Option Investor
Newsletter

Daily Newsletter, Saturday, 4/30/2011

Table of Contents

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

Market Wrap

April Closes Strong

by Jim Brown

Click here to email Jim Brown

The Dow has gained more than 700 points since April 18th and the Nasdaq ended the month at a 10-year high. The Dow Transports and the Russell 2000 closed at historic highs. It was a banner week despite the pressure from the Nasdaq rebalance and FOMC meeting.

Market Statistics

Earnings continued to power the markets higher with Caterpillar giving the Dow nearly a +25 point boost on Friday. Strong earnings and a docile Fed overcame a continued rise in oil and commodity prices. Bearish sentiment as evidenced by the VIX is almost nonexistent.

The economic news on Friday was mixed with a flat reading on Consumer Sentiment and a decline in the Chicago ISM. The final Consumer Sentiment reading came in at 69.8 and only +0.2 over the initial report. The minor improvement came from the expectations component with the present conditions component flat. Concerns about the rising deficit crept into the worries consumers have over the future. Fuel prices and unemployment are still at the top of the list but the recent political battles have evidently added a deficit worry to the list.

Consumer Sentiment

The ISM Chicago, formerly called Chicago PMI, fell for the second consecutive month. The headline number declined from 70.6 to 67.6. Analysts were quick to claim supply chain problems from Japan since a lot of Chicago's manufacturing is related to automotive production.

However, the new orders component fell from 74.5 to 66.3 and order backlogs fell to 62.4 from 69.6. I have a hard time believing a hiccup in parts supply from Japan would impact orders and especially backorders in the USA. I could see it slowing production but not orders. The activity in the Chicago area has been very strong so a cooling off period should not be a major concern. The decline from the February highs at 71.2 has still left the index at a high level compared to the last three years. There should be no complaints here.

Chicago ISM Chart

The ISM for the New York region was also released and the gains continued to push it to a new high. The index rose +3.5 points to 525.1 but the minor gain was the slowest rate of increase in nearly two years.

The current conditions component fell from 66.4 to 56.9. That 56.9 level is the lowest rate of growth since august 2009. The employment component fell back into contraction territory at 48.8 from 62.0. That is the first reading in contraction territory since 2009. This is yet another data point that suggests economic activity across the nation slowed sharply in April.

Two other reports were mostly ignored. The Employment Cost Index showed costs rose +0.6% in Q1 with most of the expenses related to benefits. Wage growth remains slow. However, in the separate Personal Income report for March we saw income rise +0.5% and slightly better than the consensus at +0.4%. Personal Spending rose by +0.6%. The report also showed top line inflation rising at +1.8% and the fastest since May 2010. Energy prices have risen by an average of +3.6% per month in the last two months.

On Monday we will get the national ISM report and it is expected to show a decline from 61.2 to 58.5 for April. Tuesday has Factory Orders and Wednesday the ISM non-Manufacturing.

Starting on Wednesday we shift into employment mode with the ADP report, which is expected to show a gain of 200,000 jobs. However, the Non-Farm Payroll report on Friday is expected to show a smaller increase at +145,000 jobs compared to the +216,000 gain in March. I am worried about this month's payroll numbers. We have seen consistent declines in the employment components in the regional activity surveys. At the same time the weekly jobless claims have been rising. Taken together these are not a good sign. It could be just a case of automakers doing short-term layoffs until parts return to full strength but we have no way of knowing. This report could produce a knee jerk reaction in the market but the bad news bulls could look at it as another data point that keeps the Fed on hold for a longer period.

Economic Calendar

The earnings parade will continue but the big names will be lacking. So far 323 of the S&P-500 have already reported earnings and the busiest week of the Q2 cycle is now behind us. The list below probably contains a lot of symbols you probably never heard of. After this week the number of reports will decline significantly.

For Q1 the earnings have been outstanding with the latest update showing 73% have beaten estimates and only 15% have missed estimates. The average earnings growth has risen to +22.6%. The best performing sectors were materials with +51% earnings growth, energy +35%, industrials +33%, tech +35% and consumer discretionary +15.5%.

If everything continues as expected for the rest of 2011 this should be a record year for earnings. The prior record earnings for the S&P were $88.18 in 2007. We saw that decline to $72.49 in 2008, $60.90 in 2009 and then rise to $84.35 in 2010. For this year consensus estimates are for another rise to $99.31 and a new record. If you apply a discounted PE of 14 that suggests the S&P is fully valued in the 1,400 range. Obviously for every PE increment over 14 that increases the equivalent value of the S&P by roughly 100 points. As earnings grow investors become more excited about owning stocks and the PE they are willing to support begins to rise. The median PE over the last 120 years has been 15.78 according to Robert Shiller. The lowest S&P PE recorded was 4.78 in Dec 1920 and highest 44.20 in Dec 1999.

Earnings Calendar

Starting Friday off with a bang was the earnings from Caterpillar (CAT). The company posted a +57% increase in sales and a +500% rise in earnings. To say this was a blowout quarter would be an understatement. It was good CAT posted such outstanding earnings because expectations were already high. Actual earnings were $1.84 compared to analyst estimates of $1.31 per share. Revenue increased from $8.24 billion to $12.9 billion. They are expecting record full year earnings of $6.25 to $6.75 per share in 2011 and $8 to $10 in 2012. The prior forecast was "near $6" earlier in the year. Analysts were expecting $6.30.

CAT said it expects global GDP growth of around 4% with developing countries at 6.5% and the U.S. under 3.5%. The U.S. was the soft spot for CAT and the CEO said they had not yet seen any material increase in business in the USA. The stock gained +2.77 to add nearly +25 points to the Dow. CAT said the Japan quake will cost it about $300 million in lost sales and $100 million in profits because of delays due to damage to supplier facilities. The CEO was interviewed on CNBC and he was positively beaming about the amount of business coming to them around the world. He said the next three years should be very strong. He also said the higher oil prices were not yet impacting sales.

Caterpillar Chart

Goodyear Tire (GT) also posted blowout earnings that beat estimates by 400% thanks to strong sales in North America. GT posted earnings of 51-cents compared to analyst expectations of 12-cents. Sales rose +27% to a record $5.4 billion. Shares gapped +12% higher to $18.15 and a new 52-week high.

Goodyear Chart

Two more major oil companies reported earnings with Chevron posting profits of $6.2 billion on a +23% rise in revenue. Earnings of $3.09 beat estimates of $3.00. However, the gains came from higher prices for oil rather than increased production. Nearly every oil company that has reported for Q1 has reported a decline in production. Chevron's decline was -1% to 2.76 million barrels per day.

Total S.A. (TOT) posted profits that rose +35% and said it would take a 60% stake in SunPower (SPWRA). That powered SunPower to a 34% gain for the day.

Occidental Petroleum (OXY) posted earnings that rose +45% at $1.96 per share and beat analyst estimates of $1.80. OXY was one of a select few that actually increased production for the quarter with a +4% increase and that was in spite of some shutdowns in the Middle East due to political unrest. OXY shares rose +9% on the news.

Occidental Chart

NetGear (NTGR) spiked +23% on Friday after posting earnings of 65-cents compared to estimates of 52-cents. Unlike Cisco, NetGear is expanding its product line and added 20 new products during the quarter. The new products powered sales and allowed them to raise guidance significantly for the second quarter. They now predict revenue in the $270-$280 million range and analysts were only expecting $240 million. That is a significant upgrade in a market where Cisco is canceling products and falling back to their core services.

NetGear Chart

On the negative side of the earnings ledger Deckers (DECK) reported earnings that beat the street on Thursday evening and then guided to an unexpected loss for Q2. They only beat by 2-cents with earnings of 49-cents but the Q2 loss forecast of -25 cents was a killer. Analysts had expected a 5-cent profit. Shares of DECK declined -10%.

Deckers Chart

You may remember Research in Motion (RIMM) also warned on Thursday after the close that sales of their trademark BlackBerry product were slowing. RIMM said sales of the smartphones would be on the low side of prior estimates because consumers were going for the cheaper products. That was the second major warning in the last six weeks. They did not say it but obviously sales are going to the iPhone and Android as well. The PlayBook is also being greeted coldly despite some decent ads this week. Analysts have recommended waiting for the next version or skipping the PlayBook completely. RIMM shares fell -14% on Friday.

RIMM Chart

Apple shares rallied strongly on Friday morning thanks to RIMM's bad news. Slowing sales for BlackBerry is good news for the iPhone. The morning spike was mostly short covering since traders had been shorting it into the close on Thursday on expectations for some serious selling on Friday when Apple's weighting was reduced from 20% to 12% in the Nasdaq 100. The best laid plans of mice and men sometimes go astray. Once it was evident shares were not going to roll over by lunchtime a new wave of buying appeared. Strength in the face of negative expectations is always a buying opportunity. However AAPL did decline about $5 at the close thanks to the rebalance selling but amazingly the shares ended the day with a decent gain.

I believe this is very positive for Apple and I would be a buyer of Apple shares on Monday as long as the markets are positive. I believe everyone was waiting for a dip to buy on the rebalance and they will chase prices higher next week.

Apple Chart - 10 Min

Apple Chart - Daily

If the market is open the dollar is dropping. That seems to be the new trading paradigm for 2011. The dollar declined -4% in April, -10% in 2011 and as been lower for the last nine trading days. Friday's close was the lowest since July 2008. This is not a situation that is going to change in the near future although there may be a temporary bounce in our near future.

US Dollar Index Chart

As usual the decline in the dollar helped push commodities higher again. Crude continues to press towards a breakout over $114 and the metals are crazy. Gold rallied to $1569.80 and a +$34 gain for the day. This is a new nominal high but the inflation adjusted high is much higher at $2300.

Crude Oil Chart

Gold Chart - Daily

Silver closed at $48 after trading as high as $49.56. While I believe in the silver story and think the long-term outlook is still bullish I can't help but think the short-term outlook is becoming increasingly bearish. I mentioned buying silver on a pullback two weeks ago. We got the -10% dip to $44.61 and then it roared off again when Bernanke said no rate hikes soon. However, it stalled just under $50 for the second time.

I believe the hype surrounding the silver trade has gotten out of hand. Yes, it is an inflation hedge. Yes, it is the poor man's gold and its use in manufacturing is increasing. Yes, there is a shortage today because of all the investor interest but the trade has clearly achieved bubble status.

Trading in silver has exploded beyond any reasonable level. Last Monday there were 319,205 contracts traded at the CME. That was 50% higher than the prior record set back in November. The average daily volume has tripled since last year according to the Wall Street Journal. Last Monday the iShares SLV ETF traded three times the volume of the S&P-500 ETF SPY. SLV volume was five times its daily average in Q1.

For those new to metals trading you should know they come down a lot faster than they go up. Back in 1980 when the Hunt brothers tried to corner the silver market and pushed prices to $50.50 the drop from that level was a disaster. Silver futures opened limit down for 20 straight trading days. That means the opening print was the low of the day and trading was immediately halted until the following day. That means traders could not sell their futures contracts for up to 20 days. Back then the limit was $1 per day so prices had to drop $20 before any normal trading could resume. That would be extremely painful for a futures trader. There are no limits on the CME today.

I don't know how that would work today with the various silver ETFs holding both bullion and futures contracts. I would bet in a panic the silver market today would simply implode without any limits to slow the drop. When all those traders and all that volume I mentioned above suddenly head for the exits at the same time it is going to get ugly.

Nobody knows when it is going to happen and calling tops in a particular bubble is a fool's errand. However, that $50 level and the 1980 high are flashing a warning signal. If you are long silver I would probably be taking some money off the table next week. I know puts have been recommended on the Proshares Ultrashort Silver ETF (ZSL). Just remember that any ultrashort or ultralong ETF has a tremendous bleed factor as a result of their options component. Those ETFs should only be used for short-term trades lasting days or weeks not months. There have been several studies of the various ultra ETFs and documented their underperformance when held for more than a few days. During the market crash in 2008-2009 there were ultra short funds that actually lost money rather than doubling or tripling the market decline. Be careful and read up on the best holding periods for ultra short/long funds before betting the farm on a long dated position.

Silver Chart - Daily

Silver Chart - Monthly

The market really had a good week and it is even more amazing when you consider the potential for an upset over the FOMC announcement and press conference. Instead of dwelling on the lowered economic outlook from the Fed and Bernanke's view of unemployment plus the constant stream of weaker economics the bad news bulls just kept buying stocks. They viewed the weaker economics as a sign the Fed would remain on hold for an even longer "extended period" and provide a fertile environment for equities. The outlook for the falling dollar is more of the same and that means investors have to buy stocks and commodities to offset the dollar's decline.

Of course it was also month end and there was new money hitting the retirement accounts. That money will dry up by Thursday along with earnings and we will see just how confident those bad news bulls really are. Given the +700 point rally in the Dow in the last two weeks there are plenty of traders who feel we are too overextended to add to longs. You can count me in that camp as well. Nothing goes up in a straight line so we know there is at least a temporary dip in our future.

The S&P only added +3 points on Friday and less than +2% for the week. The close at 1363 is about 10 points below initial resistance at 1373 and 37 points below strong resistance at 1400. There appears to be nothing to prevent another decent gain on Monday except its own weight. The momentum has been slowing for the last three days because of the overextended conditions. Support should be 1340 if we were to get a real bout of profit taking.

S&P Chart - Daily

The Dow is a carbon copy of the S&P with a clear breakout to new highs but extremely over extended with a 700 point gain in two weeks. The next material resistance is 12,950-13,000 but the overbought nature is going to be a problem.

Obviously nothing prevents the markets from posting additional gains. They can be irrational longer than we can remain solvent. When we can't bring ourselves to trade the current trend we have to wait for a break in that trend for an opportunity to reload.

Dow Chart

The Nasdaq performed pretty much as expected on Friday. The NDX lost about six points thanks to the rebalance at the close. The composite managed to close with a gain but it was minimal. The composite is bumping up against uptrend resistance at 2875 but Friday's performance was completely related to the rebalance.

The Nasdaq-100 ($NDX) has found support at 2400 and without the rebalance negativity next week I would expect to see a higher move using that support as a launching pad. Apple's performance on Friday suggests a decent day for techs on Monday assuming there are no critical events in the news.

Nasdaq Chart

Nasdaq-100 Chart

The Russell was the strongest index on Friday with a 0.4% gain and a new closing high. This has bullish implications for next week if it can continue to outperform. Support should be 855 if we get a decent dip.

Russell 2000 Chart - Daily

The Transports also closed at a new high but with only a +4 point gain. I am not going to draw any conclusions from that index this weekend. With crude prices at $114 and gasoline rising to $3.91 nationwide and more than $4 in 22 states the rally in the transports is temporary.

I do believe the performance in Apple suggests the Nasdaq will be positive on Monday and the performance of the Russell suggests fund managers are not concerned there is any trouble ahead.

I wish I could be that confident. I would prefer to see a 2%-3% pullback so traders could reload. There has been a lot of news over the last week and there is plenty more next week. The Non-Farm Payrolls will be the most critical and I suspect estimates will be declining all week.

I would be careful about entering any new long positions until we see some profit taking.

I have a favor to ask. Last May I was in the hospital for a week with a heart problem. I wrote at the time about the China Study, by Dr Colin Campbell, and Prevent and Reverse Heart Disease (and Diabetes) by Dr Esselstyn. I had corresponded with numerous readers at the time and received many testimonials about how those books had cured their health problems. Since then I have personally helped many of my friends improve their heart conditions and/or get off their diabetes medicine by passing around copies of those books and being an example in my own life. Since Memorial Day 2010 I have lost over 30 pounds and my last treadmill test showed no evidence of heart disease.

Here is the favor. Because of the excitement of another friend who just got off his diabetes medicine I want to build a health page with everything I have learned and make this information available in detail for others. Unfortunately I neglected to save all those emails from readers. If you have experienced better health from those books please send me another email and tell me how they helped you so I can include some additional testimonies on the health page I am building. I would really appreciate it and I know there are hundreds of readers who will benefit from your stories in their health. No names will be used.

Thank you in advance!

Jim Brown

Send Jim an email

"Do not meddle in the affairs of wizards, for they are subtle and quick to anger."

- J. R. R. Tolkien


Index Wrap

Renewed Uptrend Confirmed

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

As I've been anticipating, all the major market indexes broke out to new highs relative to the prior peaks of early-April. The strong move of this past week 'confirms' a renewed intermediate-term up trend. On a technical basis, an uptrend is composed of a series of higher highs and lower relative (reaction) lows. The last index lows made in mid-April were higher than prior lows and now the latest highs have pierced prior price peaks. I'm stating the obvious I suppose but it's necessary to define technical trend criteria. The tricky part now is to make some projections as to possible upside targets from here.

The Dow 30 (INDU) is the only major index to have regained its prior daily chart up trendline. Therefore INDU is also back into its prior uptrend price channel. The upper end of that channel currently intersects in the 13500 area. This upper channel line over time becomes both a potential objective and possible resistance. Sometimes rally failures occur around the middle of these type channels.

All the other major indexes I follow for this column have yet to regain their prior rate of upside momentum by climbing back above previous up trendlines. Resistances implied by such previously broken up trendlines are not too far off; e.g., in the S&P 500, the current intersection of this trendline is 1380. The Nasdaq 100 (NDX) has 3 lows that allow drawing a new up trendline and which can define a 'stop-out' point for NDX calls, However, NDX needs to climb above 2450 currently to get back above the dominant up trendline dating from its late-August 2010 lows.

My individual index charts shown below highlight the aforementioned trend and channel lines as guides to potential resistances ahead. Those resistances will either be implied by previously broken up trendlines or by the upper end of the prior uptrend price channels. We're in a strong move that should continue but a cautionary note is seen by the indexes being at or near overbought RSI readings. This (overbought) aspect is not showing up yet in terms of my sentiment indicator, which keeps me overall bullish. Once traders get much more active on the call side, I'll turn more cautious.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

I've held the view for awhile now that the S&P 500 (SPX) would NOT form another top in the 1340 area and would pierce its prior highs. Another top in this area would have been a triple top, which are rare in the indexes and is a bit more common in individual stocks and in the commodities markets.

The chart is bullish. To regain its prior up trendline, SPX would need to move to above 1380. I've noted potential resistance there and extending to 1400. Fairly major resistance then begins at the upper end of SPX's prior uptrend channel, which currently intersects around 1440. A 'measured move' objective, where the current up leg at least equals the last, is to around 1385. I think that this current leg could exceed the last (up leg), so stay tuned for that. Assuming SPX gets back up into the highlighted prior channel, there's some likelihood of at least a move to the middle of the channel.

Support is seen at what had been resistance, at 1340, extending to 1320.

RSI and TRADER 'SENTIMENT'

The 13-day RSI has now reached the low end of its 'typical' overbought zone but which, at most I think, only suggests a vulnerability to minor pullbacks. If bullish sentiment, as seen with my indicators above, was at an 'extreme', I might be more concerned about topping action. It's quite bullish that SPX and the other major indexes have gone to new highs with a some neutral stance shown by traders in terms of market sentiment. When the next significant top occurs we'll likely have some bullish extreme readings in my CPRATIO model beforehand.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) is bullish in its pattern with its strong move above prior tops in the 599-602 area. To regain its prior uptrend line, would take a move to above projected resistance at 615. Next suggested resistance is highlighted well above this area, at the top end of OEX's uptrend channel currently intersecting at 643. I foresee OEX moving back into its prior uptrend channel and moving up within it.

A 'measured move' objective, where this up leg equals the last, is to 617. However, I'm assuming at this point that OEX can climb back into its uptrend channel, in which case even a mid-point move within the channel is to 629-630.

OEX technical support is now assumed to lie at the prior high (prior resistance, once penetrated, 'becoming' new support) in the 600 area, extending to around 590.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) average is no longer alone among the major indices in going to a new high. INDU is however the only major index that's gotten back above its prior longer-term up trendline. Needless to say the chart is bullish in its pattern.

I've been saying that I thought that INDU would at least climb to the 13000 area and that looks to be on track. Short-term, the Average is overbought. Pullbacks should be well supported however. I've noted technical support at around 12500 and below this in area of the 50-day moving average currently at 12240.

AXP, CAT, DD, INTC, JNJ, MMM, PFE, T, and XOM have joined BA, IBM, KFT, TRV and UTX as having made new highs for the current move. The Dow 30 stocks at such new highs now number 14, which considerably broadens out the INDU move; last week it was just 5 stocks leading the Dow to a new high.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) chart is bullish, as it has gone to decisive new highs above 2840. The only implied resistance I can see now is at the previously broken up trendline in the 2900 area. The even 100 levels tend to often act as key support or resistance areas anyway. If COMP can climb above 2900, the index would regain its prior uptrend channel. Next resistance, at the channel midpoint, comes in around 3000 in my estimation. The 1000 point increment is even more pivotal as potential resistance.

I've noted a first key support as 2800, then at 2750. COMP has reached an overbought 71.2 in terms of the 13-day Relative Strength Index or RSI, making the index vulnerable to pullbacks.

I rarely mention it but I suppose I should occasionally that the concept of 'relative strength' within stock groups is a different concept than the RSI indicator here; i.e., relative strength in individual stocks is about a stock within say, the services or financial sector, as to its RANKING in terms of its performance relative to its group.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) is bullish but the move to new highs above 2403 hasn't yet been decisive. I've noted resistance at an extension of the previously broken up trendline, currently intersecting around 2450.

Slowing of NDX's upside momentum in the area of prior highs should put holders of NDX calls on alert to possible selling pressures or, conversely, just not enough buying to pull many big cap tech stocks much higher. As a key example, I've been thinking that Apple (AAPL) could be building a top. Stay tuned on that. A lot of money is now flowing into less glamorous NYSE listed stocks that have underperformed tech for some time.

Above pivotal resistance around 2450, I've noted next potential resistance for NDX at 2500.

Key support is highlighted in the 2350 area, then at 2300, extending to 2280, at the intersection of the up trendline.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) is bullish in its pattern, but as with the underlying index, momentum slowed when the stock hit the area of its prior highs from mid-February. If support in the 59 area holds up, next resistance comes in around 60, then at 61, with fairly major resistance at 63.

Support below 59 is at 58.0. Major support currently is seen in the low-56 area.

On Balance Volume (OBV) is a key volume indicator, along with just daily volume figures and the OBV line has turned lower. As is often the case, daily trade volume jumped on the initial breakout move, but QQQ buying wasn't heavy after that. We tend to see spikes in QQQ volume on sell offs. The current lackluster volume pattern fits with a lack of heavy buying in calls relative to puts, for individual equities. NDX is definitely lagging here but it did lead the market higher for many months in the 2009 and 2010 up legs. At some point leadership always changes.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) chart is bullish given its move to new highs. The index is also now at a key technical resistance in the 868-873 area. Based on what else I'm seeing in the overall market, I think RUT could climb above this near resistance and go on to challenge anticipated next resistance around 900.

If RUT can't gain further traction, look for support back in the 840 area, extending to around 831 currently.

On the bearish side, RUT could be tracing out a bearish rising wedge but this is an early cautionary note only as the pattern is not yet well formed or defined.



GOOD TRADING SUCCESS!


New Option Plays

Auto Parts, ETFs, and Silver

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

O'Reilly Automotive - ORLY - close: 59.06 change: +0.51

Stop Loss: 57.75
Target(s): 62.75, 67.25
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see Trigger

Company Description

Why We Like It:
ORLY has spent the last four months consolidating sideways between resistance near $60 and technical support at its rising 200-dma. Now shares are inching closer toward resistance at $60.00 again and ORLY is poised to break higher. I am suggesting a trigger to buy calls at $60.15. If triggered our targets are $62.75 and $67.25. The market is a little overbought here so I would keep our position size small.

Trigger @ $60.15

- Suggested Positions -

Buy the May $60 calls (ORLY1121E60)

- or -

Buy the June $60 calls (ORLY1118F60)

Annotated Chart:

Entry on May xxth at $ xx.xx
Earnings Date 04/27/11
Average Daily Volume = 1.1 million
Listed on April 30th, 2011


Powershares QQQ ETF - QQQ - close: 59.08 change: -0.05

Stop Loss: 56.45
Target(s): 64.00
Current Option Gain/Loss: Unopened
Time Frame: 8 to 10 weeks
New Positions: Yes, see Trigger

Company Description

Why We Like It:
The QQQ is an exchange traded fund designed to replicate the movement in the NASDAQ-100 index ($NDX). Powered by strong earnings results the $NDX has broken out to new multi-year highs on Wednesday. There was very little profit taking the last couple of sessions, which suggests strength. The market could see further gains due to the beginning of a new month where fund managers put new money to work. Thus more aggressive traders may want to go ahead and buy calls on the QQQ right here.

I would prefer to buy calls on a dip. We're setting our buy-the-dip trigger at $58.15. More conservative traders could wait for a dip toward the 30 or 50-dma instead. If we are triggered at $58.15 we'll use a stop loss at $56.45. The Qs don't move very fast so we'll have to be patient.

buy-the-dip Trigger @ $58.15

- Suggested Positions -

Buy the June $60 calls (QQQ1118F60)

- or -

Buy the July $60 calls (QQQ1116G60)

Annotated Chart:

Entry on May xxth at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 50 million
Listed on April 30th, 2011


NEW DIRECTIONAL PUT PLAYS

iShares Silver Trust - SLV - close: 46.88 change: -0.38

Stop Loss: n/a
Target(s): $40-37.50 range
Current Option Gain/Loss: + 0.0%
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Did you notice the long-term chart of silver in Jim's wrap this weekend? The rally in silver prices and the SLV has been exceptionally strong. Yet now the price of silver is nearing potential resistance. Yes, the old high of $50.50 an ounce from 1980 could easily be a target traders are planning to sell at. The $50.00 mark for silver futures certainly works as a nice, big round-number to target. It looks like the SLV is already seeing some profit taking with the massive volume over the last several days (see chart below).

I am suggesting put options on the SLV. This is pure speculation that silver could see some profit taking soon and when it happens the move down will likely be very swift and sharp. Normally trying to pick a top in a bubble-like move higher is very dangerous. Thankfully with options we can limit our risk to whatever we buy the option for. However, I would consider this a very high-risk/high reward play. Sort of like a little lottery ticket. That's why we want to buy out of the money puts to keep our initial investment (or gamble in this case) very low.

I am not setting any stop loss on this trade - at least not yet. Silver could see some big spikes higher before finally reversing.

(Open Small Bearish Positions Now)

- Suggested Positions -

Buy the July $40.00 PUT (SLV1116S40) current ask $1.46

Annotated Chart:

Entry on May 2 at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 79 million
Listed on April 30th, 2011


In Play Updates and Reviews

Gold & Stocks Surge Higher

by James Brown

Click here to email James Brown

Editor's Note:

Readers will want to seriously consider taking profits in our GLD gold ETF position immediately.

-James

Current Portfolio:


CALL Play Updates

Acme Packet Inc. - APKT - close: 82.61 change: +0.59

Stop Loss: 74.45
Target(s): 89.00, 97.50
Current Option Gain/Loss: +16.2% and + 6.9%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
04/30 update: Our new play in APKT is off to a decent start. Shares gapped down lower at the open on Friday setting our entry point at $81.20. Traders bought the dip although the rally failed to close over its high set on Wednesday. I do not see any changes from my prior comments.

This remains an aggressive, higher-risk trade. I would look for dips in the $81-77.50 zone as a new entry point to buy calls. Let's keep our position size small to limit our risk. Broken resistance at $75.00 should be new support.

Our upside targets are $89.00 and $97.50. FYI: The Point & Figure chart for APKT is bullish with a $95 target.

- Suggested Positions - (SMALL POSITIONS)

Long the May $85 call (APKT1121E85) Entry @ $2.28

- or -

Long the June $85 call (APKT1118F85) Entry @ $4.49

chart:

Entry on April 29th at $81.20
Earnings Date 04/26/11
Average Daily Volume = 2.5 million
Listed on April 28th, 2011


Deere & Co - DE - close: 97.50 change: +1.59

Stop Loss: 92.49
Target(s): 99.70
Current Option Gain/Loss: +54.0%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
04/30 update: DE's rival CAT delivered some impressive earnings that sent the stock to a new high. Shares of DE reacted with a +1.6% gain. We still have a couple of weeks before DE reports earnings so I am adding a secondary target at $104.00. We'll take profits at our first target at $99.70 and then exit completely at $104.00. I would expect some profit taking when DE hits the $100 level again. DE looks poised to rally from current levels but I would prefer to launch new positions on a dip near $95.00. We will not hold positions over the mid May earnings report.

- Suggested Positions -

Long the May $97.50 call (DE1121E97.5) Entry @ $1.61

04/30 Adjusted targets to $99.70 and $104.00.

chart:

Entry on April 21st at $95.25
Earnings Date 05/18/11 (unconfirmed)
Average Daily Volume = 3.8 million
Listed on April 20th, 2011


Fastenal Co. - FAST - close: 67.09 change: -0.01

Stop Loss: 63.75
Target(s): 69.50, 74.00
Current Option Gain/Loss: +13.6% & + 6.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
04/30 update: The trading action in FAST the last two days has been disappointing. The major averages are inching to new multi-year highs but FAST is stuck consolidating sideways. I'd wait for a new dip or bounce in the $66-65 zone before considering new positions.

More conservative traders might want to raise their stops. Our targets are $69.50 and $74.00. We should expect the $70.00 area to offer some resistance and FAST will likely pull back on the first test of $70.

FYI: FAST is due to split 2-for-1 on May 23rd. Plus, the Point & Figure chart for FAST is bullish with a $72 target.

- Suggested Positions -

Long the May $65.00 calls (FAST1121E65) Entry @ $2.20

- or -

Long the June $70.00 calls (FAST1118F70) Entry @ $0.75

chart:

Entry on April 26th at $66.25
Earnings Date 04/12/11 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on April 23rd, 2011


Fortune Brands - FO - close: 65.08 change: +0.18

Stop Loss: 61.75
Target(s): 67.50, 69.75
Current Option Gain/Loss: + 10.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
04/30 update: FO is slowly inching higher and closed at new two-year highs on Friday. Unfortunately we are running out of time with this trade and FO has not been moving very fast. The earnings report is Thursday, May 5th before the opening bell. This means we need to exit on Wednesday at the close to avoid holding over earnings. More conservative traders might want to consider inching up their stop loss.

(Small Positions) - Suggested Positions -

Long the May $65.00 call (FO1121E65) Entry @ $1.00

chart:

Entry on April 26th at $64.00
Earnings Date 05/05/11 (confirmed)
Average Daily Volume = 973 thousand
Listed on April 5th, 2011


Fossil Inc. - FOSL - close: 95.78 change: -0.09

Stop Loss: 91.95
Target(s): 99.75, 104.75
Current Option Gain/Loss: -15.0%, and - 6.6%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
04/30 update: Unfortunately, in spite of trading near all-time highs, shares of FOSL have been going nowhere the last several days. Traders have been buying dips near the rising 20-dma, which happened twice more this past week. Maybe FOSL is ready for another leg higher but I am growing cautious on this stock and would hesitate to open new positions here. The major market indices look short-term overbought and due for a dip. More conservative traders might want to adjust their stop loss higher. The May 10th earnings date is still unconfirmed.

Keep positions small. Our first target is $99.75. The $100.00 mark is probably round-number, psychological resistance. We'll set a secondary target at $104.75 but that might be wishful thinking.

(small positions only) - Suggested Positions -

Long the May $100 call (FOSL1121E100) Entry @ $2.65

- or -

Long the June $100 call (FOSL1118F100) Entry @ $3.75

chart:

Entry on April 20th at $95.60
Earnings Date 05/10/11 (unconfirmed)
Average Daily Volume = 858 thousand
Listed on April 13th, 2011


SPDR Gold ETF - GLD - close: 152.37 change: +2.55

Stop Loss: 149.75
Target(s): ---.--, 154.50
Current Option Gain/Loss: +318.4%, and +302.2%
2nd Option Position Gain/loss: +420.2% and +386.3%
Time Frame: 6 to 12 weeks
New Positions: see below

Comments:
04/30 update: The rally in gold is accelerating again. Gold hit a new all-time high of $1,570 an ounce on an intraday basis this Friday before settling near $1,556. This pushed shares of the GLD gold ETF past round-number resistance at the $150.00 mark. The high for the GLD on Friday was $153.03. Our target to exit is $154.50. Gold is looking VERY short-term overbought here. All of our options are up over +300%. Readers may want to seriously consider taking some profits right here and now. I am raising our stop loss up to $149.75.

- Suggested Positions -

Long the May $145 call (GLD1121E145) Entry @ $1.84

- or -

Long the June $150 call (GLD1118F150) Entry @ $1.33

- Second Entry Point, April 12th, Entry April 13th -

Long the May $145 call (GLD1121E145) Entry @ $1.48

- or -

Long the June $150 call (GLD1118F150) Entry @ $1.10

04/30 New stop loss @ 149.75, consider taking profits now!
04/27 New stop loss @ 141.90
04/26 UPDATE: The gap down on Tuesday morning affected our exit prices. May $145 call @ +58.6% and +97.2%. June $150 calls @ +68.4% and +103.6%
04/25 Take Profits Now. Sell all or part of our position. Options are at: May $145 calls $3.50 (+90.2% & +136.4%), June $150 calls $2.76 (+107.5% & +150.9%)
04/20 New stop loss @ 139.90

chart:

Entry on April 6th at $142.40
Earnings Date --/--/--
Average Daily Volume = 12.5 million
Listed on April 5th, 2011


Google Inc. - GOOG - close: 537.97 change: +0.21

Stop Loss: 518.75
Target(s): 549.00, 558.00
Current Option Gain/Loss: +66.6%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
04/30 update: It was a good week for GOOG with a rebound from about $522 to over $544. Shares are finally back above their simple 10-dma and nearing potential resistance at the bottom of the gap down near $547.00. I am adjusting our exit strategy since the $547-550 zone could be resistance. Let's plan on taking some money off the table (sell part of our position) at $549.00 and we'll exit the remainder at $558. More aggressive traders could aim for the 200-dma or the 50-dma as their overhead targets.

I am not suggesting new positions at these levels.

Prior Comments:
This is a very aggressive, higher-risk trade. Keep positions small.

(Very Small Positions) Suggested Positions:

Long the May $550 call (GOOG1121E550) Entry @ $3.00

04/30 Adjusted exit strategy. First target at $549.00. Final target at $558.00.

chart:

Entry on April 25th at $525.25
Earnings Date 04/14/11 (confirmed)
Average Daily Volume = 3.3 million
Listed on April 23rd, 2011


International Business Machines - IBM - close: 170.58 change: +0.20

Stop Loss: 164.75
Target(s): 174.00, 179.50
Current Option Gain/Loss: Unopened
Time Frame: 6 to 9 weeks
New Positions: Yes, see Trigger

Comments:
04/30 update: IBM rallied to another all-time high on Friday. This time shares hit $173.00 before retreating lower. The move looks like a short-term top. That's fine since we're waiting for a dip.

I am suggesting we buy calls on a dip at $167.50. If triggered we'll use a stop loss at $164.75. Our targets are $174.00 and $179.50. FYI: The Point & Figure chart for IBM is bullish with a $208 target.

Buy-the-Dip Trigger @ 167.50

- Suggested Positions -

Buy the June $170 calls (IBM1118F170)

chart:

Entry on April xxth at $ xx.xx
Earnings Date 04/19/11
Average Daily Volume = 4.8 million
Listed on April 27th, 2011


Intuit - INTU - close: 55.56 change: -0.04

Stop Loss: 53.45
Target(s): 58.75
Current Option Gain/Loss: -20.8%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
04/30 update: INTU has been consolidating sideways under $56.00 for days now. Optimistically the stock seems to be coiling for a new breakout higher. Readers may want to wait for a close over $56 before considering new positions. Please note that I am consolidating our two targets (57.50 and 59.75) into just one target at $58.75. We do not want to hold over the mid May earnings date.

I would keep our position size small to limit our risk (1/2 or less than your normal trade size).

- Suggested Positions -

Long the May $55.00 call (INTU1121E55) Entry @ $2.40

04/30 Adjusted target to $58.75

chart:

Entry on April 20th at $55.25
Earnings Date 05/19/11 (unconfirmed)
Average Daily Volume = 2.4 million
Listed on April 14th, 2011


Jos. A Bank Clothiers - JOSB - close: 52.42 change: -0.27

Stop Loss: 49.95
Target(s): 59.50
Current Option Gain/Loss: - 42.8% and -20.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
04/30 update: There is no change from my prior comments on JOSB. The stock has spent most of last week consolidating sideways in a very narrow range above the $52 level. The stock is trading near all-time highs set this past week but momentum has clearly stalled. That's disappointing with the major averages marching higher. Shares might be setting up for a dip toward support near $50.00. I am growing cautious on JOSB and would hesitate to launch new positions today. We can look for short-term technical support at the 20-dma (currently near $51.35). Our target is $59.50.

FYI: The most recent data listed short interest in JOSB at more than 21% of the small 27.3 million-share float. Together the increase the risk of a short squeeze.

- Suggested Positions -

Long the May $55 calls (JOSB1121E55) entry @ $0.70

- or -

Long the June $55 calls (JOSB1118F55) entry @ $1.75

chart:

Entry on April 26th at $52.75
Earnings Date 06/02/11 (unconfirmed)
Average Daily Volume = 510 thousand
Listed on April 25th, 2011


Ross Stores Inc. - ROST - close: 73.69 change: -0.33

Stop Loss: 69.75
Target(s): 77.25, 79.50
Current Option Gain/Loss: + 2.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
04/30 update: It was a bullish week for ROST with a breakout past resistance to new highs. I would still consider new positions now or you can wait for a possible dip into the $73.50-73.00 zone. We do not want to hold over the mid May earnings report so I am suggesting we use the May calls, which expire after the 20th.

Our first target is $77.25. Our secondary target is $79.50. FYI: The Point & Figure chart for ROST is bullish with a $97 target.

- Suggested Positions -

Long the May $72.50 calls (ROST1121E72.5) Entry @ $2.25

chart:

Entry on April 28th at $73.55
Earnings Date 05/19/11 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on April 23rd, 2011


United Technologies Corp. - UTX - close: 89.58 change: +0.57

Stop Loss: 83.49
Target(s): 89.50, 94.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see trigger

Comments:
04/30 update: Industrial names were strong again on Friday. We do not want to chase UTX at current levels. The $90.00 level could be psychological, round-number resistance. We want to wait for a little correction. Broken resistance near $86.00 should be new support. I am adjusting our buy-the-dip trigger from $86.25 to $86.50. If triggered we'll use a stop loss at $83.49. Our targets are $89.50 and $94.00.

Buy-the-dip Trigger @ $86.50

- Suggested Positions -

Buy the June $90 calls (UTX1118F90)

chart:

Entry on April xxth at $ xx.xx
Earnings Date 04/20/11
Average Daily Volume = 3.7 million
Listed on April 27th, 2011


Vertex Pharmaceuticals - VRTX - close: 55.05 change: -0.49

Stop Loss: 49.90
Target(s): 51.85, 58.50
Current Option Gain/Loss: +108.0%
Time Frame: about 2, maybe 3 weeks
New Positions: see below

Comments:
04/30 update: We only have two days left. I was expecting a bit more profit taking on Friday but VRTX held up pretty well after big gains early in the week. The company is due to report earnings on Tuesday after the closing bell. We do not want to hold over earnings so we'll plan on exiting this Tuesday at the close. I strongly suggest that more conservative traders exit now and lock in a gain. I am not suggesting new positions.

- Very Small Bullish Positions -

Long the May $50.00 calls (VRTX1121E50) Entry @ $2.50

04/30 Consider an early exit now to lock in a gain.
04/27 New stop loss @ 49.90
04/26 1st Target Hit @ 51.85, Option @ $3.40 (+36%)

chart:

Entry on April 10th at $48.28
Earnings Date 05/03/11 (confirmed)
Average Daily Volume = 2.1 million
Listed on April 9th, 2011


PUT Play Updates

Apollo Group Inc. - APOL - close: 40.03 change: -0.25

Stop Loss: 42.55
Target(s): 38.15, 35.50
Current Option Gain/Loss: -10.4%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
04/30 update: APOL is still underperforming the rest of the market. The stock did seem to find support again near $40.00 this past week. There is no change from my prior comments. More conservative traders may want to exit this trade immediately since the market's trend is clearly higher. I am not suggesting new positions at this time. Our profit targets are $38.15 and $35.50.
The Point & Figure chart for APOL is bearish with a $31 target.

- Suggested Positions -

Long the May $40.00 puts (APOL1121Q40) Entry @ $1.24

04/19 New stop loss @ 42.55

chart:

Entry on April 13th at $41.21
Earnings Date 06/30/11 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on April 12th, 2011