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Daily Newsletter, Saturday, 6/25/2011

Table of Contents

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

Market Wrap

Moody's Spoils the Party

by Jim Brown

Click here to email Jim Brown

The day after the Greek crisis appeared to take an important step towards a resolution Moody's put 16 Italian banks on credit watch for a downgrade based on contagion concerns from Greece.

Market Statistics

Just when it appeared investors were starting to get excited about buying Thursday's dip the rating agency trashed not only those 16 Italian banks but also several Italian government related bond issuers for possible credit downgrades. Shares in Unicredit, the country's largest bank, were down -8% to lead the sector lower. Moody's had already put Italy's public debt on review due to low growth and high public debt around 120% of GDP and one of the largest in Europe.

Nobody should have been surprised at the downgrades since Moody's, Fitch and S&P have been taking turns beating up the weaker Eurozone countries and their financial systems for more than a year. After these firms were smacked around for their lack of accuracy and action prior to the 2008 financial crisis they are trying to find new targets as often as they can.

What surprises me is the U.S. market reaction to this downgrade parade every time a new warning is issued. It was Moody's and Italy on Friday. It may be S&P and Ireland next week and then Fitch and Portugal the following week. It makes you wonder if they collaborated on a calendar so they can each get their weekly 15 min of fame and not bump up against a downgrade from the other firms. Everyone in the U.S. markets should understand those weaker European countries are going to get smacked around about once a month for the next couple years so what is the big deal? We know the finances are terrible and nobody in their right mind should be investing there so why the big market drop every time a new downgrade appears?

I think investors (or newscasters) are just looking for an excuse to sell OR an excuse to pin on the selling. The downgrades are a perfect opportunity.

Here in the U.S. the third GDP revision for Q1 rose to +1.9% growth from +1.84%. That was a little better than the consensus estimates for a decline to 1.7%. This compares to a +3.1% growth rate in Q4. This was a ho-hum report because everyone already knew it held no surprises. The worry is what the Q2 report will look like when it is released at the end of July. There are widely differing views on the Q2 growth rate from less than +1.0% to as high as +2.9%. Considering the sharp declines in the economic reports over the last six weeks I would lean toward the lower numbers.

GDP Chart

The first sign of good news was the Durable Goods report for May. Orders rose +1.9% in May compared to a previously reported -3.6% decline in April. That decline was revised higher to -2.7%. However, the headline number contained a significant amount of orders related to defense. Without those defense related orders the headline number would have shown a -1.9% decline. An order is an order to me since U.S. workers still have to manufacture the products.

Next week is economic week. This is the week we get all the major ISM reports along with the Kansas, Richmond and Texas manufacturing surveys. This is the week we have been waiting for to see if the economic dip in May was a one-time deal or the start of something bigger.

The biggest report for the week is the national ISM on Friday. After a 53.5 reading last month we want it to stay above 50 and in expansion territory. A drop under 50 would mean manufacturing contracted in June.

There are a few more anecdotal reports every day that suggest the impact of the Japanese quake and resulting supply chain break is fading and activity is back to 100% in some places. We want to hear more of that in the official reports. This could give the market some reason for optimism.

Economic Calendar

The market needs some reason for optimism after last week. The market did not like the collapse of the debt ceiling talks in Washington. It did not like the Greek Prime Minister making comments that sounded like they would give up and not even vote on the austerity package. That worry was erased when Greece won new concessions on Thursday. Now the big problem is the vote in parliament on Tuesday. Some of the ruling party members have said they will not vote for austerity even though that means an almost certain default in the weeks ahead. That vote is on Tuesday and is probably the most important event of the week.

The market did not like the plunging PMI in Europe and China on Thursday. However, on Friday China's Premier said the efforts to halt inflation had worked and suggesting the government could ease up on its restrictions soon. He said the falling oil prices would relieve inflation pressures. China's National Business Daily said government agencies are preparing to remove limits on automobile purchases. That will be a big boost for sentiment in China and add to China's rapidly rising demand for oil. China's oil demand has risen almost one million barrels per day over the last year and is on track for an even bigger increase in 2012.

The constant chatter about releasing the IEA oil reserves failed to push U.S. oil prices any lower and they closed with a slight gain just over $91 per barrel. The Shell CEO pointed out that the U.S. Energy Information Agency expects Gulf of Mexico oil production to decline by 330,000 bpd in 2012 because of the halt in drilling permits and nine rigs leaving the Gulf thanks to the administration's permit moratorium. That equates to lost production of 120 million barrels of light sweet crude in 2012. I seriously doubt the president will release another 120 million barrels from the Strategic Petroleum Reserve to make up for that lost production so expect fuel prices to rise again. Enjoy that cheap gasoline whiles it lasts. The national average dropped to $3.60 per gallon. It is $3.39 at Costco in Denver tonight so I am not complaining!

FYI, Senator Obama criticized President Bush on July 7th 2005 for releasing oil from the SPR after the hurricanes saying, "The oil in the Strategic Petroleum Reserve should only be used for real emergencies not for price manipulation." I guess he had a change of heart.

U.S. Crude Oil Chart

The equity markets sold off ahead of the weekend on fears of further events in Europe but the bond markets were finding plenty of buyers. Interest rates (yields) fell to a seven-month low and well under 3% on the ten-year note. This flight to quality has got to be choking Bill Gross at Pimco after he dumped all his U.S. debt a couple months ago.

Ten Year Note Yield Chart

Obviously for bonds to be soaring and yields falling there has to be stress somewhere else. That stress was being felt in equities and commodities. The dollar rose again and gold fell sharply for the second day. There were rumors some large funds were selling gold in order to raise cash to buy the dip in equities. They may also have been raising cash to prevent margin calls on other positions like oil futures and energy stocks. Gold hit $1559 on Wednesday and the highest level since the May 2nd record high but closed at $1502 on Friday for a major two-day loss. This is also a function of the rising dollar and falling euro since gold is priced in dollars.

Gold Chart

Tech stocks reversed their gains from Thursday thanks to earnings problems at Oracle and Micron on Thursday night. Oracle lost -4% and Micron -14% and they poisoned the tech sector with worries about future earnings problems in other companies.

The Q2 soft patch may have caused a detour in the road to $100 in S&P earnings for 2011. Those estimates are already starting to come down despite a lack of any big name warnings. Traders are worried those warnings are just around the corner.

The Q2 earnings cycle officially begins on July 11th when Alcoa reports. The next two weeks could be full of warnings now that the quarter is nearly over and that has pushed analysts to lower estimates now rather than be caught flat-footed with an unexpected surprise.

The bright side to this is the possibility of some upside surprises based on those lowered estimates. Obviously that would be sheer speculation since nobody of importance has guided higher recently. The trend is in the other direction with guidance being lowered. Time will tell but the next two weeks could have some potholes in the yellow brick road if major companies start to confess.

Google (GOOG) hit a new 10-month low after it acknowledged it received a subpoena in what is likely to be a broad antitrust investigation and review of business practices. The FTC has asked for access to information on search and advertising and Google said it was cooperating with the probe. European investigators are also stepping up their scrutiny of Google and questioning whether its dominance in search blocks the competition and harms consumers.

There are no positives here. Google only has downside from the probe and it could take years and billions of dollars before it is over. This will also act as a distraction to management and likely hinder acquisitions during that period. Google performed 66% of the searches in the U.S. in May with Yahoo at 16% and Microsoft 14%. Google had over an 80% of the searches in Germany, France, Italy and Spain in May according to ComScore.

An FTC official said they would be looking at things like how Google modifies their search results to "raise the cost for Google's rivals, raise their advertising costs and raise their development or operating costs." The FTC will also focus on whether Google ever tried to limit clicks to competitor websites by how it listed the search results. Obviously putting a Yahoo or Bing article on page two of the search results rather than page one would decrease the number of clicks through to that website. In addition to the FTC the states of New York, California, Texas and Ohio are in the early stages of their own antitrust investigations.

Google Chart

The airlines can't win. A day after spiking to multi-week highs on falling oil prices the sector was hit with investor concerns after United Continental (UAL) warned that second quarter revenue would be well below street estimates. UAL said in a regulatory filing that Q2 revenue would rise by 8.3% to 9.3%. Analysts were expecting more in the range of 11% to 12%. United blamed the revenue miss on a transatlantic revenue sharing agreement but then also said demand was consistent with a slow economic recovery. Consensus earnings estimates are $1.54 and UBS analysts believe that could be 30-cents too high.

AMR, parent of American Airlines said its revenue would only rise between 4.5% and 5.5%. Shares of AMR fell -5.6%. Earlier this month the International Air Transport Association industry group slashed their earnings estimates for the sector by more than half citing high oil prices, slow recovery and the turmoil in Japan.

Personally I believe any bounce in the airline is an opportunity for a long term short. Over the next two years oil prices are going to turn any airline profits into rivers of red ink. By 2015 only the very rich will be able to fly and there may only be 2-3 airlines left and those could be nationalized. Check back in 2015 and see if I was right.

United Continental Chart

Friday was the annual Russell index reconstitution event. Once a year on the Friday after option expiration the Russell takes a snapshot of all the stocks in their universe and reconstitutes their indexes. They sort all the stocks by market cap that meet their criteria. That is companies incorporated in the U.S. or a BDI country. They are over $1.00 per share and are not on the pink sheets or a bulletin board stock and have a market cap over $30 million. They must have traded on a U.S. exchange on the last business day in May. They cannot be a closed-end mutual fund, limited partnership, royalty trust, foreign stock or American Depository Receipts (ADRs), etc. After removing all the excluded stocks they sort by market cap. The top 3,000 become the Russell 3000 Index ($RUA). The top 1000 of those 3,000 stocks become the Russell 1000 ($RUI), the bottom 2,000 of those 3,000 stocks become the Russell 2000 ($RUT).

The Russell changes spiked the volume over the Friday to 8.5 billion shares and that was actually light for a normal Russell change day. Volume on Thursday's whiplash trading was 8.1 billion shares. Volume for the rest of the week averaged 6.1 billion shares. There will be some carryover into Monday but most of the funds tracking the Russell indexes are non discretionary so changes are as close to the modification date as possible. Russell claims there are $3.9 trillion dollars in investments tied to the Russell indexes.

Russell 3000 Chart

There was a lot of chatter on Friday about the debt ceiling discussion being kicked upstairs after the talks with VP Biden collapsed. President Obama has scheduled discussions with the leaders of each party for Monday and rumors are starting to slip out on what an eventual deal may look like. Treasury Secretary Geithner was interviewed on Friday and he alluded to a potential $2 trillion deal with no tax increases or a $4 trillion deal with some increases for people earning over $500,000 and elimination of come corporate deductions for things like corporate jets. Obviously they are a long way from a real deal but those rumors are probably trial balloons to see how their constituents will react. They are under the gun to get something done sooner rather than later in order to remove the cloud over the markets and prevent a credit rating downgrade due to the uncertainty. It will take a hike of about $2.5 trillion to get past the 2012 elections before this topic arises again.

If a deal was done next week I believe the market would celebrate. When the administration is doing politically questionable things like releasing oil from the SPR and announcing highly controversial events a year in advance like troops coming home from Afghanistan, a debt ceiling compromise would be a really positive accomplishment both parties could capitalize on before the July 4th holiday.

The S&P closed near the low for the day at 1268 but still over the critical support of the 200-day average at 1263. The rebound from Thursday was almost completely erased and internals were lousy despite the Russell changes adding volume. The reason for the swoon was blamed on the warning on Italian banks but I think the real reason we closed on the lows was worry over Greece. That is a very unstable situation and with only a five-seat majority in parliament it would not take but a few defections for the austerity vote to fail. There have been a lot of protests and nationwide strikes have been called starting on Monday. The GSEE union with more than 500,000 workers called the austerity requirement to get the loan a "mafia-style rescue." There could be news at any time over the weekend that could cause a triple digit drop at Monday's market open. Traders ran to the sidelines rather than face that risk.

Greece will definitely be an event risk over the next several days. However, on Friday EU leaders basically gave Greece a blank check and pledged not to abandon Greece or allow the nation to default. German Chancellor Angela Merkel said, "This is an important decision that says once again we will do everything to stabilize the euro over all." The leaders at the meeting said once Greece approves the new austerity plan they would immediately give Greece the $17 billion tranche of emergency funds and then immediately put together a second rescue plan estimated to be another 120 billion euros to be announced on July 3rd in Brussels. (On a side note, how do you help a country that has five times more debt than they could ever pay by giving them another loan that is twice again more than they can pay? Trying to cure too much debt with even more debt is irrational.)

President Sarkozy of France also said, "Greece is supported." Basically everyone is going out of their way to let the world know they will not let Greece default. They would like to have the Greek vote pass but based on the number of "support" comments it appears they are ready to bite the bullet to save the euro regardless of the Greek vote.

These comments did not come out until late Friday so the market already had its weekend event risk mindset going into the close. Depending on what Greek officials say over the weekend the fix appears to be in place unless there is an outright revolt in parliament.

To recap last week's comments the European banks have so much sovereign debt on their books from countries like Greece, Italy, Ireland, etc that they are essentially insolvent if they ever have to mark this debt to market. U.S. money market funds are in a panic. According to some analysts they have 50% of more than $3 trillion in cash invested in these banks. They are not rolling over their commercial paper to these banks so there is a liquidity squeeze coming. These banks will have a tough time selling new paper to replace those maturing loans. The Eurozone can't afford to let Greece default or those banks would also default, fail or be nationalized. Europe is hoping they can kick the can far enough down the road to give them time to work the banks out of this problem. I don't see this happening but they may be able to drag out the problem for 2-3 years by extending new loans and pretending there is not a bigger problem.

Eventually as the Eurozone begins to unwind and countries pull out of the grand experiment there will be a period where multiple countries default on their debt. The ECB has over $100 billion in Greek and Irish debt already. U.S. banks have nearly $100 billion in credit default swaps, that is known, on Greek, Irish and Portuguese banks and no telling how much in additional swaps that is unknown. As these foreign banks fail and the dominoes begin to fall around the world we could be headed back to a 2008 style credit crisis where banks won't lend to other banks because they don't trust their balance sheets. Let's hope the EU finance ministers can work a miracle and none of this comes to pass.

Assuming no major upsets in Greece over the weekend I still believe the support on the S&P will hold. That does not mean we are going to rocket higher but I would be very surprised if we moved substantially lower. Based on historical trends I was expecting a quarter end window dressing rally but I saw no evidence on Friday of any dip buying. I am withholding judgment until we get past the weekend and see what happens. This is definitely an inflection point for the market.

To be blunt the S&P chart looks bearish. Chartists always claim the chart tells the whole story and you don't need to factor in things like Greece, quarter end, debt ceilings, earnings, etc. I agree to some extent but I think we have seen over recent weeks that news events clearly over power chart trends.

While many analysts are focusing on 1263 and the 200-day as the critical support level I would also call 1250 and the March low a critical level. While a dip below 1263 would be critical, a dip below 1250 would be a disaster. We have tested the 200-day twice now with instant rebounds but Friday's close was nearly a third test. In theory a third test usually fails but theory does not take into account the calendar and the news.

S&P resistance is now a good distance above at 1300 and support is 1263 followed by 1250.

S&P Chart

The Dow lost its grip on 12,000 again but is still a long way from critical support at 11,600 and the March lows. The Dow is not very reactive to moving averages since fluctuations in individual stocks have such a dramatic impact on the Dow. Therefore the 200-day on the Dow is not that material as a support level.

The Dow is lagging on the current downtrend with the S&P and Nasdaq already lower on the charts relative to the Dow. We should watch the S&P for guidance and ignore the Dow as anything other than a sentiment indicator.

The Dow has not posted a gain in June since 2004.

Dow Chart

The Nasdaq has been extremely volatile over the last week thanks to big moves in several key large cap tech stocks. The earnings guidance from Oracle and earnings miss by Micron did not help tech sentiment but the Nasdaq still managed to close over the 200-day average for the fourth consecutive day.

May and June are not typically good for tech stocks. Earnings ease because of the end of school PC shopping and the lull before the back to school buying and then the holiday rush. Techs normally pick up again later in the summer. The technical problems with shares in Apple and Google are a very heavy weight for the rest of the Nasdaq issues to drag around. We saw how strong the Nasdaq rallied when Apple had an $8 day. On Friday Apple, Google and Priceline lost a combined $18. That is a significant anchor but the damage was not that bad relative to support.

Resistance is just below 2700 and a move over that level would be a breakout. Critical support is 2615.

The Semiconductor Index is relatively weaker and that is producing extra drag on the Nasdaq. Critical support on the SOX s about 390.

Nasdaq Chart

Semiconductor Index Chart

The Russell 2000 index is not relative for Monday because of the reconstitution. There will be dozens of new stocks in the index on Monday and dozens of old stocks will be gone. Russell balances the index weighting to roughly correspond to the closing price on Friday but it will remain slightly more volatile for the next several days as fund managers complete their adjustments.

I like that the Russell is holding well over support but we don't know how much of that is related to the index rebalance. This is a sentiment indicator only for next week.

Russell Chart

There is event risk this weekend from ruling party defections in the Greek Parliament. Only six of the 155 members of Prime Minister Papandreou's ruling party have to vote against the austerity plan for it to fail. At least one high-ranking deputy, Alexandros Athanasiades, said he would vote against it because of provisions in the plan. With protests all over Greece and nationwide strikes planned it would not be surprising to see five more lawmakers switch sides.

While this would cause a major news event and market disruption the comments from the EU officials late Friday suggest they would find someway to work around it. While the event risk is great for market disruptions the final result will most likely be a dispersal of the funds and a new bailout of some sort. We just have to put up with this slow moving train wreck a few days longer. Who knows, maybe the U.S. will come up with a debt ceiling deal to overshadow the European political theater currently in progress.

I am still leaning towards a bout of quarter end window dressing but I could easily see the Greek news over powering any thoughts of buying by fund managers. Uncertainty is a market killer and we will definitely have uncertainty next week.

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

We are launching a July 4th subscription special this weekend for readers who did not subscribe to the end of year promotion last year. This special offer will give you a significant discount in the subscription rate over the next six months. If you are not an EOY subscriber this is for you. Discount prices and a free DVD video of your choice! Click Here for Info

Jim Brown

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Index Wrap

Bottoming Prospects and a Trading Range Market

by Leigh Stevens

Click here to email Leigh Stevens
The prospects that the market is in a bottoming process is still with us even with the yo-yo volatile price swings. It's also likely that this market will offer more short-term trading opportunities.

I've gone back, in this lighter-volume summer market, to using moving average envelopes as my 'front' technical indicator for the major stock indexes. This because we're in more of a trading range market for which this indicator is superb.

I mostly use moving average envelopes with the stock indexes and only rarely with individual stocks. Especially since the upper and lower envelope lines on indexes tend to be consistently around 3% above or below a Fibonacci 21-day moving average.

The upper and lower envelope lines plot values that are set at some percentage ABOVE and BELOW a particular moving average that is in the middle. Some chart applications don't display the centered moving average, but you can add it as a separate indicator since it's important to see it. It's important to see the centered moving average because the 21-day average often acts as support or resistance.

I went into a comprehensive explanation of the use of 'simple' moving average envelopes (as opposed to Bollinger Bands) in a Trader's Corner article which can be viewed HERE.

The S&P 500 (SPX) is shown below with a 21-day moving average and envelope lines relative to this average as a representative example. The upper envelope is set to 'float' 2.5 percent above the 21-day moving average. Why 2.5%, whereas the lower envelope line is set to float 3 percent below the center (21-day) moving average? Simply that 2.5% is the value that's been working to contain rally highs. You can experiment with these values. With the Nasdaq, the particular moving average envelope values that 'contain' most intraday highs and lows, will tend to (either on the upper, lower, or on both lines) be a value of 4% or more.

You'll see an instance in early-May where SPX briefly found support at the average, but after prices fell below the moving average, the average later 'became' resistance on 2 subsequent rallies, as highlighted by the red down arrows. I'll be using moving average envelopes on the daily charts I display today for the major indexes, although I don't use them much on the Russell 2000 index as this indicator 'works' less well with RUT.

The lower envelope line will tend to 'act as' a key support area, although prices may continue to decline ALONG this line so moves to the lower envelope doesn't necessarily mean that a rebound will happen from this area. It does give some parameters to trading. If there is a rally from the lower envelope line, as happened recently, the moving average may be where the rally stops. If a rally breaks through the moving average, I look for further rally potential to or near the upper envelope line.

The foregoing is a sort of 'mechanical' explanation of a key technical model, indicator or study (moving average envelopes) that may be useful in analyzing what will probably continue to be a trading range market in coming weeks. What do I think of the trend ahead is another question?

The most potentially 'telling' chart pattern, aside from the sharp increase in volatility, I see currently is on the hourly index charts. The pattern could be one that's tracing out a rounding bottom, with the key second half (the rising second half of the circular pattern) not yet defined by future market action.

My next charts, of the hourly S&P 500 (SPX) and the Nasdaq Composite (COMP), outline what could be one way price action unfolds; assuming hourly lows stop approximately at or above the price levels I've projected out into the future. Conversely, if prices break below the representative values I've forecast then the projected rounding bottom is a bust as far as a forecasting model. These hourly charts offer a view of a possible bottoming process and the pattern that most stands out to me.

I don't have a perfect chart tool (above) to show a potential rounding bottom (or rounding top) but these charts give an idea of how such a bottom would 'look' as it unfolds.

Given the oversold intermediate-term condition of this market, I doubt that we're going to see another big leg down, without at least some rally attempts as we've seen recently. I usually say trade LESS, but this current market will likely require trading MORE and for shorter-term objectives if you want to participate. The moving average envelopes will provide some useful ideas of the where support and resistance may develop. I'll have more specific discussions on each index next.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart is still bearish on a near to intermediate-term basis but the decisive bearish event hasn't happened yet, which would be the index piercing its prior closing low at 1256.8 and I see bottoming potential still ahead. If there's a decisive downside penetration of 1250, another down leg could be underway however. It depends on whether this is new closing low or a final spike down. My lower envelope line suggests potential 'support' at 1245; next support is 1234-1235.

Longer-term chart considerations also suggest key support at 1249-1250 as the long-term weekly up trendline (not shown) now intersects in this area. Major support is assumed to lie at 1173-1175, where SPX bottomed in November 2010.

The index is not quite as oversold as last week as measured by the 13-day RSI. It only took a rebound back up to the 21-day moving average to get traders somewhat bullish again, but of course selling predominated around 1298 and SPX didn't close above the average, which is a bearish element. High bearish sentiment isn't quite the contrarian bullish influence I was seeing last week.

Resistance comes in at 1291, extending to 1298, with next higher resistance noted around 1312. Volatility is certainly up, with the VIX shooting up to 21 by Friday; midmonth the S&P 500 volatility model hit 22.7 as a closing high.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart is still bearish, with a key event the inability to get back above its 21-day moving average. In terms of the chart pattern as to future rally potential, the key is what happens if the index again sinks to the area of prior lows in the 564-559 zone. I continue to have the view that further weakness won't be all that pronounced, at least not in the next 1-2 weeks. I'm more realistic this week as to how much sustained rally potential there is in the immediate future, especially ahead of the 4th.

There was a decent-sized on Monday-Tuesday but the telling technical event was the failure for OEX to climb back above its 21-day average. This was the case in a strong, but short-lived rally in late-May.

So, OEX seems to keep getting pulled lately to the bearish envelope line. In a strict trading range market versus markets in STRONG trends (e.g., the first 6 weeks of this year), I would anticipate a rebound. The wrinkle is that markets can and do get overbought OR oversold for prolonged periods. I lean to the view that this market is basing, not setting up for another substantial decline.

I've noted support at 560-559, then at 554, assuming the index again rebounds from intraday lows in this area. 550 is key support. A daily and more especially a weekly close below 550 would suggest an initially break in the long-term up trendline.

By one measure, key near resistance is at 576-577; on my chart I've indicated initial 'resistance' at the current 21-day average at 574. 580 is the next key resistance above that. If there's even a one-day close (better is 2-days) above the 21-day moving average, there's potential for more gains. Any next rally is unlikely to be dramatic in my view.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) of course had a bullish surge this past week in the early going but got beaten back at the 21-day average. I don't think that traders are watching this average all that much (oh yeah, "we're at the 21-day average, let's sell!") but rather that this time period just simply works as a key first test of resistance; or, the first test of pivotal support (on pullbacks).

Nevertheless the hourly chart considerations I wrote above in my initial 'bottom line' commentary above suggest there's potential for a rounding bottom to set up. It's speculative at this point but I'm struck by the bottoming action being at the low point of the circle, where it 'should' be. The rounding bottom or rounding top isn't seen all that much, especially on daily INDEX charts; the patterns are more common on daily equity charts.

INDU remains the least bearish looking chart in that sense that the Average has been holding above ITS prior low, unlike the other indexes that are down and dirty testing prior (mid-March) lows. Actually, none of the major indexes have yet pierced their prior lows, a key thing that hasn't yet tipped the charts fully bearish. A weekly close in the coming week below 11900 would be an initial dip below INDU's longer-term up trendline.

AA, AXP, BAC, CAT, DD, DIS< GE, IBM, INTC, JNJ, JPM, KFT, KO, MCD (if it can pierce a minor double top), MRK, MSFT, PFE, PG, VZ, UTX, WMT, TRV, and T all have potential to rally at current or slightly lower levels. I don't see a lot more near-term downside in many to most of the aforementioned stocks so my view of the Average is not that bearish. Many of the stocks are oversold enough to get a lift on some bullish news. There was some good news (e.g., on Greece & energy costs) this past week, but when in bearish worries, investors don't switch views quickly.

I calculate Dow resistance in the 12100-12126 area, extending to the prior upswing high at 12217, with key resistance at the 12400 level. Technical support is at 11900-11870, then around 11715-11705. Fairly major support should come in at 11600. I'd love to buy DJX at 1160 for at least a short-term bounce but I'd also be surprised to see the Dow that low in the near-term.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq chart as resumed its bearish look with the recent rally failure. However, if this simply leads to more basing action around 2600 that's a good thing for the bulls as it could establish the low of a trading range. Also, the 'broader' the base, the higher is the rally future rally potential.

As to the high end of that potential price range I generally look for at least a 50% retracement in this kind of pattern; e.g., potential high end of a summer trading range equals half of the 287 point decline to around 2740. I've noted resistance at 2760, which begins in the 2750 area. Rally attempts to the 2740 could succeed easily on a next rebound. So far, we've only seen oversold rebounds fueled much by short-covering, hi-frequency trading chasing short-term momentum, and speculative buying in general but there's still a hunger and allure for tech, as seen in LinkedIn's IPO. Tech stocks, especially internet related, have potential to hit total home runs by doubling or tripling (or more) earnings. I'm anticipating that COMP holds the 2600 area, which is where long-term support trendlines intersect currently.

I've noted COMP support levels at 2600, then 2574 at the lower envelope line, and finally at 2550. 2500 is major support. COMP resistance is noted in the 2700 area which encompasses the 2693 recent rally high. Next resistance begins around 2750 but I've noted 2762 as a pivotal resistance. I could see an eventual price/summer trading range in the Composite between 2800 & 2600.

As with SPX, COMP got oversold in RSI terms (above) just ahead of the first lows made in the 2600 area. It was a type of 'oversold' situation also in that traders kicked up daily equities put activity relative to call volume to well above normal levels. This is visually seen in the sinking CPRATIO up to the week before last; this was followed by a strong surge in bullishness this past week. Traders still are predisposed to be bullish. If the bulls get another fright, my sentiment indicator should fall sharply and be ahead of a next rally.

NASDAQ 100 (NDX) DAILY CHART:

Bearish disappointments ruled this past week and the Nasdaq 100 (NDX) index fell off as sharply as it ran up on Monday-Tuesday. This kind of pattern can be part of a 'base' building process, as lows are established repeatedly in the same area. We'll see on that.

Currently I don't see enough downside momentum here to punch through key technical support at 2200-2180. This doesn't mean it's off to the races again as far as upside potential. The bulls would be doing well right now to pull NDX above its 21-day moving average; even modestly above, but to also hold those gains.

Look for initial, and intermediate-term, support in the 2200-2180 area. In the event this area is pierced, if the LOWER envelope line was again reached, NDX would hit 2159. Fairly major support begins at 2130, extending to 2100.

I've noted resistance at 2261, at my centered moving average, but to encompass the recent 2256 rally high. A key to a bullish stampede would be trading above 2300.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) chart reads of course like the underlying NDX. Each week I try to look at the chart freshly and irrespective of my view of the week before. I still get the same 'message' from this pattern, which is some likelihood that the index is at the low end of a trading range. Lows ahead that sink below 53.5 turns the chart to more bearish pattern. Next support in that case becomes 53. Major support begins at 52.

Initial resistance is at the recent 55.4 intraday high, extending to 55.5, the current 21-day average. 56.0 becomes the next pivotal resistance.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) has this clear cut Head & Shoulder's Top (H&S) pattern and an objective implied by the break of the so-called 'neckline' is 751. This is rule of thumb on the downside 'neckline' break; this is, AFTER the 3 pronged top that's the H&S pattern where a second rally (the head) is higher than the first peak (left shoulder), but with anther dip and a final rally that more or less only equals the first (right shoulder); this is definition of what the Head & Shoulder's is. I don't get overly focused on price targets. The major thing we know of trading benefit is to sell the heck out of a Right Shoulder (RS), not waiting for a deeper fall to 'confirm' direction. That's it.

An equally powerful chart reality is that a potential double bottom is forming and could become the low end of a trading range, which is where I think we are in the Nasdaq. More price action is needed to prove or disprove this picture.

Key near support in RUT is 776-772. If RUT falls decisively falls under 772, there's the aforementioned 751 target based on the outlined H&S top pattern. 740 is highlighted as my lowermost technical 'support' but more broadly it's 740-737 and a key multiyear support (up) trendline intersects there, so I see this area as a pivotal support. A break of this trendline would suggest a more bearish long-term period for the Russell ahead. Recent highs above 860 cap a rally that started in the 350 area in early-2009, a gain of 145%. Our recent top could also be a long-term top.



GOOD TRADING SUCCESS!


New Option Plays

Tech, Financials, & Oil Service

by James Brown

Click here to email James Brown

Editor's Note:

The stock market's intermediate trend is down. Yet the S&P 500 has not yet broken long-term support at the 200-dma nor one its key trendlines of higher lows in the 1260-1250 area. The index could go either way here. Stocks might bounce on end-of-quarter window dressing, or they could churn sideways as investors wait for the beginning of Q2 earnings season, or they could renew the correction lower.

Whatever your bias I would take a cautious approach to new positions. In addition to tonight's new candidates I'm presenting a list of stocks that caught my eye.

CRM - shares might be a bullish candidate here or wait for a rally past $145.50.

EL - a rally past $104 could be a new bullish entry point.

PPG - the bounce from its 200-dma has potential. Do you buy another dip near $85 or wait for a rally past the 50-dma?

DVA - a rise past $85.75 could be a new bullish entry point.

FMC - shares have been showing relative strength. A move past the 50-dma might be an entry point.

NOC - this defense contractor looks like a buy right here but readers may want to wait for another dip near $65.00.

ORLY - shares have been showing lots of strength. I wouldn't chase it. Wait for a correction.

FSLR - the oversold bounce has failed. The stock looks poised to drop toward $101 again.

CERN - a new breakdown under $115.00 could be a bearish entry point.

APA - oil stocks are trending lower. A drop under $115.00 could be a bearish entry point.

BCR - I would seriously consider a bearish entry point right now with a stop above $110. Target the 100-dma.

PH - shares are flirting with a breakdown under support near $85 and the 200-dma.

NKE - keep an eye on it for a breakdown under $79.50.

V - shares of Visa are on the verge of breaking a major trendline of support.

BHI - looks like it could drop toward the 200-dma near $60.

- James


NEW DIRECTIONAL CALL PLAYS

Teradata Corp. - TDC - close: 57.43 change: -0.61

Stop Loss: 53.45
Target(s): 59.75, 64.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
I have mentioned TDC in my editor's note before. Shares have consistently outperformed the market as traders buy the dips near the stock's rising 50-dma. Recently shares broke out to new highs. I don't want to chase it here but a dip back toward prior resistance could be an entry point.

I am suggesting a trigger to buy calls on TDC at $56.50. If triggered we'll use a stop loss at $53.45. Our targets are $59.75 and given enough time $64.00. FYI: TDC's P&F chart has produced a new triple-top breakout buy signal with a $79 target.

NOTE: As an alternative entry point readers could wait for another dip close to the simple 50-dma instead.

Trigger @ $56.50

- Suggested Positions -

buy the July $55 call (TDC1116G55) current ask $3.10

- or -

buy the Aug. $60 call (TDC1120H60) current ask $2.10

Annotated Chart:

Entry on June xx at $ xx.xx
Earnings Date 08/04/11 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on June 25, 2011


NEW DIRECTIONAL PUT PLAYS

Goldman Sachs - GS - close: 130.91 change: -1.45

Stop Loss: 135.25
Target(s): 121.00, 116.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
Earlier this month I was speculating that GS might dip toward support near $130 and bounce. Now it would seem GS could breakdown below this key level of support. Analysts are starting to lower their earnings estimates again for the financial companies and investors are still concerned over GS' potential legal troubles with the U.S. government.

I do consider this an aggressive trade. GS can be a very volatile stock at times. I'm suggesting a trigger to buy puts at $129.00. If triggered our targets are $121.00 and $116.00. We do not want to hold over the mid July earnings report. FYI: The Point & Figure chart for GS is bearish with a $102 target.

Trigger @ $129.00

- Suggested Positions -

buy the July $125.00 PUT (GS1116S125) current ask $1.53

- or -

buy the Aug. $125.00 PUT (GS1120T125) current ask $3.70

Annotated Chart:

Entry on June xx at $ xx.xx
Earnings Date 07/19/11 (unconfirmed)
Average Daily Volume = 6.0 million
Listed on June 25, 2011


Schlumberger Ltd. - SLB - close: 80.92 change: -2.15

Stop Loss: 84.65
Target(s): 76.00, 71.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 5 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
Oil service stock have been growing weaker and shares of SLB have been suffering under a bearish trend of lower highs and resistance at the 50-dma. Yet so far SLB has been able to hold support near 480 and now at its 200-dma. It looks like that could change soon. A breakdown under $80.00 would be very bearish. Back in December and January there were a couple of dips to $79.75ish. I am suggesting a trigger to launch bearish positions at $79.65. If triggered our targets are $76.00 and $71.00. We do not want to hold over the late July earnings report.

Trigger @ $79.65

- Suggested Positions -

buy the July $77.50 PUT (SLB1116S77.5) current ask $1.18

- or -

buy the AUG. $75.00 PUT (SLB1120T75) current ask $2.03

Annotated Chart:

Entry on June xx at $ xx.xx
Earnings Date 07/22/11 (unconfirmed)
Average Daily Volume = 7.5 million
Listed on June 25, 2011



In Play Updates and Reviews

SNDK Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:

Many stocks saw almost no follow through on Thursday's intraday rebound. The S&P 500 also struggled and saw its rebound off the 200-dma from Thursday roll over again. A lot of investors are watching the 1260 and 1250 levels as key support on the S&P 500. A breakdown here would be very bearish.

Don't forget that we only have three weeks left on our July calls.

-James

Current Portfolio:


CALL Play Updates

Currently we have no active call trades. Check tonight's new plays section.


PUT Play Updates

Becton, Dickinson and Company - BDX - close: 84.84 change: -0.84

Stop Loss: --.--
Target(s): 81.50
Current Option Gain/Loss: - 60.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/25 update: BDX did not see any follow through on Thursday's sharp intraday bounce. Shares might actually breakdown from its three-week trading range soon. Readers may want to launch new positions on a new relative low under $84.19. I am adjusting our target to $81.50 to stay above the 200-dma.

- Suggested (SMALL) Positions -

Long July $80 put (BDX1116S80) Entry @ $0.50

06/22 The bid for our option has vanished. I am removing our stop loss on this trade.

chart:

Entry on June 13th at $84.95
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on June 11th, 2011


Diamond Offshore Drilling, Inc. - DO - close: 67.71 change: -0.34

Stop Loss: 70.55
Target(s): 64.50, 62.50
Current Option Gain/Loss: -16.7% & -29.2%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/25 update: Shares of DO were upgraded on Friday morning and the news helped give the stock a boost. Yet oil service stocks were some of the market's worst performers and DO reversed forming another failed rally under $70. This move can be used as a new entry point but readers may want to lower their stops.

Earlier Comments:
Our targets are $64.50 and $62.50. FYI: Traders should note that the most recent data listed short interest at more than 14% of the float. That does raise the risk of a short squeeze should the stock suddenly find strength.

- Suggested Positions -

Long July $67.50 PUT (DO1116S67.5) entry @ $2.09

- Second Position -

Long July $67.50 PUT (DO1116S67.5) Entry @ $2.46

06/22 failed rally at $70 is a new entry point. add 2nd position
06/15 new stop loss @ 70.55
06/13 new stop loss @ 71.55

chart:

Entry on June 8th at $68.91
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on June 7th, 2011


Public Storage - PSA - close: 110.73 change: +1.96

Stop Loss: 113.55
Target(s): 107.50
Current Option Gain/Loss: -24.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/25 update: I had cautioned readers to expect a bounce in PSA. Sure enough the stock opened higher and posted a +1.8% gain. Volume on Friday was almost as strong as Thursday's. The move today happened to get a boost from an analyst upgrade, which probably helped account for the volume. I remain bearish on PSA but readers can choose to launch positions now or look for a failed rally type of move closer to $112.00. Our target is $107.50. More aggressive traders could aim lower but that would require PSA to breakdown under its simple 200-dma (which is certainly possible, especially if the S&P 500 breaks down under 1260 or 1250.

- Suggested (SMALL) Positions -

Long July $110 PUT (PSA1116S110) Entry @ $2.50

chart:

Entry on June 23 at $110.08
Earnings Date 08/04/11 (unconfirmed)
Average Daily Volume = 765 thousand
Listed on June 22, 2011


Transocean Ltd. - RIG - close: 59.81 change: -1.76

Stop Loss: 66.15
Target(s): 58.00, 55.25
Current Option Gain/Loss: +42.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/25 update: RIG is testing support near $60.00 again. Friday's close under this level is bearish but it's no guarantee of future declines. Previously I had suggested that more conservative traders take profits early near $60.00. The trend is very much down and oil service stocks were big underperformers on Friday. My only concern is that RIG is starting to look a little oversold here. I am moving our stop loss down to $65.10. I am not suggesting new positions at this time.

We wanted to keep our position size small to limit our risk.

- Suggested (SMALL) Positions -

Long July $60 puts (RIG1116S60) Entry @ $1.32

06/25 new stop loss @ 65.10
06/20 RIG has hit $60. Cautious traders may want to take profits now (option @ +68%). The newsletter's target is $58.00

chart:

Entry on June 13th at $63.32
Earnings Date 08/04/11 (unconfirmed)
Average Daily Volume = 4.3 million
Listed on June 11th, 2011


SanDisk Corp. - SNDK - close: 38.94 change: -3.94

Stop Loss: 42.55
Target(s): 40.50, 36.00
Current Option Gain/Loss: +213.6% & +197.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/25 update: Target achieved. A disappointing earnings report from rival Micron (MU) helped send SNDK lower on Friday. SNDK plunged through the $40 level to close at new multi-month lows. Our first target was hit at $40.50 and the puts were trading around $2.65 for the July $42 put and around $1.55 on the July $40 put. If you haven't taken profits yet you might want to do so now with the options up +200% or more.

I am lowering our stop loss down to $42.55. I would not launch new positions here. I'm adjusting our final target to $36.50.

- Suggested Positions -

Long July $42.00 PUT (SNDK1116S42) Entry @ $1.10

- or -

Long July $40.00 PUT (SNDK1116S40) Entry @ $0.69

06/25 new stop loss @ 42.55
06/24 1st target hit @ 40.50, Options @ $2.65 (+140.9%) & $1.55 (+124.6%)
06/18 new stop loss @ 45.05
06/08 New stop loss @ 46.25

chart:

Entry on June 6th at $44.31
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 5.8 million
Listed on June 4th, 2011


T.Rowe Price Associates - TROW - close: 56.51 change: -0.57

Stop Loss: 59.05
Target(s): 51.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see Trigger

Comments:
06/25 update: TROW is still bouncing near short-term support at $56.00. The overall trend is remains bearish but I am wary of launching positions. Originally our plan was to buy puts on a bounce near resistance at $60. I am adjusting our strategy tonight since the financial sector looks so weak.

We'll wait for a drop under $56.00 and use a trigger at $55.75 to buy puts. However, we want to keep our position size very small! This is an aggressive entry point. If triggered we'll use a stop loss at $59.05. Our target will be $51.00.

Trigger @ 55.75 -- new trigger

- Suggested Positions -

buy the July $55 PUT (TROW1116S55)

06/25 new strategy. Trigger @ 55.75, stop @ 59.05, Target 51.00

chart:

Entry on June xxth at $ xx.xx
Earnings Date 07/26/11 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on June 13th, 2011


CLOSED BULLISH PLAYS

Costco Wholesale - COST - close: 79.13 change: -1.27

Stop Loss: 78.75
Target(s): 83.90, 87.50
Current Option Gain/Loss: -26.2% & -14.6%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/25 update: Our new COST play is not off to a very good start. The S&P 500's bounce from its 200-dma has already reversed and COST looks like it will follow. COST's morning rally attempt on Friday quickly reversed near $81.00 and shares plunged back under the $80.00 level and its 10, 20 and 50-dma. Lack of follow through on Thursday's intraday bounce and this new close under support is very short-term bearish. COST actually closed on its low for the day. Aggressive traders may want to let it ride but I anticipate COST hitting our stop loss at $78.75 on Monday. Therefore I'm suggesting we hit the eject button and abort this trade early right now.

- Suggested (SMALL) Positions -

July $80 call (COST1116G80) Entry @ $1.60, exit 1.18 (-26.2%)

- or -

Aug. $82.50 call (COST1120H82.5) Entry @ $1.30, exit 1.11 (-14.6%)

06/25 No follow through on the bounce. Exit immediately.

Annotated Chart:

Entry on June 24 at $ xx.xx
Earnings Date 10/05/11 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on June 23, 2011


Forest Labs Inc. - FRX - close: 39.33 change: -0.56

Stop Loss: 36.75
Target(s): 39.00, 42.50
Current Option Gain/Loss: +121.4%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/25 update: The market witnessed a widespread decline on Friday and FRX was no exception. Shares are starting to see some profit taking. The $39 and $38 levels might offer some support but I wouldn't count on it. I am suggesting we exit now to lock in a gain before they evaporate.

- Suggested Positions -

August $37 call (FRX1120H37) Entry @ $1.40, exit $3.10 (+121.4%)

06/25 Exit early, Option @ $3.10 (+121.4%)
06/21 new stop loss @ 36.75
06/20 new stop loss @ 35.75
06/13 1st target hit @ $39.00. August $37 call @ $2.85 (+103.5%)
06/11 New stop loss @ 34.90
06/10 Planned exit of June $37 call. exit $1.10 (+69.2%)
06/09 Prepare to exit the June calls on June 10th at the close
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


CLOSED BEARISH PLAYS

Cognizant Technology - CTSH - close: 71.14 change: -0.96

Stop Loss: 73.05
Target(s): 68.00, 65.25
Current Option Gain/Loss: -40.0% & -40.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/25 update:j Some of the high-profile technology names have been extremely volatile this week. CTSH is one of them and the stock has been very, very tough to trade. The stock opened this morning under resistance at its 200-dma. Then on no discernable news shares spiked higher with a move to $74.79 only to reverse immediately lower and eventually close down -1.3%. Our stop loss was hit at $73.05. Aggressive traders may want to reconsider launching new put positions here but do so cautiously.

- Suggested (SMALL) Positions -

July $70 PUT (CTSH1116S70) Entry @ $1.75, exit 1.05 (-40.0%)

- or -

Aug $67.50 PUT (CTSH1120T67.5) Entry @ $2.50, exit 1.50 (-40%)

06/24 CTSH spiked past resistance on no news and then quickly reverses lower. Our stop is hit at $73.05. Options @ -40% & -40%

chart:

Entry on June 23 at $70.75
Earnings Date 08/03/11 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on June 22, 2011