Option Investor
Newsletter

Daily Newsletter, Saturday, 6/4/2011

Table of Contents

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

Market Wrap

Economic Flu

by Jim Brown

Click here to email Jim Brown

The economic virus appears to be spreading with disappointing numbers on jobs and services pushing the Dow and S&P to the first five-week losing streak since July 2004.

Market Statistics

It was a bad week for the markets with a -2.3% decline in the major indexes due almost exclusively to the economic news and very disappointing numbers. News of a compromise on Greece was actually a positive for the market on Friday that prevented an even further decline. The drop in the Dow was the biggest weekly decline since August.

The big news on Friday was of course the worse than expected Non-Farm Payroll report. The headline number dropped to a gain of only 54,000 jobs compared to the +244,000 headline number for April. That 244,000 number was also revised lower to 232,000 and March was revised lower from 221,000 to 194,000. The downward revisions totaled a drop of 39,000 jobs.

Initial jobs expectations were for a gain of +185,000 and that was revised down on Wednesday after the disappointing ADP numbers to +117,000. The actual number turned out to be less than half of the lowered expectations. The unemployment rate rose to 9.1% and the second consecutive monthly increase since its low for this cycle at 8.8% in March. The broader measure of unemployment referred to as U6 that takes into account everyone unemployed, on and off of unemployment benefits and those forced to work part time while searching for a full time position declined slightly to 15.8% and 24.4 million workers.

Private sector jobs rose by +83,000 and that was the weakest since June 2010. State and local governments cut 28,000 jobs. Government employment is down over 800,000 jobs in the last twelve months thanks to the ending of the various stimulus programs. The labor force rose by 272,000 in May as graduates attempted to enter the workplace.

Non-Farm Payroll Chart

Much of the decline was blamed on the supply chain issues from Japan. Automakers idled plants, cut shifts and laid off workers. While this caused a direct lay off of 5,000 workers at those plants it also had the trickle down affect of shutdowns and layoffs in hundreds of other U.S. manufacturers that also make components for those same cars. How many workers were ultimately impacted by the supply chain issue is unknown.

That supply chain problem is thought to be mostly over. The majority of manufacturing that was offline in Japan is now back in business although some at a lower rate due to infrastructure and power problems.

High gasoline prices were also blamed for the layoffs as business owners were quick to pull the trigger to cut costs when business began to slow. After enduring the Great Recession over the last several years those businesses did not want to undergo the same financial problems that almost ruined them before.

I think it is safe to say this soft patch is not likely to be over very quickly. There is still too much uncertainty in the economy and that breeds excessive caution. Personally I was glad to see the jobs number was not negative for May but I will be really surprised if it stays in positive territory for June given the predominately negative economic sentiment.

On the bright side the ISM Services Index actually rose slightly for May to 54.6 from 52.8. Quite a few people were worried the index could have slipped closer to 50 or even slightly into negative territory since the services sector is greatly impacted by higher fuel prices. To actually post a gain was a minor victory.

New orders rebounded from 52.7 to 56.8 but failed to recover even half of the -11 points they lost in April. The new orders component was over 64.1 for three consecutive months before crashing in April. Order backlogs were basically flat at 55.0 from 55.5 in April.

Some analysts saw the uptick in the ISM Services index as a sign the current soft patch will be transitory and not turn into a recession. However they do expect a decline in Q2 GDP to something less than +1% growth.

ISM Services Chart

Next week's economic calendar is very short. The only major economic report is the Fed Beige Book on Wednesday. This is the Fed survey of economic activity in all 12 Fed regions. The April Beige Book showed the recovery was broadening across all regions. Manufacturing was strongest but it was expanding to other industries while consumer spending was increasing. After scanning the various economic reports since April 13th we have to wonder exactly what the Fed researchers were drinking to come up with those conclusions. Let's hope they are still drinking the Kool-Aid and it shows up in their report this week. Obviously it appears on the surface that economic activity hit a brick wall at the end of April or early May. Needless to say this will be a highly watched report.

Other events of note will be a speech by Dallas Fed President Richard Fisher on Monday on monetary policy and financial stability. Fisher is a hawk and favors a tighter monetary policy. On Tuesday Ben Bernanke will speak about the economy. Both speeches should be market worthy.

Economic Calendar

Where are we going from here? The Fed has to be very nervous right now with their QE2 program ending this month. It was already a forgone conclusion they would continue buying treasuries with the payoff funds from prior purchases as they matured but now it appears they need to take some further action to prevent the economy from backsliding. The chance of a rate hike has moved from Q1 to well into 2012 and the Fed will need to remain super accommodative for the rest of the year if not longer.

The administration is stuck with rising unemployment and a potentially declining economy and the lack of any existing program they can use to move it forward. Stimulus is a four-letter word and lawmakers are not going to authorize any kind of package that includes more spending. Since FDR no president has ever won reelection with unemployment higher than 7.2% so the frying pan is definitely heating up.

The Fed is also stuck between consumer sentiment and political expediency. While Bernanke may want to apply more policy accommodation they have few acceptable tools at their disposal. They can't lower rates any further. They can't announce a QE3 because QE2 raised the price of commodities to the point where food and fuel inflation is in the +30% range and it would not be politically acceptable. About the only tool left would be to charge banks interest for funds they have on deposit at the Fed. This would force the banks to put the money to work in the private sector but that also assumes they could find credit worthy businesses that wanted to borrow money in a weak economy.

The future is definitely clouding up and the only way out of the mess may be to just board up the windows and let it blow over. Many theorize if the government and Fed had allowed that to happen in 2008-2009 and not bailed everyone out we would already be in a strong recovery. I disagree with that view but it is immaterial today. We are here and the economy appears to be declining again despite the trillions of dollars the government threw at the problem. We can't continue to throw money at the problem or we will end up with the same fate as Greece only there will be nobody to bail us out.

Over the next few months some hard decisions need to be made by the administration, lawmakers and the Fed. Some of them will not be politically palatable but they will still need to be made. If it were easy everybody would be a politician.

The good news is that eventually we will pull out of this slump. The bad news is that when we do and GDP growth starts moving over 3% again we will accelerate right into the coming oil recession. The only thing that is keeping it from happening today is our slow growth. If our oil demand grew to where it should be in a 3.5% to 4.0% GDP growth economy our oil demand would increase by 1.0-1.5 million barrels per day. That is the current limit of excess capacity. At the same time India and China are also growing demand by some monster numbers. Make no mistake, once our economy kicks into high gear there will be an oil slick just around the bend to run us into the ditch again.

In stock news Research In Motion (RIMM) declined -3.6% after a research report showed the BlackBerry maker fell from a 30.4% market share to 25.7% and moved from second place to third place behind Google (36.4%) and Apple (26.0%). UBS and Sterne Agee both cut price targets on RIMM and reiterated a neutral rating. The new BlackBerry Bold touchscreen model was announced for a summer delivery but is now expected to slip into September. The brokers warned Apple's upcoming iCloud service could cost RIMM even more market share as enterprise customers move to the iPhone and iPad.

RIMM Chart

Cisco (CSCO) shares hit a new two year low after DragonWave (DRWI) slashed guidance due to customers deferring significant shipments into the future. DRWI shares fell -6%. DRWI is only vaguely related to Cisco but any negative news in the sector appears to be an excuse to sell Cisco shares. I don't know if you remember the big Cisco bull that appeared on CNBC constantly back in late 2000 saying I will buy all the Cisco shares you want to sell me at $60. Hopefully all that paper is keeping him warm at night because it will be a long time (if ever) before Cisco is back over $60. Meanwhile Brocade (BRCD) closed flat for the day but held its gains from Thursday after rumors broke that Dell may be readying an offer for the networker.

Cisco Chart

Consumer stocks took a hit on Friday because of negative sentiment over the jobs report and its potential impact on consumer spending. The decline accelerated after Newell Rubbermaid (NWL) cut its full year profit forecast to $1.60 from $1.67. Analysts were expecting $1.69. Newell sells things like Sharpie pens and plastic storage containers. Newell said slumping sales in the USA were to blame. The stock declined -12% on the news but the damage was sector wide. Newell sells low dollar products while companies like Whirlpool (WHR) sell higher dollar products. Whirlpool declined -5% on the jobs and Newell news.

Newell Chart

I hate to be the bearer of more bad news but the second quarter is rapidly drawing to a close and we are approaching the start of earnings warning season. This is the part of the earnings cycle where corporations pre announce guidance for the quarter. Texas Instruments will lead off this cycle on Wednesday when it gives its mid-quarter update.

The update will be webcast at 4:PM ET on Wednesday. Last quarter there were some questions about slowing sales to major companies like Nokia. With Nokia recently adding its own soft sales comments there could be some problems with revenue in the forecast. You can listen to the webcast here

On the positive side of the ledger the Apple Developer Conference will be on Monday and Steve Jobs will be the keynote speaker at 1:PM ET. Jobs is expected to announce more details about the iCloud and discuss deals to license music from the four major music labels. Rumor has it that Apple paid these companies $150 million for the rights to store music in the iCloud for use on any consumer device.

In related news Apple has filed a patent for a technology that turns off camera phones while at concerts so concert attendees cannot video the concert and share it illegally. When a camera phone is pointed toward the stage an infrared signal from the stage disables the camera. The patent was filed in 2009 and published by the U.S. patent office on Thursday.

Apple Chart

OPEC meets in Vienna on Wednesday to discuss production targets for the rest of the year. This was shaping up to be a contentious meeting after Iran's president Mahmoud Ahmadinejad fired the country's oil minister and said he himself would be the delegate to the OPEC meeting. Iran currently holds the one-year rotating presidency of OPEC. To have Ahmadinejad show up as the acting president of OPEC when Iran is the arch enemy of several OPEC countries would have been interesting theater. However, he was slapped back into place by the Supreme Leader Ayatollah Ali Khamenei. An official in the oil ministry announced last week that Ahmadinejad would no longer be attending and a cabinet minister will be appointed to attend.

This means Ahmadinejad lost this round of his power struggle with Khamenei. It also means a more relaxed atmosphere at the OPEC conference. However, Saudi Arabia, normally a friend to the U.S. is frustrated with the way the Egypt revolution was handled and may not be so agreeable to President Obama's call to increase production. That means hawks like Venezuela and Iran will have a better chance of pressing for no production increase in order to keep prices high. With WTI oil prices clinging tenaciously to $100 that is the borderline between what could be considered high and damaging to the global economy if they go over that level and bearable and only mildly suppressive if they dip below $100.

OPEC is conscious of their appearance to the world as the reason for high prices and they should attempt to craft a post meeting statement that makes some kind of concession to price and production. Since they are currently producing about 2.5 million barrels per day over their actual quotas they could raise the quotas by that amount and the general public would think it was a major change in output even though in reality there would be no change.

Oil prices should be $115 today despite oil inventories in the USA near multi year highs. The price of Brent is the true price of oil at $115.84 today. The price of WTI is lower at $100 because of excess supplies in the center of North America that all have to funnel through Cushing Oklahoma where storage is limited. There are plenty of ways to get oil to Cushing but a lot fewer to get it out. A pipeline to the Gulf Coast is expected to be completed within two years and that will allow Cushing WTI oil to be sent to coastal refineries. That will allow WTI prices to rise to the same level as Brent and trade in unison as they always have. The recent $15 spread between the contracts is simply a function of limited storage at Cushing and a sudden surplus of crude from the oil sands and the Bakken. The Midwest surplus forces it to be sold at a discount. If the pipeline existed today the price would be $115.

When OPEC looks at the oil price/supply relationship next week they will be looking at the price for Brent. That is the price the various oil blends are indexed to for delivery to Europe and Asia. They are not looking at our $100 WTI price.

If they refuse to act in order to reduce the possibility of a global economic decline there are only two reasons. The first is the because they need the revenue so badly to bribe their citizens with stimulus programs that they are willing to risk a global recession to fund their budgets. The second reason is because they can't act. Excess OPEC capacity may have shrunk to a level where they really don't have any to spare and they are hoping the higher prices will keep demand moderated enough so they can keep up the charade and continue convincing everyone the "market is well supplied."

An OPEC advisor told me several months ago this was the OPEC plan. They wanted to let prices rise just enough to keep demand under control so nobody would know they had no material excess capacity. Recently Saudi Arabia announced a multi billion dollar effort to rush exploration and production on a key Saudi field. That sounds good on the surface but the field only has heavy sour crude and the market for that crude is very limited. Why spend billions to rush exploration on heavy sour crude if there was any other field you could produce that had oil refiners actually wanted? You would only do that if there were nothing else left that could be produced easily.

Regardless of the outcome of the OPEC meeting I don't actually expect the real production to change. This meeting is strictly political theater and excuse to appear on the world stage.

U.S. Crude Oil Chart

Brent Chart

Last week was rough for the market. It was the biggest one-week decline for the Dow since August. It was the first five-week decline for the Dow since July 2004. The Dow and S&P closed at six-week lows. The Tuesday short squeeze was quickly sold and now it appears we are going to test some lower numbers.

The S&P tested 1300 at the open but rallied back to test prior support at 1310 midday when it appeared Greece had won some concessions and would get the required funding. That rebound was temporary and the index returned to close at 1300 and only two points off the low of the day. This should be decent support from the 1295-1300 level. However, with market sentiment turning increasingly negative I don't have a lot of hope we will see a sudden turnaround. We appear to be in one step forward, two steps backward mode. Until the economic reports start to show a glimmer of hope the fear of a second recession will continue to grow. Should we begin to see a flurry of earnings warnings and guidance cuts it could get ugly quick.

If the S&P breaks below 1295 it has risk to 1250. The long-term uptrend has broken and June is typically the third worst month of the year. Earnings warnings tend to increase in June as companies forecast summer sales.

The S&P has made a major break below the 100-day at 1318 and that could be a sell signal for some funds and institutions. The 200-day average at 1248 would be the next major challenge. Normally a break under the 200-day is a strong sell for even more funds and institutions. I don't expect that to happen unless the economics turn significantly worse.

S&P Chart

The Dow plunged -144 points at the open before rebounding intraday but the end result was never in any doubt. The dip to the 12,104 low was a clean break of prior support at 12,200 and a retest of the April 18th low. The long-term uptrend is broken and support at the 100-day average at 12,250 is history.

The Dow did close on the bottom of its downtrend channel and could reasonably be expected to rebound on Monday but I seriously doubt the gains will hold. Overhead resistance is now the 100-day at 12,250 and downtrend resistance at 12,400.

Wal-Mart was the only Dow stock to close positive and that was due to their announcement of a $15 billion stock buyback. They declined -$2 over the prior two days so a +11-cent gain on Friday's news was inconsequential.

Dow Chart

The Nasdaq followed the other indexes lower with a solid break of the 100-day. The Nasdaq is still in its downtrend channel with support at 2725. The Apple Developers Conference on Monday should give a lift to the stock and help support the Nasdaq. However, tech stocks are under pressure as every PC maker whines about lower PC sales. That impacts semiconductors and networkers. It is possible Steve Jobs could say enough positive on Monday to produce a tech rally but I doubt it would last. Tech stocks generally dominate the June warnings cycle.

Nasdaq Chart

The Russell 2000 was the biggest loser for the week at -3.3%. Small cap investors are beginning to run for the exits. A break of support at 810 should target a retest of the March lows at 775. That would be a major breakdown of the trend but entirely possible. Based on the Russell chart I believe fund manager sentiment has turned negative.

Russell Chart

Dow Transports Chart

Despite the negative charts above and my expectations for lower lows that does not mean there won't be bounces in our future. June is normally choppy as far as trading because of the lower volume and the earnings and guidance warnings. Be prepared for anything.

We also have to remember that the current economic soft patch has some underlying reasons that are one-time items. The impact from the Japan quake is moderating and should be over soon. The spike in crude prices due to the loss of Libyan production has now been factored in and prices have declined somewhat. The closer we get to the end of Gaddafi's presidency the more prices will decline even though production will take many months to resume. The market will discount that resumption immediately upon Gaddafi's exit.

The European debt crisis could be seen as a one-time event even though it has been a recurring nightmare. The major problem is Greece and the EU appears to be on the verge of solving that problem with the new agreement. That means Greece will go on the back burner and the EU successfully kicked the can a little further down the road.

QE2 was another one-time event that is coming to a close this month. Uncertainty over the Fed's direction at the end of June should be cleared up at the FOMC meeting on June 21st. That will be another point of indecision we can put behind us.

The resolution of the debt-ceiling problem in the U.S. will be market positive. Unfortunately we may have to undergo two more months of brinksmanship by lawmakers before it is resolved. You would hope that the disappointing jobs report and the warning by Moody's would be an incentive for lawmakers to resolve it sooner rather than later.

On the bright side the Q1 earnings showed a +10% growth rate in revenue for S&P-500 companies and earnings grew by +18%. Outside of the financial sector and the construction sector the rest of the S&P is doing fine. Analysts are predicting record earnings for the S&P of $100 for the full year. After Q1 earnings the S&P is trading today at a PE of 13.3, which is very reasonable. There are plenty of opportunities and the economic outlook is not as grim as it would seem on the surface. If we start seeing some of the June economics rebound from their May levels we could quickly find a market bottom. Maybe not an immediate rebound but at least a bottom.

The Dow and S&P may have declined for five straight weeks BUT they are only -4% off their closing highs from April. Four percent is nothing. If good news broke out we could erase that drop in very short order. However, a -4% drop is also nothing on the downside. A real correction to -10% would be 1227 on the S&P. I seriously doubt we will see that level but I could easily see a dip to 1250 just because of the calendar period and the negative news. Let a few positive data points appear and sentiment could change very quickly.

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

Jim Brown

Send Jim an email

"The true measure of a man is how he treats someone who can do him absolutely no good."
Samuel Johnson


Index Wrap

The Bear is Knocking at the Door

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

In all the major indexes except the Nasdaq 100 (NDX), there were weekly closes under the mid-April downswing lows, suggesting the intermediate-term trend has joined the short-term trend as pointed down. If there was an immediate rebound ahead, then this trend change might be called into question.

I was going to be in Morocco this week, but a wedding of friends was moved to a southern Spain venue after a terrorist bombing in Marrakesh, so I'm looking at the U.S. market a bit far afield. As far as Spain being a 'domino' after Portugal, Ireland and Greece (PIG), my hedge fund manager friend here, who's been calling on Spanish banks to check out the validity of his being short Spain, indicates that the banks have not written off their bad real estate loans under what he calls a 'pretend and conceal' policy; i.e., the big banks are pretending that these loans will get paid off and are 'concealing' the true balance sheet picture if they were to write down all their bad property loans. Looks like the government may have to force that issue if at all!

The weekly S&P and Composite charts are bearish in that up trendlines in the Nasdaq Composite and the S&P 500 (SPX) have been pierced; along with these trendline breaks, the weekly MACD has been on a sell signal since the week ending 3/18/11. This downside momentum sell 'signal' hasn't played a big factor in my market view until the aforementioned weekly up trendlines were pierced this past week, as you'll see on my first two (weekly) charts. The weekly trendline break now suggests lower levels ahead, especially for a retest of the mid-April lows.

Alternatively, assuming the indices don't violate the 2/3rds or 66% retracement levels highlighted on my individual daily index charts, we may see the establishment of a broad trading range in the choppy summer seasonal period ahead.

The weekly Nasdaq Composite (COMP) chart is my first featured graph, as it reflects a possible major double top. Along with the break of the steeper up trendline, these two factors point to a possible bear market ahead; that is, for the balance of this year. A bear market would be 'confirmed' so to speak, with a weekly close below 2600 and/or a downside penetration of COMP's major up trendline, currently intersecting at 2540. Fundamentally I would assume such technical action would coincide with the dreaded (by the bulls and those looking for work!) 'double dip' recession.

The similar pattern to COMP is seen in the weekly S&P 500 (SPX) chart shown next. The prior weekly SPX low suggests key weekly support at 1250; next support is seen at the current intersection of the up trendline around 2540. Unlike the COMP weekly chart, there's no similar potential double top; SPX's May 2008 highs (not shown on this chart) are in the 1425-1440 zone.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) is bearish in its pattern, as the rebound above the previously broken up trendline, was short-lived (two consecutive daily tops at the same level was the tip off) and SPX ended up falling to a new closing downswing low relative to the 4/18 closing low which suggests an intermediate-term trend reversal from up to down. Only the long-term trend remains up.

Of course it's possible that buying interest in the early part of the coming week could pull the index back up before the index pierces its 1295 intraday low. I've said for some time that I thought 1300 was a key support in SPX and that we might see this area become the low end of a possible trading range.

Another chart/technical factor is whether SPX stops at support implied by the 62 to 66% retracement zone. If so, then this recent sell off looks like a potential retracement-only. If the S&P 500 continues lower instead, then there's a potential for a retest of implied support around 1250, as suggested by both the daily and SPX weekly charts (seen above).

Resistance implied by the previously broken up trendline is at 1332 currently, with next resistance indicated in the 1360 area.

RSI and TRADER 'SENTIMENT'

The 13-day Relative Strength Index (RSI) seen above is showing downside momentum but also is nearing a 'fully' oversold reading. An oversold RSI as well as 'oversold' sentiment readings has been a good forecaster ahead of a rally, especially if support developed in at a prior low; e.g., 1295 OR significantly lower, at or near the 1250 area.

In terms of my sentiment indicator, we've seen a couple of daily readings in the 1.3 area (daily equity call volume at only 1.3 times daily put volume) and I suspect that there will be (5-day) moving average lows in this oversold (1.3 or under) area also before this market is ready to mount any sustained rebound.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) this past week came within a hair's breath of closing below its prior 577 intraday low; OEX touched support implied by a 66% retracement of its mid-March to early-May advance. The Close at 578.5 was a new low relative to mid-March's low close at 582. Technical analysis lore would suggest that this action 'confirmed' a reversal of the intermediate-term trend to down. I'm not so sure that there won't be at least a short-term rebound from recent lows. This market is nearing an oversold condition.

However, if the recent decline continues and OEX exceeds 2/3rds of the prior advance, there's an increased likelihood for a full round trip or a 100% retracement of the prior advance; i.e., a return that retests the prior 559 low. This is how double bottoms might 'set up'.

Support below 576 is in the 560 area where the OEX bottomed in March. Near resistance is at 595, extending to the 600 area.

DOW 30 (INDU) AVERAGE; DAILY CHART:

I wrote last week how that I could "only point to real strength in a couple of (Dow) stocks such as in JNJ and KFT." I can't say that I made a definitive suggestion to short the recent rally, one that carried into Tuesday-Wednesday of this past week, but the Dow charts last week looked 'terrible' as far as pretty universal bearish looking charts. A bottom up approach of looking at the 30 charts on at least a weekly basis often works well in predicting the trend of the Dow 30 bellwether.

The Dow (INDU) chart has turned bearish in that the weekly Close fell below 12200 closing low dating to 4/18. INDU hasn't yet reached support implied by the Fibonacci 62% to 66% retracement zone at 12060, extending to 12000. A close under 12000 would suggest that INDU had potential to fall back to the mid-March intraday low at 11555 or the closing low at 11613.

I've projected near-term resistance at the previously broken up trendline, currently intersecting at 12260. Pivotal resistance then comes in around 12570-12600.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP), as with the S&P, has closed under its prior Closing low of mid-April, which suggests a shift of the intermediate trend to down. However, there's still the intraday low of 2706 that is yet to be re-tested. The decisive break of a prior intraday low is usually definitive for a trend reversal.

COMP support in the 2710 to 2697 area is implied by the Fibonacci 62% retracement level, extending to a 2/3rds 66% retracement. It's common to see retracements to this 62-66% zone, followed by a rally attempt. As long as a retracement doesn't exceed 66%, it's still considered a 'retracement' of the prior trend as opposed to strict reversal of the prior trend; i.e., the prior uptrend. A Close below 2697 would suggest the potential for a round trip retest of the previous 2603 intraday low or to the lowest prior 2735 low Close.

I've noted resistance at the previously broken up trendline, currently intersecting at 2803. Next resistance is in the 2828 area; then, at the line of 2876 resistance, extending to the prior 2886 intraday high.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart formed an 'island top' that I highlighted last week. This bearish pattern was 'confirmed' so to speak by this past week's rally carrying right to the line of prior lows; those lows 'acted as' subsequent resistance as highlighted on the NDX chart.

Unlike the Composite, NDX has not closed BELOW its prior closing low; rather, NDX closed AT this level. Moreover, keeping some bullish potential alive, the previous intraday low at 2255 has not yet been retested. Stay tuned on what comes next.

Support suggested by the 62-66% retracement zone is at 2276 to 2265. It would take a close below 2265 to suggest potential for NDX to retest its prior closing low at 2203 or the prior intraday low of 2189.

Technical resistance is apparent in the 2350 to 2373 area, then around 2400, specifically at 2417, where there was a cluster of prior intraday highs.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) went from a 'mixed' picture chart to one looking more bearish. I wrote last week that it "would take a break below the prior downswing low at 55.3 to suggest there was a reversal in the intermediate uptrend." That hasn't happened yet, but the QQQ close made a bottom at the prior Closing low of 56.3. In that sense the stock has retested its prior low but is unconvincing as more price action ahead will suggest that its headed still lower or not.

I've noted near support at 56.3, then at the 62 to 66% retracement zone of 55.8-55.6. A close below 55.6 looks to be 'definitive' for still lower prices, especially for an eventual retest of the March lows in the 54.0-53.7 area.

Immediate overhead resistance is at 57.6, extending to more pivotal resistance at 58.3. It would take a close above 58.3 to suggest that NDX was regaining its bullish footing.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) saw further weakness last week along with the rest of the major indexes when the early rally of the week reversed course. The chart is mixed. RUT closed almost at support at 808, as implied by a 66% retracement of the mid-March to early-May advance. If RUT starts falling below 808, this would imply the potential for a re-test of the prior lows in the 780 to 776 area.

Near technical resistance looks like 838 currently, with next technical resistance at 848; extending to 856 at prior upswing highs.



GOOD TRADING SUCCESS!


New Option Plays

Internet & Technology

by James Brown

Click here to email James Brown

Editor's Note:

After five weekly declines in a row it might be time for the market to bounce but the overall trend is turning negative. These stocks caught my eye this weekend.

Nike Inc. (NKE) looks like a bearish candidate. I'd look for a drop under $80 or a failed rally at its 100-dma near $83 or its 200-dma near $82 as a potential entry point.

Sears (SHLD) is breaking down to new multi-month lows. I'd watch for a failed rally near new resistance at $70.00.

Cognizant Technology (CTSH) looks like a bearish candidate now but my concern is potential support at its 200-dma.

CME Group (CME) can be a very volatile stock. Shares are down sharply in the last two weeks. I wouldn't chase it but watch for a failed rally near resistance (maybe near $280).

Quality Systems Inc. (QSII) has broken its up trend but shares look a little bit oversold.

HMS Holdings (HMSY) is breaking down from its sideways consolidation and its 100-dma. My biggest concern here was the wide spreads on the July puts. HSMY looks headed for the $70 area.

- James


NEW DIRECTIONAL PUT PLAYS

Amazon.com Inc. - AMZN - close: 188.57 change: -5.08

Stop Loss: 196.25
Target(s): 180.25, 175.00
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
AMZN spent almost three weeks consolidating sideways in the $190-200 range. Shares were slowly building a bearish trend of lower highs and lower lows. Unfortunately for the bulls AMZN broke down sharply on Friday with a -2.75% decline and a breakdown under support near $190 and its simple 50-dma. The drop also produced a new P&F sell signal (see my comments below).

I am suggesting we open small bearish put positions now. We want to keep our position small that way if we see a better entry point on a failed rally near the trend of lower highs we can increase our position. We'll start this trade with a stop loss at $196.25. Our first target is $180.25. Our second target is $175.00 (or the simple 200-dma, whichever one AMZN hits first).

FYI: The Point & Figure chart for AMZN has turned bearish with a $176 target.

- small bearish positions -

- Suggested Positions -

buy the June $185 PUT (AMZN1118R185) current ask $2.91

- or -

buy the July $180 PUT (AMZN1116S180) current ask $4.30

Annotated Chart:

Entry on June 6th at $ xx.xx
Earnings Date 07/26/11 (unconfirmed)
Average Daily Volume = 4.5 million
Listed on June 4th, 2011


SanDisk Corp. - SNDK - close: 44.32 change: -1.06

Stop Loss: 47.70
Target(s): 40.50, 36.00
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Technology stocks have not performed very well. SNDK's bearish trend of lower highs and lower lows over the last several weeks has finally broken down under key technical support at the 200-dma. Shares have also broken their long-term up trend.

I am suggesting bearish positions now. Our targets are $40.50 and $36.00, given enough time. FYI: The P&F chart for SNDK is bearish with a $30 target.

- open Bearish Positions Now - Suggested Positions -

buy the July $42.00 PUT (SNDK1116S42) current ask $1.11

- or -

buy the July $40.00 PUT (SNDK1116S40) current ask $0.62

Annotated Chart:

Weekly Chart:

Entry on June 6th at $ xx.xx
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 5.8 million
Listed on June 4th, 2011


In Play Updates and Reviews

Another Down Week

by James Brown

Click here to email James Brown

Editor's Note:

Friday was another rough day for the bulls following a very bearish jobs report. Stocks marked their fifth weekly loss in a row. We had four bullish candidates get stopped out.

-James

Current Portfolio:


CALL Play Updates

Alliance Data Systems - ADS - close: 89.86 change: -1.60

Stop Loss: 88.65
Target(s): 96.50, 99.75
Current Option Gain/Loss: -83.3% & -59.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/04 update: This is it. ADS has come to its do or die moment with a three-day pull back to support near $90 and its 40 and 50-dma. Technically this dip to support within the up trend should be considered a bullish entry point. However, if the market sees any follow through lower on Monday there is a good chance ADS will hit our stop loss. Of course if you're the optimistic type then the S&P 500 is testing significant support near 1300 and if there was a spot for the market to bounce this is it.

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

06/02 New stop loss @ 88.65

chart:

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


Baker Hughes Inc. - BHI - close: 74.58 change: +0.98

Stop Loss: 69.90
Target(s): 79.00
Current Option Gain/Loss: + 7.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/04 update: BHI was one of the market's better performers on Friday. The company issued positive comments about its outlook for the second half of 2011. The stock saw a morning dip toward short-term support near $72 and then bounced to a new four-week high before paring its gains. If you're looking for a bullish candidate BHI is probably one of the stronger contenders and we could launch positions on this bounce but you might want to raise your stop loss toward the $71.75 area. I am raising the newsletter's stop loss to $69.90.

Earlier Comments:
We wanted to keep our position size small to limit our risk.

-Small Positions - Suggested Positions -

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

06/04 new stop loss @ 69.90

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


Fossil Inc. - FOSL - close: 100.50 change: -1.76

Stop Loss: 99.39
Target(s): 109.75, 114.00
Current Option Gain/Loss: -89.1% & -60.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/04 update: FOSL did indeed bounce from support near $100 but the bounce didn't last very long. The market's negative reaction to the jobs number sent FOSL to an intraday low of $99.50 before shares bounced. FOSL was rolling over late on Friday. The stock is testing key psychological support at the $100.00 area and we have a stop loss at $99.39. Shares should also have technical support at the 40 and 50-dma but we would get stopped out if FOSL dipped that low.

Technically a bounce from $100 could be used as a bullish entry point but given the market's downtrend you may want to pause on launching new positions. If FOSL does continue to sink the stock should find additional support near $95 and $90.

Earlier Comments:
We wanted 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: 36.90 change: +1.33

Stop Loss: 34.45
Target(s): 39.00, 42.50
Current Option Gain/Loss: + 0.0% & +21.4%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/04 update: FRX was one of the market's better performers on Friday with a +3.7% rally. The stock got a boost from an upgrade by J.P.Morgan and from news it was accelerating its stock buyback program with a $500 million purchase through Morgan Stanley. FRX ended the week at new two-year highs. We are raising our stop loss to $34.45. I am not suggesting new positions at this time but if you're looking for a new bullish trade then consider buying a dip in FRX.

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.

- Suggested Positions -

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

- or -

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

06/04 new stop loss @ 34.45
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: 135.33 change: +0.95

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:
06/04 update: GS bucked the trend in financials on Friday and posted a gain. Nothing has changed for us. This remains a very aggressive trade and we're waiting for GS to hit our entry point.

Earlier Comments:
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


Union Pacific - UNP - close: 101.14 change: -1.08

Stop Loss: 98.95
Target(s): 109.00, 114.00
Current Option Gain/Loss: -70.9%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
06/04 update: Transport stocks were under performers on Friday with the Dow transportation index down -1.7%. UNP gapped open lower and dipped to support near $100 and its 50-dma before bouncing. Technically a bounce from support near $100 would be a bullish entry point but given the bearish trend in the major averages you may want to pause on starting new 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


PUT Play Updates

Stericycle Inc. - SRCL - close: 85.69 change: -1.92

Stop Loss: 90.05
Target(s): 84.00, 80.50
Current Option Gain/Loss: +80.0% & +30.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/04 update: SRCL is cooperating with us. Shares broke down under support at their 100-dma on Friday. The stock closed at new two-month lows. There is a chance that SRCL might bounce at the $85.00 level but the path of least resistance seems to be lower. I am not suggesting new positions at this time. We'll wait for a new lower high or failed rally type of move. Please note our new stop loss at $90.05.

- Suggested Positions -

Long June $85 PUT (SRCL1118R85) Entry @ $0.50

- or -

Long July $85 PUT (SRCL1116S85) Entry @ $1.50

06/04 new stop loss @ 90.05

chart:

Entry on May 31st at $88.78
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 502 thousand
Listed on May 28th, 2011


Whole Foods Market - WFM - close: 57.15 change: -1.54

Stop Loss: 61.55
Target(s): 55.10, 52.00
Current Option Gain/Loss: +40.9% & +35.2%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/04 update: The dismal jobs report on Friday did not inspire a lot of confidence for consumer-related names. WFM gapped open lower under $58 and closed down -2.6%. Please note that I am lowering our stop loss to $60.65. Don't be surprised if WFM manages a bounce near $56.50 and its late February and early March lows. Prior support near $58 and its 100-dma should be new resistance. Our targets are $55.10 and $52.00.

- Suggested Positions -

Long June $60 PUT (WFM1118R60) Entry @ $2.20

- or -

Long July $55 PUT (WFM1116S55) Entry @ $1.05

06/04 new stop loss @ 60.65

chart:

Entry on June 2 at $58.70
Earnings Date 08/11/11 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on June 1st, 2011


CLOSED BULLISH PLAYS

Avalonbay Communities - AVB - close: 131.24 change: +2.48

Stop Loss: 127.75
Target(s): 134.90, 139.50
Current Option Gain/Loss: - 70.0% & -50.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/04 update: Choose your favorite cuss word and insert it here...( )! Thursday night AVB issued a press release and raised their Q2 and 2011 earnings guidance. Yet shares still gapped open lower and sank to $127.51 before bouncing big (+1.9% on the day). The stock is now back above resistance at the $130 level. Our stop loss was hit at $127.75.

Our call play has been closed but if you were looking for a bullish candidate I'd keep your eye on AVB.

Unfortunately, AVB's options didn't trade much on Friday. The exit price listed below is an estimate.

- Suggested Positions -

June $135 call (AVB1118F135) Entry @ $0.50, exit $0.15 (-70%)

- or -

July $135 call (AVB1116G135) Entry @ $1.50, exit $0.75 (-50%)

06/03 Stopped out @ 127.75, Options @ -70% & -50%

chart:

Entry on May 31st at $130.55
Earnings Date 08/03/11 (unconfirmed)
Average Daily Volume = 571 thousand
Listed on May 28th, 2011


Boeing Co - BA - close: 74.84 change: -0.85

Stop Loss: 74.85
Target(s): 79.95, 84.50
Current Option Gain/Loss: -68.5%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/04 update: BA did not perform very well on Friday. Shares gapped open lower under support at the $75.00 level. The stock opened at $74.71. Our stop loss was $74.85 so the play was closed immediately. Shares spent the rest of the day trying and failing to rally back above the $75.00 level.

- Suggested Positions -

June $80 call (BA1118F80) Entry @ $0.35, exit $0.11 (-68.5%)

06/03 Gap open lower, Stopped out @ 74.71, option @ -68.5%
06/01 Triggered @ 76.50
05/31 New trigger @ 76.50, New stop @ 74.85

chart:

Entry on June 1st at $76.50
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 4.8 million
Listed on May 17th, 2011


Deere & Co - DE - close: 82.20 change: -2.03

Stop Loss: 82.20
Target(s): 89.75
Current Option Gain/Loss: -73.3% & -70.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/04 update: Friday proved to be another ugly day for the market thanks to the jobs report. DE gapped open lower under its 200-dma and quickly hit our stop loss at $82.20. Our aggressive trade on DE has been closed.

-Small Positions Only-

June $90 call (DE1118F90) Entry @ $0.45, exit $0.12 (-73.3%)

- or -

June $87.50 call (DE1118F87.5) Entry @ $1.01, exit $0.30 (-70.2%)

06/03 stopped out @ 82.20, Options @ -73.3% & -70.2%

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: 56.73 change: -1.31

Stop Loss: 56.95
Target(s): 64.00, 68.50
Current Option Gain/Loss: -93.4% & -58.7%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/04 update: We have been growing concerned about the action in ESRX, which is why we raised the stop loss to $56.95 on Thursday. Unfortunately for the bulls the sell-off in ESRX has accelerated. Shares gapped open lower on Friday at $57.54 and quickly fell through its 50-dma. Our stop loss was hit Friday afternoon.

- Suggested Positions -

June $60 call (ESRX1118F60) Entry @ $1.53, exit $0.10 (-93.4%)

- or -

August $60 call (ESRX1120H60) Entry @ 3.15, exit $ 1.30 (-58.7%)

06/03 stopped out @ 56.95, options @ -93.4% & -58.7%
06/02 new stop loss @ 56.95

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


Wynn Resorts Ltd. - WYNN - close: 143.41 change: -2.85

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:
06/04 update: I am removing WYNN as a bullish candidate. Shares seem stuck in the $140-150 zone. Nimble traders could try buying calls near support and selling near resistance but it's a volatile stock. WYNN looks headed for $140 again. Shares never hit our buy-the-breakout trigger at $152.00. The longer-term trend for WYNN is still up so I would keep it on your watch list.

Our Trigger to launch positions was never hit!

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