Option Investor
Newsletter

Daily Newsletter, Saturday, 3/12/2011

Table of Contents

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

Market Wrap

Never A Dull Moment

by Jim Brown

Click here to email Jim Brown

The markets faced major earthquakes and tsunamis, unrest in the Middle East, falling consumer sentiment, plunging oil prices and the impending FOMC meeting but the bulls climbed the wall of worry to push the indexes back into the green.

Market Statistics

The big news for Friday was of course the major earthquake in Japan. It was the strongest earthquake on record for Japan and the seventh largest ever recorded in the world. Damage was extensive even though it was centered well offshore and 15 miles under the surface. The quake created a 23-foot high tsunami that washed through coastal areas and destroyed everything in its path. Tokyo was 186 miles from the quake center but was still rocked by the quake with damage to glass and buildings. Eleven nuclear power plants had to shutdown due to damage. More than four million buildings lost power. Three refineries were on fire and a total of five were offline. There are no accurate estimates for loss of life because so much of the devastated areas were simply washed away.

One reactor at the Fukushima Daiichi facility appears to be in the process of melting down. Radiation levels in the control room surged to 1,000 times above normal and levels near the main gate were 70 times normal. The government widened the evacuation zone from 3km to 20km after the plant exploded on Saturday destroying the containment building. A different facility, the Fukushima Daini plant, also reported temperatures were rising inside the reactors and it had lost control over pressure in the reactors. A 3km evacuation zone was imposed around that plant as well. All the reactors shutdown automatically when the quake occurred but diesel powered cooling systems also failed. Even when offline the nuclear fuel needs to be kept cool. This quake could put another hold on new reactor approvals around the world until a solution is found to prevent future problems. Earthquakes are not going away.

The disaster in Japan actually improved our markets overnight. The futures were down hard after the Thursday decline and routine news out of Asia and Europe was continuing to depress sentiment. The quake news seemed to distract investors from their prior worries and the sentiment changed back to a buy the dip plan.

The Saudi Day of Rage evaporated and nobody showed up at either rally point in Riyadh except for riot-clad policemen. Multiple police cars blocking intersections for blocks in any direction and hundreds of riot police evidently convinced demonstrators to stay indoors. In the city of Hofuf, near the Ghawar oil field several hundred protestors congregated briefly to voice their grievances but the demonstration evaporated quickly when riot police and armored personnel carriers began to appear. Apparently the harsh methods used on Thursday to breakup a prior demonstration was more than these people wanted to deal with on Friday.

Prince Alwaleed bin Talal al Saud, nephew to the king and chairman of Kingdom Holding, said it should be renamed from Day of Rage to Day of Allegiance since no protestors in Riyadh was seen to be a vote of confidence for the king's recent $35 billion stimulus program. I suspect Prince Alwaleed is a little biased and this was his effort to be a cheerleader for the king. The prince is inline for the throne but way down the list of potential candidates.

The lack of a major clash in Saudi Arabia caused investors to breathe a sigh of relief and oil prices plunged. The news of the largest rally in a month in Yemen with demonstrators fired on by police and violence between demonstrators and police in Bahrain was ignored. Neither country has any material oil production.

Oil declined for multiple reasons. The first was the lack of a material protest in Saudi Arabia and the second was the expected drop in demand by Japan. With five refineries offline, some for an extended period to make repairs, the demand for oil for Japan is going to drop sharply. Japan is the third largest importer of crude in the world at 4.4 million barrels per day. The anticipated drop in refining and the decrease in driving due to the thousands of cars washed inland and piled up like cordwood and the severe damage to hundreds of roads and bridges helped push oil prices lower. Video of the wall of water pushing hundreds of cars across the countryside and the pictures of piles of cars in the hundreds when the water receded was simply amazing. It could be a long time before transportation returns to normal in Japan.

The decline in demand from Japan is estimated to be around 2.0 mbpd. This would easily offset the loss from Libya. This pushed WTI prices as low as $99 intraday and Brent $112. They both closed off their lows but I think it was a short covering bounce. Late in the day analysts were predicting a sharp increase in refining in other areas and the need for Japan to import large quantities of gasoline and diesel. With eleven nuclear plants offline, some possibly for months, there will be a very high demand for diesel to power diesel generators for buildings and emergency facilities. Plus the heavy equipment and trucks used to clear away the debris will be consuming large quantities of diesel. This will take a few weeks to see how demand actually changes so I would not expect crude to really take a dive but I do think the top in prices is behind us. Energy stocks did rebound strongly on Friday because an oil drop to $100 is still well above profitable levels for oil companies. WTI between $95 and $99 is the sweet spot for crude. Not high enough to drive gasoline to levels where driving slows materially but high enough for oil companies to profit from increased cash flow and direct that money back into capital spending.

WTI Crude Chart

Brent Crude Chart

On the economic front Consumer Sentiment for March plunged to 68.2 from the 77.5 reading in February. That was the eighth largest drop since records began in 1978. According to analysts the drop was due to the turmoil in the Middle East and the soaring gasoline prices. The sharp drop in the stock market over the last two weeks was also a factor. The biggest change came in the expectations component, which fell -13.3 points to 58.3 from 71.6. The parade of analysts predicting higher oil prices for the rest of the year created a serious cloud of frustration. Most consumers live from paycheck to paycheck and often run out of money before they get paid. Faced with gasoline prices headed for $3.75 per gallon from $2.75 just a couple months ago that equates to an average of an extra $20 per fill up. For a two-car family that equates to more than a $100 pay cut. The extra money they got from the social security tax cut has now been completely erased by the gas hike.

Consumer Sentiment Chart

Retail Sales accelerated in February to a +1.0% gain and the strongest growth since October. This was before the recent increases in the price of gasoline but there was enough of an increase to push gas sales up +1.4%. Sales year over year are now up +8.9%. Improving weather was a contributing factor. Bad weather in January pushed shopping into February so this number is slightly misleading. The biggest gains came from autos and auto parts at +2.3%. The weakest area was furniture and home furnishings with a -0.8% decline.

Business inventories rose +0.9% in January and inline with expectations. It was another good month after the small dip in November. The trend to add to inventories is growing and this is bullish for the manufacturing sector. This is a lagging report and was ignored.

The Job Openings, Labor Turnover Survey showed job openings declined from 2.921 million in December to 2.76 million in January. The majority of declines were in the construction and hospitality sectors and that was probably due to the harsh weather conditions in January. This is a lagging report and was overshadowed by the major events on Friday.

The calendar for next week has some big events. The biggest is the FOMC meeting on Tuesday and the potential for the Fed to change their statement. As you know I believe the market weakness over the last week was due to hedge funds taking profits ahead of that expected statement change.

We also have the PPI and CPI on Tue/Wed and while they are not expected to show any big jumps in inflation we are always just one report away from a catastrophe. A sharp spike in inflation could turn the Fed bearish in a heartbeat and that would be seriously negative for the market.

The Philly Fed survey on Thursday is a proxy for the next ISM report and estimates are for a decline to 32.4 from 35.9. Some believe the manufacturing sector may be slowing slightly although to date there has been no indications in the various regional reports. The Philly Fed would be market negative if the decline appears.

Economic Calendar

In stock news Friday was very quiet. The quake was about the only news moving the market. The severe damage means Japan is going to have to spend hundreds of billions on reconstruction and that was powering stocks like Caterpillar (CAT) and AK Steel (AKS) for obvious reasons.

Apple (AAPL) shares rallied $5 ahead of the start of iPad 2 sales this weekend. An analyst at Gleacher & Co. said Apple could sell 600,000 units this weekend alone. That is twice the volume of the original iPad when it went on sale. The iPad 2 is vastly superior to the iPad 1 and sells for the same price. Everyone who waited for the new and improved version without the initial device bugs should be very happy they waited. The first version sold over one million units in the first 28 days. Apple is expected to sell 20 million of the iPad 2 this year. Sales of just the iPad 2 in 2011 will generate more revenue for Apple than Dell Computer will generate from all sources in 2011. The iPad 2 goes on sale in 26 other markets on March 25th.

Apple Chart

Aflac (AFL) is watching the damage in Japan carefully. Aflac sells health and life insurance to 25% of the population of Japan and the Aflac CEO said they could have claims from 3-4 million people. They don't expect a lot of deaths but they do expect a lot of injuries. The CEO said Aflac was fully prepared to handle all the claims. Property damage claims were expected to be a lot larger because of the dramatic damage from the tsunami. A Credit Suisse report said insured damage could be in the range of $10 billion to $50 billion. The major reinsurers like Hannover Re declined about 5%. After gapping lower at the open Aflac rebounded on the CEO comments to nearly flat.

Aflac Chart

European leaders agreed on Saturday to strengthen the euro zone bailout fund, make its loans cheaper and lower the interest rate on loans made to Greece. They are going to extend the term on the loans to Greece to 7.5 years from the current three years and cut the interest rate by 100 basis points. The European Financial Stability Facility (EFSF) will increase in size from €250 billion to €440 billion. Any new loans to any EU country will be based on IMF rates but incur a 300 basis point penalty fee and a 50 basis point service charge. Ireland could also benefit from the lower rates but only if they agree to change their corporate tax rate. Ireland has a 12.5% corporate tax rate. The EU leaders could agree to a deal on Ireland when they meet on March 25th. The EFSF is scheduled to be replaced by the European Stability Mechanism (ESM) in 2013 and the size of the fund raised to €500 billion.

I believe this EU news will be bullish for our markets on Monday. The resurgence of the EU debt crisis with the Spain downgrade on Thursday helped to tank the markets and the resolution to upgrade the EFSF is a positive step to solve those debt problems.

The S&P dipped below support at 1295 by -3 points on the opening dip but quickly recovered. I wish I could say it was followed by a strong rebound that pushed the index significantly higher but unfortunately that did not happen. If you get out your microscope and examine the intraday chart carefully you will see the initial bounce was able to move past 1300 by a miniscule +3 points and then it used 1300 as support for the rest of the day. I do view that as slightly bullish. At 2:PM another move higher began to 1308, probably short covering, but it was sabotaged at the close by fear of darkness selling. With the weekend event risk still pretty high I am surprised we did not close flat to down.

On the bright side there were no sell programs dumping millions of shares. I actually think Friday was bullish despite the lack of a material gain. I am not complaining about +9 points but after the -24 point drop on Thursday a +9 point gain is fairly anemic.

The key idea here is that support at 1295 held and we closed above 1300. The EU agreement to raise the loan limits on their bailout fund and the lack of a major event in Saudi Arabia over the weekend could be market positive on Monday.

On the downside we had a lower low on the S&P and the Russell barely made it into positive territory. The FOMC meeting on Tuesday is a major stepping-stone in the wall of worry. I would be perfectly happy for the S&P to just remain over 1300 for two more days to get us past that hurdle. A continued rebound above 1300 would be a gift.

S&P-500 Chart

The Dow was looking good late in the afternoon with a triple digit gain. However, that fear of darkness settled in and the morning buyers retreated with what little profits they had gained. The Dow gave back nearly half of its intraday gains.

Like the S&P the Dow dipped below support at 12,000 on the opening drop but when the bears could not capitalize on the opening decline the buyers came back. The Dow was helped by gains in CAT and MMM on expectations for sales to Japan and by gains in CVX and XOM on rebounding oil prices in the afternoon.

When the Dow reached the afternoon highs from Thursday at 12,075 the sellers returned but it was 3:30 PM so I attribute that to fear of weekend event risk more than a resistance failure.

The Dow closed just a stones throw from psychological support at 12,000 but we saw new support develop at 11,950 so there are two levels to be broken before a true breakdown can occur. Real resistance is still 12,250 but I doubt we will have to worry about that on Monday.

Dow Chart

Despite the +14 point gain there was no joy on the Nasdaq. About the only thing to say positive about it was the decent jump back over 2700. The techs are still overall weak and Apple, NFLX and BIDU were the major reasons for the Nasdaq rebound with each gaining over $4. Apple should continue to move higher as weekend sales numbers for the iPad 2 are released. There were pictures on TV of lines wrapping around the block at several Apple stores. Some were 500 people long and each person was limited to "only" two iPads. Who knows how long that buzz will last before we get a sell the news event on Apple? Whatever happens to Apple stock happens to the Nasdaq since Apple is 18% of the NDX.

The Nasdaq chart is far from bullish and bordering on the edge of a serious breakdown. This is one of those make it or break it weeks and something positive needs to happen on Monday to pull us back from the brink. We could survive a dip to 2675 and maintain the overall bullish trend but that would be an extreme example of living dangerously.

I said on Thursday the Nasdaq was my indicator for Friday. The rebound was lacking conviction and it is still my indicator for market direction on Monday. This is the index that should lead us next week.

Nasdaq Chart

Trading in the small caps on the Russell should have been halted on Friday for lack of interest. After dropping -21 points on Thursday to say the +3 point rebound was lacking conviction would be an understatement. I was happy to see the support at 795 hold but you would have thought the rebound would have been stronger.

Fund managers are clearly hesitant to hold small caps over the FOMC meeting on Tuesday. Add in the return of the EU debt crisis on Thursday and I am not surprised we tested that 795 support. Now that the EU credit facility has been expanded we could see that small cap sentiment change next week. I doubt it will be before the FOMC announcement. A change in bias for the Fed would initially be a disaster for small caps but positive long term.

For Mon/Tue the 795 level needs to hold to maintain at least a shred of positive sentiment for later in the week. Resistance is so far above at 830 that it is immaterial.

Russell Chart

The indexes pulled back to critical support ahead of FOMC. The expectations for a statement change are rampant and if the Fed is NOT going to change the statement negatively I believe they need to make a positive change to get this cloud off the market. Bill Gross has said repeatedly the Fed needs to give better direction than the "extended period" language. Gross sold all the U.S. debt in the Pimco Total Return Fund because he is afraid of the market reaction when the Fed does announce the end to the QE2 program. That Pimco news last week was confirmation to the market the Fed was about to make a change in the statement to either confirm termination in June, say they are going to back off on the total amount or simply end it earlier than previously scheduled.

New York Fed President William Dudley said on Friday the Fed is "very far away" from achieving its mandate of high employment and price stability and "faster progress toward these objectives would be very welcome." This was seen as a signal the Fed was not going to change its policy any time soon. Now we need the FOMC to confirm that on Tuesday.

I believe we are at a pivotal point in the market. The pullback to critical support ahead of the Fed meeting has setup either the beginning of a strong rebound into Q1 earnings or a complete breakdown that could last through the summer. I vote for the rebound scenario but my vote does not count. Bernanke's vote does count and I am betting he does not want to tank the market next week. He has spent the last six months pumping up the stock market with record buying of government treasuries and all would be for nothing if he allows the market to crash before the recovery becomes self-sustaining.

He knows the rise in gasoline prices is going to be a drag on the slowly growing economy. He needs to keep the pedal to the metal to keep the economy moving forward until the Libyan crisis ends and oil prices drop back into a safe zone. This oil spike may have changed the Fed's plans and could even cause them to extend QE2. I know that sounds unbelievable today but it would have less political risk than adding a QE3. Extending it another six months at a lesser rate would take all the pressure off today and hedge funds would be racing back into the market.

I am looking forward to Tuesday night's market commentary. Hopefully the fog will have cleared and we will have a concrete idea on market direction.

Jim Brown

Send Jim an email

"A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain." - Mark Twain


Index Wrap

Continued Volatility, Continued Slippage

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

This past week brought more periods of high volatility in the market, with a continued tendency for the major indices to lose ground. I anticipate the major indexes going somewhat lower still as suggested by several technical factors.

The first bearish factor is a longer-term overbought situation; e.g., the weekly MACD indicator shown last week with the Nasdaq Composite (COMP) weekly chart has been pulled lower generating a downside crossover sell 'signal'. The bearish MACD crossover occurred from a high level for this indicator, which are readings above 100. An overbought extreme can go on for a long time but there is a high correlation with significant pullbacks that occur after overbought extremes are reached. Corrections can be relatively shallow pullbacks and more of a sideways trend than a deep decline, so 'overboughtness' so to speak, doesn't tell us how where the indexes will get to from current levels.

There are some chart patterns that have 'measuring' implications and yield some downside objectives. One is when prices have traced out a bearish rising wedge pattern.

There is a less common rising bearish wedge pattern that is also a 'broadening' formation. This is seen in my Trader's Corner article sent out today. The two examples I highlight are with the S&P 500, where a possible downside objective implied by this pattern is to around 1253, but perhaps just to 1260. The other major index I look at in this analysis is the Nasdaq Composite (COMP), where the ascending broadening wedge formation has a measuring implication for a further downside objective to the 2650-2645 area and not a lot lower than recent COMP lows. The point is that a broadening type top formed and the implications of this particular pattern is for still lower levels, but no major rout. There is still a good deal of buying power out there as the public (gasp) after a rise of 100's of points already is starting to shift money into stocks.

There's another way to measure downside objectives with a different and fairly reliable bearish chart pattern that completed its formation this past week: that of a Head & Shoulder's top as seen on the hourly charts of all the major indexes. I highlight in my first chart the Nasdaq 100 (NDX) Index. The way to do the downside measurement is described in more detail in my 7/9/10 Trader's Corner piece which can be seen online HERE.

The measurement is fairly simple: the distance from the top of the 'Head' (the center top of 3) to the neckline is subtracted from where prices later broke below the extended neckline. NDX in this calculation has an implied 'minimum' downside objective to around 2240. Resistance is implied on a move back up TO the neckline as noted by the red down arrow.

I have highlighted expected support (and resistance) levels in the rest of my charts. I don't see that strong support has been reached yet in any of the major indexes. For example, the Dow appears to have support at 12000 and that's a number you will see in the media. I think its more likely that better support/buying interest would be found in the 11800 area, which is a measured move objective based on this current second down leg being approximately equal to the first downswing.

In all cases a decisive move above highlighted resistance levels should be respected. My current view is this market is not ready to rally in a sustained way yet and there's likely more downside to come.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) index chart has fallen below its up trendline and appears to be struggling to stay above the 50-day moving average, all of which has turned the chart near-term bearish. If 1294, the prior downswing low is penetrated on a closing and sustained basis, the intermediate-term trend shifts lower. Next key support is in the 1280-1275 area, then at 1260.

Key resistance is implied at the previously broken up trendline, currently intersecting at 1320. A close back above this trendline that was maintained in subsequent days would be a bullish development. 1332, then 1344 are then the next pivotal resistances.

Trader sentiment got near a bullish 1.3 reading on Thursday, but then turned up some at the end of the week. Extremes in bearishness, as reflected in daily equities call to put ratios, tend to suggest future rally potential in a contrary opinion way; sort of an upside down Alice in Wonderland view of things.

An ideal buy 'signal' for is: #1.) prices bouncing from a key support; coupled with 2.) an oversold extreme in the RSI; with the addition of 3.) a significant level of bearishness as reflected in my CPRATIO indicator, especially if occurring on a 5-day moving average basis.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) index has also turned near-term bearish given the break in prior upside momentum that's implied by the downside penetration of its up trendline. As of yet there has been no Close below OEX's recent 582 downswing low. A more pivotal technical level is the late-January intraday low at 575. Potential support extends from 575 to 570.

The ability for the index to move back above 587, at the previously pierced up trendline, as well to above the 50-day moving average, currently at 586, is something to watch for in coming days. No strong regaining of upside momentum would be implied short of a move back up through 599 and beyond that, to above the prior 602 top.

As with all the indexes, I'd want to see the 13-day RSI get to a 'typical' oversold extreme before I'd get excited about taking on some index call positions. An oversold extreme hasn't occurred since late-August when OEX was trading around 475. In a bull market, the indexes resist selling off enough to make it 'easy' for those waiting to buy at what they would consider cheap prices.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) average managed to rebound back above its up trendline on short-covering at the end of the week. This occurred as prices in some key Dow stocks rebounded a bit from their 50-day moving averages. There are some money managers who will do some buying at the 50-day averages when available. Assuming of course they remain bullish on the longer-term market prospects which does remain a 'consensus' outlook.

INDU stocks rebounding from the important 50-day moving average include: BA, CAT, DD, GE, HD, JPM, KFT, MCD, MMM, T and XOM. These were enough to cause the Dow Average to rebound some from its Friday low. CVX, DIS, IBM, KO, and PFE haven't been pulled as yet to as low as their 50-day averages. Modest rallies in these 16 stocks could pull the Dow up from here.

Contrary to what I expressed in my initial 'bottom line' comments, 12000 could hold as support in the Dow and we won't see even 200 points lower, to what I consider to be stronger technical support around 11800. Stay tuned on that!

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) chart is no longer holding above it's uptrend line and looks to be headed lower still in line with the Head & Shoulder's Top pattern I wrote about last week. I also noted that I didn't "believe we'll have long to wait to see how this unfolds." That is how it went with the sharp late-week break. Where to from here? Lower I think and although 2677 could be a significant support, some chart projections I have suggest we could see 2650 as a low for the current decline.

Key near resistance is at 2265, at the current intersection of the recently broken up trendline. Above the trendline 2800 is an obvious next resistance, then at the prior 2840 top.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) broke lower on Thursday and the index formed a downside price gap. A bit of this gap got 'filled in' on Friday and may get covered completely by simply rallying back to 2309. Tougher going may be found back up at the previously penetrated up trendline, at 2336 currently. Even more pivotal resistance in the 'technical' scheme of things exists at the prior highs at 2375 and 2400.

I don't see that NDX has landed already in a solid support area, which would more likely come in around 2258, or at 2236, which were the lows of late and early-January, respectively.

I wrote last week that (like COMP) NDX could be viewed as having formed a "Head & Shoulder's top, which suggests a bearish down leg to come." We got a further move lower, but the chart pattern is a 'skewed' version of such a (H&S) top. The core idea is there; i.e., 3 tops, with one before and one after a middle higher peak. The two lower tops would have normally formed in a similar area. That's a bit of a stretch here with the first top hitting 2236 and the next at 2376. However, to not make a total liar out of me, a NDX Head & Shoulder's top did form recently on an hourly chart basis (shown as my 1st chart in my 'bottom line' commentary), which projected a potential downside objective to around 2240 once the neckline got pierced.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) fell under its up trendline, which visually of course shows declining upside momentum. I envision better support in the 55.4 to 55 area than around the Q's most recent lows at 55.9-55.8. The 55.0 area looks like it could be a next lower support and is currently my lowest objective. Moreover, 55 is where the hourly Head & Shoulder's top pattern (not shown) would suggest as a 'minimum' downside objective.

So far, daily trading volume has ramped up on the recent weakness and significant selling may continue as key big tech stocks continue to see profit taking and speculative selling. Apple is a stand out exception as the stock rebounded on Thursday and Friday from its 50-day moving average. We love the new super thin I-pads!

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) chart is mixed. On one hand RUT pierced its up trendline, a technical warning shot on arrested upside momentum and on the other had the index rebounded from it prior (down) swing low.

Key near-term support is at 795, with even more pivotal support at the late-January bottom in the 772 area.

Near term resistance is noted at 815 at the current intersection of the previously broken up trendline. As technical types like me say: previous support, once broken, tends to 'become' subsequent resistance. By extension, this goes for previous support trendlines also. Even more pivotal resistance levels are at prior 'failed' highs: at 830 and 838 respectively.

I'm not convinced that the Russell has gone as low as its going to in the current correction. RUT seems more likely to have a further decline to the 780 area or lower, such as to retest late-January support that developed in the 772 area. Such a move would complete the pattern often seen in a second downswing where a subsequent sell off equaled or surpassed the first decline.



GOOD TRADING SUCCESS!


New Option Plays

Electronics, Rails, and Casinos

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Apple Inc. - AAPL - close: 351.99 change: +5.32

Stop Loss: 344.00
Target(s): 364.00, 379.00
Current Option Gain/Loss: + 0.0%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Once again folks lined up for AAPL's latest product launch. This time it was for the new, sleeker, thinner iPad 2. While consumers are racing to buy it, analysts are trying to guess just how big is the tablet market and what will the iPad 2's impact be. Evidently, according to some reports, the new iPad 2 is going to be a bigger hit than the original iPad. Proponents are claiming that AAPL will remain out in front of the pack even though the pack of competing tablet PCs is growing significantly.

Technically shares of AAPL just bounced from technical support at the rising 50-dma again. Not only that shares bounced from support at $345.00 plus the stock has produced a bullish engulfing candlestick pattern with Friday's rebound. Yet in spite of all the bullishness I am labeling this an aggressive, higher-risk trade. The NASDAQ looks vulnerable to a sell-off after last week's decline. Normally I would have expected AAPL to see a sell-the-news move on this product release but shares were already off their recent highs.

Since this is an aggressive, higher-risk trade we want to keep our position size small to try and limit our risk. FYI: The Point & Figure chart for AAPL is bullish with a $448 target.

- Open Small Bullish Positions Now -

- Suggested Positions -

Buy the April $365 calls (AAPL1116D365) current ask $6.00

Annotated Chart:

Entry on March 14th at $ xx.xx
Earnings Date 04/19/11 (unconfirmed)
Average Daily Volume = 18 million
Listed on March 12th, 2010


Norfolk Southern Corp. - NSC - close: 66.53 change: +1.58

Stop Loss: 63.90
Target(s): 69.75, 74.00
Current Option Gain/Loss: + 0.0%
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The transportation index was hammered lower during oil's rise to new two-year highs over the last few weeks. Yet the railroad index never broke its bullish trend. Now shares of NSC are breaking out past key resistance near $66.00. I am suggesting we buy calls on this relative strength. We can use a stop under the recent low. Our targets are $69.75 and $74.00.

open positions now, above $66.00

- Suggested Positions -

Buy the April $65 calls (NSC1116D65) current ask $3.10

- or -

Buy the April $70 calls (NSC1116D70) current ask $0.80

Annotated Chart:

Entry on March 14th at $ xx.xx
Earnings Date 04/27/11 (unconfirmed)
Average Daily Volume = 3.1 million
Listed on March 12th, 2010


Wynn Resorts Ltd. - WYNN - clos: 123.79 change: +0.70

Stop Loss: 119.75
Target(s): 129.75, 137.50
Current Option Gain/Loss: + 0.0%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of WYNN held up pretty well considering the terrible consumer sentiment numbers and the earthquake/tsunami in Japan. The consumer sentiment numbers could suggest that consumers are less like to spend money here in the U.S., which would mean less business in Vegas. Meanwhile the quake in Japan could have an effect on WYNN's properties in Macau but only 1.7% of the visitors to Macau originate from Japan so any loss of business would likely be minimal.

Technically shares of WYNN just bounced from a dip near support at $120 and the stock should see additional support at its rising 50-dma. I do consider this a more aggressive, higher-risk trade because WYNN can be so volatile. I am suggesting we buy calls now on Friday's intraday bounce but we want to keep our position size small to limit our risk. We'll start with a stop loss at $119.75.

- open small bullish positions now -

- Suggested Positions -

Buy the April $130 calls (WYNN1116D130) current ask $3.25

Annotated Chart:

Entry on March 14th at $ xx.xx
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on March 12th, 2010


In Play Updates and Reviews

Back from the Brink

by James Brown

Click here to email James Brown

Editor's Note:

Stocks were on the verge of a serious breakdown Friday morning but equities recovered from their lows. Earthquakes and tsunamis in Japan, the "day of rage" protests in Saudi, and declines in oil prices all had an influence but couldn't push stocks lower. We did see the plunging consumer sentiment numbers have an effect. ROST was stopped out. Our ICE play was also stopped out. Our JOYG put play was triggered.

-James

Current Portfolio:


CALL Play Updates

Cerner Corp. - CERN - close: 103.20 change: +0.97

Stop Loss: 99.45
Target(s): 104.85, 109.00
Current Option Gain/Loss: -14.8%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/12 update: CERN continues to perform well. Traders bought the dips near $101 a couple of times last week. CERN never saw the sell-off that was so common across the market. That doesn't mean CERN would not sell-off if the major averages continued lower from here but if the market can hold up then CERN looks poised for more gains.

Given the market uncertainty right now readers may want to wait on launching new positions but the overall trend in CERN remains bullish. I am raising our stop loss to $99.45 in an effort to reduce our risk in case the market does breakdown. Our second and final target is $109.00.

FYI: I want to point out that the most recent data (as of Feb. 15th) listed short interest at 13.9% of CERN's 70-million share float. That definitely seems like a high amount of shorts and fuel for a short squeeze. Plus, the Point & Figure chart for CERN is bullish with a $115 target and what appears to be a relatively fresh quadruple top breakout buy signal.

- Suggested Positions -

Long the April $105 calls (CERN1116D105) Entry @ $2.70

03/12 New stop loss @ 99.45
03/04 1st Target Hit @ $104.85, Option @ $3.15 (+16.6%)

chart:

Entry on March 3rd at $102.62
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume = 600 thousand
Listed on March 2nd, 2010


Cognizant Technology Solutions - CTSH - close: 76.37 change: +0.26

Stop Loss: 74.75
Target(s): 82.25, 84.75
Current Option Gain/Loss: -38.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/12 update: CTSH briefly traded under support at $75.00 and its 50-dma but the stock rallied off its low of $74.90. I see the intraday bounce as a new entry point to buy calls. However, traders may want to keep their position size small since the market still looks vulnerable. We have a stop at $74.75. Our targets are $82.25 and $84.75.

FYI: The Point & Figure chart for CTSH is bullish with a $105 target. Plus, a breakout past $78 would produce a new quadruple top breakout buy signal.

- Suggested Positions -

Long the April $80 calls (CTSH1116D80) Entry @ $1.80

chart:

Entry on March 9th at $78.25
Earnings Date 05/04/11 (unconfirmed)
Average Daily Volume = 2.2 million
Listed on March 8th, 2010


Citrix Systems Inc. - CTXS - close: 71.74 change: +1.34

Stop Loss: 67.90
Target(s): 77.00, 79.90
Current Option Gain/Loss: -13.6%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/12 update: The action in CTXS on Friday was encouraging. Traders bought the dip twice near round-number support at $70.00 although I will point out that volume was pretty low. This rebound looks like a new bullish entry point to buy calls but readers may want to raise their stops toward Thursday's low of $69.61. I am raising the newsletter's stop loss to $67.90.

I do consider this a slightly more aggressive trade. Our targets are $77.00 and $79.90. The Point & Figure chart for CTXS is bullish with a $94 target.

- Small Bullish Positions -

Long the April $75 calls (CTXS1116D75) Entry @ $2.20

03/12 New stop loss @ 67.90

chart:

Entry on March 7th at $71.89
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on March 5th, 2010


Fastenal Co. - FAST - close: 61.82 change: +0.23

Stop Loss: 59.90
Target(s): 67.25
Current Option Gain/Loss: -88.2%, and -37.7%
2nd Position Option Gain/Loss: -50.0%, and - 9.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/12 update: FAST has now spent more than two weeks consolidating sideways in the $60-63 zone. Readers could still buy dips near $60. Meanwhile FAST still has resistance near $63.00 and $63.75. Don't forget that March options expire in five trading days!

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

chart:

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: 102.43 change: +0.40

Stop Loss: 99.95
Target(s): 109.50
Current Option Gain/Loss: -65.1%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
03/12 update: Monday is our last day for this FDS play. We are planning to exit on Monday at the closing bell to avoid holding over earnings due out Tuesday morning.

small positions - Suggested Positions -

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

03/12 Prepare to exit on Monday.

chart:

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


Fossil, Inc. - FOSL - close: 82.55 change: -0.73

Stop Loss: 79.40
Target(s): 82.00, 88.00
Current Option Gain/Loss: +114.2%, and + 88.4%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/12 update: Friday's drop in the consumer confidence numbers doesn't bode well for retailers but FOSL held up pretty well. Shares could see another dip toward the $80.00 level, which is where I would look for our next entry point. Don't forget that March options expire in five trading days. Our final target is $88.00.

- Suggested Positions -

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

- or -

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

03/09 New stop loss @ 79.40
03/05 New stop loss @ 76.75
03/05 1st Target Hit @ $82.00, Options @ +142% and +92.3%
03/03 new stop loss @ 74.75

chart:

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


Jones Lang Lasalle Inc. - JLL - close: 99.96 change: +4.05

Stop Loss: 93.85
Target(s): 102.50, 109.00
Current Option Gain/Loss: - 8.5%, and +17.6%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/12 update: Shares of JLL have seen a lot of volatility within its $94-100 trading range. The stock whipsawed higher on Friday with a +4.2% gain. JLL is flirting with a breakout past resistance at $100 but for now remains inside its trading range. If the rally continues we can look for JLL to test resistance at $103.00. I am not suggesting new positions at this time. Don't forget that March options expire in five trading days.

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

03/10 New stop loss @ 93.85

chart:

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: 91.61 change: +1.60

Stop Loss: 88.75
Target(s): 94.50, 99.00
Current Option Gain/Loss: + 20.5%, and + 28.2%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/12 update: MMM briefly traded under support at $90.00 on Friday morning but traders bought the dip at the stock's rising 50-dma. Shares outperformed with a +1.7% gain. The bounce from the $90 level is a new bullish entry point. More conservative traders might want to raise their stops toward Friday's low (89.71). March calls expire in five trading days.

- Suggested Positions -

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

- or -

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

chart:

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: 87.17 change: -1.01

Stop Loss: 84.80
Target(s): 88.00, 91.50
Current Option Gain/Loss: + 48.3%, and + 76.5%
2nd Position Gain/Loss: - 3.1%, and - 10.7%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/12 update: NKE gave us a scare on Friday. Shares plunged toward support near $85 and its 50 and 100-dma. The drop was probably a reaction to the huge decline in March's consumer sentiment figures, which might indicate a slow down in consumer spending. Fortunately traders bought the dip in NKE.

I do want to point out that last week's weakness has produced some bearish technical signals but bigger picture NKE is headed higher. The questions is how will NKE's stock perform this week ahead of its earnings report? Will the stock just churn sideways as investors wait for the earnings report? Or will NKE rally from Friday's test of support?

NKE is due to report on March 17th, after the closing bell. That gives us four days. We will plan on exiting Thursday at the close to avoid holding over earnings. Nimble traders who can jump in and out in four days might want to buy the bounce from Friday's low.

- 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%)

chart:

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


Quality Systems Inc. - QSII - close: 82.02 change: +0.06

Stop Loss: 77.90
Target(s): 87.25, 94.50
Current Option Gain/Loss: - 3.7%, and + 0.0%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/12 update: Friday was a very quiet day for QSII. Shares spent the session churning on either side of the $82.00 level. I would still consider new bullish positions now or you can wait for a dip toward the $80.50-80.00 zone. More conservative traders might want to raise their stops closer toward $80.

Prior Comments:
FYI: Readers will be interested to note that the most recent data listed short interest in QSII at almost 28% of the very small 17.5 million-share float. That's definitely a recipe for a short squeeze. Plus, the Point & Figure chart for QSII is bullish with a $119 target.

- Suggested Positions -

Long the April $85 calls (QSII1116D85) Entry @ $1.35

- or -

Long the June $85 calls (QSII1118F85) Entry @ $3.40

chart:

Entry on March 4th at $81.44
Earnings Date 05/31/11 (unconfirmed)
Average Daily Volume = 154 thousand
Listed on March 3rd, 2010


Stericycle Inc. - SRCL - close: 86.87 change: +0.52

Stop Loss: 84.95
Target(s): 94.00, 99.00
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
03/12 update: SRCL is still bouncing around the $86-88 zone. We are waiting for a breakout over resistance at $88.00. I am suggesting a trigger to buy calls at $88.25. If triggered our targets are $94.00 and $99.00. The $90 level could be round-number resistance but after four weeks of consolidating sideways I'm not expecting $90 to be an issue. Let's keep our position size small to limit our risk.

Trigger @ 88.25

- Suggested Positions -

Buy the April $90 calls (SRCL1116D90)

- or -

Buy the May $95 calls (SRCL1121E95)

chart:

Entry on March xxth at $ xx.xx
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume = 481 thousand
Listed on March 9th, 2010


Proshares Ultra(long) Russell 2000 - UWM - close: 44.52 change: +0.15

Stop Loss: 43.49
Target(s): 49.75, 54.00
Current Option Gain/Loss: -50.0%, and -36.0%
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

chart:

iShares Russell 2000 - IWM - close: 80.18 change: +0.21

Stop Loss: 79.20
Target(s): 84.95, 87.25
Current Option Gain/Loss: -53.6%, and -31.9%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/12 update: Friday was a real close call for our small cap trades. Investors sold the open and these ETFs spiked lower. Yet the low on UWM was $43.54 and the low on the IWM was $79.28. Our stops are at $43.49 and $79.20, respectively. While I might be tempted to buy calls on this intraday bounce the small cap index looks weak and vulnerable here. Bulls could argue that it is bouncing from its late February lows. Bears can argue that the IWM has closed underneath its 50-dma. This is definitely a pivotal spot. I am a little hesitant to open new bullish positions on the IWM or the UWM.

Prior comments:
We wanted to keep our position size small to limit our risk.

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

chart:

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


Waters Corp. - WAT - close: 85.37 change: +0.36

Stop Loss: 83.40
Target(s): 86.00, 89.90
Current Option Gain/Loss: + 27.7%, and + 45.7%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/12 update: Bingo! WAT bounced right were it was supposed to in the $83.75-84.00 region. Nimble traders might want to buy calls on the bounce and just move your stop near Friday's low (83.81). Don't forget that March options expire in five trading days. Please note that the newsletter is moving our stop to $83.40. Our final target is $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

03/12 New stop loss @ 83.40
03/10 New stop loss @ 82.80
03/05 New stop loss @ 81.80
03/04 1st Target Hit @ $86.00. Options @ +100%, and +57.1%
The March $85 was bid near $1.80, the April $85s near $2.75.

chart:

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

Joy Global Inc. - JOYG - close: 90.56 change: +2.16

Stop Loss: 94.25
Target(s): 85.25
Current Option Gain/Loss: -11.6%
Time Frame: 3 to 6 weeks
New Positions: see below r

Comments:
03/12 update: Be careful here! I have to issue a warning. We were expecting a bounce in shares of JOYG and the stock delivered a bounce on Friday. Yet the stock has produced a bullish engulfing candlestick pattern, which is normally seen as a bullish reversal pattern (that does need to see confirmation first). Our trigger to buy puts was hit at $90.00 on Friday afternoon. Shares of JOYG remain under technical resistance at its 50-dma and under price resistance near $92.00. More conservative traders may want to lower their stops toward the $92.50 area. I am not suggesting new bearish positions at this time. We'll wait to see where JOYG fails before considering new positions.

Our target is $85.25. Aggressive traders could aim for the $84 lows or a drop closer to $80.

- Suggested Positions -

Long the April $85 puts (JOYG1116P85) Entry @ $2.50

Annotated Chart:

Entry on March 11th at $90.00
Earnings Date 06/02/11 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on March 10th, 2010


CLOSED BULLISH PLAYS

IntercontinentalExchange, Inc. - ICE - cls: 126.07 chg: -1.52

Stop Loss: 125.75
Target(s): 138.00, 148.00
Current Option Gain/Loss: -68.7%, and -45.5%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/12 update: ICE's bullish breakout over $130 has completely reversed. Shares are now down four days in a row. Selling on Friday pushed ICE to an intraday low of $124.76 and our stop loss was hit at $125.75 early Friday afternoon.

Prior comments:
This is an aggressive trade. The stock is volatile and there is a chance that ICE makes an acquisition bid for another exchange. I want to warn you that the March options will probably be extremely volatile.

- Suggested Positions - (Small Positions Only)

March $130 calls (ICE1119C130) Entry @ $3.20, Exit @ $1.00 (-68.7%)

- or -

April $135 calls (ICE1116D135) Entry @ $3.40, Exit @ $1.85 (-45.5%)

03/11 Stopped out @ 125.75. Options @ -68.7% and -45.5%
03/07 New stop loss @ 125.75

chart:

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


Ross Stores Inc. - ROST - close: 71.70 change: +1.14

Stop Loss: 69.75
Target(s): 74.90, 77.75
Current Option Gain/Loss: -65.6%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
03/12 update: ROST bounced off its Friday lows and outperformed with a +1.6% gain. Unfortunately the morning spike lower hit $69.73. Our stop loss was $69.75. The initial weakness was probably a reaction to the plunging consumer sentiment numbers, which might suggest a drop in consumer spending.

- Suggested Positions -

April $75 calls (ROST1116D75) Entry @ $1.60, Exit @ $0.55 (-65.6%)

03/11 Stopped out @ 69.75, Option @ -65.6%
03/03 New stop loss @ 69.75

chart:

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: 85.92 change: +0.72

Stop Loss: 80.90
Target(s): 84.00, 89.00
Current Option Gain/Loss: +329.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/12 update: Two days in a row investors have been buying dips in TD near $84.50. More aggressive traders may want to hold on but on Thursday I suggested we exit our March calls at Friday's closing bell. March options expire in five trading days. Readers might want to keep TD on their watch list for a dip toward support near $82 or $80.

- Suggested Positions -

March $80 call (TD1119C80) Entry @ $1.35, Exit @ $5.80 (+329.6%)

03/11 Planned exit @ the close $85.92, Option @ +329.6%
03/10 Prepare to exit tomorrow
03/03 new stop loss @ 80.90
03/03 Target exceeded. Gap higher at $84.73 vs. target $84.00
03/03 March $80 call opened @ $6.00 (+344.4%)
02/28 New stop loss @ 78.40
02/26 New stop loss @ 77.90
02/16 New stop loss @ 76.90

chart:

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