions -

Long the March $80 calls (FOSL1119C80) Entry @ $1.40

- or -

Long the April $80 calls (FOSL1116D80) Entry @ $2.60

Entry on February 28th at $76.75
Earnings Date 05/11/11 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on February 26th, 2010


Hess Corp - HES - close: 84.66 change: -2.37

Stop Loss: 82.40
Target(s): 92.25, 98.50
Current Option Gain/Loss: -23.4%, and -22.8%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/01 update: Hmm... HES opened higher, tagged a new two-year high and then collapsed. That's not normally a good sign. Energy stocks found no benefit from the rally in crude oil prices today. The action in HES is technically a bearish engulfing (reversal) candlestick pattern but these normally need to see confirmation. Readers may want to wait for a bounce back above the $86.00 level before considering new bullish positions. <-- The Point & Figure chart for HES is bullish with a $107 target. -->

- Suggested Positions -

Long the April $90 calls (HES1116D90) Entry @ $2.60

- or -

Long the May $90 calls (HES1121E90) Entry @ $4.15

Entry on March 1st at $87.17
Earnings Date 04/27/11 (unconfirmed)
Average Daily Volume = 2.9 million
Listed on February 28th, 2010


IntercontinentalExchange, Inc. - ICE - cls: 127.10 chg: -1.10

Stop Loss: 119.90
Target(s): 138.00, 148.00
Current Option Gain/Loss: -28.5%, and -29.4%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/01 update: ICE held up pretty well considering the market's widespread sell-off. There is still a decent chance that shares will correct toward the $125-122 zone so I would wait for the dip before initiating new positions.

Bear in mind that this is an aggressive trade. The stock is volatile and there is a chance that ICE makes an acquisition bid for another exchange. If Wall Street thinks ICE is paying too much the stock will decline on the news. Our targets are $138.00 and $148.00.

I want to warn you that the March options will probably be extremely volatile.

- Suggested Positions - (Small Positions Only)

Long the March $130 calls (ICE1119C130) Entry @ $3.20

- or -

Long the April $135 calls (ICE1116D135) Entry @ $3.40

Entry on February 28th at $127.46
Earnings Date 05/04/11 (unconfirmed)
Average Daily Volume = 938 thousand
Listed on February 26th, 2010


Jones Lang Lasalle Inc. - JLL - close: 96.12 change: -2.30

Stop Loss: 93.30
Target(s): 102.50, 109.00
Current Option Gain/Loss: -42.8%, and -27.9%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/01 update: JLL followed the market lower. Shares failed at their 10-dma and look headed for the recent low near $94. Wait for the dip or a bounce from this level before considering new bullish positions. We have a stop loss at $93.30. JLL has see a lot more volatility in the last month so let's keep our position size small to reduce our risk. Our targets are $102.50 and $109.00.

FYI: March options are likely to be very volatile.

- Suggested Positions - (Small Positions)

Long the March $100 calls (JLL1119C100) Entry @ $1.75

- or -

Long the April $100 calls (JLL1116D100) Entry @ $3.40

Entry on February 28th at $97.96
Earnings Date 04/27/11 (unconfirmed)
Average Daily Volume = 386 thousand
Listed on February 26th, 2010


3M Co. - MMM - close: 90.46 change: -1.77

Stop Loss: 88.75
Target(s): 94.50, 99.00
Current Option Gain/Loss: + 2.8%, and + 1.2%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/01 update: MMM almost completely erased yesterday's big gains with a -1.9% drop today. The stock should have support near the $90 area but readers may want to wait for the bounce before initiating new bullish positions.

- Suggested Positions -

Long the March $90 calls (MMM1119C90) Entry @ $1.75

- or -

Long the April $95 calls (MMM1116D95) Entry @ $0.78

Entry on February 25th at $89.75
Earnings Date 04/27/11 (unconfirmed)
Average Daily Volume = 3.5 million
Listed on February 24th, 2010


Nike Inc. - NKE - close: 87.70 change: -1.33

Stop Loss: 84.80
Target(s): 88.00, 91.50
Current Option Gain/Loss: + 67.4%, and + 84.0%
2nd Position Gain/Loss: + 9.3%, and - 6.9%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/01 update: Warning! NKE has produced a failed rally and bearish reversal pattern at round-number resistance near $90.00. We should expect a pull back toward the $86-85 zone. More conservative traders might want to go ahead and consider an early exit out of their March options. I am not suggesting new positions at this time. Our final exit target is $91.50.

- Suggested Positions - (Small Positions Only!)

Long the March $85 calls (NKE1119C85) Entry @ $2.09

- or -

Long the April $90 calls (NKE1116D90) Entry @ $0.94

2nd position, buy the bounce from $85.50

Long the March $85 calls (NKE1119C85) Entry @ $3.20

- or -

Long the April $90 calls (NKE1116D90) Entry @ $1.86

02/25 New stop loss @ 84.80
02/24 New entry point, buy the bounce from $85.50, Add 2nd position
02/19 Adjusted final target to $91.50
02/18 1st Target Hit @ 88.00. March $85 call @ 3.75 (+79.4%)
02/18 1st Target Hit @ 88.00. April $90 call @ 1.80 (+91.4%)

Entry on February 15th at $85.25
Earnings Date 03/17/11 (unconfirmed)
Average Daily Volume = 2.2 million
Listed on February 9th, 2010


Occidental Petrol. - OXY - close: 100.22 change: -1.75

Stop Loss: 96.75
Target(s): 106.75, 109.75
Current Option Gain/Loss: -55.0%, and -23.7%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/01 update: It looks like I should have stuck to my guns for one more day and waited for the dip to $100.25. OXY actually opened higher at $104.12 but quickly reversed with the rest of the energy sector. Shares eventually gave up -1.7% and fell toward psychological support at the $100 level. I would use this dip as a new bullish entry point however given the tone of the market, readers may want to wait for a bounce first.

Our plan was to use small positions to limit our risk. Don't forget that March calls expire in just less than three weeks. You may be more comfortable with the Aprils.

Small Bullish Positions - Suggested Positions -

Long the March $105 calls (OXY1119C105) Entry @ $1.87

- or -

Long the April $105 calls (OXY1116D105) Entry @ $2.78

02/28 Adjusted entry strategy. Buy calls now!

Entry on March 1st at $104.12
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume = 4.9 million
Listed on February 22nd, 2010


Transocean Ltd. - RIG - close: 82.51 change: -2.12

Stop Loss: 79.75
Target(s): 89.50, 94.00
Current Option Gain/Loss: -29.2%, and -19.4%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/01 update: RIG completely gave back all of yesterday's gains and more. Shares lost -2.5% and cold easily retest the $80 area tomorrow. I would be tempted to buy calls on a dip near $80.00 but given the market's tone readers might want to wait for the bounce to appear first. Our profit targets are $89.50 and $94.00.

Please note that the March calls will likely be very volatile.

- Suggested Positions -

Long the March $85 calls (RIG1119C85) Entry @ $2.05

- or -

Long the April $85 calls (RIG1116D85) Entry @ $3.60

02/28 RIG hit our trigger @ 84.25

Entry on February 28th at $84.25
Earnings Date 05/05/11 (unconfirmed)
Average Daily Volume = 5.3 million
Listed on February 26th, 2010


Ross Stores Inc. - ROST - close: 71.51 change: -0.53

Stop Loss: 68.95
Target(s): 74.90, 77.75
Current Option Gain/Loss: -21.8%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
03/01 update: Investors are starting to worry about consumer spending with oil continuing to surge higher. If crude doesn't slow down soon the impact at the fuel pump could definitely cause problems. For now ROST held up reasonably well. Shares opened slightly higher but quickly reversed. This is a mini-bearish reversal. I would expect another dip to $70.00. However, we can use a dip or a bounce near $70 as a new entry point to buy calls. Our targets are $74.90 and $77.75. However, we will plan to exit ahead of the mid March earnings report.
The Point & Figure chart for ROST is bullish with a $97 target.

- Suggested Positions -

Long the April $75 calls (ROST1116D75) Entry @ $1.60

Entry on March 1st at $72.55
Earnings Date 03/17/11 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on February 28th, 2010


The Toronoto-Dominion Bank - TD - close: 82.00 change: -1.71

Stop Loss: 78.40
Target(s): 84.00, 89.00
Current Option Gain/Loss: +111.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/01 update: Uh-oh! A -2% pull back in TD isn't a problem. What concerns me was the big volume on today's profit taking. Readers may want to go ahead and take profits now. If you're looking for a new entry point I'd wait for a dip or a bounce near $80.00 and I would consider the April options but keep in mind our plan to exit ahead of the March earnings report.

Our targets are $84 and $89. We will plan to exit ahead of the March 11th earnings report (unconfirmed date).

- Suggested Positions -

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

02/28 New stop loss @ 78.40
02/26 New stop loss @ 77.90
02/16 New stop loss @ 76.90

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


Proshares Ultra(long) Russell 2000 - UWM - close: 45.13 change: -1.85

Stop Loss: 43.49
Target(s): 49.75, 54.00
Current Option Gain/Loss: -41.8%, and -20.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Small Positions - UWM Position -

Long the April $48 calls (UWM1116D48) Entry @ $2.75

-2nd position (entry 2/25)-

Long the April $47 calls (UWM1116D46) Entry @ $2.50

02/26 New stop loss @ 43.49
02/25 April $47 call opened at $2.50
02/24 Add another position, April $47 calls
02/14 UWM opened at $46.90. Option opened @ $2.75

iShares Russell 2000 - IWM - close: 80.62 change: -1.65

Stop Loss: 79.20
Target(s): 84.95, 87.25
Current Option Gain/Loss: -42.7%, and -20.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/01 update: I was hearing a lot of negativity regarding the small caps today. The worry is that when Wall Street turns cautious (this time because of rising tensions across the Mideast and worries about access to the global oil supply) that investors will flee from small caps into more liquid large cap names. Thus the concern is that small caps will underperform. That is certainly a risk here. While the sell-off today was painful, the up trend is not broken yet.

The UWM will likely test support near $44 and its lows from last week. The IWM will probably test support near its lows last week near $79.50. Aggressive traders could buy calls on this dip near last week's lows. I would prefer to wait for the bounce. Our stop losses are directly under these levels.

Small Positions - IWM Position -

Long the April $84 calls (IWM1116D84) Entry @ $1.92

-2nd position (entry 2/25)-

Long the April $82 calls (IWM1116D82) current ask @ $2.35

02/26 New stop loss @ 79.20
02/25 April $82 call opened at $2.35
02/24 Add another position (April $82 calls)
02/14 IWM opened @ 82.11. Option opened @ 1.92

UWM Entry on February 14th at $46.90
IWM Entry on February 14th at $82.11
Listed on February 12th, 2010


CBOE Market Volatility Index - VIX - close: 21.01 change: +2.66

Stop Loss: N/A
Target(s): 22.50, 28.00
Current Option Gain/Loss: -21.8%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/01 update: The widespread market weakness was definitely fueling investor fears. The VIX rallied off its morning low to post a +14.4% gain. If you think the market has begun a new leg lower then this would be an entry point. However, until I see the major indices break support I would hesitate to launch positions (and of course by then it might be too late). Officially our final exit target is 28.00.

- Suggested Positions -

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

02/28 Consider an early exit now.
02/23 1st Target Hit @ 22.50, Option @ 2.35 (+46.8%)

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


Waters Corp. - WAT - close: 82.04 change: -1.01

Stop Loss: 79.80
Target(s): 86.00, 89.90
Current Option Gain/Loss: -44.4%, and -22.8%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/01 update: WAT continues to struggle with resistance near the $83.50 area. Today's failure would suggest the stock is poised to retest support near $80.00. I would use a dip near $80 (or a bounce from $80) as a new entry point to buy calls. Our targets are $86.00 and $89.90.

FYI: The March calls will likely be very volatile.

- Suggested Positions -

Long the March $85 calls (WAT1119C85) Entry @ $0.90

- or -

Long the April $85 calls (WAT1116D85) Entry @ $1.75

Entry on February 28th at $82.61
Earnings Date 04/27/11 (unconfirmed)
Average Daily Volume = 876 thousand
Listed on February 26th, 2010


PUT Play Updates

Freeport-McMoran - FCX - close: 51.62 change: -1.33

Stop Loss: 55.15
Target(s): 50.25, 47.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see trigger

Comments:
03/01 update: I am starting to think that yesterday was our entry point for puts on FCX. Aggressive traders could buy puts now but I would cinch my stop loss down to the $54.00 or $53.75 levels. Officially the newsletter will keep our trigger to buy puts at $54.00. If triggered our first target is $50.25. Our second target is $47.00.

Trigger @ 54.00

- Suggested Positions -

Buy the March $52.50 PUTS (FCX1119O52.5) current ask $2.03

- or -

Buy the April $50.00 PUTS (FCX1116P50) current ask $2.13

02/26 Update our trigger to buy puts at $54.00, stop 55.15

Entry on February xxth at $ xx.xx
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume = 14.4 million
Listed on February 19th, 2010