Option Investor
Newsletter

Daily Newsletter, Saturday, 5/28/2011

Table of Contents

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

Market Wrap

Four In A Row

by Jim Brown

Click here to email Jim Brown

The major indexes completed their fourth consecutive week of losses with the exception of the Russell 2000 and NYSE Composite. The NYSE was higher thanks to influence from the energy sector.

Market Statistics

It was definitely a holiday Friday; the news was light and volume even lighter. Only 5.3 billion shares traded and the lowest since April 25th, the Monday after Easter. Everyone was focused on their plans for the holiday weekend rather than trading.

More than 35 million people will travel over the weekend and 31 million of those will travel by car. That is an increase of +0.5% over 2010. They are fortunate that the national average for gasoline has declined to $3.81 per gallon and as low as $3.60 in the Midwest. Only New York, California, Chicago and DC are still averaging about $4.06 per gallon.

Two surveys were taken last week and the results were slightly different. In one survey 76% of the responders said the high gasoline prices were impacting their plans for the weekend. However, in the other survey 65% said it would not change their plans for driving. The way I read that is simple. The distance to grandma's house or the beach has not changed. If you always go to a relative's house or the lake for Memorial Day then your distance traveled will not change. However, reading the headline from the second survey in another way it suggests 35% of consumers DID change their plans because of high gasoline prices.

Friday's Consumer Sentiment Survey showed an unexpected rise in sentiment to 74.3 from 72.4 for May. That is a +4.5 point increase from the April reading. The complete March decline has not yet been erased but we are making progress. The present conditions component declined slightly from 82.5 to 81.9 but the expectations component rose sharply from 61.6 to 69.5. Inflation expectations declined from 4.6% to 4.1%.

Analysts seem to believe we went through a soft patch in March and early April and that softness is easing thanks to the falling gasoline prices and the worry over a nuclear disaster in Japan spreading to the USA that failed to come to pass.

Consumer Sentiment Chart

It is strange that sentiment improved as well as it did with another report showing Pending Home Sales Index for April declined by -11.6% to 81.9 from 94.1. Analysts blame the drop in contract signings to severe weather and rising oil prices. The index fell in all regions with the exception of the Northeast. Nationally sales are now -26.5% below the April 2010 level. That was the end of the homebuyer tax credit and the cyclical peak in the index. Obviously making comparisons to that period are going to be tough. Sales slipped to the lowest level since Sept 2010.

On the flipside home affordability today is at an all time high. Foreclosures are expected to decline by year-end and the summer buying season will help reduce some of the excess inventory on the market.

Moody's Pending Home Sales Chart

The economic calendar for next week is packed full of critical events. Three different ISM reports culminating with the national ISM on Wednesday. Expectations are for a decline in the Chicago and national ISM reports.

Also on the list are three employment reports led by the ADP report on Wednesday and ending with the Non-Farm Payrolls on Friday. That is the most important report for the week and even more so after the sharp downturn in the regional Fed surveys. However, everyone expected a sharper decline in hiring last month and it did not happen. Will hiring in May also be better than expected? Estimates are for a gain of 185,000 jobs compared to the +244,000 gain in April.

The national ISM and the Non-Farm Payrolls are going to be the major potholes in the market's path next week.

Economic Calendar

Friday's equity rally was powered by a sharp decline in the dollar because of the continued decline in our economic reports. This was a reaction to the lackluster +1.8% GDP growth for Q1 that was reported on Thursday. The sharp drop in the dollar was accentuated by a +1.50 rise in the Euro. The dollar was weak because a sagging economy suggests it may be a long time before the Fed begins to raise interest rates. The Financial Times reported a Eurozone officer as saying China may buy euro bonds in June and that would reduce demand for U.S. treasuries. The ECB raised its interest rate to 1.25% in April compared to the Fed's interest rate at less than 0.25%. Analysts believe the Fed will not increase rates until 2012-Q1 at the earliest. If the economy continues to weaken it could be a lot longer.

Dollar Index Chart

Euro Chart

In stock news Broadcom (BRCM) moved sharply higher after FBR Capital Markets said they had the potential to become one of the world's largest suppliers of chipsets for smartphones. FBR added Broadcom to their "top picks" list. They rate the company an outperform. FBR believes Broadcom is poised to benefit from the rapid growth of the 4G smartphone mania. Broadcom reported a weak view of Q2 revenue when they reported earnings. They said weakness in orders from major customers was the reason. FBR feels this is a temporary pause in what will be an increasingly busy market.

Broadcom Chart

Another chipmaker, Marvell Technology (MRVL) survived missing estimates by a penny on Thursday night and rallied +11% on Friday thanks to some strong guidance. Marvell reported earnings of 29-cents with analysts expecting 30-cents. Shares initially declined but immediately reversed after the company raised estimates for Q2 and the full year. Marvell said Q1 would be the low point for the year and projected earnings of 37-cents for Q2 compared to analyst estimates for 34-cents. Marvell predicted revenue from the mobile and wireless market to grow in excess of 20%.

Marvel Chart

Abbott Laboratories (ABT) got its second dose of bad medicine on Thursday when federal scientists halted a large study of the drug Niaspan when it failed to reduce heart attacks and slightly increased the number of strokes among patients in the study. Niaspan is an extra strong prescription strength dose of a form of Niacin that raises good HDL and lowers LDL and triglycerides. Raising good cholesterol (HDL) was thought to reduce the impact of the bad cholesterol (LDL) and lead to fewer heart attacks. It is not without some serious side effects but it does work well in patients that are either not getting the desired results with a statin drug or are allergic to statins.

I have taken Niaspan in the past because I am allergic to statins so I paid particular attention to the news on Friday. Niaspan has been taken for decades and it is a fairly expensive drug at $325 per month for the 2,000MG per day dose. I am sure it will continue to be sold and be effective for its original purpose. They just can't claim the rise in HDL will reduce heart attacks. Abbott received just over $900 million in revenue from Niaspan in 2010. Several analysts slashed their estimates by half for 2011 to account for a possible decline in sales.

Only a week ago Abbott was told by a panel of advisers that the drug Trilipix would need to be relabeled to indicate that it failed to lower heart attacks in a study of diabetics. Trilipix is a fibrate that was advertised to lower triglycerides while boosting HDL.

Abbott's cholesterol drugs account for $2.6 billion or 7% of its total revenue. The small drop because of the label changes in both these drugs should be inconsequential toward Abbott's earnings. They will likely offset any decline in sales by cost cutting or repricing to account for the drop. Wells Fargo cut 6-cents from their projected 2010 earnings of $4.90 per share. That lessened the impact to the stock to a decline of only 59-cents on Friday but there was a dollar loss on Thursday as well.

Abbott Chart

Medco Health Solutions (MHS) was crushed on Friday after Blue Cross Blue Shield chose CVS Caremark (CVS) over MHS for a three-year contract worth $3 billion. MHS had the contract and filled 9.8 million mail-in prescriptions for Blue Cross but BCBS opted to renew the contract with CVS instead of MHS. Medco earnings won't be impacted until 2012 because the existing contract still has time remaining. Lazard Capital said the contract was worth 35-cents a year in earnings for MHS or roughly less than 10% with projected earnings in the $4.07 range. MHS lost -9% while CVS gained +2%.

Medco Chart

Polo Ralph Lauren (RL) was knocked for a major loss on Wednesday after reporting earnings that missed street estimates. RL dropped -$14 on the news. By Friday's close they had gained $11 of that back. Several analysts reiterated their buy ratings on the stock and went out of their way to call the drop a buying opportunity. Obviously somebody was listening.

Polo Ralph Lauren Chart

Lululemon Athletica (LULU) continued its plunge from a harsh downgrade on Thursday. FBR cut their rating to underperform (aka "reduce" rating) from market perform or neutral. Analyst Lizabeth Dunn said the shares were priced to perfection and there was earnings risk for the June 10th earnings. A Nomura analyst reiterated his "reduce" rating and a price target of $47. LULU closed at $90 on Friday.

LULU Chart

Happy Memorial Day and welcome to the official start of the summer doldrums. To celebrate the kickoff of summer most people eventually end up at a group barbecue or dinner of some sort. This year it will cost a lot more to feed the hungry mob because of the rise in food inflation. One survey estimated it would cost $199 to feed a group of twelve. That is a $45 increase over Memorial Day 2010.

The cost of food has rocketed higher over the last year but fortunately that is not included in the government's inflation numbers. (Sarcasm) For instance ground beef for those hamburgers is up +14%, lettuce +28%, tomatoes +86%, potatoes +27%, and corn on the cob +150%. An ear of corn cost 20-cents last year and 50-cents this year. This is due in part to 43% of the 2010 corn crop being used as ethanol. Gasoline to get you to the picnic will cost +37% more and coffee after desert is up +83%. However, a case of beer only rose +3% so buy an extra case to help you forget about the price inflation for the picnic.

In some areas of the country Memorial Day also marks the first weekend of swimsuit season. For some that is exciting but for others it is the start of torture season. Another survey found that 41% of U.S. adults would rather go to the dentist than go shopping for a new swimsuit. Those self-conscious individuals will spend the summer making up excuses for not going to the beach or appearing in public partially clothed. For me, I am scheduling a dentist appointment. Maybe several!

If you want to earn some extra cash OptionsXpress is offering $500 cash to any Option Investor reader that opens an account. With that cash you can pay for a new swimsuit and the Memorial Day picnic. You know we don't normally advertise for third parties in our newsletters but I have received a lot of inquiries about brokers recently and OX is one I normally recommend anyway so I agreed to a limited promotion. Click the image below for details.

As we head into June the outlook is not bright. So far in May the Dow has declined -2.8% from the 12,810 high close on the last day of April. That is -369 points and relatively speaking the decline has been rather painless. There were some big moves but most were erased the next day or even the same day with rebounds. If we are going to have a correction this is definitely preferable to a -10% drop in two weeks. This type of move allows traders to enter and exit positions within the trend without the stomach churning volatility that accompanies many corrections.

There are still stocks making new highs with 220 on Friday alone. That was the most in more than a week. There were only 64 new lows on Friday.

It should be no surprise to anyone that the economy is going through a soft patch. We report on it almost every day. However, the election cycle is in full bloom and we know from experience that politicians will do everything possible to add stimulus in some form in order to get reelected. They just may not call it stimulus this time. That should keep the markets from declining to far although the debt ceiling confrontation is going to add some negative sentiment. Once we are past that hurdle and the politicians have gamed the event to their best advantage the markets should begin to rebound. Unfortunately that scenario has a couple of months to run with August 2nd the unofficial drop dead date on the debt ceiling.

Most of us would ignore the possibility of a U.S. debt default the same way we ignore the possibility of a large asteroid strike eliminating a major U.S. city. However, the background chatter has increased to the point that credit default swaps on U.S. debt have more than doubled in volume over the last year. The Financial Times reported that the amount of one-year credit default swaps on U.S. debt has increased to $24 billion in derivative value today compared to only $12 billion for the same month in 2010.

Zero Hedge reported treasuries held in custody by the Federal Reserve for foreign accounts this week experienced their biggest drop in four years. That could suggest foreign investors and central banks are scaling back their investments in U.S. debt. On the other side of that coin the yield on 10-year treasuries has been falling as investors buy treasuries as a safe haven as the economy weakens. The yield on the 10-year closed at 3.06% on Friday, nearly a six month low and well below the 3.6% on April 8th.

Some analysts are predicting a rocky June. Even though the end of QE2 has been known and discussed for months there is still the uncertainty about what will really happen to rates when it expires. If the economy was accelerating the rate would not be that material but in a declining economy real interest rates are critical.

The current worry is that the current soft patch will turn into a rough patch or even another recessionary dip caused by high fuel prices. That was not supposed to happen until the middle of 2012 but the Libyan crisis took 1.3 mbpd out of circulation and accelerated the coming oil crisis.

Regardless of the filler surveys on how gasoline prices are affecting Memorial Day travel they are affecting the daily lives of consumers. The rising prices have slowed the economy and that decline was rather dramatic. I believe it is because consumers have a very vivid recent memory of the price spike in 2008 to make them pay attention in 2011. They did not wait as long this time around to park the gas-guzzler and avoid the weekly trips to Wal-Mart. Fool me once shame on you, fool me twice shame on me. Consumers were not going into debt again over gasoline prices.

John Mauldin has made the term "muddle through economy" famous. He claims it means years of slow below trend growth and more susceptible to short term recessions. We definitely have the slow growth and unless it changes almost immediately we could drop back into a recession. However, various analysts are now calling for the summer to be a short-term version of the muddle through economy. Growth is +1.8% and could decline even lower in Q2 but remain in growth mode. In the fall most analysts expect it to accelerate again thanks to the rising corporate profits and election politics. The QE2 end and debt ceiling battle will be behind us by then.

The real point of concern for me is the gasoline prices. I wrote on Thursday about the new and higher price predictions for crude by Goldman, Morgan Stanley and JP Morgan. If crude hits those $120-$130 targets later this year the price of gasoline is going right back to $4 and consumers are going to stay home again. Every 50-cent increase in gasoline takes $70 billion out of the economy over a year's time. AAA predicted the average family will spend only $692 on its vacation in 2011 compared to $809 in 2010. Out of every $10 earned by an average family they estimate just under $1 is spent on fuel. (8.9%) That is a 40% bigger chunk than normal. In 2000 it was 5.7%. Only twice before have they spent this much. That was 1981 and the first gas crisis at 8.8% and in July 2008 at 10.2%. Households spent an average of $369 on fuel in April. For the same period in 2009 they spent just $201.

We are already seeing analysts lower their S&P targets for the year based on the weakening fundamentals. Goldman lowered their estimates from 1500 to 1450 for the S&P. Citigroup and UBS both raised their earnings estimates for the S&P-500 but left their price targets the same. That means they are pricing in more risk along with more earnings power.

June could be rough simply because there is no reason to buy stocks with so much economic and political uncertainty. Market volume is going to slow until vacations are over and Labor Day arrives to signal the close of summer. It happens this way every year only this time there is an entire list of potential problems hanging like a cloud over the market.

I am actually encouraged by the lack of a major decline in May. Given the "sell in May and go away" trend we could have seen a decent decline. That is especially true given the QE2 end, European debt crisis, weakening economy, debt ceiling, etc. Heck we could be trading at Dow 12,000 again and I would not have been surprised. Instead there has been little real effort to sell off the market. The volatility index routinely trades under 16 in what would be a strong sell signal but nothing happens.

I think investors are confused. They saw the 1425 to 1550 S&P targets from a couple months ago and took them as gospel. Up until last week those targets had not changed. How much longer will they continue to hold stocks in anticipation of those targets being hit? Obviously nobody knows.

On Friday the S&P rallied to downtrend resistance at 1335 and managed to hold over the 1330 level despite some afternoon selling. I am pretty sure this was short covering ahead of the three-day weekend but we will never know for sure. The pattern has not changed and the declines have now stretched for four consecutive weeks. That has not happened since February 2010. Support is now 1315 and resistance 1335.

S&P Chart

The Dow pattern is the same as the S&P with a narrow downtrend channel and rising support in the form of the 100-day average. The chart suggests we will see a test of support at 12,200-12,225 soon. The rebound from the lows of the week was lackluster and failed to touch the top of the descending channel. Sector rotation is causing blocks of Dow stocks to weaken and the defensive stocks are not strong enough to compensate.

Dow Chart - Daily Short Term

Dow Chart - Daily Longer Term

All the big cap techs seemed to rally on Friday and that included FFIV, BIDU, GOOG, FSLR, AAPL, SINA, CREE and BRCM. Since most of those were heavily shorted earlier in the week I still believe it was just short covering on Friday. The Nasdaq is in the same pattern as the other indexes although it has been somewhat weaker based on the moving average breaks. I still expect further weakness. Support is 2750 and resistance 2800.

Nasdaq Chart

The Russell 2000 is somewhat confusing since it closed with a gain for the week. The pattern is the same but evidently there was enough short covering to push it back over the 50-day. The two-day support test at 810 could be significant but I think it was more coincidental than strategic. However, a continued push higher to close over 838 and the February high would be a very positive sign. It would suggest fund manager sentiment is improving. Why that would be the case is beyond me but let's wait and see if it happens before I consult my crystal ball for a reason.

Russell Chart

The Wilshire-5000, now the Dow Total Stock Market Index, cannot be gamed by hedge funds or pushed around by strategically placed trades. It is a true picture of the overall market. Obviously the chart looks exactly like the ones above only with a perfect textbook rebound off the 100-day. Should that average break in the coming weeks it would be a warning with a dip below 13,800 a sell signal.

Total Stock Market Index Chart

In summary I believe there will be more weakness ahead. I am not looking for a sudden washout but more of a choppy market with minor rebounds and declines. The trend appears to be heading slowly lower.

European event risk and currency fluctuations will continue to be a problem. The economic reports next week are market movers with the national ISM and Non-Farm Payrolls the most critical.

We are at that point on the calendar where I like to use the term "why buy?" Investors, as opposed to traders, have no real incentive to put additional money at risk ahead of the summer doldrums. This year they have even less reason because of the uncertainty surrounding QE2 and the economy. Until this cloud of uncertainty clears I doubt we will see a sustained rally.

I would continue to be cautious. Enter passively, exit aggressively.

Jim Brown

Send Jim an email

"The only difference between me and a madman is that I'm not mad."
Salvador Dali


Index Wrap

Hanging In By a Thread

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

Technically, the S&P 500 and Nasdaq Composite rebounded enough that by week's end the indexes remained within their broad uptrend channels. The prospects are for a further modest advance and possibly for the market to settle into a broad trading range.

There is no indication that the intermediate or long-term up trend has reversed since the indexes have held above their prior downswing lows. This market doesn't look like it will have a dynamic further rally, or start any prolonged decline. It's a classic meandering trend with dampened volatility as we head into summer.

Two key indicators, RSI and my sentiment model, got almost fully 'oversold' early in the past week and preceded the modest Wednesday to Friday rally. Is there enough buying interest to keep this recent rebound going after the long holiday weekend ahead? I would give a tepid yes to that question.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) remains bullish in its pattern in that so far the index has held above its prior downswing low. SPX briefly fell below its up trendline as well as support implied by its 50-day moving average but then recovered to close above this technical support. As long as SPX doesn't start falling under 1325-1312 and especially below 1300-1295, its uptrend is intact.

A big question is can the index mount another sustained rally such as to challenge resistance in the 1360-1370 area. I don't envision new highs above 1370. On the other hand, I don't anticipate a bearish drop below 1300. SPX may be held within a 1370 to 1300 price range in the coming 1-2 weeks.

Since SPX is back above its up trendline, I've noted near support at the current intersection of that line at 1325, extending to 1312, with pivotal lower support at 1300, extending to 1295 at the last intraday low. Immediate overhead resistance is at the minor down trendline (not noted on the chart) at 1334-1335, with key resistance in the 1360-1370 price zone.

RSI and TRADER 'SENTIMENT'

Bullish sentiment this past week got to as low as we've typically seen in recent months before another advance got underway. After this there was a rapid rise in trader bullishness into the end fo the week. The RSI has lifted off the low end of its range. Both indicators together suggest further rally potential from the 5/27 close.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) this past week held above its prior intraday low (at 577) and then rebounded to resistance implied by its previously broken up trendline. Unlike SPX, OEX hasn't regained its 50-day moving average and is a benchmark to watch for. The chart remains bullish given that OEX hasn't pierced its last (down) swing low. However, resistance at 595-600 needs to be overcome to suggest that the bulls are again taking charge.

I've highlighted near support in the 583 area around the last cluster of lows, with pivotal support at 580-577. A couple of closes under 580 would suggest that intermediate-term momentum was slipping further. A weak rally, followed by another decline would suggest a possible bearish tipping point.

Another rally up to the 595-600 zone followed by another decline would raise the possibility that a Head & Shoulder's top had formed. Additional resistance is seen at 604, extending to 611. A close above 610 is needed to suggest that a new up leg was underway.

DOW 30 (INDU) AVERAGE; DAILY CHART:

After a multiweek decline the Dow 30 (INDU) average has rallied some from a level above support implied by its up trendline, currently intersecting in the 12200 area. INDU had fallen to below its 50-day moving average but ended the week back above it. There's resistance at the 21-day average however. It's questionable from the chart whether INDU won't slip lower and test support in the 12200 area. Of the 30 Dow stocks I can only point to real strength in a couple of stocks; e.g., JNJ and KFT.

INDU resistance is apparent at 12600, then at 12800. Near support is assumed to lie in the 12300 area, at recent intraday lows, but I don't see this as key an area as potential support around 12200, extending to the prior low in the 12100 area.

As mentioned already, looking at the individual stocks, it's hard to be bullish on the Dow even though the Average itself hasn't pierced its prior 12093 downswing low. One more sell off should put INDU into a fully oversold condition in terms of the 13-day RSI and if such an oversold was registered I think there would be more rally potential than currently, especially if accompanied by a successful retest of the prior low and the Dow's up trendline.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) has held so far above its prior 2739 downswing low but the recent decline temporarily fell under its 50-day moving average and support implied by its up trendline. The rebound seen late this past week brought COMP back above technical support.

I think this recent rally can carry somewhat higher but I'm not convinced that the Composite doesn't have another sell off to come soon after any extension of the recent rebound. I'm watching the 21-day moving average as a key upside test; currently this average is at 2816. I'd peg key near resistance at 2816, extending to 2828. Fairly major resistance then comes in around 2876, the area where COMP made most of its highs previously.

Since COMP has regained its up trendline near support is implied at 2787, at the near-term intersection of this line. Next support looks to be 2743-2739, extending to around 2706 at the prior bottom.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) has a mixed chart and technical pattern as I suggested last week. Sure enough, another downside price gap marked another sell off at the beginning of this past week. I pointed out last time the possible 'island top' formation per the highlighted circle on my NDX daily chart. The fact that the index next promptly fell to below its up trendline and hasn't regained it, demonstrates the selling that's still hitting the 100 big cap tech stocks. The minor rebound of late in the week may carry higher but the key test ahead is whether NDX can regain and stay above, its previously broken up trendline.

Near resistance implied by the aforementioned trendline comes in around 2350 currently. Next resistance is at 2365-2374, then at the line of prior highs in the 2417 area.

Near support is at 2300 currently, then in the 2255-2250 area. The prior low at 2255 is a pivotal area. A downside penetration of this prior low, particularly on a closing basis, would turn the intermediate trend lower.

On a related note, I've thought for awhile that Apple (AAPL), a key big cap Nasdaq bellwether could be tracing out a rectangle top. Without a confirming lower low here, I'm not assuming that NDX is also building a top, although the island formation is suggestive of it. Tops are tricky to time and I tend to be cautious about assuming this long time uptrend is done for.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) has a mixed chart like the underlying NDX index. As I noted last week, it would take a break below the prior downswing low at 55.3 to suggest there was a reversal in the intermediate uptrend. The stock did pierce its up trendline and hasn't regained it; or regained its 50-day moving average.

Immediate overhead resistance, at the moving average and at the trendline is currently 57.5-57.75. Next resistance is highlighted at 58.3, with the major line of resistance then at 59.3.

Support is assumed to lie at the cluster of recent lows around 56.5, with pivotal support at the prior intraday low around 55.3. I'm assuming that QQQ may be locked in a 59.3 to 55.3 trading range.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT), like the Nasdaq composite, fell below its up trendline but then regained it; that and its 50-day moving average. I've noted potential near support at the regained up trendline at 831. If RUT moves higher within its broad uptrend channel, the chart will regain its bullish footing. I tend to be somewhat skeptical about the further bullish outlook when a long standing up trendline is pierced. Sometimes the dip below such a trendline is brief and not repeated. Time will tell. RUT could be also simply be slipping into a 800-860/870 trading range.

Support below 831 is assumed for the prior low around 808. Very pivotal next support comes in at 776, the previous intraday low. I didn't take the cluster of lows in the 820 area as the crucial must hold support but the break below 820 demonstrated slipping (upside) momentum this past week; now a moot point with Friday's RUT close at 836.

Resistance is highlighted in the 856 area, then at the previous top made at 868.



GOOD TRADING SUCCESS!



NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS

CHART MARKINGS:

1. Technical support or areas of likely buying interest and highlighted with green up arrows.

2. Resistance or areas of likely selling interest and notated by the use of red down arrows.

I WRITE ABOUT:

3. Index price areas where I have a bullish bias or interest in buying index calls, selling puts or other bullish strategies.

4. Price levels where I suggest buying index puts or adopting other bearish option strategies.

5. Bullish or Bearish trader sentiment and display the graph of a CBOE daily call to put volume ratio for equities only options (CPRATIO) with the S&P 500 (SPX) and the Nasdaq Composite (COMP) charts. However, this indicator pertains to the market as a whole, not just SPX or COMP. I divide calls BY puts rather than the reverse (i.e., the put/call ratio). In my indicator a LOW reading is bullish and a HIGH reading bearish, consistent with other overbought/oversold indicators.

Trading suggestions are based on Index levels, not a specific option (month and strike price) and entry price for that option. My outlook often focuses on the intermediate-term trend (next 2-3 or more weeks) rather than just the next several days of the short-term trend.

Having at least 3-4 weeks to expiration tends to be my guideline for trade entry choice. I attempt to pick only what I consider to be 'high-potential' trades; e.g., a defined risk point would equal in points only 1/3 or less of the index price target.

I tend to favor At The Money (ATM), In The Money (ITM) or only slightly Out of The Money (OTM) strike prices so that premium levels are not as cheap as would otherwise be the case, which helps in not overtrading an account. Exit or stop points, as well as projected profitable index price targets, are based on my technical analysis of the underlying indexes.


New Option Plays

REITs and Medical Waste

by James Brown

Click here to email James Brown

Editor's Note:

The market's major indices are down four weeks in a row. Yet I found more bullish candidates than bearish ones. There are so many people expecting a deeper correction the market might rise just to spite them. If you are interested in bullish trading ideas check out this list of stocks I'm watching:

BIDU, FFIV, CTXS, BMC, CMG, PX, NFLX, COH, JNJ, ZMH, ANF, SHW, MSI, and PCP

- James


NEW DIRECTIONAL CALL PLAYS

Avalonbay Communities - AVB - close: 130.00 change: +0.53

Stop Loss: 127.75
Target(s): 134.90, 139.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
The market might be down four weeks in a row but many of the REIT stocks have avoided this decline. Shares of AVB have been consolidating sideways under resistance at $130 the past month. Now shares are poised to breakout past this level.

I'm suggesting a trigger to launch bullish positions at $130.51. If triggered we have two targets at $134.90 and $139.50.

Trigger @ 130.51

- Suggested Positions -

Buy the June $135 call (AVB1118F135) current ask $0.50

- or -

buy the July $135 call (AVB1116G135) current ask $1.30

Annotated Chart:

Entry on May xxth at $ xx.xx
Earnings Date 08/03/11 (unconfirmed)
Average Daily Volume = 571 thousand
Listed on May 28th, 2011


NEW DIRECTIONAL PUT PLAYS

Stericycle Inc. - SRCL - close: 88.34 change: -0.81

Stop Loss: 91.55
Target(s): 84.00, 80.50
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Technically things have turned bearish for SRCL. Shares produced a bearish head-and-shoulders pattern and broke down under the neckline last week. Shares of SRCL also broke down under its 50-dma and its up trend of higher lows. I am suggesting bearish positions now with a stop loss at $91.55. More conservative traders may want to use a stop closer to the $90 level. Our targets are $84.00 and $80.50. FYI: The Point & Figure chart for SRCL is bearish with a $82 target.

- Suggested Positions -

buy the June $85 PUT (SRCL1118R85) current ask $0.70

- or -

buy the July $85 PUT (SRCL1116S85) current ask $1.60

Annotated Chart:

Entry on May 30th at $ xx.xx
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 502 thousand
Listed on May 28th, 2011


In Play Updates and Reviews

Three-Day Rebound

by James Brown

Click here to email James Brown

Editor's Note:

Stocks posted a three-day bounce but have yet to break the four-week bearish trend of lower highs and lower lows. We're approaching the month of June, which has been down the last several years, so history is against the bulls here.

-James

Current Portfolio:


CALL Play Updates

Apple Inc. - AAPL - close: 337.41 change: +2.41

Stop Loss: 317.00
Target(s): 339.00, 359.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see trigger

Comments:
05/28 update: AAPL spent the week slowly drifting higher after Monday's drop to short-term support near $330. Now AAPL is nearing resistance at $340 again. The stock will also face several key moving averages, which could act as resistance. Currently our plan is to buy calls on a dip near support at $320, an area bolstered by the simple 200-dma. However, we might switch to a breakout entry point if we see rise past the $345 level of resistance.

Earlier Comments:
We have a buy-the-dip entry point at $321.00 with a stop loss at $317. We might switch to a breakout entry point if AAPL can rally past $345.

Buy-the-Dip Trigger @ $321.00

- Suggested Positions -

Buy the June $330 calls (AAPL1118F330)

- or -

Buy the July $330 calls (AAPL1116G330)

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


Alliance Data Systems - ADS - close: 93.72 change: +1.71

Stop Loss: 87.99
Target(s): 96.50, 99.75
Current Option Gain/Loss: +12.5% & + 8.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/28 update: As expected ADS continued to rally on Friday. Shares opened at $92.23 and then climbed past $94 intraday. Shares settled up +1.8%. You could argue ADS is short-term overbought here. Readers might want to consider waiting for a dip near $92 before considering new positions. I'm expecting a short squeeze to lift ADS toward its highs and beyond.

Earlier Comments:
This is an aggressive trade. We want to keep our position size small to limit our risk. FYI: The most recent data listed short interest at more than 26% of the float. This elevated short interest significantly raises the risk of a short squeeze.

- Suggested (SMALL) Positions -

Long June $95 call (ADS1118F95) Entry @ $1.20

- or -

Long July $95 call (ADS1116G95) Entry @ $2.45

chart:

Entry on May 27th at $92.23
Earnings Date 07/18/11 (unconfirmed)
Average Daily Volume = 999 thousand
Listed on May 26th, 2011


Boeing Co - BA - close: 76.99 change: +0.33

Stop Loss: 71.45
Target(s): 79.75, 84.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see Trigger

Comments:
05/28 update: BA spiked higher on Friday morning. Yet shares seemed to struggle after it filled the gap down from Monday morning. Shares were unable to close over their 30-dma, a level of resistance that's lasted all week long. If we see another bounce from the $75 level or the 50-dma then we'll reconsider our entry strategy. For now the plan is to buy calls on a dip at $74.00. If triggered our targets are $79.75 and $84.50. The Point & Figure chart for BA is bullish with an $87 target.

Trigger @ $74.00

- Suggested Positions -

Buy the June $80 call (BA1118F80) current ask $0.80

chart:

Entry on May xxth at $ xx.xx
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 4.8 million
Listed on May 17th, 2011


Baker Hughes Inc. - BHI - close: 73.46 change: -1.04

Stop Loss: 68.40
Target(s): 79.00
Current Option Gain/Loss: -15.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/28 update: Oil stocks lost some steam on Friday. BHI saw its rally fail at the $75.00 level. Look for a dip back toward the $72.00 or $71.00 levels, which we can use as a new entry point to buy calls. Our first target is $79.00. We want to keep our position size small to limit our risk. Oil and oil stocks can be a volatile bunch.

-Small Positions - Suggested Positions -

Long June $75 call (BHI1118F75) Entry @ $1.61

chart:

Entry on May 26th at $73.34
Earnings Date 08/03/11 (unconfirmed)
Average Daily Volume = 2.2 million
Listed on May 25th, 2011


Deere & Co - DE - close: 85.74 change: +0.80

Stop Loss: 82.20
Target(s): 89.75
Current Option Gain/Loss: +11.1% & +12.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/28 update: DE extended its bounce to four days in a row. Shares did manage to close above short-term resistance at its 10-dma and above the $85 level on Friday. The stock continues to look a little oversold here. We're planning to exit on a bounce near resistance at $90. If you're looking for a new entry point consider waiting for another bounce from the $84 level.

Earlier Comments:
Remember, this is a higher-risk, aggressive trade as we look for an oversold bounce from technical support at the 200-dma. Our exit target is $89.75. More nimble traders could aim for the 100-dma or 50-dma overhead. I would keep our position size small to limit our risk.

-Small Positions Only-

Long June $90 call (DE1118F90) Entry @ $0.45

- or -

Long June $87.50 call (DE1118F87.5) Entry @ $1.01

chart:

Entry on May 26th at $84.61
Earnings Date 08/17/11 (unconfirmed)
Average Daily Volume = 5.3 million
Listed on May 25th, 2011


Express Scripts - ESRX - close: 58.48 change: -1.05

Stop Loss: 56.75
Target(s): 64.00, 68.50
Current Option Gain/Loss: -71.2% & -37.1%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/28 update: There was big news in the pharmacy benefits industry today. CVS Caremark (CVS) won the Blue Cross Blue Shield contract from Medco Health Solutions (MHS). MHS plunged -9% on the news. CVS rallied +1.7%. ESRX initially rallied on the news but quickly failed and closed the day down -1.7%. Thus Friday's session has produced a big bearish engulfing candlestick pattern for ESRX with strong volume.

More conservative traders may want to exit early now but I still see likely support in the $58-57 area. We're going to wait and see if ESRX has any follow through on Tuesday before we consider an early exit. I am not suggesting new positions at this time.

- 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


Fossil Inc. - FOSL - close: 105.28 change: +0.13

Stop Loss: 99.39
Target(s): 109.75, 114.00
Current Option Gain/Loss: -16.6% & -11.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/28 update: The Friday before a long holiday weekend proved to be a quiet one for FOSL. Shares churned sideways near $105. I don't see any changes from my Thursday night comments. I'm suggesting bullish positions now or as an alternative consider waiting for a dip into the $103-102 area before starting positions. We do want to keep our position size small to limit our risk.

- Suggested (SMALL) Positions -

Long June $110 call (FOSL1118F110) Entry @ $1.38

- or -

Long July $110 call (FOSL1116G110) Entry @ $3.00

chart:

Entry on May 27th at $104.96
Earnings Date 08/09/11 (unconfirmed)
Average Daily Volume = 842 thousand
Listed on May 26th, 2011


Forest Labs Inc. - FRX - close: 35.78 change: +0.27

Stop Loss: 33.75
Target(s): 39.00, 42.50
Current Option Gain/Loss: -46.1% & -17.8%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/28 update: FRX has continued to climb ever since its intraday lows on Monday. Shares end the week at new two-year highs. If you're looking for a new entry point I'd wait for a dip near $35 or the 10-dma. I am raising our stop loss to $33.75. Our target is the $39.00 level and the $42.50 mark but I'm starting to worry that FRX just doesn't move fast enough. If you do launch new positions I'd buy the July or August calls.

- Suggested Positions -

Long the June $37 call (FRX1118F37) Entry @ $0.65

- or -

Long the August $37 call (FRX1120H37) Entry @ $1.40

05/28 New stop loss @ 33.75

chart:

Entry on May 20th at $35.29
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 3.2 million
Listed on May 19th, 2011


Goldman Sachs - GS - close: 138.66 change: +2.75

Stop Loss: 128.45
Target(s): 134.00, 137.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

Comments:
05/28 update: The bounce in financial stocks actually started to gain some traction on Friday. GS outperformed with a +2.0% bounce. If we see GS close over the $140 level we'll re-evaluate this trade. At the moment our plan is to buy calls on a dip at $130.25. The 2010 lows are near $130. I am suggesting we launch very small bullish positions on a dip at $130.25. This is a very aggressive, higher-risk trade.

Trigger @ 130.25 (very small positions)

- Suggested Positions -

buy the June $135 call (GS1118F135)

chart:

Entry on May xxth at $ xx.xx
Earnings Date 07/19/11 (unconfirmed)
Average Daily Volume = 6.5 million
Listed on May 21st, 2011


Jos. A Bank Clothiers - JOSB - close: 56.01 change: +0.56

Stop Loss: 53.75
Target(s): 59.50
Current Option Gain/Loss: +40.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/28 update: We could be running out of time on this trade. JOSB is expected to report earnings on June 2nd although this is an unconfirmed earnings date. That only gives us a couple more trading days. I am raising our stop loss to $53.75 and I'm not suggesting new positions at this time.

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 -

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

05/28 new stop loss @ 53.75
05/18 new stop loss @ 52.90
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


Union Pacific - UNP - close: 103.53 change: +0.29

Stop Loss: 98.95
Target(s): 109.00, 114.00
Current Option Gain/Loss: -22.8%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/28 update: It was a low-volume Friday ahead of a long holiday weekend. I am not surprised to see UNP rally to resistance at $104 and stall. Readers might want to wait for a close above the $104 level before considering new bullish positions.

- 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: 86.33 change: -0.06

Stop Loss: 83.80
Target(s): 89.50, 94.75
Current Option Gain/Loss: -62.5%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/28 update: There was almost no change in UTX on Friday. I am growing more concerned about this trade. UTX has struggled with resistance in the $86.50-86.75 area all week long. At this point I'd rather see another bounce from $85 or a rise past $87.50 before considering new bullish positions.

- Suggested Positions -

Long the June $90 calls (UTX1118F90) Entry @ 0.40

05/26 New stop loss @ 83.80

chart:

Entry on May 23rd at $86.41
Earnings Date 04/20/11
Average Daily Volume = 3.7 million
Listed on April 27th, 2011


Wynn Resorts Ltd. - WYNN - close: 146.40 change: +1.06

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:
05/28 update: WYNN is still inching higher. The stock is now approaching resistance near in the $150-152 area. Currently our plan is to buy calls at $152.00.

Trigger @ $152.00

- Suggested Positions -

Buy the June $160 calls (WYNN1118F160)

- or -

Buy the July $160 calls (WYNN1116G160)

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


PUT Play Updates

DaVita Inc. - DVA - close: 83.62 change: -0.32

Stop Loss: 85.35
Target(s): 80.50, 77.00
Current Option Gain/Loss: -18.7% & -58.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/28 update: Wow! DVA flat lined most of Friday. There was virtually no trading action. I remain cautious here. Readers may want to wait for a new failed rally type of move under the $85 level and/or its 50-dma before initiating new bearish positions.

Our first target is $80.50 (near the 100-dma). The $80 area will probably be short-term support so we can expect a bounce there. Our secondary target is $77.00.

We want to keep our position size small to limit our risk. The wide spreads on the June $80 puts definitely put us at a disadvantage.

(small positions) - Suggested Positions -

Long Jun $85 PUT (DVA1118R85) Entry @ $2.40

- or -

Long Jun $80 PUT (DVA1118R80) Entry @ $0.60

chart:

Entry on May 25th at $83.30
Earnings Date 08/02/11 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on May 24th, 2011


Perrigo Co. - PRGO - close: 85.00 change: +0.29

Stop Loss: 86.15
Target(s): 78.00
Current Option Gain/Loss: -75.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/28 update: PRGO popped higher at the open on Friday and then spent the rest of the day drifting sideways. The high was $85.36. I have been suggesting that readers watch for resistance in the $85.50-86.00 area. Wait for this bounce to reverse before considering new bearish positions. Our plan was to keep our position size small to limit our risk. Our first target is the $78.00 level (or the 100-dma).

Small Positions!

Long June $80 PUT (PRGO1118R80) Entry @ $1.00

05/25 Gap down entry @ 81.74

chart:

Entry on May 25th at $81.74
Earnings Date 08/11/11 (unconfirmed)
Average Daily Volume = 654 thousand
Listed on May 24th, 2011


Pioneer Natural Resources - PXD - close: 91.14 change: +0.02

Stop Loss: 93.05
Target(s): 85.25
Current Option Gain/Loss: -37.8%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/28 update: PXD has been stuck in the $90-92 zone for the last four days in a row. I remain concerned about our put play. The strength in oil stocks stalled on Friday but this past week has been bullish for the group. PXD looks like it wants to rally from this sideways consolidation. However, the stock has been underperforming its peers the last few days. I'm not ready to abandon ship just yet but I'm not suggesting new positions. If we see PXD close over $92.00 I'll probably close this trade early.

Earlier Comments:
We want to keep our position size small to limit our risk because oil and oil stocks have been increasingly volatile lately. Our target is $85.25. FYI: The Point & Figure chart for PXD is bearish with a $72 target.

-Small Bearish-

Long the June $90 PUT (PXD1118R90) Entry @ $3.30

05/25 Energy stocks look ready to rally. Consider an early exit from this trade now. New stop loss @ 93.05.

chart:

Entry on May 16th at $91.64
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on May 14th, 2011


Roper Industries - ROP - close: 82.99 change: +0.62

Stop Loss: 84.05
Target(s): 78.00, 75.50
Current Option Gain/Loss: -45.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/28 update: ROP's bounce from the $80 level is now three days old. Friday saw shares close above the 100-dma and the 10-dma. The action this past week has created what looks like a potential bullish reversal on the weekly chart. If the market continues to rebound there is a good chance ROP could hit our stop this coming week. In the meantime, ROP still has a bearish trend of lower highs and lowers but this trend could change soon. ROP should have some overhead resistance at $84.00 and at its 50-dma. I am not suggesting new positions at this time.

Earlier Comments:
Our targets are $78.00 and $75.50. The $80 level might offer a little support so don't be surprised to see a bounce. I would keep our position size small to limit our risk.

(small positions) Suggested Positions -

Long the June $80 PUT (ROP1118R80) Entry @ $1.20

chart:

Entry on May 23rd at $81.75
Earnings Date 07/26/11 (unconfirmed)
Average Daily Volume = 570 thousand
Listed on May 21st, 2011