Option Investor
Newsletter

Daily Newsletter, Wednesday, 11/23/2011

Table of Contents

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

Market Wrap

Global Concerns Depress Stock Market

by Keene Little

Click here to email Keene Little
Market Stats

Tonight's newsletter will be a little shorter than usual since I've got to start some travel plans for the holiday.

Today started like so many days recently, with a gap down. This market, for a long time, has been making it very difficult to get into a trade during the day since the gap becomes most of the move, which is then followed by consolidation. Traders who want to participate in the move must make a decision to get in before the close and hope they're right. Too many times we've seen gap reversals of reversals, making it a dangerous market to get pre-positioned.

The market has been dealing with the European debt issue for a while now and it remains a concern. The market hates uncertainty and the health of the global financial system is about as uncertain as it's ever been. The banks remain one of the weaker sectors and as long as that remains true there's not going to be much strength in the broader stock market.

Adding to the market's worries and uncertainty, there have been some war drums beating lately about Syria (most countries are moving their diplomats out and the U.S. has told all Americans to leave the country) and Iran (its nuclear program). Both Russia (which has warned not to attack Syria) and the U.S. have moved warships closer to Syria (Russia has a Navy base in Syria). Israel has of course been beating the war drums about Iran. All of this has created a lot more tension in a world that is already filled with more uncertainty than it can handle. It's part of the explanation for this week's selloff in front of the holiday, which is typically flat or bullish.

The weakness in the stock market is partly due to lingering concerns about the financial situation in Europe, which was exacerbated today by weak demand for a German bond auction, which caused another jump in European bond yields.

Peter Boockvar, equity strategist at Miller Tabak, said, "While it's not the first time Germany has failed to sell as many bunds as they hoped, the timing and scale of today's ten-year auction was quite disappointing. Unfortunately for the rest of the region, with the German bond market being one of the only risk-free securities left and seeing a rise in its yields, yields are jumping elsewhere, particularly in France."

Not helping sentiment this morning was some disappointing Chinese manufacturing data, with a report from HSBC showing that Chinese manufacturing activity contracted in November. If China slows down, on top of the mixed economic data from the U.S. and a sure-to-come slowdown in Europe, we're facing the prospects for another global economic contraction. To think otherwise is simply wishful thinking.

In the "less bad" department, U.S. durable goods orders fell by -0.7% in October, but that was a little better than the -1.0% that most economists had been expecting. Excluding transportation equipment (the more volatile sector), durable goods orders rose by +0.7 percent.

Because tomorrow is a holiday, the unemployment claims numbers were released today. There was a modest increase in initial jobless claims in the week ended November 19th, rising 2K to 393K, but the number stayed below the key 400,000 level.

The Commerce Department also released a report showing stronger than expected personal income growth in October, personal spending inched up by less than expected. Spending came in less than expected and that's worrisome in an economy that is so dependent on the mighty consumer. Lastly, Michigan Sentiment came in flat compared to last month.

The gaps to the downside fit the pattern I was expecting to see as the decline builds momentum to the downside. Drop hard (usually with a gap), consolidate, drop hard, consolidate, rinse and repeat. It's part of the stair-stepping lower that I had mentioned last week to expect. It's likely to continue for another couple of weeks since it's now looking more probable for and end-of-year selloff instead of a rally. But as always, we've got some price levels to watch for a possible reversal and the rally into year-end that many are still expecting.

The SPX weekly chart below shows two big red candles, offsetting a good chunk of the October rally (almost a 62% retracement so far), and MACD is just rolling back over and crossing the zero line back into negative territory. That's not a good sign for bulls. As I'll show with the wave count on the daily chart, the bearish price pattern would look best with a consolidation for a couple of days before heading lower again and the 200-week MA near 1136 looks like a good downside target. A bounce into early December should then be followed by another drop lower, targeting 1100 before year-end. The bullish wave count calls the pullback from October 27th an a-b-c correction to the October rally, which will be followed by a rally into year-end. I consider this the lower-probability move.

S&P 500, SPX, Weekly chart

The daily chart shows potential support near 1158, the 62% retracement of the October rally. There are a couple of other nearby downside targets surrounding the 1140-1150 area and assuming SPX will find support in this zone, we should see a bounce/consolidation into early December before heading lower again. While a bounce might offer some trading opportunities on the long side I consider that the riskier trade from here. We're clearly in a downtrend and I think it's best to look at bounces as shorting opportunities, especially with SPX below 1200. Above its 50-dma near 1207 would be bullish and above 1216 would have me looking to buy pullbacks for a run higher into the end of the year.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1216
- stay bearish below 1210

There are a couple of timing factors to consider right now. There are some cycle studies pointing to November 22-23 as a turn date, so it's possible today's low will mark a low, even if for only a short term. Coming up, on Friday the 25th, is the new moon so it's possible we'll see a low put in on Friday (the short-term pattern supports this), which is what I've depicted on the SPX MPTS chart below. A bounce into the full moon on December 10th followed by a drop to a new low on December 24th would fit an EW count for a 5-wave move down from October.

S&P 500, SPX, Daily chart, MPTS

The chart comparison below is an update to one I showed a few weeks ago when discussing the bearish setup with a retest of the broken H&S neckline and 200-dma, as it did after the 2007 top. The setup has seen the bearish follow through and I'll continue to monitor the analog pattern between the 2007 and 2011 tops. All analog patterns eventually break but so far it's tracking the same. I know I don't need to remind you how bearish 2008 was after the bounce into May.

S&P 500, SPX, Daily chart, 2007 vs. 2011 tops

Whether a bounce leads to the start of a stronger rally into year-end or just a larger bounce/correction into early December before heading lower again is the big question. There's really no way for us to know right now. Once we find what looks like the end of the leg down from November 8th we will want to be flat or long and then watch what kind of bounce develops in order to provide some clues about what to expect into the end of the year. For now I see further downside so it's too early to be thinking long.

We've got a couple of price projections/targets to watch, starting with 1158 (62% of the October rally). Then there's 1152.58 where the leg down from November 8th will be 162% of the 1st leg down from October 27th. For a 5-wave move down from November 8th the 5th wave would equal the 1st wave at 1140. I'm a little less certain of this lower number because the end of the 4th wave (yesterday) is not clear.

S&P 500, SPX, 120-min chart

Now is a time to stay on your toes if short -- use today's midday high now for your stop. SPX should stay below 1180 if there's lower to go. The potential for a stronger rally still needs to be respected (watching the dollar here for some clues in this regard).

The DOW has dropped below potential support at the lows of the mid-October consolidation are located as well as the 38% retracement of the May-October decline and 50% retracement of the October rally, all in the d11300-11350 area. The next Fib support level is the 62% retracement of the October rally, at 11123. The 2nd leg down for the decline from October 27th would be 162% of the 1st leg down at 11129 so there's good correlation at that level. There's not much else for support between 11300 and 11100.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,000
- stay bearish below 11,737

The large white candles off the October 4th low are basically air pockets now. NDX has dropped into the air pocket and the next level of support is near 2120, its uptrend line from July 2010, which held the pullbacks in August and September. The wave pattern would look best with a bounce (from here or a little lower first) into early December and then lower. It could be argued that it will stair-step lower (with two bounces along the way) into the end of the year and as with the other indexes, drop down to the October low before the year ends (near 2043). The bullish potential is for the start of another rally leg that takes us into year-end instead but that possibility will only become apparent after we see the shape of the next bounce.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2300
- stay bearish below 2254

Today the RUT dropped below the bottom of its down-channel from October 27th, near 688, which is bearish. It remains bearish below 686 and should continue to stair-step lower into the end of the month before a larger bounce/consolidation into mid month. That should be followed by more selling into Christmas before setting up a larger bounce into January. The move down has a couple of gaps to the downside and as I had mentioned last week, an unwinding of multiple degrees of 3rd waves to the downside would likely be accompanied by a few breakaway gaps, which I believe is what we're getting. In other words, there's very little chance they'll be filled anytime soon. With a bigger bounce into the new year, after we get a 5-wave move down into December, could start filling some of these but if we're going to see October's lows tested before getting the next big bounce then this week's gaps are likely to remain unfilled for many years.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 718
- stay bearish below 705

The RUT's 60-min chart below shows the bearish break below a down-channel from October's high, which should act as resistance if retested. In the meantime, it's in a tight down-channel from November 16th -- stay short (or don't think about the long side) as long as price remains inside the down-channel (for now that means the bulls need to see a break above 686).

Russell-2000, RUT, 60-min chart

The banking index, BKX, shows this weakness as it has the decline has the appearance of a waterfall decline, breaking below the bottom of a parallel down-channel from October. The pattern is bearish and points lower, with a probable test of the October low within the next couple of weeks.

KBW Bank index, BKX, Daily chart

After breaking down from its sideways triangle pattern the TRAN has now broken below the bottom of a parallel down-channel from October. Near the same level it has also broken below its 50-dma at 4642, both bearish confirmation. The downside target for now is 4454 where the 2nd leg of the decline would be 162% of the 1st leg down. From there it's possible we'll see the start of a new rally leg but at this point that's the lower-probability move.

Transportation Index, TRAN, Daily chart

Bonds rallied into the close today (yields dropped to their lows of the session) so there was clearly some money rotating out of stocks into the perceived safety of U.S. Treasuries. That will likely continue as long as there remains so much uncertainty about the global situation (financial as well as war). Money has been running into the relative safety of the U.S. dollar as well.

The dollar's bounce off its October 27th low has been choppy and looking like it's building a bearish rising wedge pattern. Today's rally had the dollar rallying above the wedge so a drop back below 79 would create a sell signal which could lead to a strong selloff back down to the 74 area before starting another rally. But any continuation of the rally from here would first target 80.48 for two equal legs up and then close to 82 by early December to reach the top of a parallel up-channel for its bounce. What the dollar does from here will provide clues for what the stock market will do next (a continuation of the dollar rally will push the stock market lower and vice versa).

U.S. Dollar contract, DX, Daily chart

On Monday gold broke below the bottom of its parallel up-channel from September (bear flag pattern) and today bounced back up to it for what appears to be a back test and kiss goodbye. It also tested its broken 50-dma at 1707.30 at the same time. A further drop from here, especially if it breaks below its uptrend line from October 2008 (which supported the pullbacks in September and October), it will be the signal that the next leg down has begun (downside target is 1421.50, potentially lower). It takes a rally above 1737 to turn it at least short-term bullish.

Gold continuous contract, GC, Daily chart

This week silver bounced off the bottom of a parallel up-channel, using the October 5th low as the starting point for the bottom of the channel, but found resistance at its downtrend line from September through its October 28th high. A break below this week's low at 30.65 would confirm a breakdown from the bear flag pattern that it's been in since September's low and should lead to the next strong decline towards 18-20 (potentially lower). A rally back above 33 would suggest we might get another leg up for its bounce before proceeding lower, especially if it can get above its 20 and 50-dma's, at 33.82 and 33.34, respectively.

Silver continuous contract, SI, Daily chart

Oil broke down from its up-channel for its October-November rally last week and has been finding support near its 20 and 200-dma's, near 95.30, and just above the 50% retracement of its May-October decline, at 94.89. Oil could bounce back up for a retest of November's high and another test of its broken uptrend line from February 2009 but at this point it's looking lower for oil.

Oil continuous contract, CL, Daily chart

There will be no economic reports of importance on Friday.

Economic reports, summary and Key Trading Levels

Friday's half-day session is typically bullish and it will be interesting to see if this Friday will fit the typical pattern. Even a sideways consolidation at this point would be considered positive (better than selling). But the price pattern supports the idea that we'll see a continuation lower and by the turn dates and new moon we could see a quick low and then turn back up, which would set Monday up for a bounce (relief over nothing bad happening over the weekend?)

The trend is clearly down and while I think we're due at least a bounce I think it's too early to go bottom picking. Having said that, I also think it's too late to press bets to the downside. We're due at least a bounce and it should come from close to current levels, probably a little lower. Once the bounce gets started we'll get some clues as to whether or not the end-of-year rally is going to start (bears beware of that possibility) or if instead we get a choppy sideways/up consolidation that will lead to lower prices in December (bulls beware of that possibility if you try buying the bounce).

We'll certainly know more by next Wednesday when I'm back with you. In the meantime I hope everyone has a great Thanksgiving and even if you don't participate in the holiday it's a great reminder to be thankful for what we have, what we do and for our family and friends. Have a great long weekend and I'll be back with you next Wednesday.

Key Levels for SPX:
- bullish above 1216
- stay bearish below 1210

Key Levels for DOW:
- bullish above 12,000
- stay bearish below 11,737

Key Levels for NDX:
- bullish above 2300
- stay bearish below 2254

Key Levels for RUT:
- bullish above 718
- stay bearish below 705


 

Black Friday Special

It seems like every year the retailers move their special hours and deals closer to the beginning of Thanksgiving week. Numerous retailers are now opening Thanksgiving evening for Black Friday and some online retailers are having a Black Friday week with specials starting this weekend.

We don't want to be left out while everyone else is having all the fun. We normally start the End of Year Subscription Special on Black Friday. This year we are jumping ahead and starting it this weekend.

Not to let Target, Wal-Mart or Toys-R-Us beat us to the punch with their "Early Bird Specials" we have adopted one of our own.

Sign up for the End of Year Special before midnight Sunday and we will give you a genuine U.S. Silver Dollar as an additional bonus. At today's silver price this dollar is worth about $27 in silver value alone.

Genuine U.S. 90% Silver Dollar

Of course there are some other bonus items as well but this is real money that goes up in value every year. No deflation here!

Click this image to see the full End of Year Special!

Keene H. Little, CMT


New Option Plays

Markets Turn Sour

by James Brown

Click here to email James Brown

Editor's Note:

It is starting to look pretty ugly for stocks. This week alone (three days) the S&P 500 index is down -4.4%, the NASDAQ -4.3%, and the small cap Russell 2000 index is off -6.2%. The last 24 hours has delivered a small parade of bearish economic data with PMI numbers in Europe and China coming in below expectations. Then there is the German bond auction today, which saw poor demand. It seems that no one wanted to be long stocks ahead of the long weekend. Granted the U.S. markets are open for half a day on Friday (they'll be closed tomorrow for the Thanksgiving holiday) but trading volume will be very light on Friday.

As a matter of fact, the light volume on Friday could cause problems. Stocks are oversold and due for a bounce. If equities start to rally there could be a short squeeze. Any attempts to trade it are probably better left to day traders.

The S&P 500 at 1161 is not that far away from the 50% retracement (1158) of its October rally. Since investors like round numbers I'd probably focus on the 1150 level as potential support. If that fails then I'd look for a drop to 1120.

We are not adding any new trades tonight. Stocks may be due for a bounce but the short-term trend is clearly down. While the U.S. markets are closed tomorrow Europe is still open. With the daily headlines out of Europe there is no telling what could happen tomorrow. There is some speculation that we could hear a significant policy announcement out of Europe this weekend but I repeat, it's just rumor at this point.

From our family to yours, we wish you a wonderful Thanksgiving holiday. Newsletter coverage returns this weekend.

- James


In Play Updates and Reviews

Markets Accelerate Lower

by James Brown

Click here to email James Brown
Current Portfolio:


CALL Play Updates

Edwards Lifesciences - EW - close: 62.95 change: -0.11

Stop Loss: 61.25
Target(s): 69.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
11/23 update: The EW trade is not open yet. The market continues to show weakness. Shares of EW gapped open lower. The stock fell to $61.59 intraday versus the August low of $61.63. There is still a good chance that EW Can bounce here.

I am suggesting we try again. Buy calls at the open but only if EW and the S&P 500 index both open positive. As an alternative more aggressive traders may want to use a trigger above $64.00 to open positions regardless of what the S&P 500 is doing.

Given EW's recent decline we are adjusting our stop loss down to $61.25.

*See Entry Details Above*

- Suggested Positions -

buy the DEC $65 call (EW1117L65)

- or -

buy the 2012Jan $70 call (EW1221A70)

11/23 still not open
11/22 not open yet

Entry on November xx at $ xx.xx
Earnings Date 02/02/12 (unconfirmed)
Average Daily Volume = 1.2 million
Listed on November 21, 2011


Family Dollar Stores - FDO - close: 55.90 change: -1.50

Stop Loss: 54.75
Target(s): 64.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
11/23 update: Hmm... the situation is growing worse for FDO. Yesterday's failed rally has been followed up with today's -2.6% decline. Shares are on the verge of breaking down under their 50-dma. There is still a chance that FDO might find support near $55.00 but I am starting to wonder if FDO is going to see a correction down to its trendline of higher lows, which could mean a drop toward the $54-53 zone.

At the moment we have a trigger to buy calls at $58.50. I am leaving it there tonight and we will re-evaluate our entry point strategy after Friday's session.

I am setting our exit target at $64.00 using the January calls. We will list December calls as well but you may have to exit earlier. FYI: The Point & Figure chart for FDO is bullish with a $66 target.

Trigger @ 58.50

- Suggested Positions -

buy the DEC $60 call (FDO1117L60)

- or -

buy the JAN $60 call (FDO1221A60)

11/22 not open yet

Entry on November xx at $ xx.xx
Earnings Date 01/04/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on November 21, 2011


JB Hunt Transport Services - JBHT - close: 42.95 change: -0.97

Stop Loss: 41.99
Target(s): 48.25
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Comments:
11/23 update: The Dow Jones Transportation average fell -2.4%. Shares of JBHT followed it lower with a -2.2% decline. Shares of JBHT still have a bullish trend of higher lows but if the market keeps falling then JBHT's trend may not last.

I don't see any changes from my prior comments. JBHT has resistance near $44.00. I am suggesting a trigger to open bullish positions at $44.35. If triggered our multi-week target is $48.25. JBHT doesn't move super fast so give yourself time for the trade to work. FYI: The Point & Figure chart for JBHT is bullish with a $63 target.

Trigger @ 44.35

- Suggested Positions -

buy the 2012JAN $45 call (JBHT1221A45)

Entry on November xx at $ xx.xx
Earnings Date 01/30/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on November 22, 2011


Phillip Morris Intl. - PM - close: 71.02 change: -0.99

Stop Loss: 69.49
Target(s): 78.50
Current Option Gain/Loss: -31.2%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
11/23 update: The stock market is accelerating lower. Today's widespread decline hit shares of PM too. The stock gapped open lower at $71.46 and closed with a -1.3% decline. At this point I am expecting a drop toward the $70.00 level, which should offer some support. Please note that our stop loss at $69.90 might be a little bit too tight. I am adjusting our stop loss to $69.49.

I would wait for PM to dip to or bounce from the $70 level before initiating new positions.

Earlier Comments:
Our multi-week target is $78.50. FYI: The Point & Figure chart for PM is bullish with a $95 target.

- Suggested Positions -

Long 2012 Jan $75 call (PM1221A75) Entry $1.12

11/23 adjusted stop loss to $69.49
11/22 trade opened. PM opened at $72.11

Entry on November 22 at $72.11
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 7.3 million
Listed on November 19, 2011


PUT Play Updates

Deutsche Bank - DB - close: 32.46 change: -1.13

Stop Loss: 37.55
Target(s): 30.50
Current Option Gain/Loss: Dec$35p: +61.5% & Jan$30p: +62.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
11/23 update: DB posted another loss. Shares gave up -3.3% and fell for the seventh time out of the last eight days. Bearish PMI data in Germany didn't help but what really shook investors was a poor demand for a Germany bond auction.

DB is short-term oversold and could see a bounce at any time. More conservative traders may want to start taking profits now. I am adjusting our stop loss down to $37.55. The newsletter's final target remains $30.50.

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

11/23 new stop loss @ 37.55
11/23 more conservative traders may want to take profits now. The Dec $35 put (+61.5%) and the Jan $30 put (+62.6%)
11/21 new stop loss @ 38.75
11/12 new stop loss @ 41.55
11/11 DB gapped open higher at $39.00

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


Lululemon Athletica - LULU - close: 46.70 change: -0.31

Stop Loss: 50.25
Target(s): 42.50
Current Option Gain/Loss: Dec$47.50p: + 4.5% & Jan$45p: + 4.6%
Time Frame: Seven Trading Days or 6 weeks
New Positions: see below

Comments:
11/23 update: Attention! It might be time to consider an early exit for our LULU trade. The market has been plunging this week. While LULU is down for the week the decline has been mild. Shares are slowly drifting lower inside the $48-46 zone. This doesn't bode well for the bears. Readers may want to consider an early exit now. I am not suggesting new positions. We will lower our stop loss to $50.25.

Earlier Comments:
TIME FRAME: Traders have to make a decision about their time frame with LULU. Normally I would give this trade a few weeks to work out but LULU is due to report earnings on December 1st. As a rule the newsletter almost never holds over an earnings report. At the moment we'll plan to exit this trade on November 30th if shares don't hit our exit before then.

- Suggested Positions -

Long DEC $47.50 PUT (LULU1117X47.5) Entry $3.54

- or -

Long 2012 JAN $45 PUT (LULU1221M45) Entry $3.63

11/23 new stop loss @ 50.25
11/23 LULU is not falling very fast. Readers may want to consider an early exit now.
11/21 trade opened on LULU's gap down at $47.63.

Entry on November 21 at $47.63
Earnings Date 12/01/11 (confirmed)
Average Daily Volume = 2.8 million
Listed on November 19, 2011


PACCAR Inc. - PCAR - close: 37.05 change: -0.82

Stop Loss: 40.25
Target(s): 35.50
Current Option Gain/Loss: +51.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/23 update: PCAR lost another -2.1% and posted its eighth decline in a row. Shares are short-term oversold and due for a bounce. I am not suggesting new positions at this time. Please note our new stop loss at $40.25.

- Suggested (Small) Positions -

Long DEC $39 PUT (PCAR1117X39) Entry $1.75

11/23 new stop loss @ 40.25
11/21 new stop loss @ 41.50

Entry on November 18 at $39.42
Earnings Date 02/01/12 (unconfirmed)
Average Daily Volume = 3.7 million
Listed on November 17, 2011


Western Digital Corp. - WDC - close: 25.59 change: -0.19

Stop Loss: 27.75
Target(s): 21.00
Current Option Gain/Loss: Dec$25p: -11.4% & Jan22.50p: + 8.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/23 update: The action in WDC remains disappointing. Shares are merely churning sideways in a narrow range. It is worth noting that the consolidation is narrowing and that should suggest a breakout one way or the other soon.

At this point I would wait for a breakdown under $25.00 before initiating new bearish positions.

Earlier Comments:
It is possible that the 2010 lows near $23.00 could be support but we're aiming for a drop to the $21.00-20.00 zone. We do want to keep our position size small because WDC has been very volatile the last few weeks.

- Suggested (Small) Positions -

Long DEC $25 PUT (WDC1117X25) Entry $1.49

- or -

Long JAN $22.50 PUT (WDC1221M22.5) Entry $1.13

Entry on November 18 at $26.04
Earnings Date 01/18/12 (unconfirmed)
Average Daily Volume = 6.4 million
Listed on November 17, 2011