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Daily Newsletter, Saturday, 5/14/2011

Table of Contents

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

Market Wrap

Is Risk Off The New Trade?

by Jim Brown

Click here to email Jim Brown

Worries over Eurozone economics, rising U.S. debt levels, slowing economics, rising inflation and the end of QE2 appear to be changing the dynamics of the market.

Market Statistics

The European Central Bank warned that the likely restructuring of Greek debt would create massive harmful effects for the Eurozone as a whole. Juergen Stark warned against underestimating the damage from a restructuring saying it would risk the financial stability of the entire Eurozone. Greece and the various EU finance ministers continue to claim a restructuring of debt will not be necessary but the numbers don't lie. Almost every analyst believes a 50% to as much as a 75% haircut on Greek debt will be necessary in order for them to eventually pull out of their economic mess. This would sink the banking system of multiple countries that hold hundreds of billions in Greek debt. There is no way in the foreseeable future for Greece to make all the payments required to service their existing debt plus the 160 billion in bailout debt. Greek debt is currently 158% of its GDP and will jump to 166% in 2012. Greece can no longer borrow in the open market because the interest rates in the market are now 25% for its two-year bonds.

This resurgence in the uncertainty over the European debt crisis and another drop in the euro caused commodities and equities to weaken. There is a meeting or Eurozone finance ministers scheduled for Monday and worry over that meeting caused the Euro to fall and the dollar to rebound as traders reduced their risk ahead of an unexpected result. A rising dollar causes equities and commodities to decline.

It was a Friday the 13th but it was not black cats or broken mirrors that caused the markets to decline. The economics were positive but they failed to move the market. The Consumer Price Index (CPI) for April rose only +0.4% and only half of the consensus estimate of +0.8%. That was less than the +0.5% increases over the prior two months and inline with the gains for the two months prior to that. The report suggested that inflation might be peaking and this would be confirmation for the Fed. Bernanke has claimed the impact to inflation from rising commodity prices would be temporary and with the declines in commodities over the last couple weeks he could be right. He also points out rather reluctantly that the high unemployment and lack of spending capacity by consumers will make it nearly impossible for companies to raise prices.

Excluding food and energy the Core CPI rose +0.2% and also inline with the last three months of gains. On an annualized basis the core CPI is up +1.3% over the last twelve months. That is very tame and well below the 2.5% Fed target range. The CPI for food and beverages rose +0.4% and is up +3.9% over the last 12 months thanks to the rise in grain prices. For example corn is up +86%, cotton +80% and soybeans +46% over year ago levels.

Until the labor market improves we are probably not going to see any significant rise in inflation. This should have been good news for the markets but they were focused on other things.

CPI Chart

Consumer sentiment for April rose +2.6 points to 72.4 after a sharp -10 point dip to 67.5 in March. The rebound was smaller than expected since the elimination of Osama occurred at the beginning of the survey period. The rebound was powered by a significant bounce in the expectations component from 61.6 to 67.4. The present conditions component actually declined from 82.5 to 80.2. Inflation expectations declined from 4.6% to 4.4%.

At the time of this survey the gasoline prices were closing in on $4 and the events in the Middle East were intensifying although the worry over Japan's nuclear problem was receding. The next reading on sentiment should show another gain. However, the coming debate on the U.S. debt limit and the budget fight will likely weigh on sentiment as funding for favored programs like social security and Medicare are argued in the headlines.

Consumer Sentiment Chart

Next week the biggest reports are the FOMC minutes on Wednesday and the Philly Fed Survey on Thursday. The FOMC minutes will be scoured for clues on future Fed stimulus like a QE3 or the end of the QE1 payoff reinvestments. Fed governors appear to be equally divided over the need for continued policy accommodation and analysts will be trying to weigh the comments in the minutes for clues.

The Philly Fed survey imploded last month from 43.4 to 18.5 in a very surprising decline that shocked analysts and forced a downgrading of economic activity estimates for April. If this week's report shows conditions worsened in April it would be very ugly for the stock market. Estimates are for a minor rebound from 18.5 to 20.0 so clearly expectations are subdued.

The Philly Fed and the NY Empire (Monday) are the two earliest reports for the monthly cycle and they will set the tone for the rest of May.

Economic Calendar

Another problem for next week is the flood in Louisiana. At 4:PM on Saturday the Morganza Floodway was opened in an effort to prevent serious flooding in Baton Rouge and New Orleans. The spillway was built in 1954 and can release 600,000 cubic feet of water PER SECOND into central Louisiana. That is the equivalent of filling ten football fields ten feet deep every second. It has not been open since 1973. When opened it will create a new 100-mile long tributary of the Mississippi to the Gulf.

The problem comes from the damage that will occur when the gates are opened. There are 2,500 people and 2,000 structures in the immediate spillway area and another 22,500 people and 11,000 buildings farther down stream that will be flooded when the water rises.

Several hundred thousand acres of farmland and crops will be wiped out and 10% of Louisiana's oil production will be flooded. There are 2,264 wells producing 19,278 barrels per day that will be underwater. The Alon refinery will be closed and they are rushing to build dikes around the facility. Exxon has said their docks in Baton Rouge are already under water. Crews are working around the clock to build dirt levees around critical installations but the rising water in the Mississippi forced the opening of the spillway late Saturday.

Morgan City is right in the middle of the flood path and that is the home base for most crews servicing the Gulf of Mexico wells. All of the major companies like Transocean and Oceaneering International have extensive offices there. It will take three days for the water from the spillway to reach Morgan City. The city is rushing to complete a 10,000-foot long fortification in an effort to divert water away from critical areas like power stations.

The opening of the spillway will force the closing of the roads and railroads across the three million acres that will be flooded. It will also close portions of the river to barge traffic. The last time that happened it cost $275 million a day. Barges filled with rocks and broken concrete are being sunk on purpose in specific locations in order to divert water around strategic structures that would be damaged by the full force of the river.

By opening the spillway and causing all this damage that will require months to dry out and repair it will only lower the crest of the Mississippi at New Orleans by a foot. The river is expected to crest at 19.5 feet and the levees are only rated for 20 feet. Even with the spillway open there is still a chance of levee breakage and serious flooding downstream.

Colored areas will be flooded.

Flood Plain from Corps of Engineers

The Colonial Pipeline, which carries more than 100 million gallons of gasoline, kerosene, heating oil, diesel and jet fuel to terminals in 12 states over 5,519 miles, is located in the flood plain. The pipeline transports fuel from refineries in Houston, Louisiana and Mississippi to the northeast. Officials are worried the pipeline could suffer structural damage by the raging floodwaters. That could cause months of delays and impact the price of fuel all along the east coast. If it was damaged to the west of the Mississippi there would still be a large number of refineries on the east side that could still feed fuel into the system so there would not be a complete shutdown, just a decrease in the amount of volume. Louisiana has 17 active refineries and nine are in danger of flooding.

Exxon said it had already shutdown three pipeline segments in the danger zone and they were in the process of purging oil from the lines to prevent spills in case of damage. They are refilling the lines with fresh water to reduce the chance of empty pipes becoming buoyant and tearing away from their foundations. Magellan Midstream partners discontinued operations at two of its terminals on the river because of the flood. Magellan said it had no estimates when it would reopen the 2.8 million barrel terminal in Marrero.

Colonial Pipeline System

Even without a serious crisis developing in the flooded region it will remove tens of billions of dollars from GDP and impact prices of multiple commodities. The flood higher up the river and into the Ohio river has already flooded hundreds of thousand of acres of farmland and wiped out crops and stalled barge traffic of ore, grains and oil products. This is another hit to the U.S. recovery that we did not need.

The impact of the flood upriver is a disaster to the agricultural community. The rains and flooding have caused 2.3 million acres of cropland not to be planted. More than 1.1 million acres of that was scheduled for corn. Currently only 40% of the nations anticipated corn crop has been planted compared with 80% in the same week in 2010. Only 22% of the wheat crop has been planted compared to 65% in 2010.

On the flip side the severe drought in Texas and Oklahoma has caused 35% of the crops already planted to be abandoned. Some areas have seen no rain for up to 60 days and the heat has been scorching for new crops. That 35% had just sprouted and then died for lack of moisture.

The Waterford 3 nuclear plant is also in danger of being flooded. Currently the plant is offline for refueling and they are taking precautions to prevent a disaster. As in Japan, a country that stupidly built plants in tsunami zones, you have to wonder who approved building a nuclear plant in Louisiana in flood zone?

The Louisiana region is used to getting hit from the south by hurricanes, the season starts June 1st, but they have not had a flood from the north of this magnitude since 1927.

The flood will be the headline topic all next week and will completely overshadow the dwindling earnings calendar. The other headline for next week will be the debt ceiling. The $14.29 trillion debt ceiling is expected to be reached as early as Monday according to Treasury estimates. The Treasury Dept has already begun to take emergency measures that will let it operate until August 2nd with no change in the limit. On August 2nd the government would have to shutdown in order to conserve cash for debt payments.

Temporarily they have suspended payments and transfers for some services from state and local governments. They have also halted some borrowings for the civil-service fund. As the days drag by they will have to continue to limit other spending measures. Senators have pointed out that 67% of all government spending comes from tax revenue and debt service only accounts for 6.5% of all government spending so there is plenty of cash to prevent a default. That is not the problem even though some politicians and public officials would have you believe a default is imminent.

The government could also sell assets like student loans ($400 billion) or pare down their gold reserves ($400 billion). It also has giant equity stakes in GM and AIG that are worth billions and the administration would love to see those go away before Election Day.

The coming debt limit battle is going to be ugly and it is sure to depress consumer sentiment and investor confidence. Based on the latest estimates the ceiling will have to be raised by another $2 trillion to keep the government running until after the next election. That means the current administration and the Congress is going to have a heated battle that will take place in sound bites and headlines and that battle is going to increase in intensity beginning next week. It is likely to weigh on the market simply because of the uncertainty around what programs will be cut and what taxes will be raised.

In stock news Yahoo (YHOO) continued to decline on Friday by another -4% after the company disclosed a problem with Alibaba.com earlier in the week. Yahoo is a 43% shareholder in Alibaba.com and the company's various businesses. Earlier this week Yahoo disclosed that Alibaba had transferred ownership in Alipay, a payment processor like PayPal and a key asset of Alibaba, to another company owned by the CEO of Alibaba. This not only significantly weakens the $1 billion investment in Alibaba but it also reveals a problem in the partnership. Alibaba claims the transfer took place over a year ago but Yahoo did not find out about it until March 31st. Furthermore Yahoo did not disclose the information to shareholders as a material event when they reported earnings on April 19th.

The asset sleight of hand by Alibaba's CEO also highlights the problems of trying to do business in China where there is no rule of law. It is pretty much anything goes and buyer beware. Even Google, the most powerful Internet company, was unable to successfully do business in China. Analysts believed Yahoo's investment in Alibaba was worth $8-$10 per share and roughly half of Yahoo's stock price last week at $18.50. Now analysts are revising their numbers to eliminate the Alipay asset. A Gleacher analyst said he believes Alipay was worth 65-cents per share to Yahoo or $850 million. Yahoo said they "hope" to be compensated by the loss of the Alipay asset. Without Alipay and with the apparent internal feud brewing the value of Alibaba to Yahoo may be significantly lower. Yahoo CEO Carol Bartz, often known for her fiery and profanity laced speech, probably needed to have her office repainted after she learned of the transfer. The office would have been scorched from the inside out from the resulting tirade. Bartz will have some explaining to do when Yahoo holds its analyst meeting on May 25th.

Yahoo Chart

AIG announced its plans to go ahead with a 300 million share offering with 200 million to be sold by the US Treasury and 100 million by AIG. The Treasury has committed an additional 45 million for over allotments. The decision was made to go ahead with the offering even though the stock price has been falling since January. The breakeven price for the Treasury Dept shares is $28.72 per share. The government has repeatedly said it would not sell its shares for a loss and can still pull out if the price falls below their breakeven level. The offering is expected to raise $9 billion with $6 billion going to the Treasury Dept. AIG would get $3 billion and will use $550 million to fund part of a litigation settlement with the remaining balance to be used in operations.

AIG paid the Treasury Dept $7 billion in March to lower its debt to $60 billion. The government owns 92% of AIG with that expected to decline to 77% if the offering is successful. The outlook for AIG has soured since January. The company has sold off some key assets and very profitable businesses. This has weakened their potential performance. Investors are also worried about AIG's ability to perform once the government removes its financial support. AIG currently has $37 billion in an undrawn credit line with the government. That will likely end before the election. I would say the odds are good the Treasury Dept will own a substantial part of AIG for a very long time. Having AIG owned by the government and dependent on government credit lines will be a critical issue in the coming election. Voters were strongly against bailouts and having this one lingering in the background will give opponents plenty of ammunition.

AIG Chart

Rambus (RMBS) was kicked to the curb after an Appeals court determined the technology company destroyed key documents in patent suits with Micron and Hynix Semiconductor. Rambus had won a patent suit and $397 million settlement against those companies. The Appeals court threw out the settlement and sent the case back to the lower courts. The district court will now try to decide if Rambus acted in bad faith and if those actions ruled the settlement invalid. Rambus said they were very disappointed by the court decision. This is the third time Rambus has been to court to prove it did not destroy documents. Shares of Rambus declined by 18% on the news.

Rambus Chart

Market sentiment took a serious hit the last two weeks. The new highs on May 1st eroded on what was initially thought of as normal profit taking but now it appears there are more problems than just profit taking. For the last three years the market has declined in May and unless something changes quickly it looks like this will be the fourth.

The basic problem is the suddenly weakening economics. I think I must have read or heard the word stagflation at least ten times last week. I think we are far from a stagflation event as evidenced by the PPI/CPI last week but the stagnant part could be upon us. The sudden decline in the last round of regional economic reports suggests the economy is still growing but the pace could have slowed by more than half. The first reading on the Q1 GDP dropped to +1.75% growth from +3.1% in Q4. That number could decline when it is revised on May 26th. Even worse that is for Q1 and the sudden decline in activity did not happen until April and won't be reflected in the GDP until the first report at the end of July. Q2 will also bear the brunt of the flood impact and the break in the supply chain from Japan so Q2 GDP could be under +1.0%.

Employment is the key and employers are no longer that confident about hiring because lawmakers are talking about new taxes and lower deductions and the economy appears to be slowing. They don't want to over commit to hiring and then have the recovery stall. Housing prices are still falling and credit is becoming harder to get as each day passes. The double drag of housing and employment is going to be tough to overcome.

The ECRI Weekly Leading Index appears to have topped out at downtrend resistance and is struggling to hold its gains. This composite index is reportedly a leading indicator of key turning points in the economic cycle. The dip in 2010 was what caused all the worry over a double dip recession. Fortunately it did not come true but that is when the growth in GDP growth dipped back to +1.7%. The WLI pointed the way but the move was not completed. It is time we started watching this weekly indicator again. If it dips below 128.0 it would be an early warning signal. Last week was 129.7.

ECRI Weekly Leading Index Chart

The Q1 earnings cycle started out with the number of companies beating the estimates up around 76% and very high compared to the normal 67% beat rate. However, with more than 1800 companies now reported the beat rate has fallen to only 60% because the recent reporters have been turning in quite a few misses. This is the lowest beat rate since 2008-Q4 when the recession was in full bloom.

Apparently investors are picking up on these facts and we hear a lot in the press about the "risk off" trade. That means investors are moving to cash or cash equivalents like TIPS, treasuries and money market funds to wait out the storm. There was never a lot of confidence in the market in 2011 to begin with. Volume since January has been very low and that shows a lack of conviction. We know for a fact that QE2 provided the majority of the gains since August. Now that QE2 is coming to an end investors are confused about direction. Evidence of the move from risk assets can be seen in the drop in interest rates. The chart below is the Treasury 13-week T-Bill with a yield of a whopping .02%. The flight to quality is in full swing.

Treasury 13-Week T-Bill Chart

Interest rates are also falling because of a sudden flurry of analysts claiming the Fed will have to resort to more stimulus to keep the economy from falling back into a recession. Former Fed Vice Chairman Alan Blinder told Bloomberg last week the U.S. needs "somewhat more" fiscal stimulus once again in order to boost employment. He believes the current austerity program being discussed by lawmakers should be implemented but not yet, otherwise the fragile economy will suffer. Put the plans in place for 3-5 years down the road but wait for an actual recovery to start the budget trimming.

Obviously Blinder is on the "spend ourselves to prosperity" program. Given the current makeup of the House and Senate there will be no material budget cuts or spending increases for the next two years so Blinder does not have to worry about austerity getting in the way of the recovery. Since lawmakers are not going to pass any further stimulus programs it will be up to the Fed to follow through on its dual mandate of "low unemployment and price stability."

On Friday Goldman's Sven Jari Stehn released a paper titled "Fiscal Adjustment without Fed Easing: A Tall Order" in which he compares the two paths to austerity and concludes it will be up to the Fed to provide more monetary policy accommodation (QE3) in order to keep the economy from backsliding. Stehn compared the two proposals to achieve trillions in budget reductions and concluded neither would work. Republicans want spending cuts and democrats want tax hikes. Neither is going to happen in the current political environment. He analyzed 29 efforts to cut the budget by 1% of GDP or more over the last several decades based on U.S. data and studies produced by the IMF on similar events in other countries. Stehn found that on average the spending cut model was more effective but it only truly worked when done in parallel with monetary easing. Since interest rates are already zero the only option available to the Fed is more quantitative easing.

Stehn also argued that in either fiscal case the drag on economic growth will be substantial. In our current reality Stehn found regardless of the austerity method the economy will slow dramatically but without additional monetary easing it will crash. Based on his analysis of our current situation he expects the Fed to remain on hold or to be even more accommodative to keep rates at low levels for a long time. Translated that means some form of QE3.

That would be positive for commodities and equities if it appeared the Fed was going to continue pushing the dollar lower. Commodities were hit again on Friday after China hiked reserve rates by another half a point effective May 18th. They announced the hike after their inflation rate for April remained high at 5.3%. This was the fifth hike this year as China tries to slow inflation to the official target of 4%. Oil, silver and copper finished with gains but well off the highs for the day. Gold declined $12 to $1494.

Oil prices are struggling to hold support at $98 with the dollar closing at the highest level since April 5th. The dollar spike will not hold. The worry over Greece will eventually fade as the EU applies Band-Aids to the problem. When the dollar begins to slip again the price of crude will rebound. We are moving into the high demand driving season and prices normally rise.

Dollar Index Chart

WTI Crude Oil Chart

The Russell 2000 declined -1.4% on Friday compared to the OEX at -.7%. The Russell is the small cap index and the OEX is the top 100 stocks in the S&P. This seems to confirm some traders are becoming risk averse and are moving from the higher beta small caps to the safety of lower beta big caps. They may not be leaving the equity market for the safety of zero percent bonds but they are altering their risk profile.

The S&P-500 posted another lower high on Thursday and unfortunately the new pattern looks bearish with a potential break below support. That support is 1333 and a print below 1328 would be a lower low to confirm the current pattern of lower highs. We could dip to 1295 and hold but I would read that as a break in the trend and worry it would mean we were going a lot lower over the summer.

Remember, when we hit 1365 on the S&P we filled quite a few analyst targets. There are still higher targets in the 1375-1425 range with one all the way up at 1525. However many analysts were more conservative and in the 1350 range. When their targets are hit they have two choices. They can change their target to something higher and appear to have been wrong on the first target or they can advise their clients to start taking advantage of any additional advances to exit positions at a profit. That way they look smarter and they can use any future advances as an exit ploy rather than "I was wrong."

There are still plenty of analysts calling for higher highs but their voices have softened a lot over the last two weeks. Now we are hearing the terms soft patch, profit squeeze and uncertainty a lot more often. Repetitive phrases eventually become accepted as reality and traders begin to take action on those phrases.

S&P-500 Chart - 90 Min

S&P-500 Chart - Daily

The Dow chart is similar to the S&P only at a higher level. The blue chips in the Dow have been benefiting from their better earnings performance and the move into lower beta names. So far support has held but the Dow is still over extended from its +700 point rally in late April. A break below 12,550 could easily test 12,400 or even 12,200 if sentiment continues to deteriorate.

Dow Chart

The Nasdaq has been struggling without the help of Apple and Google. I showed the Apple chart last week and the shares broke out of the downtrend channel on Friday. Google also broke below a recent consolidation pattern and helped drag the Nasdaq lower.

The Nasdaq closed on critical support at 2825 with a break there targeting 2800. Unless the selling in Apple suddenly ends I doubt 2825 will hold.

Apple Chart

Google Chart

Nasdaq Chart

The longer term chart of the Russell is showing increasing weakness despite a new historic high on May 1st. The momentum has slowed and even though the Russell actually posted a gain for the week it was the biggest percentage loser on Friday. I fell like it was running on hope on Monday and Tuesday but that hope faded quickly after a couple triple digit losses by the Dow.

All is not lost yet. As long as the Russell holds 820 as support, yes it would be a lower low, it would still be in a longer term uptrend. Under 820 could see investors flee ahead of the summer doldrums.

Russell Chart

The Dow Transports have been very bullish in the face of high oil prices. They set a new historic high in early May and then retested that high last week. Friday did see a lower low but given the relative out performance they could decline to 5200 and still maintain a bullish trend.

Dow Transports

In summary I am cautious about market direction. I am not ready to switch into summer bear mode but with several of the indexes on critical support we may only be a day or two away from making that change in trend.

If economics continue to weaken we could be in trouble. Several weeks ago we had strong earnings to capture investor attention and make them ignore the weaker economic reports. That has changed. Earnings have turned negative and now anyone looking for another reason to buy stocks for a summer rally may have trouble finding one.

The conversations about pending Fed action are going to heat up and it will be tough for the Fed to do anything positive for the market. At this point even additional stimulus could be seen as a sign of a weakening economy and a signal to head for the exits. The Fed almost needs to let QE2 end on schedule and the economy weaken so they can make a case for some new monetary policy. None of that would be good for equities.

Add in the uncertainty over commodities, the flood and possible pipeline disruptions that could send gasoline prices soaring and there are some definite potholes ahead. If the bad news bulls want a wall of worry to climb they got their wish.

I would be cautious. Enter passively, exit aggressively.

Jim Brown

Send Jim an email

"If you can count your money, you don't have a billion dollars."
J. Paul Getty


Index Wrap

Friday the 13th Blues

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

Friday saw lows close to piercing near support around 1330 in the S&P 500 (SPX), but the most pivotal technical support is still lower, at 1300. And, who would have thought that as ExxonMobile (XOM) goes, so goes the S&P? I recall hearing about a famous statement from 'engine' Charlie Wilson, then the GM CEO, that "as General Motors goes, so goes the nation". (That might still be true actually!)

This most recent weakness in equities and the bearish sentiment that's come out, suggests that weakness in oil and commodity prices is a 'bad' thing for the overall market. Since when are lower prices for consumers negative? Maybe for some of the affected stock groups only! And what's the big deal with Greece anyway as far as Market impact here? And I hope that the dollar gets stronger still, especially for me personally as I take off for Portugal and Spain, weak sisters of Greece, in 10 days.

I think the XOM chart was at least a 'bellwether' for this recent correction; leading to more of a sideways move in the tech heavy Nasdaq. Did you notice?

Where does the Market go from here? I wrote last week that: "There may however be another somewhat lackluster short-term rally, followed by another minor sell off before there's a stronger and more prolonged rally attempt."

I'm not as sure this week as to how prolonged any next rally will turn out to be. It can't yet be said that the major indexes have made an intermediate top. Technical 'evidence' for that comes only if the prior downswing low is pierced. Not the most recent low, which was only a minor pullback, but talking about the mid-April lows.

Some chartists would say that because the most recent rally peak was a new high, a downside penetration of the lowest intraday low made AFTER this top, becomes the key technical support. I take the view that, for example, 1300-1295 in the S&P 500 (SPX) at the mid-April lows, is key support for SPX, as opposed to the 1329 low of 5/5.

The aspect of current directional momentum is one thing, the other important forecasting note is the likelihood that we're in the SEASON, as we approach Memorial Day, where there are likely to be more two-sided trading swings. This view is based on the chart patterns involved AND a seasonal summer tendency for choppy back and forth price action. You will need to be more cautious about holding outright long or short positions without keeping closer tabs on the short (2-3 days) to intermediate-term (2-3 week) trends. Trading opportunities will come but the subsequent prices swings may not be as big.

Moving Average Watch:

The S&P and the Dow recent Closes have held in the area of their 21-day moving averages and intraday lows in the Nasdaq indices have held at this key average. Even more important is to see if the 50-day moving averages provide support on any further weakness. Piercing the 50-day averages in the major indexes would suggest more weakness than I'm anticipating currently.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart has turned mixed in the short-term as prices trend sideways. Recent lows have gotten near the March 5th reaction low of 1329. I consider the 1300-1295 area of the mid-April bottom to be the pivotal support. SPX has had one close below the 21-day moving average; a close back above this average would be a short-term bullish plus. The SPX 50-day average, at 1323 currently, is even more widely watched; a couple of consecutive closes below this average would have bearish intermediate implications. The main chart consideration is whether the mid-April lows hold as support on further downswings.

Best trader advice repeated from last week: "Given that we're entering a seasonally choppy period, we should wait for trades with compelling technical aspects." Technically 'compelling' trade set ups on the long-side would include indicators at oversold levels like the 13-day Relative Strength Index (RSI) and my 'sentiment' indicator. In chart terms, a bullish set up would exist on a second low that formed around 1300.

I've noted resistance on my SPX daily chart at 1370, the up in the 1400 area. Support is noted (by the green up arrows) at 1320-1323, then at 1300-1295.

RSI and TRADER 'SENTIMENT'

The 13-day RSI is in a neutral area, after declining momentum dating from an overbought 70 in late-April. Around the same time, my sentiment indicator, also seen above, hit an 'overbought' extreme. The ideal for bullish options strategies is to see oversold readings on both along with bottoming action occurring in the chart patterns. Getting into this range for the RSI is less common but worth waiting for. When these indicators get to oversold extremes, accompanied by suitable bottoming or (upside) reversal type price action, helps identify favorable risk to reward trading opportunities on the long-side.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) hasn't held up quite as well as the S&P 500 in that OEX has already one recent intraday touch to its 50-day moving average. Of course, rebounding from this key average is a bullish plus, as long as this continues and there's not a future close or two below the 50-day.

To turn bearish in terms of the chart would be a close below the 577 low of 4/18; the rebound from this area was followed by a bullish upside price gap. Technical support implied by this gap area is at 589-586, although I noted initial support around 590. Must hold support for the bulls is 580-577.

While I didn't highlight it on the chart, 604 is immediate resistance, with 610-611 as a next selling overhang. Fairly major resistance begins in the 622-623 area.

DOW 30 (INDU) AVERAGE; DAILY CHART:

It's been somewhat downhill since the Dow 30 (INDU) average hit the top end of its uptrend price channel, accompanied by an overbought RSI reading. To nail down profits on long DJX calls was a likely good move at that juncture. I try to resist 'holding out' for more all the way up by thinking about whether I would take NEW index call positions at points along the way. If I wouldn't add to call positions, I will tend to exit if prices are also near projected resistance levels, especially if the index also is showing overbought RSI and/or bullish 'sentiment' extremes per my CPRATIO indicator seen with SPX.

If INDU rallies again up toward resistance implied by the upper channel line, which intersects around 13000 currently, I'd not only take call profits but may look to also buy puts based on a favorable risk to reward; e.g., risking 10 DJX points (100 points in INDU), with a downside objective to the Dow 12500-12465 area or lower.

Technical support is highlighted in the 12463 area, then at 12200.

Dow charts with bullish patterns or showing price consolidation only (so far) even after this past week's bearish action is seen with AXP, BA, IBM, INTC, JNJ, KFT, KO, MCD, MMM, MRK, PFE, PG, MMM, T, TRV and UTX. This is just over half of the 30 Dow stocks still in position to advance. The Industrials are holding up quite well here as can be seen with the limited downside seen so far after the recent 12876 top.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) chart remains bullish, although short-term momentum has slowed and turned sideways. As long as 2800 is not pierced, the Composite remains in an uptrend. A move above 2875, then 2887 is needed to achieve a further bullish breakout. An advance above resistance at 2950 would put COMP back above its longer term up trendline.

Key support as noted is at 2800 currently, extending to 2765-2750. The most pivotal support is the prior (down) swing low at 2706; piercing this level on a closing basis would suggest that the intermediate trend had reversed to down.

Overbought extremes in terms of the RSI and my bullish sentiment indicator were seen at the recent 2886 high. As of Friday, RSI is 'neutral' and there was a Friday dip in my sentiment indicator to near 'oversold' readings, showing a build up in bearishness. The chart pattern seen since formation of a line of recent highs, with prices to date holding above COMP's 21-day moving average, maintains a bullish chart. I wrote last week that formation of a possible bear flag suggested downside potential to around 2750, but there wasn't the downside follow through necessary to maintain that interpretation.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) remains bullish as is the case with the Composite. NDX does seem to be nearing a key juncture, as prices seem likely to either turn higher again or start to slide as in a new down leg. Given what we see here on the chart and knowing how much selling pressure was in some key S&P sectors, the Nasdaq is holding up quite well here.

Key resistance in NDX is at 2400-2417, with next resistance implied by the previous up trendline, currently intersecting at 2480.

Pivotal support comes in around 2350, extending to 2306, the low end of the big upside gap of 4/19-4/20. 2315 is support implied by a trendline drawn and extended from just two intraday lows, so it lacks the better 'definition' of a trendline drawn with at least 3 lows; the more such points the better in terms of how reliable the trendline as a guide to future technical support.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) of course has the same pattern (bullish, but with slowing upside momentum) as the underlying NDX index so I won't repeat what I've already said immediately above.

In terms of price levels in QQQ, the key 'line of resistance comes in at 59.2-59.3. Above this area, I've projected resistance at the previously broken up trendline, currently intersecting at 60.5. Key near support is at 58.0, with even more pivotal support at the up trendline, intersecting around 57 currently.

There's nothing noteworthy in QQQ volume patterns here. On Balance Volume (OBV) is trending sideways, reflecting the price pattern. Does a sideways move predict a top formation or consolidation only of the current uptrend? Usually, benefit of the doubt goes to the direction of the prior trend which remains up.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) has fallen back to its up trendline, which is also just above support implied by RUT's 50-day moving average. There's a little more to this picture, as even more key is support implied by the mid-April lows in the 816 area. Only a break below this level would suggest that RUT has turned intermediate-term bearish.

It's worth noting that the last (868) high was at the previously broken up trendline. It's not for nothing this trendline has been called by one analyst I respected for his technical expertise as the 'kiss of death' trendline. Return to what was prior support can be a potent forecast of where selling can come in earnest. What's the potential of the current up trendline to suggest support/buying interest? Not as great as it would be if this was a multi-month up trendline with numerous lows that 'defined' the trendline. So far lows are holding this line however.

Resistance is highlighted in the area of the prior high around 868, then at 883 which would be a return to the resistance trendline already noted.

I wrote last week that I saw "more likelihood for further weakness such as to 800-780 than I do for another immediate challenge ahead to the 880 area." That's still my best bet on how this trend unfolds given the chart pattern as of Friday. However, it really could go either way.



GOOD TRADING SUCCESS!


New Option Plays

Mixed Signals

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. stock market is flashing some mixed signals. Some of the short-term technicals have turned bearish. New relative lows for the banking stocks have been a stumbling block for the market. Strength in the U.S. dollar is definitely having an impact, especially on commodities. Readers may want to take a step back and just wait. Give the market a couple of days to determine its direction. At the moment the S&P 500 has not yet broken the bullish trend of higher lows and higher highs but it certainly looks vulnerable.

- James


NEW DIRECTIONAL CALL PLAYS

Sherwin-Williams Company - SHW - close: 86.20 change: +0.08

Stop Loss: 83.95
Target(s): 92.25, 98.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see Trigger

Company Description

Why We Like It:
SHW has been very resistant to any profit taking. The last couple of weeks have seen shares slowly march higher. Now the stock is challenging major resistance and its all-time highs in the $86.00-86.75 zone. If SHW can breakout it could make a run at the $100 area. Of course that might be hard to do with the market's major indices slipping lower. I would take a cautious approach to new entries here.

I'm suggesting a trigger to buy calls at $87.00. If triggered our first target is $92.25. Our second, much more aggressive target is $98.50. I would not be surprised to see some resistance near the $90 and $95 levels. The Point & Figure chart for SHW is bullish with a $99 target. If the stock can rally past $87 it will produce yet another buy signal.

Trigger @ $87.00

- Suggested Positions -

buy the June $90 call (SHW1118F90) current ask $0.65

- or -

buy the Sept. $90 call (SHW1117I90) current ask $2.50

Annotated Chart:

Entry on May xxth at $ xx.xx
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on May 14th, 2011


NEW DIRECTIONAL PUT PLAYS

Pioneer Natural Resources - PXD - close: 92.15 change: -0.82

Stop Loss: 96.15
Target(s): 85.25
Current Option Gain/Loss: + 0.0%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
PXD is an independent oil and gas company that has seen a very impressive run from its August 2010 lows. Now the rally appears to have run its course. The sell-off in early May was very sharp. The oversold bounce is failing at resistance.

I am suggesting bearish positions now. We do want to keep our position size small to limit our risk because oil and oil stocks have been increasingly volatile lately. I am suggesting a stop loss at $96.15. We'll target a drop to $85.25. More aggressive traders could aim for the rising 200-dma instead. FYI: The Point & Figure chart for PXD is bullish with a $72 target.

Open Small Bearish Positions Now!

- Suggested Positions -

Buy the June $90 PUT (PXD1118R90) current ask $3.00

Annotated Chart:

Entry on May 16th at $ xx.xx
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on May 14th, 2011


In Play Updates and Reviews

Ignoring Good News

by James Brown

Click here to email James Brown

Editor's Note:

The tone of trading may have changed. Stocks are ignoring good news with positive GDP data out of Europe and better than expected consumer sentiment numbers here in the U.S.

I am suggesting we exit our GOOG trade early. We also want to exit our May calls in the JOSB play.

Don't forget that May options expire after May 20th. If you're holding May options you've only got a few days left. Given the market's weakness on Friday readers will want to seriously consider exiting early any bullish positions if you're holding May calls. A market decline now will have a large negative impact on May options.

-James

Current Portfolio:


CALL Play Updates

Apple Inc. - AAPL - close: 340.50 change: -6.07

Stop Loss: 339.40
Target(s): 374.00, 395.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see trigger

Comments:
05/14 update: Uh-oh! Trading in AAPL has taken a turn for the worse. After more than two weeks of bouncing from support near $345 the stock has broken down under a cloud of moving averages. Shares are now trading underneath their 10, 20, 30, 40, 50 and 100-dma. The $340.00 level might offer some support but for the moment the short-term trend is down.

Currently our trigger to buy calls is at $352.50. That may not happen any time soon so we might want to watch for potential support near $330 as a possible entry point instead.

Buy-the-breakout Trigger @ $352.50

- Suggested Positions -

Buy the June $370 calls (AAPL1118F370)

- or -

Buy the July $380 calls (AAPL1116G380)

chart:

Entry on May xxth at $ xx.xx
Earnings Date 07/20/11 (unconfirmed)
Average Daily Volume = 16.6 million
Listed on May 2nd, 2011


Alexion Pharma. - ALXN - close: 99.53 change: -1.34

Stop Loss: 95.75
Target(s): 104.85, 109.00
Current Option Gain/Loss: -34.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/14 update: ALXN tried to rally this morning but the stock failed at the $102 level. The close under $100.00 is short-term bearish but ALXN should have some short-term support in the $98-96 area. Given the stock market's weakness on Friday I would wait for a new bounce from ALXN before considering new bullish positions.

The $105 level is overhead resistance so we'll set our first target at $104.85. Our second, more aggressive target is $109.00. However, we may choose to exit prior to the 2-for-1 split.

FYI: ALXN has a 2-for-1 split payable on May 20th. Shares will begin trading post split on May 21st.

- Suggested Positions -

Long the June $105 call (ALXN1118F105) Entry @ $2.35

chart:

Entry on May 13th at $101.00
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 832 thousand
Listed on May 12th, 2011


Amazon.com - AMZN - close: 202.56 change: -3.51

Stop Loss: 198.00
Target(s): 213.50, 219.75
Current Option Gain/Loss: -33.1%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/14 update: Our new AMZN trade may not last very long. Shares opened at $205.70, briefly traded to a new high, and then reversed. Profit taking produced a -1.7% decline. AMZN should have some short-term support at its 10-dma and at the $200.00 level but if the stock market accelerates lower I do not believe these levels will hold. I would wait for a new bounce in the $201-200 area before considering new bullish positions.

Prior Comments:
I consider this an aggressive, higher-risk trade because AMZN can be a volatile stock at times. We'll try and limit our risk with small positions and a stop loss under $200. Our upside targets are $213.50 (thanks, Jeff!) and $219.75. FYI: The Point & Figure chart for AMZN is bullish with a $242 target.

- Suggested (SMALL) Positions -

Long the June $215 call (AMZN1118F215) Entry @ $3.65

chart:

Entry on May 13th at $205.70
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 6.4 million
Listed on May 12th, 2011


Express Scripts - ESRX - close: 59.92 change: +0.13

Stop Loss: 56.75
Target(s): 64.00, 68.50
Current Option Gain/Loss: +10.4% & + 0.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/14 update: ESRX ended the week on a high note but was unable to breakout past resistance at the $60.00 level. If the stock market continues lower we should expect ESRX to dip towards short-term support near $58.50 or the $57.00 levels. I am not suggesting new positions at this time. We'll wait and see if ESRX produces a dip next week. Our targets are $64.00 and $68.50. FYI: The Point & Figure chart for ESRX is bullish with a $72 target.

- Suggested Positions -

Long the June $60 call (ESRX1118F60) Entry @ $1.53

- or -

Long the August $60 call (ESRX1120H60) Entry @ 3.15

chart:

Entry on May 10th at $59.21
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume = 4.6 million
Listed on May 9th, 2011


Fastenal Co. - FAST - close: 66.61 change: -0.43

Stop Loss: 63.75
Target(s): 69.50, 74.00
Current Option Gain/Loss: -20.4% & -40.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/14 update: Unfortunately FAST has not been very fast. The stock has gone nowhere for two weeks with this consolidation under resistance near $67.50. The simple 50-dma has risen to $64.57 so I am raising our stop loss to $64.49. I am not suggesting new positions at this time.

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


FactSet Research Systems - FDS - close: 109.50 change: -1.79

Stop Loss: 106.40
Target(s): 114.75, 119.50
Current Option Gain/Loss: -46.3%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/14 update: Our new trade in FDS has been opened. Profit taking on Friday produced a -1.6% decline and a close under what should have been support near $110. The next level of potential support looks like the $108 level. We had a trigger to buy calls on a dip at $110.25. Given the stock market's recent weakness I would look for buy calls on a dip near $108.25 now. Our targets are $114.75 and $119.50.

Please note that this is a higher-risk, more aggressive trade because FDS doesn't have a lot of option volume and the option spreads are a little too wide. Keep your position small to limit our risk.

(small positions only!) Suggested Positions

Long the June $115 call (FDS1118F115) Entry @ $2.05

chart:

Entry on May 13th at $110.25
Earnings Date 06/15/11 (unconfirmed)
Average Daily Volume = 211 thousand
Listed on May 10th, 2011


International Business Machines - IBM - close: 169.92 change: -2.32

Stop Loss: 165.90
Target(s): 174.75, 179.50
Current Option Gain/Loss: + 30.7%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
05/14 update: Ouch! After showing relative strength on Thursday IBM gave back almost all of its gains. Shares spent a good portion of Friday just hovering near the $170 level. The larger trend for IBM is up but given the market's weakness on Friday I am reluctant to launch new positions here.

Our first target is $174.75. Our second and final target remains $179.50. FYI: The Point & Figure chart for IBM is bullish with a $208 target.

- Suggested Positions -

Long the June $170 calls (IBM1118F170) Entry @ $2.60

05/12 Adjusted first target to $174.75
05/10 New stop loss @ 165.90

chart:

Entry on May 5th at $167.50
Earnings Date 04/19/11
Average Daily Volume = 4.8 million
Listed on April 27th, 2011


Illumina Inc. - ILMN - close: 76.26 change: +1.03

Stop Loss: 69.90
Target(s): 79.50, 84.00
Current Option Gain/Loss: +20.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/14 update: ILMN displayed relative strength on Friday and hit a new all-time high as we expected. Shares do look a little bit overbought here. With the major market indices looking vulnerable we may want to wait on initiating new positions. ILMN should have some support in the $74.00-72.00 area.

Our targets are $79.50 and $84.00. The Point & Figure chart for ILMN is bullish with a $90 target.

FYI: The most recent data listed short interest in ILMN at 22% of the 121 million-share float.

- Suggested Positions -

Long the June $75 call (ILMN1118F75) Entry @ $2.75

chart:

Entry on May 11th at $74.50
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on May 10th, 2011


Jos. A Bank Clothiers - JOSB - close: 55.12 change: -0.39

Stop Loss: 51.75
Target(s): 59.50
Current Option Gain/Loss: + 28.5% and +40.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/14 update: It's time to take profits on our May options. JOSB looks pretty bullish here but I suspect the stock is ready for a pause. We want to go ahead and lock in a gain and exit the May calls. Look for a dip into the $54-53 zone. Readers can use dips near $53.00 as a new entry point.

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

- Suggested Positions -

May $55 calls (JOSB1121E55) entry @ $0.70, exit @ 0.90 (+28.5%)

- or -

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

05/14 Exit the May calls. May $55 call @ 0.90 (+28.5%)
05/12 New stop loss at $51.75

chart:

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


NetApp, Inc. - NTAP - close: 53.99 change: +0.00

Stop Loss: 50.75
Target(s): 58.00
Current Option Gain/Loss: - 1.0%
Time Frame: about 3 weeks
New Positions: see below

Comments:
05/14 update: Shares of NTAP were upgraded this morning but the news had little impact on the stock. Shares opened higher but quickly retreated and spent the whole day consolidating sideways near $54.00. This is the third day in a row NTAP has been hovering near $54. If you are looking for a new entry point I would wait for a dip near $53.00 and its 100-dma. Our target to exit is the $58.00 mark.

NOTE: We do not want to hold over the late May earnings report. The date is still unconfirmed. This gives is about two or three weeks as our time frame.

- Suggested Positions -

Long the June $55 calls (NTAP1118F55) Entry @ $1.90

chart:

Entry on May 9th at $ xx.xx
Earnings Date 05/25/11 (unconfirmed)
Average Daily Volume = 5.8 million
Listed on May 7th, 2011


O'Reilly Automotive - ORLY - close: 60.90 change: -0.27

Stop Loss: 57.75
Target(s): 62.75, 67.25
Current Option Gain/Loss: + 4.7% & +18.1%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/14 update: ORLY has been inching higher this past week. Yet in spite of the trend I am reluctant to chase it here. There is a very good chance that ORLY will retest the $60 level or the $59.00 level soon, especially if the market continues to sink. Readers may want to exit their May $60 calls immediately. The plan was to keep our position size small to limit our risk.

- Suggested (Small) Positions -

Long the May $60 calls (ORLY1121E60) Entry @ $1.05

- or -

Long the June $60 calls (ORLY1118F60) Entry @ $1.65

05/14 Consider exiting the May calls now!

chart:

Entry on May 4th at $60.15
Earnings Date 04/27/11
Average Daily Volume = 1.1 million
Listed on April 30th, 2011


Powershares QQQ ETF - QQQ - close: 58.41 change: -0.70

Stop Loss: 56.99
Target(s): 64.00
Current Option Gain/Loss: -33.8% & -25.0%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
05/14 update: After two weeks of consolidating sideways the short-term technical indicators for the NASDAQ-100 index and the QQQ have turned bearish. There is a growing chance that the QQQs will see a pull back toward their 50-dma near $57.00. I am not suggesting new positions at this time. Our upside target is $64.00. The Qs don't move very fast so we'll have to be patient.

- Suggested Positions -

Long the June $60 calls (QQQ1118F60) Entry @ 0.59

- or -

Long the July $60 calls (QQQ1116G60) Entry @ 1.00

05/12 New stop loss at $56.99

chart:

Entry on May 4th at $58.15
Earnings Date --/--/--
Average Daily Volume = 50 million
Listed on April 30th, 2011


ProShares Ultra(long) S&P 500 - SSO - close: 54.32 change: -0.86

Stop Loss: 52.75
Target(s): 59.00
Current Option Gain/Loss: -28.7% and -21.0%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
05/14 update: The S&P 500 and the SSO have not broken down yet but they certainly look vulnerable. Upward momentum has stalled and short-term technical oscillators are turning bearish. More conservative traders may want to lighten up on their positions and/or raise their stop loss. I am not suggesting new positions at this time.

The SSO is twice as volatile as the market so we want to keep our position size small. Our multi-week target is the $59.00 level.

Small Positions Only - Suggested Positions -

Long the June $56 call (SSO1118F56) Entry @ $1.60

- or -

Long the September $60 call (SSO1117I60) Entry @ $2.00

chart:

Entry on May 5th at $54.39
Earnings Date --/--/--
Average Daily Volume = 11.3 million
Listed on May 4th, 2011


Tractor Supply Co. - TSCO - close: 61.89 change: -1.02

Stop Loss: 56.99
Target(s): 69.00
Current Option Gain/Loss: + 0.0% & +25.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/14 update: TSCO gave up -1.6% on Friday. Overall nothing has changed. I'm still bullish on TSCO but we will want to wait for dips near $60.00 again before launching new positions.

There is resistance at $65.00 but I'm setting our profit target at $69.00. More conservative traders may want to take profits at $64.80 and then sell the rest at $69.00.

- Suggested Positions -

Long the June $65 call (TSCO1118F65) Entry @ $1.00

- or -

Long the July $65 call (TSCO1116G65) Entry @ $1.20

chart:

Entry on May 11th at $61.62
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 958 thousand
Listed on May 10th, 2011


Union Pacific - UNP - close: 100.46 change: -1.97

Stop Loss: 98.95
Target(s): 109.00, 114.00
Current Option Gain/Loss: -34.5%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/14 update: Railroad stocks were hit hard on Friday. UNP lost -1.9%. Shares are now testing round-number support at the $100 level. This should be a new bullish entry point. Unfortunately most of the technical indicators on the daily chart have turned bearish. Readers will want to wait for a bounce from current levels before considering new positions. Our targets are $109.00 and $114.00. FYI: The Point & Figure chart for UNP is bullish with a $116 target.

- Suggested Positions -

Long the June $105 call (UNP1118F105) Entry @ $1.62

chart:

Entry on May 9th at $102.19
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on May 7th, 2011


United Technologies Corp. - UTX - close: 88.98 change: -0.59

Stop Loss: 83.49
Target(s): 89.50, 94.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see trigger

Comments:
05/14 update: Surprise, surprise, nothing has changed with UTX. In spite of a little volatility on Friday morning the stock is still consolidating sideways inside the $88-90 zone. There is no change from my prior comments.

We have two different triggers to open positions here. One is a buy-the-dip entry point at $86.50 with a stop loss at $84.75. Another one is a breakout entry point at $90.75 but with very small positions and a stop loss at $87.75.

If UTX hits $86.50 first then our targets are $89.50 and $94.75. If UTX hits $90.75 first then our targets are $94.75 and $98.50.

Buy-the-dip Trigger @ $86.50
-OR-
breakout @ $90.75 and use small positions to limit our risk!

- 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


Wynn Resorts Ltd. - WYNN - close: 146.27 change: -0.56

Stop Loss: 146.40
Target(s): 159.75, 169.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see Trigger

Comments:
05/14 update: The last couple of days have been quiet ones for WYNN. The stock is churning inside the $145-150 zone. I don't see any changes from my prior comments. If WYNN can breakout to a new multiyear high it could spark some short covering and a run at its all-time highs.

This stock can be somewhat volatile so I am suggesting we keep our position sizes small to limit our risk. We'll use a trigger to buy calls at $152.00. If triggered at $152.00 our targets are $159.75 and $169.00. The $160 and $170 levels look like potential resistance.

Trigger @ $152.00

- Suggested Positions -

Buy the June $160 calls (WYNN1118F160) current ask $2.15

chart:

Entry on May xxth at $ xx.xx
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume = 2.1 million
Listed on May 11th, 2011


CLOSED BULLISH PLAYS

Google Inc. - GOOG - close: 529.55 change: -5.50

Stop Loss: 529.00
Target(s): 549.00, 558.00
Current Option Gain/Loss: -90.0%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
05/14 update: I'm throwing in the towel for this GOOG trade. What was supposed to be a quick bounce higher stalled at resistance. GOOG spent two weeks going sideways. Now shares are flirting with a breakdown under the $530 level. The low today almost hit our stop loss. I am suggesting an early exit now before these out of the money May options vanish altogether. Of course most of the damage has been done. More aggressive traders could let it ride. At this point odds are these options will expire worthless.

Prior Comments:
Keep positions small. This is a very aggressive, higher-risk trade. May options expire after the 20th.

(Very Small Positions) Suggested Positions:

May $550 call (GOOG1121E550) Entry @ $3.00, Exit @ 0.30 (-90%)

05/14 Exit early. GOOG @ 529.55. Option @ -90%
05/09 New stop loss @ 529.00
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