Option Investor
Newsletter

Daily Newsletter, Saturday, 11/12/2011

Table of Contents

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

Market Wrap

Mario to the Rescue?

by Jim Brown

Click here to email Jim Brown

Headlines again powered the market when Italy's Senate approved the reforms demanded by the European Union. The lower chamber of parliament approved the measure on Saturday.

Market Statistics

Italy has resolved not to be the new Greece and they are moving quickly to implement the reforms demanded by the EU. The lower house approved the measure on Saturday and Premier Berlusconi resigned as promised. Respected economist Mario Monti is expected to be appointed interim prime minister in his place. Monti has already been appointed senator for life because of his past contributions.

It is entirely possible we could have new governments in both Greece and Italy before the market opens on Monday and both governments committed to implementing the austerity moves. In Greece the new interim leader is Lucas Papademos who will head a coalition government for the next several months with the sole responsibility of implementing austerity.

Italian 10-year bond yields plunged from their 7.4% high earlier in the week when it appeared Berlusconi may have been reconsidering his resignation, to 6.48% on Friday. That is well under the 7% rate that is considered unsustainable and suggests the bond vigilantes have decided to let the process play out. Actually, it probably means the ECB was buying Italian bonds in volume to give the appearance of a cooling off period.

While the weekend transition of power in Italy won't solve the long term problems it should take Italy out of the spotlight. Both Italy and Greece should have reached the point where we are not trading on their headlines every day. It will be a breath of fresh air to have the markets focus on U.S. conditions rather than Europe. It amazed me that the fate of the world markets has been resting for the last year on a country, Greece, with fewer people than Los Angeles.

Italy is much bigger. It is the eighth largest world economy and world's third largest debtor, but their problems are not nearly as great as Greece. They have a budget deficit of only 25 billion euros but they have 1.9 trillion euros in debt. ($2.6 trillion) They are not having any real problems paying their immediate debts but the debt service on that debt is squeezing the life out of the country. Italy's problems are a better example of what the U.S. will face in 5-6 years if something is not done quickly.

I will be thrilled to not have to discuss European countries in every commentary. I will also be thrilled if the U.S. economics continue to improve as we have seen in recent weeks. On Friday the Consumer Sentiment for November rose to the highest level since June at 64.2, up from its prior reading of 60.9. That was the third consecutive gain since posting 55.7 in August. That was only 0.4 points from matching the 28-year low from Nov-2008. The present conditions component rose to 76.6 from 75.1 but the expectations component spiked significantly to 56.2 from 51.8. The Michigan Sentiment Survey is sensitive to home prices and fuel prices so the expected rise in fuel prices from $100 oil could weigh on sentiment for December.

Consumer Sentiment Chart

The weekly Jobless Claims were Thursday but I think the number was important. The headline was 390,000 and the lowest level since April. The prior week's number at 397,000 was revised to 400,000 but the trend remains the same. The October high was 411,000 on Oct 8th and we are starting to see some progress to the downside once again. A continued move lower would be bullish. However, I am sure there are some workers taking seasonal positions and that is influencing the numbers.

Jobless Claims Chart

We have seen some improvement in several employment metrics over the last month that suggest full time employment is also improving. Bloomberg reported on Friday that American manufacturers booked $32.6 billion in new orders for machinery equipment in September. That is the most since July 2008 and a 13% increase over the prior month.

Parker Hannifin (PH) raised its fiscal 2012 outlook for North American revenue growth to +8.3% from +6.2% saying orders had "re-accelerated" in the period ending on September 30th. Orders rose +16% for the quarter compared to +11% in Q2. Caterpillar said its order backlog rose +40% in the quarter to $24.4 billion. CEO Doug Oberhelman said, "This was the best quarter for sales in our history and our order backlog is at an all time high."

All these reports, both economic and industrial, point to an expanding economy and the risk of a new recession has declined sharply in just the last 30 days. If the market begins to focus on the story at home rather than the Euro states abroad we could see a strong rally.

The economic calendar pace picks up a little bit next week with the PPI/CPI inflation reports, Empire Manufacturing Survey and the Philly Fed Survey. The Philly Fed is the most important. That is seen as a preview of the national ISM due out the first week in December.

Economic Calendar

Investors have climbed the wall of worry for the last six weeks but it was not without a few slips along the way. Wednesday's -400 point decline was one of those slips as well as the declines at month end that knocked -600 points off the Dow. However, despite those major hiccups the markets are right back near their highs for the month and very close to testing the October three month highs.

The sell in May and go away strategy worked very well this year and now we are seeing a growing trend of investors coming back into the market. I believe most are still overly cautious and are just sticking their toe into the market and waiting for the all clear from Europe before taking the big plunge. We may not get an all clear for many more months but at least the hurricane warnings will fade into the past and future events may be more like thunder storms.

Hopefully investors are going to be free to concentrate on stocks and not on geopolitical events. On Friday Caterpillar (CAT) announced it was moving 1,000 jobs from Japan to the USA and will build a new plant to put them to work. The location of the plant has not yet been determined but will be announced before the end of the year. The plant will manufacture small tractors and excavators. The majority of those customers are in North America and Europe. The old plant in Sagami Japan will remain open and continue to fulfill a "strategic role." CAT is opening a new plant in Winston Salem NC next week to produce axles for mining machines. The company is also planning on expanding operations in Decatur and East Peoria Illinois where the majority of large trucks and tractors are built. No recession for Caterpillar.

Caterpillar Chart

Electric car maker Tesla Motors (TSLA) was shocked to a new 11-month high after Barclays named it a "top pick." The analyst said the market for electric cars could rise to 4.8 million units worldwide by 2020. The analyst thinks Tesla will lose money through 2012 but turn to a $1.02 profit in 2013 and $2.50 in 2014. He believes Tesla is selling into the right market, the high end consumer. Since Tesla has been given up for dead more than once in the last several years this was a major turn of events. Shares gained +7% on the news.

Tesla Chart

Apple (AAPL) may need an electric shock if investors don't develop some holiday cheer soon. Apple shares declined about -4% for the week on worries about cutbacks in orders. Cleveland Research cut its Q4 iPad sales estimates to 12 million units from 14 million. The company cited "surprise revisions" to supply chain orders and lack of visibility. Ticonderoga Securities also said October sales were below average and there were negative indications in the supply chain. Analysts believe Apple may have overbuilt iPhones before the 4S launch and that led to an excess in supply when the global economy did not pickup.

However, this is normally an outstanding quarter for Apple and the company has already said there was record demand for the 4S. Analysts are still unsure how the new Kindle tablet from Amazon as well as some other Android releases will impact iPad sales in Q4 since most of the other tablets are cheaper than the iPad. Ticonderoga believes this is a buying opportunity because Apple's compound annual growth rate (CAGR) can still be well over 20%. Morgan Stanley expects Apple sales to grow from $64 billion in 2010 to $108B in 2011, $140B in 2012 and $176B in 2013. That is some serious revenue growth and the Apple TV has not even been released yet. The iPad 3 is expected in Q1 and the iPhone 5 in Q3.

Apple Chart

Dillard's (DDS) posted earnings that rose +85% but the shares were crushed due to a lower profit margin. Same store sales rose +5% for the quarter and the company reported last week that October same store sales rose +8%. You would think investors would be thrilled. Gross margins were 36.8%, the same as in the year ago quarter but not enough to please analysts according to JP Morgan. Shares declined -13% on the news.

Dillards Chart

E*Trade (ETFC) cancelled its plans to sell itself. E*Trade's largest shareholder, Citadel, asked E*Trade to sell itself to another online broker like TD Ameritrade or Charles Schwab. After several months of discussions CEO Steven Freiberg, said on Friday, "Following a review by the board, the management team will continue to execute on our strategy designed to create value for both our stockholders and our customers." E*Trade had hired Goldman Sachs to advise on strategic alternatives in order to please Citadel. That hedge fund invested $2.5 billion in E*Trade in 2007 to keep it out of bankruptcy after its mortgage portfolio imploded in the subprime crisis. E*Trade has $182 billion in customer assets under management and has returned to profitability in 2011 after several years of losses. Citadel owns 9.6% of E*Trade.

Chart of E*Trade

MolyCorp, the rare earth miner everybody loves to hate, reported earnings of 67-cents compared to a loss of 10-cents in the year ago quarter but missed estimates of 70-cents and the stock was punished for a -13% loss. Sales rose to $138.1 million from $8.5 million but nobody seemed to care. MolyCorp is in the middle of an $895 million expansion program and they had to shut down production for a few days to install new equipment and bring new facilities online so they can more than double production by the end of 2012 to 19,050 tonnes a year. Last quarter they sold 1,400 tonnes of rare earths at $131.19 per kilogram, which was a record price. Installing new equipment to increase production from 1,900 tonnes a quarter to 4,800 tonnes should be a good thing. Once renovations and improvement are complete they expect production to rise to 40,000 tonnes a year. Can you say "long term buying opportunity?"

MolyCorp Chart

The dollar index fell -1.25% on news Italy had advanced the austerity bill to the lower house for approval. The declining dollar meant commodities rose once again. With the dollar trading well above levels seen for much of the summer we can expect it to trend lower again once the clouds over Italy evaporate.

Dollar Index Chart

Gold Chart

Crude oil rallied another $1.44 to close at $99.22 on the falling dollar, rising worries over Iran, declining inventories and rising demand expectations. Distillate inventories in the U.S. are 15% below average and dropping fast. There was a -6.0 million barrel drop last week alone. Demand for distillates is +4% over the same period in 2010. In the chart below the red line is the east coast distillate inventory at the end of October.

Distillate Inventories

U.S. heating oil prices are breaking out to new highs and the season is just getting started. There is a good chance we could see record prices this winter.

Heating Oil Chart

Tensions over Iran and its nuclear ambitions continue to support higher oil prices. The IAEA released a report last week citing "credible evidence" supporting the claim Iran was trying to develop nuclear weapons and mount them on long range missiles. The report has escalated the talk about a military option to shutdown Iran's nuclear capability. Israeli President Shimon Peres said "airstrikes against Iran's nuclear facilities were becoming more and more likely." Israel has struck nuclear sites in Iraq and Syria in the past so there is precedence.

Secretary of State Clinton urged Iran on Friday to "urgently" address the latest concerns about its nuclear program and said the U.S. was consulting with its allies over the next course of action. Iran responded saying it will hit back against any attack or even "a threat of military action." "Iran will respond with full force to any aggression or even to threats in a way that will demolish the aggressors from within." Iran warned its response would not be limited to the Middle East. Meanwhile Israel has ramped up civil defense drills in order to be able to respond to both "conventional and non-conventional missile attacks." The EU is reportedly preparing a new round of sanctions against Iran ahead of a meeting of its foreign ministers on Monday. Russia has already ruled out additional sanctions in the UN where it holds veto power.

One of the problems in attacking Iran is the straits of Hormuz. An average of 13 tankers carrying 16 million barrels of oil transit the strait every day. That represents 33% of the world's seaborne oil shipments. The sea lanes though the strait are only two miles wide. Iran has repeatedly threatened to seal off the strait if it was attacked for any reason. This would cause havoc in the oil markets and we could see $150 oil within days of any such action and $200 if it lasted more than a few days. Most tanker owners would refuse to transit the strait if Iran said it was closed. Insurance companies would not insure the tankers and nobody wants to lose millions of dollars invested in their tankers. A million barrel tanker is a very large slow moving target that would be nearly impossible for any Iranian missile team to miss.

Add the threat of some form of action against Iran to the other factors supporting oil prices and there is a good case for taking out an insurance position on something like the USO. Buying a long term OTM call would certainly be a decent lottery play. I don't expect anything to happen BUT the longer this drags on the more likely Iran will reach a point where somebody, like Israel, will eventually act unilaterally.

Crude Oil Chart

USO Chart

The Dow closed near the highs for the week. The S&P did not. The S&P declined from 1277 on Tuesday to 1227 on Wednesday. A 50 point move on the S&P is not a small feat. The two day rebound only managed to recover about 35 of those points to end at 1263. Nice recovery but still a lower high. The market may not be done yet so we can't confirm that as a lower high until it is in our rear view mirror. S&P 1277 remains the initial line in the sand with 1285 and 1300 the next two major areas of resistance. It could be a rough battle moving higher or we could just spring over those levels at the open on Monday if the weekend's positive events in Italy cause another monster short squeeze.

Friday was a monster short squeeze on extremely low volume. The volume on the NYSE was the lowest since July. Overall volume across all markets was only 5.9 billion shares. The bond market was closed on Friday for Veterans Day and a lot of businesses were closed as well. You can't draw any conclusions about market direction from a low volume short squeeze. Without liquidity there is no consensus.

There are many technical possibilities for the S&P. Most of the scenarios are negative. However, the economic and fundamental picture is improving daily. I believe the fundamentals and the seasonal trends will combine to produce a return to the July highs. Once there we could have significant trouble moving higher. Support remains 1225.

S&P Chart - 3 min

S&P Chart - Weekly

S&P Chart - Daily

The Dow is testing downtrend resistance from July and a breakout here would be major. Despite the big triple digit moves the Dow has been consolidating in a very wide band. The big moves work both against us and in our favor. A major news event this weekend could blow past current resistance and eliminate days of anguish. The October closing high at 12,231 is only 80 points over Friday's close. The Dow has had 88 triple digit days so far in 2011. A +100 point gain at Monday's open could trigger yet another day of short covering and begin a new leg higher. Conversely a triple digit decline knocks us back below 12,000. This is going to be a pivotal week. We need big news, big volume and a big move to confirm sentiment.

Dow Chart - Daily

The Nasdaq can't get any respect without Apple leading the way. The Nasdaq gained +53 points on Friday BUT finished the week with a loss. Nasdaq 2600 appears to be solid support but 2700 and the 200-day average has been decent resistance. Several closes above those levels have proved to be one day wonders.

We need to hope that Apple rejoins the party soon or it is going to be a long November.

Nasdaq Chart - Daily

Nasdaq 100 Chart - Daily

The Russell 2000 continues to lag the other indexes and until it takes a leadership role the rally has no legs. Fund managers are still too unsure about market direction to take a chance in small caps.

Russell 2000 Chart - Daily

The next two weeks are typically bullish. If there is a resolution in Italy over the weekend and some other country does not pop up like a bad case of chicken pox then maybe the focus will change to North America rather than Europe.

Thoughts to ponder. No country has ever managed to recover from massive overspending on the magnitude of Greece or Italy using austerity alone. Without a sudden acceleration of growth they are doomed to fail. Austerity produces recessions, lower employment, lower tax revenues, lower future budgets, etc. Eventual debt restructuring is the only answer. This is especially true with the euro zone since each country does not have its own currency. Italy cannot print more euros and thereby devalue its debt. The U.S. can print more dollars, produce inflation and eventually pay back its debt in 50-cent dollars. Euro countries no longer have that luxury. Even if Italy does everything right and moves out of the European headlines there is still trouble ahead for Europe.

Merkel and Sarkozy are making plans for the eventual departure of countries from the zone. They have skipped to the end of the book and they know how it will eventually end. The zone in its current form is on life support and the prognosis is terminal. There are rumors Germany, France and maybe a few other fiscally responsible countries will either exit out the top of the economic zone and form a new group, a super zone. There are also rumors they are planning on pushing the PIIGS out the bottom of the zone because their economic problems are terminal. They are only surviving because of a constant diet of bailout euros. They need to pull the feeding tubes and cut them loose or risk seeing the countries in the top half of the zone pulled down with them. Cutting them loose allows the remaining zone members to stiffen economic rules and will produce a stronger zone in the future.

Regardless of what happens in our markets over the next two weeks or two months there will be another European disaster. Just keep that thought in your subconscious and be prepared for the next round of volatility. Until then I remain in buy the dip mode. Buying the gaps on days the market gaps higher is not a winning strategy. Be patient, volatility has its rewards.

Jim Brown

Send Jim an email

Red Skelton with an interesting view on today's political scene.
Red Skelton


Index Wrap

Holding Support On a Sharp Pullback

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

Last week I predicted a consolidation before a push higher and this week I still have a bullish outlook since this past week saw a successful test of the prior highs as 'new' support. While bigger price swings seem here to stay with hi-frequency trading, technical principles still work.

The technical 'principle' that I'm referring to specifically is that prior highs in a well establish trading range, once penetrated (to the upside), should 'become' new support on subsequent pullbacks. There are various reasons why this dynamic tends to be but chief among them is that traders who bought the breakout move were willing to step up again when prices came back to the 'breakout' area. This just seems to be natural area where short-covering will ensue and buyers in general will come in.

The 200-day moving average assumes some importance here as one of the most widely followed technical type indicators among otherwise fundamentally oriented traders and fund managers; the S&P 500 (SPX) and 100 (OEX) faltered and reversed in this area this past week, as did the Nasdaq Composite (COMP). The Dow 30 (INDU) quickly got back above this key moving average by week's end and NDX found support on a pullback BACK to its 200-day average. Look for NDX and INDU to lead the way higher.

The low point was seen on Wednesday (the 9th) on a day when my CPRATIO sentiment indicator fell to a bullish 1.1; i.e., total CBOE equity put volume was close to being equal to total daily equity options call volume. You can follow this number, the way I keep it at least, by simply dividing daily CBOE equities-only call volume BY total daily equities put volume. Takes a mere minute to check on the CBOE web site statistics page.

Traders 'shouldn't have gotten overly bearish as support was found exactly where it 'should' have to maintain a bullish chart; i.e., at the prior upside 'breakout' point. If there's a decisive downside penetration of this expected support, then it's another story as that would be bearish action.

The weekly INDU chart is of interest below. The recent 3-week consolidation looks like a bull flag pattern which suggests a push higher ahead, such as a run to the 13000 area. If the Dow gets to around 13000, strong resistance is suggested by both the prior 12-month high and by a return to the previously broken up trendline; which I sometimes whimsically call the 'kiss of death' trendline.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) remains bullish on technical/chart basis as the recent pullback found support exactly where it 'should' have for a presumed bullish trend. Which is to say that SPX pulled back to what had been prior resistance for a prolonged period. After the breakout move above this resistance a stock or index meets a bullish test when this same area 'becomes' support on pullbacks. If you want to call the heart-stopping Wednesday sell off as a mere 'pullback'!

Key support is in the 1230 area, extending to 1200. Key near resistance is seen (again) in the area of the SPX's 200-day moving average, currently at 1272. A couple of consecutive day's closing above this average would suggest renewed upside momentum. Next pivotal resistance comes in around 1300. A couple of closes above 1300 would suggest further upside potential back to the prior highs. Not in a straight line necessarily.

There's room on the upside for further gains before the Index would again be in an overbought situation. Trader 'sentiment' would have to get substantially more bullish to suggest danger from a contrary opinion point of view.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart remains bullish. It hasn't been able to break out to the upside and there is congestion as they say just under the 200-day average; that back and forth 'churning' in a 10-12 point zone. Nevertheless, a bullish pattern is that there are some stair step lows even in rough patches like this past week. The index is holding up and inching higher.

A bullish sign would be a strong move above OEX's 200-day moving average; the same as with SPX. That would in turn suggest further resistance starting around 580 could get churned through. If so, OEX would then look like it was good for another 20 points on the upside, to the 600 area. It may look like 600 is in the cards but a cautionary note is possible heavy supply (S&P big cap stocks for sale), above 570. The buyers have been at times shall we say 'timid'. We're scaring ourselves to death with Europe!

The coming week may make the trend clearer. Suggested to me is OEX gets above 570 heading to a test of 580 resistance. Not my top view of how this goes but an alternative view is OEX spending another 1-2 weeks bouncing between 550-580. A prolonged fall below 550 turns the near-term trend lower. The chart would then begin to look like a secondary top formed in the 570-580 area.

Near support begins in the 560 area with 550 as a pivotal support and a dip of much time under this level would turn the chart mixed again from its current bullish hue. Not that the price and volume action is wildly bullish, but OEX keep bouncing higher and lately has been making stair-step lows as it inches above 550-560. I anticipate further gains and a key to prospects for further gains is what happens if/when OEX hits 580 again.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) Average continues bullish in its pattern. BA, DIS, JNJ, MRK, UTX have or are breaking out to the upside and CSCO, HD, MCD and WMT remain in strong uptrends; other Dow stocks are mostly in a holding pattern or inching higher. A 'bottoms' up approach to the individual INDU stocks suggests further gains ahead.

Unlike the S&P, INDU rebounded back to its prior highs by the end of this past week already, seemingly all set to challenge levels above key resistance at 12200 and a level INDU looks ready to pierce on the way toward next resistance at 12400. With simply a strong move above 12200, 12600 becomes an upside target based on its last leg up. 13000 is a potential major target per a pattern I'm seeing with the weekly INDU chart seen above with some of my initial 'bottom line' comments.

Support is apparent in the 11800 area. A fall to below 11800 checks the more bullish view I'm seeing with last week's action. Next key support is at 11650-11600; if the Dow falls below 11600 it could be setting up a retest of 11400 and what should be fairly major support.

INDU is leading the S&P side of the market. The group of stocks, although small, that Charles Dow envisioned as the most representative group of stocks to judge the overall economic trend. There have been of course stocks that fall out of INDU and new ones that come in. When I worked for Dow Jones (pre-Murdoch days) I never saw much info about what individuals made the selections and how. Somehow the Average does continue to 'work' and allow some good forecasting of the overall Market trend.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) consolidation above 2600 that's gone on for a while now suggests to me 'basing' action for a push through 2700 that gets sustained for more than a day or two. Initial resistance still is in the same area around 2700 and the 200-day moving average. Next key resistance comes in at 2750. If COMP gets through 2750 the index could be starting a push back to its 12-month highs in the 2880-2890 area.

My general rule of thumb is to assume at least potential for a retest of prior highs if an Index gets within striking distance such as the pattern we have here, especially enhanced if COMP pierces 2750.

The chart would turn mixed again with future closes below 2600; next support comes in at 2560-2550. I look for 2600 to hold up as support and resistance at 2700, then 2750, to be pierced in a possible next move toward my upper (red) envelope line.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) rebounded from key support in the 2300 area, after clearly establishing (again) the strong resistance/selling pressure that's getting triggered around 2400. There was a bearish downside chart gap the day following what had been a strong march to 2400. But Europe got very muddled and intense again. I assess that NDX weathered the storm nicely. You often get a sense of an index's strength by how it holds up on heavy selling. In the case of NDX, heavy selling only pushed the index back to, but not under, a line of chart support at 2300. The subsequent bounce from there suggests NDX is perceived cheap around 2300 and the stocks will get bought.

The index is perceived 'rich' currently at and above 2400. The chart pattern suggests potential for another test of 2400 and the resistance layered above. I'm watching closely on any rallies into the 2412-2438 zone; if NDX clears this resistance, upside potential is suggested to the 2500 area.

Key near support is at 2280-2300, extending to 2250. A Close below 2300 sets up a bearish break in the recent 30 day pattern. The next day then becomes the key test of whether the prior day's close was a fluke OR marked the start of a reversal and downside potential to 2200.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) continues to trade above support in the low-56 area and 56.5-56 is again 'established' as the low end of our current trading range. From the past month is established the high end of this trading range at 59. The fact that the index has again tested its support floor in the 56.5-56 area suggests the potential for another rally to 59, with its possibility of a breakout above this level and a move to 60 and above.

A break below the line of support at 56 changes the chart picture. Back to back closes below 56 would suggest another secondary top has been completed and there's potential of a further fall to 54.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) chart remains bullish to 'mixed' with support still established in the 720 area. Resistance is in the 760 to 770 zone and clearing this would set up a test of resistance from 780 to 800.

Conversely, a decisive downside break below 720 would suggest a test of key support at 700, extending to 680.



GOOD TRADING SUCCESS!


New Option Plays

Industrial Components and Grocery

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidates readers may want to consider the following symbols:

BCR - a breakout past resistance at $90.00 could be a bullish entry point.

FFIV - this stock is showing strength. The breakout past $110 could signal a rally toward the $118-120 zone.

NKE - Friday's rally is a breakout from the short-term two-week trend of lower highs.

TSCO - A rally past the $75.00 level could be a bullish entry point.

- James

FYI:

Speculation on Oil?
Iran's nuclear weapon program has been making headlines. There has been an increase of saber-rattling from both Iran and Israel. Most people do not think Israel would unilaterally attack Iran in an attempt to stop them from completing their nuclear warhead development. However, Israel does have a history of strategically bombing crucial weapon sites in neighboring nations. If there is military action from Israel or the West against Iran then Iran has threatened to shut down the Straits of Hormuz, which handles about 33% of the global oil tanker traffic. Oil prices would skyrocket should this occur.

We are contemplating a long-term, deep out-of-the money call position on the U.S. Oil ETF (USO) just in case something does happen. Oil could surge to $150, $200 a barrel or more if Iran tries to shut down the Straits of Hormuz. Just headlines of an attack by Israel would send oil screaming higher. Yet at the moment the USO looks extremely overbought with a nearly non-stop rally from its October lows.

It's something to think about.


NEW DIRECTIONAL CALL PLAYS

Parker Hannifin Corp. - PH - close: 84.22 change: +1.84

Stop Loss: 81.45
Target(s): 89.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
PH is an industrial component maker. Shares have been churning sideways in the $80-85 zone for over two weeks. The stock currently looks poised to breakout from this trading range and make a run at the $90 level or its July highs near $91.80.

I am suggesting we use a trigger at $85.25 to open bullish positions with a stop at $81.45. More conservative traders will want to consider a higher stop loss. Our target is $89.75. More aggressive trades could aim higher (91.50 or the $97-99 zone).

FYI: The Point & Figure chart for PH is currently bearish but a breakout past $85.00 would create a brand new quadruple-top breakout buy signal.

Trigger @ $85.25

- Suggested Positions -

buy the DEC $90 call (PH1117L90) current ask $1.60

- or -

buy the JAN $90 call (PH1221A90) current ask $3.20

Annotated Chart:

Entry on November xx at $ xx.xx
Earnings Date 01/19/12 (unconfirmed)
Average Daily Volume = 2.6 million
Listed on November 12, 2011


Whole Foods Market, Inc. - WFM - close: 68.70 change: +1.57

Stop Loss: 67.40
Target(s): 74.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
WFM is a high-end grocery chain. The stock has been underperforming the last several days as investors sold the earnings news. The company beat by a penny but revenues were light. Now it appears the correction is over. Shares are bouncing from their 100-dma and trendline of higher lows.

WFM can be a very volatile stock so trading options on it is a higher-risk trade. We want to keep our position size small. I am suggesting a trigger at $69.65 to open bullish positions with a stop loss at $67.40 (a tight stop for this stock). Our target is $74.00. More aggressive traders could aim higher.

Trigger @ $69.65

- Suggested Positions -

buy the DEC $70 call (WFM1117L70) current ask $2.50

- or -

buy the JAN $75 call (WFM1221A75) current ask $1.93

Annotated Chart:

Entry on November xx at $ xx.xx
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on November 12, 2011



In Play Updates and Reviews

COG Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:

Shares of Cabot Oil & Gas (COG) tagged our exit target on Friday.

We also saw APC, FLS, OXY, and the UA trades all opened or triggered.

-James

Current Portfolio:


CALL Play Updates

Anadarko Petroleum - APC - close: 80.72 change: +1.23

Stop Loss: 77.45
Target(s): 98.50
Current Option Gain/Loss: Dec$85c: - 6.1% & Jan $90c: - 9.4%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
11/12 update: A strong start this morning lifted APC past short-term resistance at $81.00. The stock actually gapped open higher at $81.00, hit our trigger to buy calls at $81.05, and made it to $81.73 before fading to a +1.5% gain. I would still consider new positions here if both APC and the S&P 500 index open positive on Monday morning.

FYI: Our target is for the January position. We will likely exit the December calls at a lower price.

Earlier Comments:
Shares of APC are on the verge of a major breakout past resistance near $85.00. This would produce a new all-time, record high for the stock. We want to be ready when that happens.

- Suggested Positions -

buy the DEC $85 call (APC1117L85) Entry $2.60

- or -

buy the JAN $90 call (APC1221A90) Entry $2.76

11/11 Triggered at $81.05
11/09 adjusting our trigger to buy calls down to $81.05 and stop loss to $77.45.

chart:

Entry on November 11 at $81.05
Earnings Date 01/31/12 (unconfirmed)
Average Daily Volume = 5.0 million
Listed on November 8, 2011


DaVita Inc. - DVA - close: 74.34 change: +0.95

Stop Loss: 72.25
Target(s): 79.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
11/12 update: DVA has almost recovered from Wednesday's swoon. The stock has bounced back toward resistance near its 100-dma, its exponential 200-dma and the $75.00 level. We are waiting for a breakout.

Earlier Comments:
I am suggesting a trigger to buy calls at $75.25. If triggered we'll aim for the $79.50 mark. More aggressive traders could aim for the May-June lows near $82.50 instead. FYI: The Point & Figure chart for DVA is bullish with a $97 target.

Trigger @ $75.25

- Suggested Positions -

buy the DEC $75 call (DVA1117L75)

chart:

Entry on November xx at $ xx.xx
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on November 8, 2011


Flowserve Corp. - FLS - close: 99.37 change: +3.59

Stop Loss: 93.95
Target(s): 109.50
Current Option Gain/Loss: Dec$105c: - 3.3% & Jan$105c: + 5.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/12 update: Our FLS trade has been opened. The market's early morning strength pushed FLS to gap open higher at $97.26. Our trigger to buy calls at $97.30 was quickly hit. FLS ended the day up +3.7%. Now the stock faces resistance at $100 and its exponential 200-dma. I would wait for a breakout past $100 if you're still looking for an entry point.

It was our plan to keep our position size small. Please note that I am adjusting our exit target down to $106.00, essentially trying to stay under the simple 200-dma.

Earlier Comments:
I do consider this a slightly more aggressive trade because FLS can be so volatile. We want to keep our position size small to limit our risk.

(small positions) - Suggested Positions -

Long DEC $105 call (FLS1117L105) Entry $2.95

- or -

Long JAN $105 call (FLS1221A105) Entry $4.65

11/12 adjusted exit target to $106.00
11/11 trade opened at $97.30
11/09 New strategy: trigger to buy calls at $97.30, stop loss $93.95. Small positions only

chart:

Entry on November 11 at $97.30
Earnings Date 02/23/12 (unconfirmed)
Average Daily Volume = 712 thousand
Listed on November 8, 2011


SPDR Gold Shares - GLD - close: 173.96 change: +2.82

Stop Loss: 164.95
Target(s): 182.50
Current Option Gain/Loss: +25.0%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
11/12 update: Gold continues to rebound thanks in part to a drop in the U.S. dollar. The GLD spent much of Friday churning sideways in a very narrow range under the $174.00 level.

The trend remains up but I am not suggesting new positions at this time.

Earlier Comments:
Cautious traders might also want to consider an exit target near $179.00 instead. Our target is $182.50.

- Suggested Positions - (Small Positions)

Long 2012 Jan $175 call (GLD1221A175) Entry $6.00

11/07 new stop loss @ 164.95

chart:

Entry on November 2 at $168.59
Earnings Date --/--/--
Average Daily Volume = 15.3 million
Listed on November 1, 2011


McDonald's Corp. - MCD - close: 94.76 change: +1.50

Stop Loss: 91.95
Target(s): 99.75
Current Option Gain/Loss: Nov95c: - 7.1% & Dec95c: + 3.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/12 update: MCD gapped open higher on Friday and rallied to a +1.6% gain. Traders were buying the dips later Friday afternoon near $94.50. If the stock market rally continues on Monday I suspect we will see MCD hitting new record highs.

Please note that I am adjusting our stop loss to $91.95.

Earlier Comments:
I am suggesting small positions to limit our risk. We will list both November calls and Decembers, but keep in mind that Novembers will expire soon. FYI: The Point & Figure chart for MCD is bullish with a $112 target.

(small positions)- Suggested Positions -

Long NOV $95 call (MCD1119K95) Entry $0.70

- or -

Long DEC $95 call (MCD1117L95) Entry $1.55

11/12 new stop loss @ 91.95
11/07 MCD hit our trigger at $94.05

chart:

Entry on November 7 at $94.05
Earnings Date 01/24/12 (unconfirmed)
Average Daily Volume = 6.0 million
Listed on November 5, 2011


Occidental Petroleum - OXY - close: 99.81 change: +1.71

Stop Loss: 95.75
Target(s): 104.50
Current Option Gain/Loss: Dec$100c: - 6.7% & Jan105c: - 9.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/12 update: Our new trade on OXY is open. Shares gapped higher at $99.67 on Friday. The stock closed up +1.7% but I'm a little surprised that on such a bullish day that OXY couldn't close above the $100.00 mark.

I don't see any changes from my prior comments. Nimble traders could try buying dips near the rising 10-dma. We do want to keep our position size small because the oil stocks can be a volatile bunch and OXY is arguably a little bit overbought here. FYI: The Point & Figure chart for OXY is bullish with a $116 target.

(small positions) - Suggested Positions -

Long DEC $100 call (OXY1117L100) Entry $5.04

- or -

Long JAN $105 call (OXY1221A105) Entry $4.79

11/11 trade opened.

chart:

Entry on November 11 at $99.67
Earnings Date 01/26/12 (unconfirmed)
Average Daily Volume = 5.4 million
Listed on November 10, 2011


Under Armour, Inc. - UA - close: 83.90 change: +2.86

Stop Loss: 79.35
Target(s): 92.50
Current Option Gain/Loss: + 9.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/12 update: Our trade on UA is finally open. Shares rallied hard on Friday and closed with a +3.5% gain. Our new trigger to buy calls was hit at $82.55. If you don't feel like chasing it here then wait for a small dip to launch positions.

Earlier Comments:
We do want to keep our position size small to limit risk since UA can be a volatile stock.

(small positions) - Suggested Positions -

Long DEC $85 call (UA1117L85) Entry $3.75

11/10 adjusted trigger to 82.55 and stop to 79.35
11/09 new strategy: use a trigger at $83.50 to buy calls, stop loss @ 79.90
11/08 adjusted entry trigger from $86.25 to 85.25 and moved stop loss from $81.90 to $80.90.

chart:

Entry on November xx at $ xx.xx
Earnings Date 01/26/12 (unconfirmed)
Average Daily Volume = 1.4 million
Listed on November 5, 2011


Visa, Inc. - V - close: 95.16 change: +2.12

Stop Loss: 89.75
Target(s): 99.75
Current Option Gain/Loss: Nov$95c: +26.3% & Dec$95c: +23.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
11/12 update: Visa displayed a little relative strength on Friday with a +2.2% gain. The really past prior resistance near $94.50 is bullish but shares still have potential resistance near $96.00. If Visa can rally past $97.20 it would be a new all-time, record high.

We currently have an exit target at $99.75 but more aggressive traders may want to aim higher.

Don't forget that November options expire soon. Readers may want to consider an early exit for the November position.

- Suggested Positions -

Long Nov. $95 call (V1119K95) Entry $1.10

- or -

Long Dec. $95 call (V1117L95) Entry $2.75

11/08 new stop loss @ 89.75
11/01 new stop loss @ 88.75
11/01 Visa gapped lower at $91.16
10/31 adjusted trigger to $92.25

chart:

Entry on November 1 at $91.16
Earnings Date 10/26/11
Average Daily Volume = 5.0 million
Listed on October 29, 2011


VMware, Inc. - VMW - close: 100.67 change: +3.48

Stop Loss: 97.40
Target(s): 107.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
11/12 update: VMW has almost completely recovered from the market-wide sell-off on Wednesday. Now shares are nearing resistance under the $101 level. I don't see any changes from my prior comments.

The plan is to buy calls at $101.00. More conservative traders may want to use a trigger at $101.50 instead. Our exit target is $107.75. We want to keep our position size small to limit risk.

Trigger @ $101.00 (small positions)

- Suggested Positions -

buy the DEC $105 call (VMW1117L105)

11/08 adjust stop loss to $97.40.
11/07 Adjust strategy. Instead of buy the dip at $97.00 we want to buy calls on a rally at $101.00. Stop loss at $96.75. Target 107.75.

chart:

Entry on November xx at $ xx.xx
Earnings Date 01/24/11 (unconfirmed)
Average Daily Volume = 2.2 million
Listed on November 3, 2011


PUT Play Updates

Deutsche Bank - DB - close: 39.77 change: +2.29

Stop Loss: 41.55
Target(s): 30.50
Current Option Gain/Loss: Dec$35p: -17.3% & Jan$30p: - 6.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
11/12 update: I warned readers that this could be a volatile trade. Stocks rallied on Friday as investors reacted to positive headlines out of Europe, specifically a new Prime Minister in Greece and progress in Italy. Unfortunately new politicians are unlikely to solve the EU's problems but that doesn't mean stocks won't rally on short-term headlines.

Shares of DB gapped open higher at $39.00 on Friday morning but failed to breakout past round-number, psychological resistance at $40.00. I would still consider new positions now. The plan is to keep our position size small to limit our risk.

Please note that given our new entry point at $39.00 I am adjusting our stop loss higher to $41.55.

Earlier Comments:
Keep position size small to limit risk. This is going to be a volatile trade. FYI: The Point & Figure chart for DB is bearish with a $30 target.

- Suggested Positions - (small positions)

Long DEC $35 PUT (DB1117x35) Entry $2.60

- or -

Long JAN $30 PUT (DB1221m30) Entry $2.09

11/12 new stop loss @ 41.55
11/11 DB gapped open higher at $39.00

chart:

Entry on November 11 at $39.00
Earnings Date 02/02/12 (unconfirmed)
Average Daily Volume = 4.3 million
Listed on November 10, 2011


CLOSED BULLISH PLAYS

Cabot Oil & Gas - COG - close: 88.06 change: +1.51

Stop Loss: 79.65
Target(s): 89.75
Current Option Gain/Loss: Nov$85c: +78.2% & Dec$90c: +108.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/12 update: Target achieved.

COG continued to surge. Shares have rallied from $80 to $90 in three days. The stock hit our exit target at $89.75 on Friday. The November $85 call was trading with a bid of $4.60 (+78.2%) and the Dec. $90 call had a bid of $5.10 (+108.1%).

(small positions)

- Suggested Positions -

NOV $85 call (COG1119K85) Entry $2.58, exit $4.60 (+78.2%)

- or -

DEC $90 call (COG1117L90) Entry $2.45, exit $5.10 (+108.1%)

11/11 target hit @ 89.75
11/08 trade opened.
11/07 not open yet. try again

chart:

Entry on November 08 at $84.66
Earnings Date 02/22/12 (unconfirmed)
Average Daily Volume = 2.6 million
Listed on November 5, 2011