Option Investor
Newsletter

Daily Newsletter, Saturday, 7/23/2011

Table of Contents

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

Market Wrap

Deal Or No Deal?

by Jim Brown

Click here to email Jim Brown

Big cap tech stocks broke out to high on Friday thanks to Google, Apple, Microsoft, Intel, Amazon and Baidu. All of those companies contributed between 1-5 points to the Nasdaq 100 Index ($NDX).

Market Statistics

The Nasdaq 100 may have been setting new highs but the Dow was trailing the broader market thanks to an earnings miss by Caterpillar. CAT was crushed for a $6.50 loss and was solely responsible for a decline of more than 50 Dow points. Without the CAT loss the Dow would have posted a minor gain.

Earnings remained the focal point because of a lack of material economic reports and the lack of a debt limit deal. The only economic report was the Mass Layoffs for June. The number of reported events declined slightly for the second month to 1,532 from 1,599. The number of workers impacted declined only slightly to 143,444 from 143,540.

This report was market neutral because it was a lagging report for June and there was almost no change. The manufacturing reports next week will be far more important.

The Regional and State Employment report, also for June, showed employment rose in 26 states and DC and declined in 24 states. The largest gains in employment came from Texas +32,000, California +28,800, Michigan +18,000 and Minnesota +13,200. The biggest declines came from Tennessee -16,900, Missouri -15,700, Virginia -14,600 and North Carolina -9,500.

Next week is regional report week with reports on economic conditions in Chicago, Texas, Richmond, Kansas and New York. The Fed Beige Book on Wednesday will also tell us how the economy is doing in each of the twelve Fed districts. In short this week plus the national ISM on the following Monday will tell us if the soft patch is over, improving or still holding the economy back.

Economic Calendar

The earnings for Q2 have been a very diverse collection of mixed results. There have been quite a few blowouts on earnings but also a few misses and quite a few guidance warnings. Caterpillar's earnings covered the entire gamut. CAT posted earnings of $1.72 compared to estimates of $1.75. The reason for the earnings miss was the impact to production in Japan after the earthquake and increasing costs. With backlogs at record levels and sales increasing sharply analysts had expected another earnings beat and a new hike in guidance. Unfortunately in the real world CAT was seeing the results of higher commodity prices, less than expected manufacturing output in Japan and some increased acquisition costs from buying Bucyrus for $8.8 billion.

Despite the miss Caterpillar still had a phenomenal quarter. Earnings rose +44% and sales rose +37%. They increased guidance from a midrange of $6.50 per share to $7.00 per share for the full year. They raised full year revenue guidance by +$2 billion to $55 billion. CAT said the slowdown in China had impacted growth but sales were still increasing. They were just increasing at a slightly slower rate. The CEO said CAT had record order backlogs and those backlogs were growing.

The drop on Friday was significantly overdone because the Caterpillar story is still alive and well. The stock had risen +54% over the last 12 months and the sell off was knee jerk profit taking on the earthquake related earnings miss. I believe CAT is a strong buy at these levels with risk to $100.

Caterpillar Chart

Just because the U.S. economy is stuck in the mud does not mean the rest of the world is waiting for us. The rest of the world is growing much faster than the USA and Caterpillar is seeing robust sales growth in these areas. Don't toss CAT into the trash bin because they have the capability of continuing to grow earnings for years to come. Once the USA growth catches up to the rest of the world their sales will explode.

Global GDP Rates

While on the subject of Caterpillar the CEO had some harsh words for lawmakers. He said he had been meeting with the leaders of his biggest customers in the USA and they reported U.S. businesses were rapidly shrinking purchases in an effort to stockpile cash because of events in Washington. He said there was "extreme uncertainty" in the U.S. business community over the country's future because of the high deficit and not the current artificial crisis of the debt ceiling. Those managers reported worry over future debt payments, taxes, regulation, healthcare costs, interest rates and inflation. Until that uncertainty begins to ease those customers are going to be buying less and hoarding more.

CEO Doug Oberhelman said, "Lack of clarity on a U.S. debt reduction plan, trade policy, regulation, much needed tax reform and the absence of a long-term plan to improve the countries deteriorating infrastructure does not create an environment that provides our customers with the confidence to invest."

Offsetting some of the CAT impact on the Dow was McDonalds (MCD). The burger seller roared off to a new high at $89 with a +$2 gain after reporting profits that increased +19%. A weaker consumer appears to be benefiting McDonalds as more people turn in for fast food rather than visiting a higher priced sit down restaurant. Also helping were the new coffee offerings along with smoothies and new breakfast items. Drink sales at the McCafe increased by +29%. McDonalds raised prices in March and May to keep pace with soaring commodity prices. The company said it was planning to offer some "premium burgers" in the U.S. in order to fend off competition from places like Five Guys. The U.S. same store sales rose only +4% while Europe sales rose +21% and Asia and Middle East rose +25%.

McDonald's Chart

General Electric (GE), another Dow component, reported earnings that rose +18% to $3.73 billion or 34-cents per share. That beat estimates by a penny but GE is never one to produce a blowout. Analysts watch GE earnings for a clue to the pace of the U.S. and global economy. GE reported industrial order backlogs rose +6.8% to record levels at $189 billion and that is a good sign for the future economy. Equipment orders rose +33%, service orders +16%, transportation +74% and infrastructure orders +24%. Revenue was $35.6 billion and well over estimates of $34.7 billion. CEO Immelt said GE would post double-digit earnings growth for the rest of the year and earnings would increase in 2012.

Overall the GE earnings were very positive. The earnings from GE Capital more than doubled and Immelt repeated his claim the worst was behind the troubled division. He said GE was making profitable loans again.

GE Chart

Oilfield services firm Schlumberger (SLB) posted earnings that rose +64% to 87-cents per share. That was a slight beat of two cents over estimates. Analysts were very positive on the sector and we saw Halliburton also post strong earnings on Monday. Schlumberger said sales rose +62% to $9.62 billion. The average number of rigs in operation worldwide rose +15% to 3,163 in Q2. Crude oil prices averaged $102.34 for the quarter compared to the $78.05 average in Q2-2010. SLB said drilling activity was very strong and there was a shortage developing in people and equipment. The company said the acceleration of onshore exploration and development will put considerable strain on the service industry to meet those activity levels. This will lead to an increase in pricing power by SLB, HAL and others.

This was a very strong quarter but remember the weather in Q2 in North America was very bad and hampered drilling activity. Also the activity in the Gulf has not returned to normal although several companies have been able to restart drilling activity. As Gulf activity increases so will earnings from the various service companies. Halliburton gets half its revenue from North America while it only accounts for one third of revenue for SLB. Schlumberger gets the majority of its revenue from overseas with Saudi Arabia a strong growth market for SLB today. Iraq is currently SLB's 7th strongest market out of their top 15 and it is expected to rise to third place in 2012.

Schlumberger Chart

The biggest winner for the day was Athena Health (ATHN) with a +17% spike after reporting earnings of 22-cents compared to estimates for 19-cents. On a net basis they reported 14-cents that was more than three times the 4-cents earned in the comparison quarter. Revenue rose +33% to $77.8 million compared to estimates of $74.9 million. Analysts were very pleased with the results but the shorts were not so happy.

Athena Health Chart

Next week is the busiest week of the Q2 earnings cycle and the sheer volume of earnings will over power everything but the debt ceiling crisis. Energy stocks will highlight the list next week with Exxon, Conoco, BP and Chevron leading the charge. Earnings should be very strong with the average price for crude over $100 in Q2. The downside to earnings will be any impact from rigs still on standby in the Gulf incurring daily rental payments while waiting for the administration to release permits. Otherwise energy earnings should be outstanding. I am sure the numbers posted by the majors will prompt renewed calls for higher taxes.

Amazon will report on Tuesday and that company can't seem to do anything wrong. They just lost a major competitor with the shutdown and liquidation of Borders this weekend.

Of all the reports this week I view the UPS earnings on Tuesday as the most relative. UPS has their finger on the day-to-day shipments of millions of packages. They can tell on a daily basis if the economy is slowing or recovering. Their earnings and guidance is critical.

Earnings Calendar

So far 143 S&P companies have reported earnings. 75% of those have beaten the street on earnings and 69% on revenue. That is much higher than the normal 66%. However, the number of companies guiding lower has also risen sharply. Of the 345 total companies that have reported 5.8% raised guidance and 6.1% lowered guidance. This produces a net negative guidance of -0.3%. That may not seem like much but it is the lowest guidance outlook since Q1-2009. Guidance after Q1 reporting was positive +3.5% and the eighth consecutive quarter of positive guidance upgrades. There are 180 S&P 500 companies reporting next week.

Net Guidance By Quarter

Current overall earnings estimates for the S&P 500 for Q2 have declined to growth of only +9.2% and well off the +15% from the beginning of the quarter and +12.7% just two weeks ago. This is astounding since 75% of companies have beaten estimates. Apparently the size of the beats has been lower than normal.

The new deal on Greece appears on the surface to have moved Greece out of the headlines for the near term. Most analysts believe the EU successfully kicked the can down the road for another 6-12 months but it will come back to haunt them. The deal requires quite a bit of accommodation (selective haircuts in either principal or duration) from the private sector. It remains to be seen if the private sector will cooperate. The new deal for dealing with future EU problems will eventually require the ECB to take on more than one trillion euros in new debt of a very long-term variety. That debt will have to be paid by the healthier Eurozone countries in a roundabout bailout of Greece and eventually Italy, Portugal, Ireland and probably Spain. Despite the apparent solution being reported in the press most analysts believe the Greek debt crisis will come back in an even stronger form. For now we should be happy the problem has at least been moved out of the headlines and should no longer be a drag on the U.S. markets.

The main force behind the market next week will still be the debt ceiling. It is deal or no deal time and lawmakers must act to avoid a financial Armageddon. That point seems to be lost on lawmakers because we are moving ever closer to a disaster that could cause untold harm to the U.S. economy. The risk is two fold. The first is the risk of ratings downgrades by the ratings agencies. That will push our interest rates higher and increase the amount of new debt we will have to sell to pay off the old debt. Just imagine if the interest rate on all your credit cards suddenly went up by 35%. The implied interest rate on a ten-year treasury today is less than three percent. If S&P and Moody's downgraded the credit rating that could rise to 4%, a +33% increase on all future debt. Since the U.S. has to sell another $2.5 trillion in debt by the end of 2012 that will equate to a lot of additional interest. Demand for the new debt could decrease once our credit is lowered and that could push interest rates up even higher.

The second risk is that of a default. While the odds of this happening are very slim the possibility is growing. We have never defaulted on an obligation in the history of the USA. A default would cause our credit rating to not be just lowered but slashed and our interest rates would rocket higher by several percent. We could actually be paying 100% more interest on our debt within weeks. For every 1% increase in interest it would cost taxpayers $150 billion a year in additional interest.

These events do not need to occur. This is a political battle not a real crisis. Since 1960 Congress has acted 78 separate times to permanently raise, extend or revise the debt limit. This has occurred under republican presidents and democratic presidents. The debt limit was just raised by $1.9 trillion in January 2010 and very few people even knew about it. The current war of words is political posturing for the next election.

The deficit is out of control and will eventually cause America serious grief but that is a longer-term issue not one that has to be solved next week. The debt is commonly referred to as $14.5 trillion. That is up from just over $5 trillion only a decade ago. That does not include the "unfunded liabilities" like Social Security, Medicare, Medicaid, etc. The total debt including the unfunded liabilities is more like $115 trillion. Either number is more than we can ever pay but that is not the problem today. How much is $1 trillion dollars?

On Thursday night I was hopeful the President and Speaker Boehner would announce a compromise on Monday. Secret discussions were being held daily. Late Friday they both announced the negotiations had ended. The parting was not amicable. The president held an immediate press conference to say he had demanded Boehner, McConnell, Reid and Pelosi return to the White House on Saturday at 11:AM with hard plans to discuss in an effort to work out a deal.

The meeting occurred with full attendance by the press with camera flashes blazing. After 10-15 minutes of posturing for the cameras the meeting began and then ended at 11:58. Being generous there was roughly 45 minutes of conversation on ways to avoid a national default, avoid a downgrade of our credit rating and come together in a bipartisan agreement. Considering the weeks of conversations before this I view the meeting as nothing more than a photo opportunity to show leaders hard at work on a Saturday. Post meeting comments from Boehner, Reid and McConnell claimed they were working through the weekend in an effort to reach a compromise by Monday. Late Saturday Boehner told House republicans he would have a draft framework prepared by 4:PM on Sunday. Treasury Secretary Geithner, also at the Saturday meeting, reminded the participants a deal needed to be concluded at least in principal before the Asian markets opened on Sunday night.

I wish I could say I was confident they will work out a deal by Monday but after reading dozens of articles my confidence is fading. They may work out a deal to extend the debt limit but I have no confidence it will have enough credible changes to avoid a credit downgrade. S&P and Moody's have said they will likely downgrade the U.S. debt even if the limit is raised if there is no credible plan to cut spending. The chances for a credible plan are shrinking hour by hour.

The most likely outcome for next week is a band-aid to postpone the crisis and kick the can down the road. Basically we become Greece with an ever-increasing pile of debt and no real way to pay it off only there is nobody to bail us out.

Unless some "grand bargain" is struck over the weekend the debt news is likely to weigh heavily on the markets on Monday. The view that lawmakers would never allow the U.S. to default is rapidly fading and being replaced by a dumbfounded stare of disbelief.

One final point. I read in one of the debt deal articles that as part of any deal lawmakers were going to claim $1 trillion in spending cuts over the next decade because the wars in Iraq and Afghanistan were ending. For me this is another stupid lawmaker trick. We already know the wars are ending and the president has announced a timetable for withdrawal. To announce a "new" deal with a trillion dollars in savings for something that has already been planned and in the system for two years is nothing more than an accounting trick to claim a "grand bargain" of larger proportions. Do they think S&P and Moody's are too stupid to see through this smoke and mirrors?

The markets finished better than I had expected on Friday. The opening dip was erased and were it not for Caterpillar it would have been a positive day all around. Unfortunately, the S&P could not punch through the resistance from Thursday at 1,345. However, it was a summer Friday with very low volume of only 5.7 billion shares compared to 8.1 billion on Thursday. There was no conviction on either side as investors held their breath waiting for a debt limit resolution.

The S&P stall at 1345 was not surprising given the shock to the Dow from the Caterpillar decline. Without the Dow posting a gain the S&P was unable to find any traction. Surprisingly the Nasdaq was able to post a decent gain of +25 points without the Dow and S&P going along for the ride. Big gainers were Apple +6, Google +11, SNDK +3.93, ATHN +8.51, CPHD +8.83, VRUS +6.22 and APKT +5.37.

The 1345 level on the S&P is the resistance high from February. That high has been bested more than once since then but it keeps returning to cause problems. Real resistance is from 1350-1365 and the highs from May.

Rather than try to attach too much technical significance to Friday's market action I believe everyone understands the market is in a wait and see mode until the debt limit is resolved. When it is solved the market will rally but the strength of the rally will depend on the eventual solution and the likelihood of a rating downgrade.

This means anything is possible next week but the most likely scenario is some ugly work around on the debt and a minor market rally. If that rally succeeds in breaking out to new highs then an entirely new version of bullish sentiment will take hold.

The bad news bulls are waiting for an answer so they can discount the news and rally on. As long as the solution is palatable they will likely ignore the news and move on. A week from now everyone will look back and wonder what all the worry was about. At least I hope that is what we are doing a week from now.

S&P support is 1325 and resistance 1345-1365. Every point we move higher will be a battle without some market moving news.

S&P Chart

The Dow stalled at 12700 once again but the lack of forward motion was due entirely to the Caterpillar loss of -51 Dow points. I won't rehash those comments but suffice to say without the CAT loss the Dow would have been positive.

The 12700 level has been solid on both attempts in July and 12800 is very strong resistance as a three year high. With the high profile Dow stocks already reported there will be less upward pressure from earnings anticipation. IBM closed at the exact same level on Friday as it did on Tuesday. Their forward motion has ended.

Fortunately Dow components Chevron and Exxon report next week and earnings should be outstanding. Unfortunately they don't report until Thursday and Friday so the early week moves will have to be on 3M and UPS. This is not going to be a technical or fundamental week but a news reactive week so be prepared.

Dow Chart

The Nasdaq was bullish on Friday despite the lackluster performance by the Dow and S&P. This is entirely out of character for the Nasdaq and clearly a bullish sign. This is not normally a good season for tech stocks so a breakout would be very bullish. Support is 2800 and new high resistance is 2872. Netflix is the next big tech stock to report on Monday followed by AMZN and JNPR on Tuesday.

Nasdaq Composite Chart

Nasdaq 100 ($NDX) Chart

In summary I believe a deal of some sort will appear. Market reaction and ratings results will depend on the grand scale of the deal. Our market will not be trading on fundamentals, but purely news focused. Since the downside potential is so significant I can't conceive we will get to August 2nd without a resolution. For that reason I am still mildly bullish. Once the debt ceiling war ends the markets should rally.

Please click like, thank you!

Jim Brown

Send Jim an email

"Bull markets are born in despair, grow in skepticism, mature in optimism and die in euphoria."
John Templeton


Index Wrap

Possible Top; or, Poised For a New Up Leg?

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

Now that the market has snapped back to at or close to its prior highs (top of a broad trading range?), a major question is whether there's been 'too much' in the way of bullish expectations priced into the market.

The Nasdaq 100 (NDX) has been the strongest index and NDX has gone on to new daily and weekly high, above the pivotal 2400 level. NDX price action may or may not be a harbinger for the rest of the market given that the major indexes are again rather far extended above their pivotal 21-day moving averages as you'll see in my major market index charts.

Whether NDX is or isn't a bellwether for the overall market here will be seen ahead. The fact that NDX might occupy the position that 'as NDX goes, so goes the Market' makes it useful to look at the weekly NDX chart. The ability for NDX to hold above the 2400 level is as good a sign as I know of as to the overall market working higher. Conversely, a downside penetration of 2200 would suggest that the market was making a major top.

On a daily chart basis, the fact that there was only a single day Closing penetration of the S&P 500's 21-day moving average, followed by such a strong rebound, was a definite bullish development this past week. OEX, INDU, COMP, NDX and RUT only had minor to relatively minor intraday penetrations of this same key moving average support.

There may or may not be a move to new highs in the other major indexes, following the lead of the Nas 100, but I'm doubtful about there being a strong new up leg in the overall market. I would not be surprised to see prices start to work sideways to lower again consistent with the major indices being in a broad trading range.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart is bullish but SPX is now back at the top of a possible broad trading range. Triple tops aren't all that common in the major market indexes, so we may see a nominal NEW high in SPX, with the index coming down some thereafter.

It's of course also possible that SPX begins to work higher, going up along ('hugging') my upper (3%) envelope line, eventually reaching the 1400 area.

Resistance is assumed for the prior closing high, extending to the 1365-1370 area.

Support is highlighted at the 1319, at the current 21-day moving average, with next support at prior lows in the 1300-1296 area.

RSI AND TRADER 'SENTIMENT':

The most recent rally came after RSI got down to a 'neutral' 50 area, suggesting a still-strong uptrend. If the uptrend was a weaker one, it would have taken RSI getting to a lower level before a rally would set up so to speak.

My bullish/bearish sentiment indicator, also seen above, saw a 1-day extreme in bearishness and this was followed by another strong rebound. Bullish sentiment is not showing an extreme, which is a plus for the bulls.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart, what I rated last week as bearish in the short-term, mixed to bullish on an intermediate-term basis, has now resumed its prior strong bullish chart. The bullish tip off for me was the ability for the index to 'hold' at support implied by its 21-day moving average. After being at the upper envelope line, the 'centered' 21-day moving average either 'acts as' support or, if pierced, suggests further weakness.

What is hard to decipher is whether OEX again makes a top above 600, say at 608-610 or whether the index gradually works higher by another 20, or as much as 50 points. I currently don't anticipate another major up leg without prices working sideways to lower again beforehand.

Key technical support is at 588, extending to 580. Technical resistance is in the 603 area, extending to 608-611.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) has come roaring back to retest its prior recent high around 12753. The prior intraday top was made at 12876 and I've highlighted resistance at these two levels. At the prior 12876 intraday peak, INDU would be too far 'extended' in my opinion for the Average to continue to move much higher.

If there's rule of thumb to follow here it's to not expect a major new up 'leg' with the 13-day RSI at or near 70. While the major indexes can advance for some time and 'hug' the upper envelope line, just be aware that this is generally NOT a dramatic advance; e.g., don't expect a second dramatic up leg.

I pointed out last week that 2/3rds of the 30 Dow stocks were in a position to rally, so this past week's rally wasn't too surprising on the basis of the individual (30) stock charts. Still looking bullish to having bullish potential are the charts of AXP, BA, CSCO, CVX, DD, GE, IBM, JNJ, KFT, KO, INTC, JPM, MCD, MSFT, PG, VZ, UTX, and XOM.

Support I already talked about above as highlighted on my INDU daily chart. Resistance is at 12600, then in the 12750 area.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) chart is bullish. The odds of at least a nominal new high above 2879-2887 is fair to good. Conversely, prices could again begin to sink again in the near-term if the market continues to be confined to a broad trading range which is what the major indexes look like currently.

Triple tops are not all that common in the major stock indexes and I doubt that COMP is setting up for one. More likely in my estimation would be for a move to a nominal new high, with prices then again working sideways to lower. Eventually however COMP could reach 3000, but probably not without more sideways to lower basing type action coming first.

Resistance is assumed to lie at 2879, extending to 2887; with next resistance coming in around 2911.

Support is at 2786, then at 2744.

RSI AND TRADER 'SENTIMENT':

The most recent rally came after RSI got down to a 'neutral' 50 area, as seen above, suggesting a still-strong uptrend. If the uptrend was a weaker one, it would have taken RSI getting to a lower level before a rally would set up so to speak.

My bullish/bearish sentiment indicator saw a 1-day extreme in bearishness and this was followed by another strong rebound. Bullish sentiment is not showing an extreme, which is a plus for the bulls.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) index chart is bullish as NDX rebounded strongly from the area of its 21-day moving average and then went on to make a new high. I myself am not looking for a big new up leg however, given that NDX is again almost to my upper 4% envelope line. We do see sometimes of course a rally up along this line and that's of course another possibility for NDX. Resistance implied by the upper moving average envelope line is currently at 2452. I would say NOT to expect a dramatic or strong further advance such as seen this past week or like the last week in June.

Immediate support may be found at the steep up trendline, but more safely so to speak at the current 21-day moving average, currently at 2346. Next support is assumed to lie (again) at the recent 2318 low, with support extending to 2300. Watch Apple Corp (AAPL) for signs of a weakening NDX as this stock is leading the big cap Nasdaq index.

'Resistance' is assumed for the upper envelope line, currently intersecting at 2452 but this is a 'soft' resistance so to speak as there's no prior high at this level; nothing hard and fast like that. In terms of years prior, we can assume major resistance may next come into play at the 2500-2550 price zone.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock has the same technical/chart considerations as the underlying NDX chart and is bullish.

Next resistance is assumed for around 60.2, extending to 60.5. Support is at 57.6, extending to 57.0.

Daily trading volume has been relatively low on this last rally, but individual price/volume patterns characteristic of individual stocks rarely apply to the Nasdaq 100 tracking stock, QQQ and I don't read too much into the low volume rally pattern in terms of it being a 'weak' rally.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) is bullish in its pattern but RUT has seen lower rally highs dating from the early-May intraday top at 868, extending to the 860 high earlier this month. The most that I currently anticipate, as far as a further advance, is to 860, possibly again to the 868 area.

On the downside, I've highlighted support in the 812-810 area. Major support is assumed to lie between 800 and RUT's 200-day moving average, currently at 793.



GOOD TRADING SUCCESS!



NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS

CHART MARKINGS:

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

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

I WRITE ABOUT:

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

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

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

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

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

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


New Option Plays

Industrials & Technology

by James Brown

Click here to email James Brown

Editor's Note:

It's going to be an interesting week with a flood of earnings and the debt ceiling tussle. Cautious traders may want to step back and not trade or at least scale back and trade very small. Headlines concerning the debt ceiling talks could roil the markets up or down on a daily basis. On top of that earnings will produce waves of headlines and plenty of volatility for individual stocks.

We're adding some bullish candidates but enter cautiously!

- James


NEW DIRECTIONAL CALL PLAYS

Caterpillar Inc. - CAT - close: 105.15 change: -6.45

Stop Loss: 102.95
Target(s): 110.00,
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The reaction to CAT's earnings was overdone on Friday. The knee-jerk reactions pushed CAT to gap open lower and then hover near support around $105 and its 50-dma. Obviously the technical picture doesn't look so hot with the big decline, big volume, and now a new sell signal on the daily chart's MACD indicator. However, I suspect CAT will see a bounce back toward the $110-111 area as it fills the gap.

I am suggesting calls if both CAT and the S&P 500 open in positive territory on Monday morning. We'll start with a stop loss at $102.95, just under Friday's low.

buy calls if both CAT & S&P 500 are positive on Monday morning

- Suggested Positions -

buy the AUG $105 call (CAT1120H105) current ask $3.35

- or -

buy the AUG $110 call (CAT1120H110) current ask $1.43

Annotated Chart:

Entry on July xx at $ xx.xx
Earnings Date 07/22/11 (confirmed)
Average Daily Volume = 8.5 million
Listed on July 23, 2011


Open Text Corp. - OTEX - close: 69.48 change: +0.71

Stop Loss: 67.45
Target(s): 74.50
Current Option Gain/Loss: Unopened
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
OTEX is a application software company. The stock has been surging and shares hit new all-time highs over $70 on July 14th. Since then the stock has been consolidating sideways in the $67.65-70.00 range. That consolidation seems to be narrowing. A breakout over $70.00 could produce another short squeeze. The most recent data listed short interest at more than 10% of the 55.9 million-share float. I am suggesting we buy calls now if both OTEX and the S&P 500 are both positive on Monday morning. More conservative traders will want to strongly consider waiting for a new breakout past $70.00 (maybe use a trigger at $70.25 to open positions). We will try to keep our exposure to a minimum with a tight stop loss at $67.45. We do not want to hold over the August earnings report.

If both S&P 500 and OTEX open positive on Monday

- Suggested Positions -

buy the AUG $70 call (OTEX1120H70) current ask $2.75

Annotated Chart:

Entry on July xx at $ xx.xx
Earnings Date 08/10/11 (unconfirmed)
Average Daily Volume = 300 thousand
Listed on July 23, 2011


PowerShares QQQ - QQQ - close: 59.60 change: +0.61

Stop Loss: 57.75
Target(s): 62.50, 64.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Big cap technology stocks are leading the market higher. The NASDAQ-100 ETF (a.k.a. the QQQ) has broken out to new multi-year highs. I am suggesting we buy calls on this breakout. However, we only want to launch positions if the QQQs open positive on Monday morning. FYI: The Point & Figure chart for QQQ is bullish with a $89 target.

Trigger @ if the QQQs open positive on Monday morning.

- Suggested Positions -

buy the AUG $60 call (QQQ1120H60) current ask $0.97

- or -

buy the AUG $62 call (QQQ1120H62) current ask $0.24

Annotated Chart:

Entry on July xx at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 61.7 million
Listed on July 23, 2011



In Play Updates and Reviews

Friday's Mixed Results

by James Brown

Click here to email James Brown

Editor's Note:

Friday's session was a mixed bag for us. We're trimming a couple of plays that have earnings coming up soon. Lack of a debt ceiling deal in Washington is bearish but I have a hard time imagining that lawmakers are really going to let us reach the Aug. 2nd deadline without some sort of agreement.

Our DMND and TDC trades continue to disappoint. I'm removing MJN and SBUX since they have earnings coming up in a few days.

-James

Current Portfolio:


CALL Play Updates

Agrium Inc. - AGU - close: 92.56 change: +0.74

Stop Loss: 87.75
Target(s): 94.00, 98.00
Current Option Gain/Loss: +59.2% & +75.5%
Time Frame: 4 to 5 weeks
New Positions: see below

Comments:
07/23 update: It ended up being a pretty good week for AGU with the stock rising the last four days in a row. Shares are now at ten-week highs and appear to have broken out past potential resistance near $92.50. However, I would be reluctant to chase it here. I'd prefer to look for a dip back into the $91.00-90.00 zone before launching new positions. Currently our stop loss is at $87.75 but I'm tempted to raise it into the $88.50-89.00 zone.

- Suggested Positions -

Long AUG $90 call (AGU1120H90) Entry @ $2.70

- or -

Long AUG $95 call (AGU1120H95) Entry @ $0.94

07/21 New stop @ 87.75
07/19 Breakout past $90.00 is a new entry point.
07/19 new stop @ 86.90

chart:

Entry on July 11 at $88.54
Earnings Date 08/03/11 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on July 9, 2011


Diamond Foods Inc. - DMND - close: 75.36 change: +0.12

Stop Loss: 73.60
Target(s): 79.50, 83.00
Current Option Gain/Loss: -17.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
07/23 update: I remain very concerned about our DMND trade. The stock has been underperforming the market for the last three days in a row. Yes so far shares have not broken key support at the rising 30-dma. This has been support for weeks. At the same time DMND has a two-week trend of lower highs. The last two days shares have gone nowhere with a narrow sideways consolidation. Cautious traders may want to just abandon ship and exit now since DMND has not been performing. You could jump back in later.

At this point I'd rather see a rally past $77.00 before initiating new positions. If that happens I'd add a secondary target at $83.00. Currently the 30-dma is at $74.54. I am suggesting we keep our stop below last week's low of $73.77. More conservative traders may want to raise their stop instead.

- Suggested (small) Positions -

Long AUG $75 call (DMND1120H75) Entry @ $2.25

07/23 Cautious traders may want to exit early now
07/19 new stop loss @ 73.60
07/15 triggered at $74.25
07/14 Adjusted entry point to $74.25 and stop to $72.75

chart:

Entry on July 15 at $74.25
Earnings Date 10/05/11 (unconfirmed)
Average Daily Volume = 237 thousand
Listed on July 11, 2011


Helmerich & Payne Inc. - HP - close: 72.56 change: +0.70

Stop Loss: 68.45
Target(s): 76.50
Current Option Gain/Loss: +28.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
07/23 update: HP added another +0.9% on Friday. The stock closed at two-year highs. The trend is up and the breakout past $70.00 is very bullish. However, I want to warn you that we only have four days left. HP reports earnings on Friday morning (July 29th). We will plan to exit on Thursday at the closing bell if we don't see an exit or get stopped before then. I am raising our stop loss to $68.45. More conservative traders may want a stop closer to $70.00 instead. If you're nimble enough I'd look for a dip near the $70.50-70.00 zone before initiating new positions.

- Suggested Positions -

Long AUG $75 call (HP1120H75) Entry @ $1.25

07/23 new stop loss @ 68.45
07/23 Plan to exit on July 28th at the close

chart:

Entry on July 20 at $71.49
Earnings Date 07/29/11 (confirmed)
Average Daily Volume = 1.3 million
Listed on July 19, 2011


Joy Global - JOYG - close: 99.85 change: -0.47

Stop Loss: 96.45
Target(s): 104.50, 107.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
07/23 update: JOYG gapped open lower on Friday morning as investors reacted to earnings guidance from CAT. Shares of JOYG opened at $98.00, dipped toward $97.50 intraday and then rebounded back to $101 by Friday afternoon only to settle inside Thursday's trading range.

The fact that JOYG's morning gap and dip on Friday was pretty much inline with Thursday's low is a positive. The failure to close back above $100 is negative. The general trend of higher lows and higher highs over the past few weeks is bullish. The fact that JOYG is close to resistance in the $102-104 area is a concern. In summary I am still bullish on JOYG but this remains a very aggressive, higher-risk trade. Our plan on Thursday night was to buy calls on Friday morning if both the S&P 500 and JOYG were both positive at the open. That didn't happen with JOYG's gap down. I am suggesting we try again. If both the S&P 500 and JOYG are positive on Monday morning buy calls but keep positions very small to limit our risk.

Open SMALL positions if JOYG and S&P 500 are positive at the open on Monday.

- Suggested Positions - Buy the Aug $100 call (JOYG1120H100)

07/23 Open positions if JOYG and market are positive on Monday morning
07/21 New entry point. Buy calls, small positions only, if the stock and the S&P 500 are positive at the open.
07/21 New stop loss @ 96.45. New targets are $104.50 and $107.50
...please see earlier updates for previous notes here...

chart:

Entry on July xx at $ xx.xx
Earnings Date 08/31/11 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on June 30, 2011


Nu Skin Enterprises - NUS - close: 40.40 change: +0.40

Stop Loss: 38.90
Target(s): 44.00
Current Option Gain/Loss: - 7.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
07/23 update: NUS rallied off its intraday lows on Friday morning to post a +1% gain. Shares closed less than half a point from all-time highs set on Tuesday. I am encouraged that short-term technical support at the 10-dma has not been broken. Yet I remain concerned that NUS is overbought. I am raising our stop loss to $38.90.

Earlier Comments:
Our target is the $44.00 mark but we will plan to exit ahead of the early August earnings report. FYI: The Point & Figure chart for NUS is bullish with a $62 target. Investors should note that the most recent data did list short interest at 14.4% of the 53.4 million-share float. That does provide some fuel for a short squeeze.

- Suggested Positions -

Long AUG $40 call (NUS1120H40) Entry @ $2.10
07/23 new stop loss @ 38.90
07/20 Entered at $40.80
07/19 buy calls tomorrow if NUS and S&P 500 are both up at the open.
07/19 new stop loss @ 38.40
07/18 Our play has not been opened yet. We're going to wait 24 hours and reconsider.

chart:

Entry on July 20 at $40.80
Earnings Date 08/02/11 (confirmed)
Average Daily Volume = 700 thousand
Listed on July 16, 2011


Potash Corp. - POT - close: 61.64 change: +0.93

Stop Loss: 58.95
Target(s): 63.75, 68.00
Current Option Gain/Loss: +29.1%
Time Frame: exit prior to July 28th
New Positions: see below

Comments:
07/23 update: POT extended its gains with a +1.5% rally on Friday. Shares hit $62.04 at its best levels. The $62 area has a lot of congestion from resistance back in February and March this year. This could be a tough area for POT to power through but it is possible. More importantly we only have three days left. POT is due to report earnings on Thursday morning (July 28th). We will plan to exit on Wednesday at the closing bell assuming shares have not hit our target or stop before then. I am not suggesting new bullish positions at this time. Please note that I am raising our stop loss to $58.95. More conservative traders may want to take profits now instead.

- Suggested Positions -

Long AUG $60 call (POT1120H60) entry @ $2.40
07/23 New stop loss @ 58.95
07/23 Time is running out. Prepare to exit on Wednesday
07/19 Play is opened. POT gapped open at $59.98
07/18 We are still unopened. Try again. Both POT and S&P 500 need to open higher on July 19th to buy calls.
07/18 new stop @ 56.70

chart:

Entry on July 19 at $59.98
Earnings Date 07/28/11 (confirmed)
Average Daily Volume = 7.4 million
Listed on July 16, 2011


Teradata Corp. - TDC - close: 57.27 change: +0.44

Stop Loss: 55.40
Target(s): 62.00
Current Option Gain/Loss: -35.4%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
07/23 update: Nothing has changed for us with TDC. The stock managed to outperform on Friday with a +0.7% gain but shares still look vulnerable here. The rally failed on Friday morning at its 10-dma near short-term resistance at $58.00. This is not very inspiring. While the long-term trend of higher lows and technical support at the 50-dma is still intact I am reluctant to launch new positions here. I am tempted to raise our stop loss closer to the $56.00 level but we'll leave it at $55.40 for the moment. I am not suggesting new positions at this time. FYI: The Point & Figure chart for TDC is bullish with a $79 target.

- Suggested Positions -

Long AUG $60 call (TDC1120H60) Entry @ $1.55

07/21 TDC is underperforming. Cautious traders may want to exit
07/19 new stop @ 55.40
07/19 Trade is open. TDC gaps up at $57.69.

chart:

Entry on July 19 at $57.69
Earnings Date 08/04/11 (confirmed)
Average Daily Volume = 1.5 million
Listed on July 18, 2011


PUT Play Updates

FactSet Research - FDS - close: 96.10 change: -0.22

Stop Loss: 100.25
Target(s): 90.50, 86.00
Current Option Gain/Loss: -50.0% & -43.7%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
07/23 update: The stock market is surging toward its 2011 highs while FDS is trading near six-month lows. The oversold bounce seems to have stalled but that does not mean we're not in jeopardy. It is encouraging to see that the rebound has pretty much stalled under the $96.50 level but I would rather see a failed rally near resistance at $98.00 or the 200-dma before we consider launching new bearish put positions.

Earlier Comments:
Our targets are $90.50 and $86.00 but the $90.00 level is support and FDS will probably see a bounce from this level. The Point & Figure chart for FDS is bearish with a $64 target.

- Suggested (SMALL) Positions -

Long AUG $95 PUT (FDS1120T95) Entry @ $3.50

- or -

Long SEP $90 PUT (FDS1117U90) Entry @ $2.40

chart:

Entry on July 18 at $94.48
Earnings Date 09/21/11 (unconfirmed)
Average Daily Volume = 363 thousand
Listed on July 16, 2011


CLOSED BULLISH PLAYS

Mead Johnson Nutrition Co. - MJN - close: 69.08 change: -0.69

Stop Loss: 67.99
Target(s): 74.75
Current Option Gain/Loss: Unopened
Time Frame: up to July 27th.
New Positions: Yes, see below

Comments:
07/23 update: I am giving up on MJN. For the second time in three days this stock has recoiled from resistance near the $70.00 level. While the larger, longer-term trend is higher, we are running out of time. MJN is due to report earnings on Thursday morning (July 28th). We do not want to hold over the announcement. I am removing MJN from the play list. Our trade never opened.

Our Trade Never Opened.

chart:

Entry on July xx at $ xx.xx
Earnings Date 07/28/11 (confirmed)
Average Daily Volume = 1.1 million
Listed on July 19, 2011


Starbucks Corp. - SBUX - close: 40.38 change: +0.55

Stop Loss: 38.85
Target(s): 44.00
Current Option Gain/Loss: unopened
Time Frame: up to its earnings report in late July
New Positions: see below

Comments:
07/23 update: I am giving up on SBUX. The plan on Thursday night was to buy calls if both the stock and the S&P 500 opened higher on Friday morning. SBUX opened higher but the S&P 500 opened unchanged at 1,343.80 and then ticked lower. I've decided to drop SBUX as a candidate. We're running out of time. Now if you did choose to buy calls on Friday morning you're not in bad shape with the stock above resistance at $40.00 but keep in mind I would exit prior to earnings. I can't find a confirmed date yet but it looks like SBUX is expected to report earnings on Thursday (July 28th). We do not want to hold over the announcement even though I suspect it will be better than expected. More conservative traders may want to raise their stop loss. The 20-dma has risen to $39.69 so the $39.60 area might work as a new stop.

- Suggested (Small) Positions -

Our Trade Never Opened.

07/21 Try again. Buy calls tomorrow if SBUX and S&P 500 are positive at the open
07/20 Trade was not opened. Wait for a close over $40.00
07/19 buy calls tomorrow if both SBUX and S&P 500 open positive
07/19 new stop loss @ 38.85
07/12 adjust trigger to $38.50
07/11 Our first attempt at a call play on SBUX did not pan out. Shares opened lower at $39.98 and then hit our relatively tight stop loss at $39.45. The option opened at $1.49 (ask) and we were stopped out at $1.22 (bid)for an -18% loss.
We are reloading this trade with a buy-the-dip trigger at $38.75.

chart:

Entry on July xx at $ xx.xx
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume = 6.8 million
Listed on July 9, 2011