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Newsletter

Daily Newsletter, Saturday, 3/19/2011

Table of Contents

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

Market Wrap

Dividend Friday

by Jim Brown

Click here to email Jim Brown

The Fed gave the green light to major banks to raise their dividends and the flood of announcements helped push the Dow into the green. Techs stocks were not so lucky with the NDX closing in the red.

Market Statistics

It was a tale of two markets on Friday with the financial sector lifting the Dow and S&P but large cap tech stocks were not finding any love. The Nasdaq 100 lost -4 points for the day with FFIV, NFLX, FSLR, ISRG, AAPL and PCLN all closing in the red. The rally started overnight with a strong bounce in the futures thanks to a coordinated currency intervention by the G7 nations and a UN resolution to impose a no-fly/no-drive zone on Libya. The opening bounce faded again just like on Thursday as traders seized the chance to take profits and avoid the weekend event risk.

There were not any major economic reports to provide an incentive to buy stocks. The Risk of Recession over the next six months fell to 19% in February from 21% in January. The Weekly Leading Index was flat at 130.4 and in the same range now for the last six weeks. Both reports were completely ignored.

The economic calendar for next week is headlined by the home sales reports for February and the Richmond Fed Manufacturing Survey. These are not normally market movers. Existing home sales are expected to decline thanks to the winter weather in Jan/Feb and new home sales are expected to see a minor increase.

Economic Calendar

The big news for Friday was the approval by the Fed to allow some banks to raise their dividends. The Fed said it was generally restricting payouts to 30% or less of the company's expected 2011 earnings. This is still lower than the 50% ratio some banks paid in a better economy. The Fed said common equity had increased +$300 billion across the 19 banks in the stress test group.

Suntrust Banks (STI) and Keycorp (KEY) have to pay off their remaining TARP loans before they can pay larger dividends. Both announced a secondary offering on Friday with plans to pay off those loans. STI said it was selling $1.04 billion in shares to finish out its payment plan on $4.85 billion in TARP loans. KEY sold $625 million in a secondary to finish paying its $2.5 billion in TARP loans. KEY was approved to raise their dividend from 1-cent to 3-cents after the TARP payment and the bank said it was considering the dividend. KEY and STI both closed in positive territory despite the share offerings.

Regions Financial (RF) is the last bank with a remaining TARP liability and the bank did not propose any capital raise to pay off the loan. The bank said it would repay its $3.5 billion TARP loan in a "prudent manner, on shareholder friendly terms."

Most of the major banks making announcements on Friday were announcing larger dividends. However, some were just making an announcement to avoid being left out of the rally. The dividend increases totaled $22 billion annually. There were $16.2 billion in buybacks and $5.4 billion in dividends.

JP Morgan (JPM) raised its dividend from 5-cents to 25-cents and announced a $15 billion stock buyback with $8 billion to be spent in 2011. Prior to the recession JPM had a 38-cent dividend.

Goldman Sachs (GS) said it was buying back the $5 billion in preferred stock owned by Warren Buffet as security for a loan he made Goldman during the crisis. The buyback includes $1.65 billion in dividends and will incur a $2.84 charge to earnings in Q1. Warren said he hated to see them buyback the stock because the dividend equated to $16 per second to Berkshire. Don't feel sorry for him because Berkshire still has warrants to purchase 43.5 million shares at $115 per share any time before Q4 in 2013. Goldman shares closed at $160 on Friday and I would expect them to be well over $200 before Berkshire exercises those warrants. Assuming a $215 stock price that would be a $4.35 billion profit.

Wells Fargo declared a special one-time dividend of 7-cents in addition to its regular 5-cent dividend. The dividends are payable on March 31st to holders on March 28th. The bank will also buy back $200 million in shares.

State Street (STT) will raise its dividend from 1-cent to 18-cents payable on April 15th to holders on April 1st. They also authorized a $675 million stock buyback.

US Bank (USB) raised its quarterly dividend from 5-cents to 12.5 cents and authorized repurchase of $50 million in shares by year-end. However, they said they would wait on the Fed to provide long-term capital guidance later this year before launching the share buyback. The dividend will be payable on April 15th.

BB&T (BBT) said it would pay a special 1-cent dividend in addition to its regular 15-cent dividend on May 2nd.

American Express (AXP) said it planned to buyback $5 billion in shares and return 50% of its capital to shareholders but not until after the Q1 results are released.

PNC Financial (PNC) said it was "considering" a Q2 dividend.

Bank of New York Mellon (BK) said it was planning a Q2 dividend increase and share buyback.

Bank of America, Citigroup, Fifth Third and Capital One did not raise dividends. I believe all said they were planning on changes to dividends in the second half of 2011. BAC did say it was planning on 30% payback to investors in 2012.

The banks all survived the stress test but they can't tell anyone about the results. The Fed issued a gag order that prevents them from disclosing the results without prior Fed approval. Evidently the Fed does not want news surfacing that a bank like Goldman may have received an A+ score while some other bank may have just scraped by with a D-. As long as nobody knows the results and all "passed" then all are on equal footing with investors and depositors. There will be no rush to pull funds out of those banks on the bottom of the grading scale. However, I think investors are smart enough to look at all the dividend announcements and decide pretty easily which banks are strongest and which are weakest.

Going forward the banks will have to submit a two-year capital plan each year and submit to an annual stress test.

Cisco (CSCO) also announced its first ever dividend of 6-cents to be paid on April 20th. Cisco shares hit a new 52-week low on Thursday at $16.97 and the Friday announcement only resulted in a 14-cent gain. Cisco has more than $40 billion in cash and the dividend will cost them less than $350 million. Cisco has 5.53 billion shares outstanding. The 6-cent dividend does not seem to represent a vote of confidence by the board on the company's future.

Cisco Chart

The UN passage of the no-fly, no-drive resolution against Libya's armed forces late Thursday also provided the market with support but the real help came from an early morning announcement from Libya. The Libyan defense minister said Libya had declared an immediate ceasefire and was complying with the resolution. The market spiked and oil prices plunged nearly $3. Unfortunately that was the Gaddafi version of the rope-a-dope. Fighting did not stop and government forces actually stepped up attacks on cities held by the opposition. That bit of news did not seem to trickle out into the market until late in the day. Crude prices immediately spiked again to close at just over $101.

The president gave a speech on Libya and warned against a fierce response from coalition forces if Gaddafi did not honor the ceasefire. However, he later briefed congressional leaders and told them the U.S. would only be there in a supporting role and U.S. planes would not be involved in policing the no-fly zone. He also told them there would be some hectic activity for only a couple weeks and then the U.S. would pull back to a remote support role.

We found out on Saturday that French and British planes had begun patrolling Libyan skies early Saturday morning and had destroyed four tanks advancing on Benghazi. Late Saturday evening Libyan time the U.S. and Britain launched 110 Tomahawk missiles at $500,000 each against Libyan air defense targets and Libyan air force bases.

Another event helping push stocks higher on Friday was the G7 currency intervention to weaken the Yen. In theory the G7 nations followed Japan's lead in selling Yen and buying other currencies in order to weaken the Yen rally over the last week. Japan sold two trillion Yen ($85 billion) to start and other countries followed suit. The dollar initially rose about 4% against the Yen to Y82.00 to the dollar. However, the spike faded and the Yen closed at Y80.58, up +2.4%. Analysts expect Japanese companies and corporate investors will be bringing cash and investments back from overseas and converting into Yen for rebuilding and investments into local projects. This raises the value of the Yen against other currencies. The dollar collapsed to a new 15-month low on the dollar index. The falling dollar supported stocks and commodities. The Euro rallied to a new five month high so that is a real clue about which currency the G7 banks were buying with their Yen. Seems nobody wanted to buy the dollar when the Fed is printing money at the rate of $135 billion a month.

Note the exact inverse correlation between the dollar and euro in these charts.

Dollar Index Chart

Euro Chart

While on the subject of Japan the engineers working on the stricken plants have connected reactor one and two to an auxiliary power line and hope to have "some" cooling pumps running by Sunday. The other two reactors are scheduled to be connected to power by Monday. However, they caution the cooling pumps may be too damaged to be of use. They won't know until they get the power connected to the subsystems. Just having power to the plant does not mean they can flip a switch and everything will work. Because of all the misleading information being constantly disseminated on the Internet we won't really know what is happening until Tepco tells us the problems have been solved.

However, the U.S. public is starting to become immune to the news. Not only has the frequency of nuclear stories been declining but the quake stories are also slowing. This is good news on both counts for our markets next week. The bad news on both counts has now been factored into stock prices with the exception of a few tech stocks.

The new headlines concern problems with the supply chain of parts from Japan that are necessary for building cars, computers and electronics in the USA. Market research group iSupply predicted a shortage of iPad 2 tablets due to the quake. They identified at least five parts that come from Japan including memory, screens and other components. iSupply said some of the vendors have said their facilities were not damaged but they may be impacted by the resulting logistic problems including lack of electricity and lack of shipping. Aftershocks are still keeping semiconductor facilities offline because tolerances on the chip fabricators are extremely delicate and they have to be recalibrated after each shock. Apple is already sold out and there is a 4-5 week wait for online orders.

There are similar stories circulating for many other products and it is hard to tell what is real and what is a rumor but the tech sector is not recovering like we have seen in the Dow. The Nasdaq 100 actually lost -4 points on Friday.

Sony alone makes 10% of the world's laptop batteries. Japan is responsible for 30% of global flash memory, 20% of semi-conductors, and 40% of electronic components.

The Japan supply line damage is not limited to electronics. Deere (DE) warned on Friday it expects delivery delays for excavators and mining equipment due to a parts shortage. Deere said some manufacturers are recovering but overall conditions remain too uncertain to estimate the full effects on the movement of supplies.

GM will halt production at its pickup plant in Louisiana next week because of a shortage of parts from Japan. The company imports transmissions from Japan for two versions of pickups. The plant employs 900 workers and GM had no idea when it would be able to reopen.

Toyota, Honda, Suzuki and Nissan have shut down most of their facilities in Japan at least through next week and have warned the closures could be extended. Goldman says the shutdown is costing Toyota more than $73 million a day with another $25 million each for Honda, Nissan and Suzuki. A 30-day shutdown for Toyota would set them back about $2 billion. Honda said it took a week just to make contact with its more than 100 suppliers and they are shutting down some production for up to a month.

Toshiba, which makes the liquid crystal display screens for many models of autos, has closed its plant for at least a month. That will impact nearly every automaker with navigation screens and LCD instruments.

Japan is expected to suffer from rolling blackouts for at least the next six months. Every blackout halts automated production lines and requires a lengthy restart procedure. Car frames being painted when power drops have to be scrapped and molten steel used for doors and other parts has to be scrapped if it starts to cool.

These supply line shortages could lead to layoffs in the U.S. just as the recovery was beginning to accelerate.

I reported in the OilSlick newsletter on Thursday that the refineries in Japan were coming back online sooner than expected. The Petroleum Association of Japan (PAJ) said it expects 780,000 bpd of refining capacity to be restored next week. An Exxon refinery with 335,000 bpd capacity and a Kyokuto refinery at 175,000 bpd are already back online. The PAJ said it had canceled exports of 4.09 million barrels of refined products through the end of March and had acquired an extra 2.83 million barrels of crude to feed the refiners through month end. I reported last week the fears over a drop in demand from Japan were misplaced. It appears demand is actually going to rise by 500,000 bpd with 200,000 bpd going to additional electricity generation and 300,000 bpd going into refined products to support the relief and rebuilding effort.

The problem is where to get those barrels since Japan uses light sweet crude. We have already seen a shortage of light crude since the Libyan problem began. Seeing demand increase another 500,000 bpd is only going to push prices higher.

Gasoline prices in the U.S. rose to $3.54 to $3.62 depending on which survey you use. Colorado and Wyoming were the cheapest at $3.30 per gallon thinks to their access to the cheaper $90 oil out of the Bakken. Diesel prices now average $3.91 per gallon nationwide with prices well over $4 on the coasts. We are already seeing the high prices crimp demand in the USA. The EIA reported gasoline demand declined to 8.83 mbpd for the week ended March 11th from 9.19 mbpd the prior week. That is a 360,000 bpd decline when spring weather should be pushing demand higher.

As long as WTI crude prices remain in the $100 range the damage to demand will be limited. If Libya were to be resolved quickly, an outcome I don't expect, I believe we would see oil decline to the upper $80s again. I don't see that happening any time soon without some expiration volatility on the futures contracts. The current WTI contract expires at Tuesday's close. However, I believe the economy has reached escape velocity and baring another high profile news event we should continue growing. This should translate into a higher market in the weeks ahead. You have to admit the market was inundated by a tsunami of negative news for a couple weeks now and it has held up relatively well with only a -6% decline. It was due for a correction and the multiple news events gave it plenty of reasons to take that needed break.

The overriding theme I kept hearing this week was the fundamental analysis about the longer-term outlook. Valuations are reasonable with earnings expected to grow +15% for the full year. The economy is expanding and accelerating as evidenced by reports like the Philly Fed Survey on Thursday hitting highs not seen since 1984. Corporations have nearly $2 trillion in cash on their balance sheets and they are starting to put it to work.

The Fed is pouring a massive amount of stimulus into the market in the form of QE2 and extremely low interest rates that are likely to be with us into 2012.

Bonds are extremely over valued and knowledgeable investors like Bill Gross at Pimco has exited all his U.S. Treasury positions in the Total Return Fund. This is prompting investors to avoid bonds and put cash into other investments like commodities and equities.

Even after the six-month rally most investors are still under invested because of the lingering worries from the 2008 bear market and events like the flash crash. Now, thanks to the recent news events the overbought conditions from the last six months have been neutralized.

As the news stories start to improve we could see a decent ramp into Q1 earnings. If the economic conditions overcome rising fuel prices and continue accelerating into Q2 we could see another move higher ahead of QE2 termination at the end of June. If gasoline prices remain high and geopolitical conditions remain a problem I am starting to believe there could be an extension of QE2 on a smaller scale. The Fed can't allow the economy to slip back into recession on high fuel prices just as the QE2 ends.

Everyone knows gasoline prices are higher in the summer and the EIA is already predicting a $3.75 average this summer and more than $4.00 in the fall. That is a strong headwind for the Fed and I can't believe they will just pack up their bag of tricks and start raising rates. That would be the effect of halting QE2 in June. Without the Fed buying treasuries the bond market would decline and rates would rocket higher even without the Fed actually raising the Fed Funds rate. Bernanke has a problem. He has a tiger by the tail and he can't afford to turn lose or it will turn on him and the result will not be pretty. He has to find a way to transition from QE2 to some form of lower intensity stimulus.

All of this will be positive for the stock market until he turns loose of that tiger. When that happens the economy better be exploding along with earnings or we are going right back to another bear market. Don't fight the Fed in EITHER direction.

Bill Gross produced this graphic last week to illustrate the absurdity of the current QE2 program. The first chart shows the normal breakdown of treasury buyers. The second shows the current ratios. Note foreign central banks dropped from 50% to 30% and the Fed bought 70%. What happens when the Fed quits buying in June and 70% of the debt needs to be sold?

Who will buy Treasuries when the Fed doesn’t?

That instant void in the debt market could be a major challenge for the U.S. and that is why I suspect there will be an extension of QE2 in some form. Regardless of what happens at the end of June I believe we have another 4-6 weeks before funds start boarding up the windows and stockpiling cash ahead of the June end to QE2.

If you recall I suggested several times over the last few months that the end of April was my target for a change in the trend. After the strong economics accelerated at the end of February and the Fed heads all started taking sides in public speeches on the merits of continuing QE2 I warned we could see some weakness ahead of last week's FOMC meeting. To be fair I did not expect that much weakness and the post meeting declines were news related not Fed related.

If you print these pages my opinion will make a good fire starter for your next barbecue. Opinions are like noses, everybody has one. I believe you should know where I stand on more than a day-to-day basis. I trust more in the longer term underlying fundamentals then in strict technical analysis. I believe they both have merit but you should not rely on just one. Pure technical analysis of the charts will always get run over by current events. However, believing solely in the underlying fundamentals will also get you killed because the market is cyclical between short-term bullish and bearish cycles inside the longer trend.

It is my opinion that baring an unforeseen news event we have seen the lows for this mini-correction at S&P 1250. A full -10% correction would take us to 1209. I will be the first to admit the chart is bearish and the total lack of conviction the last two days is also bearish. However, I wrote on Thursday I doubted very many traders would want to remain long over the weekend given the recent event risk. That was probably a major reason for the daylong decline off the opening highs. On the positive side resistance at 1275 was broken and became light support late in the afternoon. It may not hold past the opening tick on Monday but that is the way the day played out.

"IF" there are no negative news events over the weekend the market should open higher. If it follows the same pattern of gap and crap as it did the last two days I would expect a retest of 1250 before the week is out. If it can close over 1290 on Monday then I think the low really is behind us. It is going to be very difficult for that to happen if the big cap tech stocks remain weak. Investors are pricing in a series of announcements from companies like Apple on how sales will be impacted by the broken supply chain. If those companies were to make a positive announcement claiming no material disruption it would go a long way towards healing the market. Right now investors are grasping at straws and trying to guess which companies may be impacted. This weakness in techs has me cautious on the S&P for next week.

S&P-500 Chart

The Dow rebounded over prior support at 11800 and that could return as support but my confidence in that level is weak since it has already broken once. I do believe 11600 should hold if retested but I would rather not go there again. Energy stocks and financials should provide support for the Dow but that leaves about 24 other stocks to cause trouble.

In order for any rally to gain conviction we need to see the Dow move over 12,000 on decent volume. Volume on Friday was 9.6 billion shares but it was a quadruple witching option expiration so volume should have been high. Thursday's rebound volume was only 7.8 billion. We need volume to confirm any further moves higher or sellers will gain confidence and wait at 12,000 for a shorting opportunity. Sellers have lost the "overbought conditions" as a valid reason for shorting. Now the risk has leveled for both the buyers and sellers.

Dow Chart

The Nasdaq Composite rebounded to a dead stop at the resistance from the 100-day average at 2663. That resistance has held the intraday bounces for three consecutive days. Support at 2610 is still within reach and the big cap techs are suggesting a further decline. The composite has to move over 2675 for confirmation of a rally and hold over 2610 to prevent a larger correction.

Nasdaq Composite Chart

The Nasdaq 100 big cap index is bearish. The NDX has failed at the 100-day average for three consecutive days at 2249. This repeated failure and the -28 point close off the highs on Friday is very bearish. This could be due to the chip problems in Japan and the broken supply chain or it could be just the need for further profit taking in the big caps that have performed so well since year-end. Whatever the reason we have a clear resistance level at 2250 and clear support at 2200. A break past either one will give us the new market direction.

Nasdaq 100 Chart

The Russell was the best looking index on Friday. Support at 780 appears to have held and Friday was the highest close in four days. This is far from bullish but it was the biggest percentage gainer for the day at +1.16% and the smallest loser for the week at -1.02%. This appears to be a glimmer of evidence suggesting fund managers are starting to nibble at small caps again. They are definitely not selling them and we can take a lack of sales as a positive indicator.

Russell Chart

The Oil Service Index ($OSX) put in what appears to be a tradable bottom at 270 and multiple levels of converging support. High oil prices provide additional free cash flow to developers that they can use to pay for additional services and expand drilling programs. Investing in service companies at this level should result in future gains. The OIH ETF is one way to play this sector.

Register for the OilSlick.com newsletter and receive free daily updates and commentary on the energy sector. Register here

Oil Service Index

Fundamentally I am bullish for next week but that is a long-term view. Technically I think the weakness in the Nasdaq big caps is going to be the controlling factor, assuming there is not another tsunami of bad news. The weakness in the NDX can significantly influence the S&P so we need to watch the NDX for market direction.

On Friday evening I had written several paragraphs about the possibly improvement in the nuclear crisis and its potential impact on our markets on Monday. On Saturday that changed for me when news broke that milk produced 20 miles away and spinach from six farms 60+ miles away had tested positive for elevated levels of radioactivity. Water in Tokyo had tested positive for radioactive iodine. This is not good news and I am sure the media is going to blow it out of proportion again.

Scientists said drinking a liter of the radioactive water would be the equivalent of one eighty-eighth of a chest x-ray. The levels in the spinach would require eating a kilo per day for a year to get the radiation equivalent of a CT-scan. Despite these infinitesimal levels of radiation it still represents contamination not previously expected.

I think we are closer to the end than the beginning of the correction because the news from Japan will improve. Japan's Nuclear and Industrial Safety Agency (NISA) is reporting power has been reconnected to reactor 1 & 2 and 3 & 4 should be connected by Monday. "IF" there is no significant damage to the cooling pumps we could see dramatic change in the situation by Monday. There are still a lot of unknowns about this process but they can't just throw up their hands and quit. They have to eventually fix the problem and no expense is being spared to solve it. That means eventually there will be a resolution and the hysterical news reporting will end. This is NOT a Chernobyl and there is a containment vessel around the reactors. It will take years to completely resolve but the crisis should end soon. Once this crisis passes the global markets should breathe easier.

Other challenges this weekend included a televised speech by Saudi king Abdullah, which promised $93 billion more in stimulus but failed to deliver any of the political reforms everyone had been led to expect. He said the government was hiring 60,000 additional security personnel. That should give you a clue as to their worries about future unrest.

In Bahrain the government demolished the 300-foot high Pearl Square monument that had become a backdrop to the protest movement after demonstrators setup camp in the square.


A weekend protest in Yemen attended by tens of thousands was attacked by police firing into the crowd from rooftops and 52 demonstrators were killed and hundreds more injured. Demonstrators were calling for the end to president Saleh's three-decade rule. Saleh declared martial law and said further gatherings would be illegal. The government began expelling journalists claiming they were acting improperly in their reporting.

In Iran thousands of demonstrators took to the streets protesting against the crackdown on demonstrators in Bahrain and Yemen. They also complained about Saudi troops in Bahrain and the Saudi government stopping protests inside Saudi Arabia. A prominent Iranian cleric urged Bahrain's majority Shiites to keep up their protests until death or victory. Obviously there is some country politics in play here as well.

The bigger problem with these various events is the rise of civil unrest all across the Middle East and Northern Africa. This genie is not going back into the bottle and if it continues to grow it may eventually envelope Saudi Arabia and slow oil production. Responding with indiscriminate force against a majority of the population only increases the hostility towards the ruling government. When residents of one country see positive results in another you get eventual contagion. I believe these uprisings have a long way to go before they are over and there could be significant unintended consequences along the way.

Jim Brown

Send Jim an email

"Silence is golden when you can't think of a good answer." - Muhammad Ali


Index Wrap

Possible Bottoming Action

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

All downside objectives that I've had have been mostly met, such as to the 1260 area in the S&P 500 (SPX), a 50% retracement of the late-Nov low to mid-Feb advance. I also thought that the Nasdaq Composite could get back to the 2600 area; COMP reached 2603 as its weekly low.

I don't necessarily expect an immediate sustained rebound but if you bought calls or implemented other bullish strategies near my downside objectives, I think they'll be good trades. Good gutsy trades as most wait until they see the 'whites of their eyes' as far evidence of a bottom. Don't hesitate and wait for the thundering herd to join you in that moment. They won't! Trading is often a lonely business.

Besides price considerations of a potential bottom, we have FINALLY gotten an 'oversold' reading both on the 13-day RSI and in terms of low bullishness/high bearishness as seen in my market sentiment indicator, as you'll see on my charts further on.

This past week brought still more extreme volatility and the major indexes fell sharply before recovering some into their weekly closes. Levels reached were fairly predictable based on various ways of calculating downside technical chart objectives.

Coming into the past two weeks, there were various bearish chart patterns, such as implied by:

The tendency for the second down leg in an a-b-c (down-up-down) to be at least equal to the point decline of the first leg and often more than the first decline; e.g., anywhere from 1.25-1.38 to 1.5 to 1.6 times greater than the first downswing.

Prior formation of a bearish rising (and broadening) wedge pattern

Bearish Head and Shoulder's top patterns most clearly defined on the hourly index charts.

I wrote last week that: "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."

Sorry for a repeat of all that but it's important to explain the calculation for downside objectives once a 'neckline' is pierced. You will see these patterns again. In this case, 2240 was definitely a minimum downside target implied by the H&S pattern as NDX fell to an intraday low of 2189 this past week. Some traders, myself included, find that formation of the H&S top pattern alone is enough to initiate bearish option plays, without waiting for a 'confirming' break of the neckline. Formation of the 3rd top (the 'Right Shoulder') usually offers enough evidence of a top to take action.

I also noted last week about not seeing 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. Its more likely that better support/buying interest will be found in the 11800 area..." while the Dow closed above 11800 for the week, the low print for the week was 11555.

Expected and projected support levels, as well as resistance, are as usually seen with the charts below.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) index continued sharply lower after breaking under its up trendline, before rebounding some by week's end. The second down leg (from 1332 to 1249) has fulfilled a Fibonacci objective by the second decline being 1.6 times the point distance covered in the first sell off (from 1344 to 1294).

I noted last time that "an ideal index buy 'signal' 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 seen on a 5-day moving average basis."

My aforementioned price and indicator considerations point to good potential for the market having made, or being in the process of making, a bottom. After such a period of volatility and other thrills and chills, a bottom doesn't always take the form of a single spike lower and that's it for a low. Sometimes prices have to retest prior lows and potential support and just generally chop around before we there's sustained rally potential.

I've noted SPX support levels at: 1260; 1249 and at 1231, representing what would be a 2/3rds or 66% retracement (of the late-Nov to mid-Feb run up). Resistance is projected for the 1300 area, then back up at the prior highs at 1332 and 1344.

I noted in my initial 'bottom line' comments that the 13-day RSI AND my bullish/bearish sentiment indicators (seen above) FINALLY saw 'oversold', and potentially bullish, readings this past week. This development, along with fulfillment of certain downside price objectives suggest an increasing likelihood for the market having seen, or being near, a possible bottom.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) also has completed a 50% retracement of its last major advance from the 527-530 area to 602. The chart is now bearish on a short to intermediate-term basis; the major trend remains bullish. However, it also should be noted that the second recent down leg at 40 points was double the first 20 point decline. The second decline often has a Fibonacci relationship to the first. Common would be a second decline that was approximately, 38, 50, 62 percent, and sometimes 100% greater than the initial sell off. Once the longer second leg down has occurred the decline is over or nearly over.

For the first time since August lows (2010) in the 475 area, the 13-day Relative Strength Index or RSI has registered a 'fully' oversold reading this past week. If this is still a bull market, which it is, just an oversold reading or two (or 3) tends to suggest bottoming action ahead of an upside reversal.

Key support levels are: 565, then at the recent intraday low at 559 and next around 552, representing a 2/3rds/66% retracement of the prior advance.

Near resistance is in the 590 area, relative to our most recent OEX close at 572. Next resistance is fairly obviously pegged at the 599 and 602 prior highs.

As was seen with Friday's intraday price action, it won't be surprising to see a further period of whippy price action and rallies that don't catch fire, but also without the sharp declines of this past week. In other words, like bottoming action; emphasis on the 'ing' form of the verb of the present continuous tense.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) average didn't go too much past a 50% retracement before rebounding some. The chart has to be considered mixed, what with bearish short and intermediate trend patterns. The second downleg was 728 points versus 408 points for the first or around 78% more. The most I was/am anticipating is second leg decline that's double the first. In this regard at least I don't think there much more downside to come with INDU.

Judging how much more downside there may be is helped by retracement considerations. A 'normal' or average correction for a stock or index is to retrace around 50% of the prior rally, sometimes a bit more such as a decline that equals a 62% to 66% retracement. If INDU starts falling below 11660, then to below 11417, it would suggest the potential for a 'roundtrip' in INDU back to the 11000 area. This is not what I expect but to ALSO make forecasting room for the worst case scenario is worthwhile.

I've noted support at 11660, with a next assumed support at the recent 11555 Dow low; finally, 11417 is potential support implied by what would be a 66% retracement level for INDU.

Resistance at 12100 is implied by the current intersection of the previously broken up trendline, with next resistance at the prior intraday highs at 12283 and 12391.

Dow stocks now below their important 50-day moving averages include: AA, AXP, BA, BAC, CSCO, DIS, GE, HD, HPQ, IBM, INTC, JNJ, KFT, KO, MCD, MMM, MRK, MSFT, T, UTX, VA, WMT and XOM. 23 out of 30 stocks or 3/4ths of the Average looking weak in terms of this one key moving average. A lot of leaders on the prior prolonged advance have been shot down, at least temporarily.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) chart is bearish on a near to intermediate-term basis. The second recent decline, has carried about 50% further than the first; a second leg decline that's around 1.5 of the first is a common downside objective in the a-b-c corrective pattern or wave. Moreover, COMP has completed to date a Fibonacci .618 (commonly rounded to .62) retracement of the November to February advance. I don't anticipate a much deeper retracement although if COMP slices through 2586, the Index might be heading to as low as the 2460-2480 area again over the longer term.

I've noted expected layers of overhead resistance at 2722; then, well above, in the 2800 area; finally at the 2840 rally peak.

Future support is assumed again at the 2603 recent low with 2600 as a viable support area. 2605 to 2586 implies potential technical support as encompassing the key .62 to .66 retracement zone as highlighted on my COMP daily chart below.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart is bearish now on a short to intermediate-term basis, although recent lows have reached my particular technical expectations. Especially, in that NDX has now retraced fully 2/3rds of its last advance dating from its November low. In an index that is NOT reversing its major trend, pullback retracements of around 66% will stop there. If weakness continues then the possibility does come into play for a full round-trip 100% retracement back to NDX's November low.

I thought support might develop at 2258 or around 2236, which were lows seen in January. Not to be; once the selling got rolling, especially when 2200 was pierced, further panic type selling set in which is also fairly common in the second stage decline of a correction.

My first chart above (within my initial 'bottom line' commentary) showed a clear cut outline of a Head & Shoulder's top on the hourly NDX chart, with the predictable result of a sharp further sell off. Sometimes, use of hourly charts will bring into focus a chart pattern that is only vaguely evident on the daily chart for the same index or stock. Even on the daily chart there was the typical 3-top outline (of a H&S top pattern) with the middle top being higher than the two on either side.

Support is noted in the 2200 area, then at the recent low at 2189, extending down to 2179.

Key near resistance is pegged at 2307 then at the prior intraday highs, first at 2375, then at 2403.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The most recent sharp decline in the Nasdaq 100 tracking stock (QQQQ) may have panicked enough QQQQ holders to set up a next advance. Not necessarily immediately, especially if oil prices start climbing steeply again with the allied 'shut down' of Libya.

As with NDX of course, the NDX tracking stock, has retraced 2/3rds of its last sizable run up. I doubt that we'll see any prolonged decline below the 54-53.7 area. I anticipate support/buying interest will develop on dips below 54, extending to 53.6. If there is a decisive downside penetration of 53.6, that's another potential story as major support doesn't come before 52 to 51.

Resistance is well overhead currently, first at 56.6, then up at the prior 58.3 and 59.0 tops.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) chart is mixed, with only its long-term trend still up. However, RUT has not yet 'tested' and certainly has not pierced its prior its prior (January) pivotal 772 low. If RUT continues the same pattern it has been in for awhile, it will resist as deep a decline as the Nasdaq and will start rallying first.

Support is implied at the recent RUT low at 776, extending of course to 772 and is lastly projected at 754, based on some retracement expectations.

Resistance is seen at the previously broken up trendline, currently intersecting at 822. Resistance then extends to the prior top at 830 and the earlier 838 peak.

I wrote last week that: "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." Not quite as low as 772 yet but that could happen. I'd buy into a successful retest of the 772 area. Right now the Index looks to be headed UP to a test of resistance implied by the 50-day moving average.



GOOD TRADING SUCCESS!


New Option Plays

Relative Strength

by James Brown

Click here to email James Brown

Editor's Note:

There seems to be a lot of indecision in the stock market right now. Traders are nervous about holding over the weekend. Every day seems to present new headline risk. Will the next few days bring positive headlines regarding Japan's ability to cool their troubled reactors? Or will we see more negative headlines about out of control radiation and a spreading contamination. How about Libya? The U.N. has gotten involved. French fighter jets are flying over Libya trying to enforce a no-fly zone while the U.S. fires tomahawk missiles to destroy Qaddafi's anti-aircraft weapons. Violence is getting worse in places like Bahrain and Yemen as the governments there try to quell the protests for democracy and change.

The market's bounce off its lows could be nothing more than a bounce. The correction may not be over yet. If that's your view then I would avoid launching new bullish positions. Instead you may want to watch for the market to fail at overhead resistance to initiate new bearish plays. Potential failure points are 1275 and the 1300 level on the S&P 500. On the other hand if you are optimistic that the market will recover and focus on the bullish fundamentals in spite of the wall of worry then carefully consider new bullish trades. The best trade tonight might be to just stand back and wait and see if we have any more clarity on Monday or Tuesday before putting capital back to work in the market.

Tonight I have picked a couple of stocks that have been showing some relative strength. In addition to tonight's new candidates check out these stocks:

PCAR - I was tempted to buy calls on PCAR since the stock is trying to bounce from its long-term trendline of higher lows (see a weekly chart). Readers might want to consider a trigger to buy calls on a move over $50.00 again.

GR - This stock has a similar pattern where it is bouncing from its long-term trendline of higher lows and is also bouncing from support near $80 and its 200-dma. Aggressive traders could launch positions now. I would look for a dip back toward the $82.50-81.50 zone as an entry point to buy calls.

CHRW - I would hesitate to buy a transport with oil poised to rally but CHRW has been holding support near $70.00 and its 200-dma. A rally past $74 or $75 might be a new bullish entry point to buy calls. I am concerned the 50-dma overhead could be resistance.

- James


NEW DIRECTIONAL CALL PLAYS

CSX Corp. - CSX - close: 76.22 change: +0.50

Stop Loss: 73.45
Target(s): 79.90, 83.75
Current Option Gain/Loss: + 0.0%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Railroad stocks have been pretty resistant to rising oil prices and if oil continues to rise this industry should fare better than its less efficient peers. CSX has been showing relative strength recently. Instead of declining with the broader market the stock has been bouncing. Shares broke out to new highs this past week with the rally past resistance in the $75-76 zone.

If you believe the market will continue to bounce then consider bullish positions now. If you think the market's correction has farther to fall then I would avoid new bullish trades. I am suggesting small bullish positions in CSX now. We'll put our stop loss at $73.45, just under the $74.00 level. More aggressive traders could put their stop under $72.00 and the technical support near CSX's rising 40 and 50-dma.

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

- Small Bullish Positions -

Buy the April $80 calls (CSX111680) current ask $0.97

Annotated Chart:

Entry on March 21 at $ xx.xx
Earnings Date 04/13/11 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on March 19th, 2010


Whole Foods Market Inc. - WFMI - close: 60.44 change: +0.04

Stop Loss: 57.95
Target(s): 64.75, 69.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see Trigger

Company Description

Why We Like It:
Investors are obviously not concerned about consumer spending or what high gasoline prices might mean to consumer's pocket books. Otherwise, why would WFMI be showing so much strength. The stock did not sell-off with the market last week. Instead WFMI is coiling for a breakout to new multi-year highs.

Aggressive traders may want to buy calls now. The high on Friday was $61.43. I am suggesting a trigger to buy calls at $61.55. If triggered we'll use a stop loss at $57.95. Our upside targets are $64.75 and $69.00.

FYI: The Point & Figure chart for WFMI is bullish with an $86 target.

Trigger @ 61.55

- Suggested Positions -

Buy the April $65 calls (WFMI1116D65) current ask $0.58

- or -

Buy the May $65 calls (WFMI1121E65) current ask $2.02

Annotated Chart:

Entry on March xxth at $ xx.xx
Earnings Date 05/11/11 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on March 19th, 2010


In Play Updates and Reviews

Stocks Trim Loss on the Week

by James Brown

Click here to email James Brown

Editor's Note:

The major U.S. indices have produced a two-day bounce from last week's lows. Gains were relatively widespread on Friday but stocks were gravitating toward their nearest strike price for option expiration. We had FOSL, JOYG and UNP all hit our stop losses.

-James

Current Portfolio:


CALL Play Updates

Caterpillar Inc. - CAT - close: 105.06 change: +1.94

Stop Loss: 99.00
Target(s): 109.00, 114.00
Current Option Gain/Loss: - 1.4%, and - 4.7%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/19 update: Our new play in CAT is already open. Shares gapped higher on Friday at $104.99. There was a brief dip toward $104.66 before bouncing back toward the $105 level. CAT hovered there the rest of the session.

This morning CAT announced that sales for the last three months were up +59%, which was an improvement from the +49% in the three months ending January. Thus far the company has seen ten months in a row of improving sales figures. This news probably sparked the gap higher on Friday morning.

Meanwhile the company issued a press release regarding its Japan operations. Here's an excerpt:

Caterpillar's facilities in Tokyo, Akashi and Sagami were not damaged by the earthquake, and are outside of the current area the Japanese government has declared as a mandatory evacuation zone. Both the Sagami and Akashi facilities have continued to operate and produce product, although the current situation in Japan is having some impact on production, which has varied day to day over the last week. To date, the disruption to the supply chain in Japan has not stopped production at other Caterpillar facilities around the world; although moving forward, it is possible those facilities may be sporadically impacted as a result of the situation in Japan.

Our plan was to buy calls on CAT at $104.00 so the play was opened this morning at $104.99. If you missed the entry point I would probably wait. We might see a better entry point on a dip back into the $104.50-103.50 zone. Or you could buy calls on a breakout past its recent high at $106.00. Our targets are $109.00 and $114.00.

- Suggested Positions -

Long the April $105 calls (CAT1116D105) Entry @ $3.40

- or -

Long the May $110 calls (CAT1121E110) Entry @ $3.15

chart:

Entry on March 18th at $104.99 (gap higher)
Earnings Date 04/29/11 (unconfirmed)
Average Daily Volume = 7.4 million
Listed on March 17th, 2010


Cerner Corp. - CERN - close: 103.10 change: +0.42

Stop Loss: 99.45
Target(s): 104.85, 109.00
Current Option Gain/Loss: -27.7%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/19 update: CERN rallied Friday morning but shares failed again at resistance near the $105 area. The stock might be stuck in the $105-100 trading range until the broader market recovers or breaks down again. Bigger picture the trend in CERN remains higher. At this time I would wait for dips near $101 or a breakout over $105 before initiating new positions.

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


Capital One Financial - COF - close: 51.05 change: +0.27

Stop Loss: 47.75
Target(s): 54.75, 59.00
Current Option Gain/Loss: - 5.7% and -24.6%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/19 update: Many of the financials were showing strength on Friday after it was announced the Federal Reserve would allow 19 of the major banks to resume or raise their dividends. The announcement was widely expected but stocks rallied anyway. COF rose to $52.28 before trimming its gains. In the news COF issued a press release stating they plan to keep their quarterly cash dividend at $0.05 per share through the first quarter of 2011.

Overall I don't see any changes from my prior comments. Readers can open call positions now or hope for another dip closer to the $50.00 mark. Our targets are $54.75 and $59.00.

- Suggested Positions -

Long the April $50 call (COF1116D50) Entry @ $2.63

- or -

Long the April $55 call (COF1116D55) Entry @ $0.65

chart:

Entry on March 16th at $51.08
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume = 4.4 million
Listed on March 15th, 2010


Jones Lang Lasalle Inc. - JLL - close: 98.35 change: +1.55

Stop Loss: 93.85
Target(s): 102.50, 109.00
Current Option Gain/Loss: - 2.9%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/19 update: JLL is still slowly bouncing from the bottom of its recent trading range toward the top of its range and resistance near $100.00. I am not suggesting new bullish positions at this time.

Prior Comments:
We wanted to keep our position size small to limit our risk. Our targets are $102.50 and $109.00.

- Suggested Positions - (Small Positions)

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

03/17 Exited March calls @ open, Estimated exit @ 0.10 (-94.2%)
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


Polaris Industries, Inc. - PII - close: 81.87 change: +0.42

Stop Loss: 78.49
Target(s): 84.95, 89.00
Current Option Gain/Loss: -20.0%
Time Frame: 4 to 7 weeks
New Positions: see trigger

Comments:
03/19 update: Our bullish play on PII has been triggered. The stock opened at $82.23 and rallied to $82.91 before paring its gains. Our trigger to buy calls was hit at $82.25. I would still consider new positions now or you could wait for another dip into the $80.50-80.00 zone.

PII has been showing relative strength lately and just hit new all-time highs on Friday morning. I would keep our position size small to limit our exposure. Our targets are $84.95 and $89.00. FYI: The Point & Figure chart for PII is bullish with a $98 target.

- Small Positions -

Long the April $85 calls (PII1116D85) Entry @ 2.00

chart:

Entry on March 18th at $82.25
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume = 396 thousand
Listed on March 14th, 2010


Quality Systems Inc. - QSII - close: 79.51 change: +0.24

Stop Loss: 77.90
Target(s): 87.25, 94.50
Current Option Gain/Loss: -59.2%, and -25.0%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/19 update: QSII has spent the last three trading days in a narrow range. Friday saw the early rally attempt fade but at its lows of the day traders were buying the dip near $79.00. I don't see any changes from my prior comments. If the market rolls over then we can expect QSII to breakdown. More conservative traders might want to raise their stops toward this past week's low near $78.66. For the moment I am keeping our stop loss under the 50-dma (near $78.00). Readers might want to wait for a rally over $81.00 before initiating new bullish positions.

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


PUT Play Updates

Fortune Brands Inc. - FO - close: 60.12 change: +0.49

Stop Loss: 62.05
Target(s): 55.15
Current Option Gain/Loss: - 9.3% and - 3.7%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/19 update: The stock market is trying to bounce. FO is not seeing much follow through on this past week's bearish breakdown. That makes me a little more cautious here. However, Friday's action was probably clouded by option expiration. FO hovered near the $60.00 strike price all day. Monday should offer some new insight in FO's strength or weakness. I am thinking about lowering our stop loss closer to the $61.50 level. For the moment we'll leave the stop unchanged at $62.05.

If you're looking for a new entry point consider waiting for another failed rally under $61.00 or a new drop under $59.50.

Remember our plan was to keep our position size small to limit our risk. Our target is $55.15. More aggressive traders may want to aim for the simple 200-dma instead.

- Open Small Bearish Positions -

Long the April $60 put (FO1116P60) Entry @ $1.60

- or -

Long the June $55 put (FO1118R55) Entry @ $1.35

chart:

Entry on March 17th at $60.26
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on March 16th, 2010


Infosys Technologies - INFY - close: 64.55 change: -0.68

Stop Loss: 68.15
Target(s): 60.25, 57.50
Current Option Gain/Loss: - 1.2%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/19 update: Our INFY is off to a decent start. Shares underperformed the market on Friday. The stock opened at $65.30 and eventually settled with a -1.0% loss. INFY looks poised to breakdown to new lows soon. I would still consider new bearish positions now or you could wait for a breakdown under the $64.00 level.

We want to keep our position in INFY pretty small to limit our risk. I'm suggesting a stop loss at $68.15. Our targets are $60.25 and $57.50. INFY looks like it might have support near $60.00 and the $57.00 levels.

- Small Bearish Positions -

Long the April $65 PUT (INFY1116P65) Entry @ $2.48

chart:

Entry on March 18th at $65.30
Earnings Date 04/15/11 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on March 17th, 2010


CLOSED BULLISH PLAYS

Fossil, Inc. - FOSL - close: 79.52 change: -1.52

Stop Loss: 79.40
Target(s): 82.00, 88.00
Current Option Gain/Loss: + 21.1%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/19 update: The tone of trading in FOSL is getting worse. Shares slipped to new two-week lows late in the day. The drop toward $80.00 was not unexpected since this was an option expiration weekend. Stocks tend to gravitate toward the nearest strike price. However, FOSL traded under the $79.50 level and hit our stop loss at $79.40. The low for the day was $79.22.

- Suggested Positions -

April $80 calls (FOSL1116D80) Entry @ $2.60, Exit @ 3.15 (+21.1%)

03/18 Stopped out @ 79.40, April call @ $3.15 (+21.1%)
03/17 FOSL opens at $83.03, March option exit @ $2.10 (+50%)
03/16 Exit the March calls ASAP (morning of 3/17) currently +39%
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


CLOSED BEARISH PLAYS

Joy Global Inc. - JOYG - close: 91.96 change: +0.76

Stop Loss: 93.75
Target(s): 85.25
Current Option Gain/Loss: -53.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/19 update: The market's strength on Friday was enough to lift JOYG past resistance near $92 and its 50-dma. Yet I suspect it was the drop in the dollar to new relative lows that had the biggest impact. A falling dollar makes commodities more expensive. JOYG sells mining equipment yet it tends to trade like a mining stock. Dollar weakness is bullish for commodities and thus mining stocks. JOYG hit $93.77 intraday. Our stop loss was hit at $93.75 closing our trade.

- Suggested Positions -

April $85 puts (JOYG1116P85) Entry @ $2.50, Exit @ 1.16 (-53.6%)

03/18 Stopped out. Option @ $1.16 (-53.6%)
03/15 New stop @ 93.75

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


Union Pacific Corp. - UNP - close: 93.80 change: +2.33

Stop Loss: 95.05
Target(s): 85.25, or 200-dma
Current Option Gain/Loss: -37.1%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/19 update: Lack of follow through on the market's sell-off this past week doesn't bode well for the bears. A drop in oil prices helped lift the transportation stocks toward their recent highs. While UNP is underperforming the bounce in the transportation index it did bounce enough to hit our stop loss. Shares of UNP rallied past resistance at $95 and its 50-dma to hit a high of $96.00.

UNP actually gapped open at $95.15 on Friday morning. Since our stop loss was at $95.05 the play was closed immediately.

- Small Bearish Positions -

April $90 PUTS (UNP1116P90) Entry @ $1.75, Exit @ $1.10 (-37.1%)

03/18 Stopped out, gap open higher. Option @ -37.1%)

chart:

Entry on March 17th at $92.90
Earnings Date 04/20/11 (unconfirmed)
Average Daily Volume = 2.7 million
Listed on March 16th, 2010