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Daily Newsletter, Saturday, 12/3/2011

Table of Contents

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

Market Wrap

Best Weekly Gain in Two Years

by Jim Brown

Click here to email Jim Brown

The S&P rebounded from the worst Thanksgiving week since 1932 to post a +7.4% gain this week. Extreme weekend event risk kept it from being even stronger.

Market Statistics

The fear of events in Europe caused traders to take profits when the Dow rallied +126 at the open. That was the high for the day and there was a steady pattern of selling into the close as competing headlines from Europe gave traders a taste of what could happen on Monday.

We definitely can't complain about this rebound even if 750 points of the 787 point gain were on opening short squeezes. They are still gains regardless of how they occurred.

On Friday there were multiple headlines from Europe suggesting the new fiscal stability pact may not be as far along as investors had hoped. British Prime Minister David Cameron let it be known he was not favorable of a treaty change for the EU to allow more financial oversight and control of a country's finances. Britain is not part of the 17 nation common currency euro zone but still has a lot of power in the full 27 nation European Union. He said it was up to the 17 nations to get behind their currency and convince the markets they had the firepower to do it. The second thing needed was real competitiveness throughout the euro zone to ensure the currency works properly. He said both of those things do not require a treaty change.

The excitement has faded over a possible fiscal stability pact among the 6-8 strongest nations in the euro zone. Comments from Merkel show a still stiff backed German position while Sarkozy also threw some cold water on the outlook.

On the positive side the ECB said any agreement by those nations could free it to act quickly and aggressively to halt the run on sovereign debt. The IMF said an agreement by those nations could produce a cash infusion of 250-270 billion euros which the IMF would put in a trust to be loaned to the debtor nations currently in crisis. IMF head Christine Lagarde was in Brazil looking for money to beef up their current 400 billion euros in available cash. Brazil did say it was willing to contribute to the IMF in an effort to halt the crisis.

The ECB can't legally bailout Italy, Spain or any other euro zone nation. However, it can loan money to the IMF, which can then loan money to debtor nations with a long list of conditions that would force them to greater fiscal stability. It is a long way around to fix the problem but it would help when added to the 250 billion euros currently available in the EFSF.

There was a move last week by U.S. lawmakers to block any U.S. funds contributed to the IMF from being used to bail out any European country. President Obama would veto anything sent to him so that legislation was an empty threat.

The economic calendar next week is full of European potholes. Merkel and Sarkozy meet on Monday in Paris to discuss their new plan. Greece has to approve its new budget on Wednesday in order to receive the next 8 billion euro tranche of aid money and avoid a default on the 19th. The ECB will likely cut rates on Thursday. The EU leaders meet on Friday for the 15th time to discuss the debt crisis.

There is a huge potential for positive headlines as well as negative headlines and I am surprised the market did not close lower in anticipation. Ordinarily I would say the risk was weighted to the downside simply because getting that many countries to agree to anything is next to impossible. However, because of the spike in bond yields all across Europe they may have seen the light and be willing to come to some agreement. I am just not confident it will be substantial enough to actually do any good.

On the economic front in the U.S. there were only two reports on Friday. The biggest was the Nonfarm Payrolls, which came in with a gain of +120,000 jobs compared to a gain of 80,000 in October. That October number was revised higher to 100,000 and September's gain of 158,000 was revised higher to 210,000. That stretches the consecutive winning streak to 14 months since the last net job losses in Sept 2010. The economy has added 1.864 million jobs in the last 14 months. Allowing for population growth and immigration we need to add an average of 400,000 jobs per month to return to full employment by 2020. Employment growth has never been that strong for that long ever before. With U.S. austerity likely between now and 2020 I have serious doubts we are going to see that kind of employment growth.

The unemployment rate fell sharply to 8.6% from 9.0% but it was not due to a large number of new hires. The Household Survey showed a gain of 278,000 jobs but it also showed 315,000 more workers had become discouraged looking for work and had quit looking. The combination of those two numbers pushed the unemployment rate lower. The true unemployment rate or U6, which includes those working part time while they look for a full time job and those who have been out of work so long their unemployment benefits have expired, fell to 15.6% from 16.2%. The number of people not counted as being in the labor force rose by 487,000 to a record 86.5 million. That number was only 77 million four years ago. Fewer people working, more people being supported.

Unfortunately the job gains were mostly in retail and service businesses and the majority were temporary hires. FedEx and UPS hired more than 50,000 and retailers hired 50,000. Private payrolls rose by 140,000 but government lost 20,000 jobs to lower the net total.

This was a decent report but it suggests we could drop back into job losses in the first quarter as all of these seasonal workers are returned to unemployed status. Real employment is still not rising although that could change in the second quarter of 2012 if the European debt crisis has stabilized.

Nonfarm Payroll Chart

The Monster Employment Index declined to 147 for November compared to 151 in October. The decline came from a drop in help-wanted ads in more than half of the industries tracked by the index. Despite the decline, the help-wanted index is still 9.7% over the same period last year. The November reading is the lowest level of help-wanted ads since July.

The economic calendar for next week is light if you don't count the European events. The big report is the ISM Nonmanufacturing Index on Monday. The headline number is expected to rise only slightly to 53.5 from 52.9.

Economic Calendar

In stock news Western Digital (WDC) rallied over 10% at the open after raising their guidance. The disk drive maker said it had resumed partial production ahead of schedule and raised its outlook for December. Three analysts raised their ratings on WDC saying it could regain market share quickly and the accelerated production would allow them to retain some market share they had expected to migrate to Seagate. Shares of WDC ended the day with a 7.5% gain. Seagate (STX) suffered on the expectations they would not benefit as much from the flood impact on WDC as previously expected. STX shares declined -7%. With current prices for disk drives about 300% higher than three months ago those selling current production into these flood bounce prices should be very profitable.

WDC Chart

Research in Motion (RIMM) can't get a break. After rising for the prior three days on expectations of a possible acquisition bid by somebody like Microsoft, the shares were crushed for -10% on an earnings warning. The company said it was taking a $485 million charge for the write down of its tablet inventory. Reportedly the company has about 500,000 units in the channel and another two million internally. Unfortunately they are not selling at the $500 price point and analysts were told to expect a significant reduction in the sales price. Some were speculating the price would be $199 to be equivalent to the cheaper tablets on the market.

RIMM said it would ship 14.1 million Blackberry phones in Q4 and that was in the middle of its guidance of 13.5-14.5 million. Revenue will be below the prior range of $5.3-$5.6 billion. For the next quarter analysts are now projecting a decline in Blackberry sales to 12 million. There is a new equipment launch of QNX/BBX phones late in Q1 and sales are likely to decline ahead of that event.

RIMM Chart

Big Lots Inc (BIG) posted earnings of 6-cents and missed estimates by 3-cents. The reason for the miss was an 11-cent loss from Liquidation World, a company Big Lots purchased in July. Big Lots operates 1,445 stores in the U.S. and profits for the quarter fell -41.3%. BIG opened 89 stores in Canada in the prior quarter with more than 1,000 new employees. Expenses are increasing but the company continues to return money to shareholders through share buybacks. BIG purchased 77 million of its own shares last quarter.

Big Lots Chart

While on the subject of buybacks Conoco (COP) announced it would buy back up to $11 billion in shares in 2012. That represents a new $10 billion buyback approval. Conoco also said it would raise its capex spending by 15% to $15.5 billion. About 90% of that budget will support oil and gas exploration with 60% in North America. Conoco plans to focus on the Eagle Ford, Permian, Barnett and Bakken fields. Conoco has plans to sell $15-$20 billion of assets from 2010-2012 and so far $10.5 billion have been either announced or completed. I believe when Conoco completes the spinoff of its refining and pipeline assets and converts to a pure play exploration and production company it will be an excellent stock to own and a major producer with rapidly expanding production.

Conoco Chart

While on the subject of oil companies the price of oil rallied again to close over $101 on the potential for a boycott of Iranian oil. EU foreign ministers slapped sanctions on 180 additional firms and individuals as tensions increase over the Iranian nuclear program. The 27 EU foreign ministers urged the EU to extend the scope of the current sanctions and strike at the heart of Iran's financial support. Britain urged the group to accelerate sanctions after the British embassy in Tehran was sacked by a mob last week. Britain, France, Germany and Sweden now favor a ban on buying oil from Iran and the list is likely to grow. Iran's oil accounts for 5.8% of EU imports and their fifth largest supplier. Spain gets 14.6% from Iran, Greece 14.0% and Italy 13.1%. Greece is against the embargo because Iran sells them oil on credit and it is hard for Greece to get credit from anyone today.

Crude Oil Chart

Google (GOOG) is reportedly considering implementing a new one-day shipping service for retailers for a nominal fee. In order to do that it would have to offer an enhanced shopping cart to retail partners or allow users to buy directly from its search results pages. Initially this hit Amazon's shares but analysts were quick to claim it would not impact Amazon Prime, the two day shipping service Amazon customers get for free if they are Prime subscribers for $79 per year. Analysts were fairly negative on the Google idea given vast amount of complexity needed to link the service to the tens of thousands of retail customers.

Google shares have rallied strongly over the last week with a $60 gain into Friday's close. That puts Google at $620 and very close to a breakout over resistance that has held for two years. This could be a powerful breakout if it happens.

Google Chart

Zumiez (ZUMZ) shares rallied +24% after the company reported earnings that beat the street and raised its guidance. Earnings were 45-cents on a 13% increase in revenue. The big excitement came from a +8.4% increase in same store sales. That was well above the +2.7% analysts expected. Total sales in November alone increased +16.5%. Zumiez sells sports related equipment in 444 stores in North America.

Zumiez Chart

Stocks weakened after the opening spike on Friday for multiple reasons. First the +126 points the Dow gained at the open put it up more than 900 points for the week. That would have been one of the biggest one week Dow gains ever but there was too much working against it.

The jobs numbers had already been baked into the market cake after the ADP report on Wednesday predicted 206,000 jobs had been created. Nobody expected to see 206,000 on the nonfarm report but they did upgrade estimates to 120,000 to 150,000 in most cases. That meant the 120,000 actual was right in line with the increased estimates. The drop in the unemployment rate was due to people leaving the work force rather than new hires.

David Cameron, the British Prime Minister, was quoted as taking exception to the Merkel-Sarkozy plan and that was a downer for European expectations. More notably there was a rumor that Spain was going to be downgraded over the weekend by S&P. There is also that lingering rumor that France will also be downgraded soon.

With Merkel and Sarkozy meeting on Monday there are likely to be sound bites ahead of the meeting and after the meeting and who knows how that will play out as each leader struggles to claim the upper hand in the negotiations.

There was simply too much event risk for any cautious investor holding double digit profits to add to positions before the close. Most were probably taking profits off the table instead.

The Volatility Index (VIX) declined to 25.29 at the open but rose steadily throughout the day to close at 27.52 as traders bought more puts than calls. Actually any number under 30 is relatively tame and the VIX closed right at its low for the month despite the intraday rebound.

The problems for next week are many and mostly European. I won't repeat all the meetings here but there are plenty. There is also the China PPI, CPI and Industrial Production on Thursday. I don't expect any major decline but China did ease last week and that suggests they are worried about future growth. A sharp decline in those numbers could be ugly.

In the long term view there is no magic bullet for Europe. There is slim to zero chance they will come up with a master plan that works next week. We can expect this problem to remain with us well into Q1 or even all of 2012. That does not mean there won't be progress. Any crisis resolution in Europe is a multi-step process. That must be floated, discussed, changed, discussed, voted, implemented, etc and that could take a year depending on the changes.

However, we could see positive steps toward a resolution such as the fiscal stability pact by the stronger nations. There are also the strong hints by the ECB of a big increase in monetary support if that pact is enacted. The IMF could easily begin supporting the debtor nations if the stronger countries begin to contribute additional support. There are plenty of steps that could point to a solution in the works and relieve the extreme concern of a breakup of the euro zone.

That is all investors really want to see. They want to know the euro currency is going to survive and European banks are not going to fail. The EU leaders could solve that problem in principle next week with a strongly worded plan with hard details and the world would rejoice. It might take a year to complete it but as long as real progress was being made the problem would be defused.

The bigger problem for me is the sudden deterioration in earnings guidance. We are more than half way through Q4 and approaching the period where earnings warnings could surface. Since the end of Q3 the pace of guidance cuts has accelerated and is now outpacing those raising guidance by the most in over ten years. According to Thomson Reuters some sectors, like materials, have seen a dramatic decline in guidance.

On Oct 3rd the S&P earnings estimates for Q4 stood at 15% earnings growth. That has declined to 10% as of the end of November. That is a major decline and companies are beginning to report almost daily that economic activity in Europe has fallen off a cliff. Shippers, both air and water, claim traffic to Europe has declined -20%. It is pretty much common knowledge the euro zone has fallen back into recession.

The biggest worry over Europe is not a default by a country but large scale bank failures as a result of the decline in value of the sovereign debt they currently hold. The problem of liquidity was solved temporarily by the coordinated actions of the central banks last week. That is a temporary solution but the real problem is their solvency. Most European banks are already technically insolvent but banking rules don't require them to market sovereign debt to the market. If they did that today they would be bankrupt. Eventually this problem will have to be addressed in order to halt the flow of cash out of the banks. About the only solution is nationalism because no solvent bank will want to buy a chain of insolvent banks for anything other than salvage value. It is estimated there could be as much as 3 trillion euros of bad debt on the books of European banks. Most never marked down the bad mortgages they still hold.

There are worries that China is also seeing activity decline drastically. Shippers and contract manufacturers are complaining they can't get paid for products shipped into China. Real estate prices in China have fallen 30% to 50% in some areas in just the last several months and there is a panic beginning to develop. People who paid the high prices six months ago are demanding a refund of the difference. Developers have canceled orders for building supplies. There is a problem developing in China and if it were not for Europe stealing the spotlight we would be a lot more concerned about the Chinese economy.

On Saturday China's Federation of Logistics and Purchasing said on its website the November PMI fell to 49.7 from 57.7 in October. A number under 50 indicates contraction. A separate manufacturing index released by the Federation earlier in the week came in at 49.0, down from 50.4 and the first contraction since Feb 2009. The flash PMI released by HSBC earlier in the week fell to 47.7 and the lowest level since March 2009. If three different reports show contraction the odds are good they are correct. However, an economist with the Bank of America, Lu Ting, said the Chinese PMI has a history of dropping sharply in November. No reason was given.

John Mauldin had an interesting table in his weekly newsletter this week. This shows the manufacturing PMI for all the major countries. Note the majority have already slipped back into contraction territory (under 50) and the overall trend is declining.

Table from John Mauldin, Markit

I believe today that the U.S. market will ignore most of these global problems for the rest of December "IF" the EU leaders can come up with a comprehensive statement next week. Funds are under invested and as many as 75% of retail investors are invested in bonds and money markets or mostly in cash. The stage is set for a yearend rally whether we deserve it or not. It is January we really need to worry about.

On Friday the S&P rallied to beginning resistance at 1260 and just below the 200-day at 1265 before falling sharply. While it gave back all its intraday gains of +17 points it closed only fractionally negative and above current support at 1240. Considering the +7% rally for the week we should be very grateful the index did not plunge by double digits instead of just giving back its intraday gains.

Resistance remains 1265 and it should be strong. I don't know what headline could come out of Europe over the weekend to catapult us over 1265 on Monday but it is always possible. I do believe market sentiment has changed to bullish and we could see even slightly negative headlines be used as stepping stones higher. Over the last 25 years the S&P has rallied in December 80% of the time despite numerous problems in the economy and the world. New retirement money flowing into the market as well as funds chasing performance tends to push the indexes higher. Strong stocks over the last month will likely continue to be strong since they attract the hot money.

I would be cautious on any decline under 1240 but I would view the initial dip as a buying opportunity given the sentiment expressed above.

S&P Chart

The Dow came to a dead stop at downtrend resistance and the opening spike was immediately sold. This is going to be a tough hurdle to jump but once over it should attract billions in cash from the sidelines. The range from 12,000-12,200 is a mine field of resistance and it will take a strong headline to vault us over that level. Support is 11,975-12,000.

Dow Chart

The Nasdaq chart is similar to the others only it managed to close in positive territory with a +7.6% gain for the week. The Nasdaq faces resistance at the 200-day at 2675 but first it has to free itself from the clutches of resistance at 2625. We traded the entire day on Friday over that level but its influence was felt at the close when the index fell back to 2626.

The news from Western Digital about an earlier resumption of some Thailand production was a positive for tech stocks and PC stocks in general. We heard earlier last week that Intel said they were not seeing a major decline in PC sales due to a lack of hard drives so maybe this is another bullet that will end up being just a bad hangover for manufacturers and not a disaster.

Nasdaq Chart

The Russell 2000 is our canary in the coal mine and the Russell was the strongest performing index on Friday. That should suggest fund manager sentiment is improving. Or, it could be just the normal Santa Claus rally where funds buy small caps in December for expected gains in the following year. Multi-decade habits are hard to break even with all the global economic problems.

The Russell closed right at resistance and is poised to break higher on any good news on Monday. Conversely a negative headline could confirm the resistance and a lower high. A move over 750 would a strong buy signal.

Russell 2000 Chart

The Dow transports are not showing any economic weakness. They are also poised to break over the 200-day at 5,000 and break out to a new four month high. This would also be very bullish and positive support for the Dow Industrials. I would remind you that transports are strong even though oil prices are over $100. How long a breakout could last on rising oil prices is unknown but probably through the end of December if the transports can just move over 5,000.

Dow Transport Chart

As I stated earlier I think market sentiment has changed. Investors have their hopes up that the coming EU summit will produce a solid plan to resolve the European debt crisis. Unfortunately this is the 15th summit to resolve the debt crisis and they are no closer to a real solution then they were the last 14 times. Maybe they are a little closer but the cracks in the Merkel-Sarkozy plan are already showing up in the headlines. Eventually the EU leaders will get the message.

The group has been on an increasingly bumpy flight for the last two years and the captain (Merkel) and copilot (Sarkozy) have long since given up on the fasten seatbelt warning. The attendants have stowed the beverage carts and buckled into their crash seats after giving the instructions for floating seat cushions and deploying the emergency slides multiple times. Unfortunately the passengers, (EU leaders) are still in denial the flight might end badly with a serious breakup at the end of a long dive. They still believe they can talk the problem away. Talk is not going to solve this problem. Somebody needs to grab the controls and pull the euro zone out of its dive and do it quickly. I don't see that happening but I hope I am wrong.

I believe they will kick the can a little further down the road and announce a new plan to form a plan. Because it is December and fund managers need to show some gains for the year the markets will probably be satisfied with the new plan for at least the rest of December. Once into January and they realize the plan is not coming together we could be right back in crash mode again. We will have to deal with it when it happens.

Assuming there are no explosive headlines out over the weekend I would expect the market to take another run at resistance. This is a light weak for economics and for earnings so we will be entirely headline driven again. Anything is possible and volatility is probable.

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Every December we offer the best prices of the year on a renewal package of our top newsletters. If you have been a subscriber for several years you know this is the best price and the best deal of the year.

This year we are offering Option Investor, Premier Investor, Leap Trader, Option Writer and our new newsletter starting in January, Ultimate Investor.

Please follow the link below to see for yourself the EOY subscription special for 2011. You will not be disappointed!

Jim Brown

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"In economics, the majority is always wrong."
J.K. Galbraith


Index Wrap

Back Toward the Top (again)

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

This past week's rebound occurred after the two main S&P indexes retraced a Fibonacci 61.8% of their last upswing and from just slightly more (66%) in the Nasdaq. The sharp rebound those areas suggests to me that the prior sell off was driven mostly by big short-sellers. All the major indexes rallied after reaching the top end of oversold zones in terms of the 13-day Relative Strength Index (RSI). Given how much the indexes had retraced AND the oversold condition, rebounds weren't surprising.

Retracements in my experience tend to hit 38, 50, or 62% and sometimes a bit more at 66%. If the retracement exceeds one level, it sets up a target for the next fibonacci number. Once in a while there's a 75% retracement of a prior move or of course a round-turn 100% retracement back to the prior low or high point.

When retracements exceeded 50% and I anticipated 50% at a minimum last week, it was natural to look for a next low in the 62 to 66% retracement area and a 'natural' place for a bottom, especially given the oversold RSI.

If you were in puts during the fall or had adopted other bearish index strategies, the retracement amounts and oversold condition hopefully prompted you to exit those positions before prices took off again. Buying calls after retracements of 62% or a bit more, especially 66% or 2/3rds in an oversold market was a good risk to reward proposition. Staying with those positions? Hard to say but there's an old trader's saying to TAKE quick profits. I never like to turn a 'trade' into an 'investment' anyway!

Where to now is the difficult question. Here we are back near the top of the prior trading range. The S&P 500 (SPX) and 100 (OEX) broke out above their minor down trendlines, as did the Russell 2000 (RUT). Not so with the Dow 30 (INDU) and the Nasdaq indices as rallies reversed at or near their down trendlines.

Bottom line, from current levels it's unclear whether there's enough buying power to lift the indexes to above technical resistance; first, at their down trendlines and second, to challenge highs made in late-October. It could be more of the same where the indexes chop around in a new trading range. To put one 'face' on it, this view would suggest that SPX trades between 1160 on the downside and 1280-1290, maybe 1300 on the upside. It doesn't look right now that the indexes will break out above their prior October tops.

SELECT INDUSTRY GROUP INDEXES:

There's nothing especially noteworthy to report with the CBOE Oil Index (OIX), Philly Gold & Silver Index (XAU), CBOE S&P Bank sector Index (BIX) and the Philly Semiconductor Index (SOX). All mostly rebounded with the strong market of this past week; none broke out above down trendlines. BIX rebounded this past week from a long-term up trendline dating from its 2009 low.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart regained its bullish pattern after snapping back from a 61.8 (I usually just say '62') Fibonacci retracement. SPX stabilized at lows in the 1160 area for two days running. Good potential for a low was based on a retracement 62%, the usual max (within a bull market), plus the oversold condition suggested by the RSI and by lows that got to the SPX's lower 5% envelope line per my chart. When SPX has traded 5% under its 21-day average, good-sized rebounds have occurred previously.

Highs tend to get stretched out and REPEATED highs form in the same area. Not so much after scary waterfall type declines. If you get 2 or 3 lows made in the same area after a big heart-stopping sell off and those lows measure to the fibonacci retracements, it calls for a play on a rally.

The test for the bulls is to pull SPX above its 200-day moving average and keep it there. The index has been struggling to regain that much upside momentum. The 6-12 months outlook looks still too uncertain, too tied to Europe.

1200 looks like a support floor now. 1200-1220 was the prior top end of the Aug-Sept price range and this area looks like it will be new support, although prices briefly knifed through 1200 in the low-volume thanksgiving week. That week, with market jitters what they've been, made for a perfect time for big short sellers to drive down prices and make their money for the quarter.

Resistance is 1260-1265, with pivotal resistance in the 1290-1300 area. Support is at 1233 or the trendline, then at 1200.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart reads similarly to the S&P 500. OEX also experienced the rapid recovery from a 62% retracement. Touched its lower envelope extreme and registered an oversold RSI reading on the Wednesday and Friday closes of Thanksgiving week. If you weren't too busy shopping and bought a few calls that day, congratulations on your best of all 'black Friday' bargains!

OEX pierced its minor down trendline when it soared above its 21-day moving average, but the 200-day average as been akin to a kind of resistance; or, faltering there simply is a good visual to show that upside momentum hasn't been consistent and robust after the early-August decline.

To keep a bullish pattern going technically, OEX would find support in the 553-550 area on pullbacks. A move above 570 suggests potential to 580 or higher. Right now 570 looks like strong resistance. Conversely, 540 looks like good technical support.

An extension of the recent strong rebound looks more in doubt if OEX starts trading under its 21-day moving average again. Conversely, staying above this average keeps upside possibilities alive for another leg higher such as to 580-590.

DOW 30 (INDU) AVERAGE; DAILY CHART:

I wrote last week that "The Dow is at the beginnings of an oversold RSI. Don't get more bearish due to the absence of an immediate rally, assuming prices stabilize. The Dow Index may be a best rebound play." Actually the rally WAS immediate! I don't know if it was the 'best' play in index calls but the Dow blasted higher after getting down to its lower envelope extreme and to an oversold RSI reading.

Better than average rebounds occurred in at least 18 of the 30 Dow stocks this past week. The Average as a whole then saw selling as INDU was approaching the 12200 area again, a strong line of previous resistance. INDU needs to get above its down trendline and challenge pivotal overhead resistance at 12200 to suggest another up leg could lie directly ahead.

More likely may be some backing and filling and a possible pullback to the 11800 area. INDU looks more likely to retest 12200 if it pulled back and consolidated some after its fast and furious rally. Conversely, a retreat back to 11600 support keeps INDU in a downtrend pattern.

Pivotal overhead resistance based on a line of prior highs is very apparent at 12200 and a bit higher. Next resistance looks like the 12400 area, at the low end of the consolidation made prior to the double top of July.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) chart was looking bearish prior to the most recent rally. On the one hand, COMP is maintaining a bullish pattern of higher pullback lows. On the other hand, next to maintain a bullish chart is a pattern of higher highs.

After hitting a low at 6% under its 21-day moving average (I thought it might even hit 7%), COMP rebounded strongly on news out of Europe. COMP's retracement of its prior advance was 2/3rds. Not in a bear market, but otherwise I've done well to buy retracements of 62 to 66%. This 2/3rds retracement also occurred at an 'extreme' low as suggested by COMP falling to 6 percent under its 21-day moving average. The RSI was also hitting its version of an oversold extreme. All the stars lined up.

COMP has failed in its first attempt to get above its minor down trendline. This trendline and the area of the 200-day moving average are key areas for COMP to churn through to keep bullish action going. If COMP instead falls back under its 21-day average, it may continue in the overall downtrend implied by the down trendline of recent weeks.

Very near support comes in at 2600, then at 2542-2535. Near resistance is in the 2650 area, next around 2700 extending to 2750.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) had looked bearish previously or at least painted an unknown as to whether its pullback was going to remain within a 'normal' downside correction OR was reversing its intermediate trend lower. The strong snap back rally was proof that the index remains within a long-term uptrend. The recent lows retraced a bit more than 2/3rds of the last upswing from 2043 to 2412. Retracements of 66% is a favorite buy area when I'm anticipating a snap-back rally. In addition to retracement amount, next up is to look at measures of 'oversold'.

They managed to push NDX to my lower envelope line, suggesting an extreme had been reached or was near; i.e., at a Close here of 6 percent under the 21-day moving average. NDX reaching the oversold zone in terms of the (13-day) RSI indicator was another harbinger of strong snap back rally potential.

The strong rebound of this past week took the index back above its 200-day moving average but not to above its down trendline which is a key resistance and currently intersects at 2340. If NDX doesn't manage to pierce this line, it keeps the chart in a bearish pattern. Conversely, buying the recent fall to the area of the lower envelope line offered successful trade potential for the week. In on Monday, out on Friday.

If NDX slips back under the 200-day average and the 21-day as well this would suggest another drift lower. My highlighted support points are 2290, with next support at 2240, then 2200. Overhead resistance begins around 2365, with pivotal next resistance at 2400-2412.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) chart is showing resistance at the highlighted down trendline, currently intersecting at 57.3. Further resistance comes in at 58 and an area of prior recent highs. An upside breakout above the trendline is key in terms of projecting a further up leg.

Support is seen in the 56-56.3 area, then at 55. The snap back rally showed the potential when QQQ gets to a real oversold extreme. What remains to be seen is will a next rally attempt be one that carries to or above its prior highs in the 59 area.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) achieved a bullish breakout above its down trendline after retracing its 'fibonacci' 62% retracement of its last upswing. Expected support is at the prior down trendline as highlighted on my RUT daily chart. Next key support is 700.

If RUT holds most of its recent gains, rally potential is suggested to retest its prior high. I've noted resistance in the 745-750 area, with next resistance assumed to lie at the prior high at 769 as an intraday high, 765 as the prior high close. It's an even bet as to which way is the next 20-30 point swing. Not my odds and am standing aside from trading a direction here.



GOOD TRADING SUCCESS!


New Option Plays

Industrials, Medical, & Generic Drugs

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidates, consider the following as possible trading ideas:

FFIV might be a buy if it can breakout past resistance near $113.75.

GMCR could be a trade for aggressive investors. Look for the stock to fill the gap back toward $65.00.

WFM would be tempting if it could rally past $70.00 again.

CERN is at a turning point. The stock has rallied to resistance near its trendline of lower highs and Friday's session looks like a reversal pattern. My first thought would be to buy puts here with a stop in the $62.75 area, above Friday's high. If CERN can breakthrough the trendline of lower highs, then it becomes a bullish candidate.

- James


NEW DIRECTIONAL CALL PLAYS

Caterpillar - CAT - close: 96.29 change: -0.53

Stop Loss: 95.45
Target(s): 107.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
If you believe the world is going to see a global economic slow down in 2012 then CAT is probably a short with the stock testing resistance. I suspect we'll see CAT breakout higher, which could send shorts running for cover. The stock has failed at resistance near $98.00 and its simple 200-dma several times in the last six weeks. A breakout here would be very positive.

I am suggesting we buy calls with a trigger to open positions at $98.55. If triggered we'll use a stop loss at $95.45. Our target is $107.00.

Trigger @ 98.55

- Suggested Positions -

buy the 2012Jan $100 call (CAT1221A100) current ask $3.20

Annotated Chart:

Entry on December xx at $ xx.xx
Earnings Date 01/26/12 (unconfirmed)
Average Daily Volume = 8.1 million
Listed on December 03, 2011


NEW DIRECTIONAL PUT PLAYS

Thermo Fisher Scientific - TMO - close: 46.54 change: -0.50

Stop Loss: 48.25
Target(s): 42.75
Current Option Gain/Loss: Unopened
Time Frame: 2 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
TMO makes a variety of medical instruments and supplies. Unfortunately for shareholders the stock has broken down from a three-month trading range in the $49-55 zone. Last week's oversold bounce has failed at resistance near $48.00. This looks like an entry point to buy puts near the new trendline of lower highs.

I am suggesting put positions on Monday morning with a stop loss at $48.25. Our target is $42.75. FYI: The Point & Figure chart for TMO is bearish with a $41 target.

- Suggested Positions -

buy the DEC $45 put (TMO1117X45) current ask $0.75
(Only 2 weeks left for Decembers)

- or -

buy the JAN $45 put (TMO1221M45) current ask $1.65

Annotated Chart:

Entry on December xx at $ xx.xx
Earnings Date 02/01/12 (unconfirmed)
Average Daily Volume = 3.5 million
Listed on December 03, 2011


Watson Pharmaceuticals - WPI - close: 62.86 change: +0.03

Stop Loss: 64.25
Target(s): 56.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Investors are not impressed with the news that WPI has launched a generic form of LIPITOR, Pfizer's blockbuster cholesterol drug. That might be due to the fact that several companies will be making generic versions of LIPITOR now that PFE has lost its patent protection on it. Yet WPI and Ranbaxy Labs will be the only two generic producers for the U.S. market for the next six months. PFE is fighting this battle by offering a one-month supply of LIPITOR for $4 for the next six months.

WPI's LIPITOR announcement helped produce the big spike higher on Wednesday but WPI was unable to hold these gains. The stock's long-term up trend is in jeopardy. The last couple of months have seen a new trend of lower highs and lower lows building.

This past week WPI has broken down under its 200-dma. I am suggesting we use a trigger to buy puts at $61.75 with a stop loss at $64.25. There is potential support at $60.00 but I am aiming for the $56.00 level.

Trigger @ $61.75

- Suggested Positions -

buy the DEC $60 PUT (WPI1117X60) current ask $0.70
(Only 2 weeks left for Decembers)

- or -

buy the JAN $60 PUT (WPI1221M60) current ask $1.80

Annotated Chart:

Entry on December xx at $ xx.xx
Earnings Date 02/14/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on December 03, 2011



In Play Updates and Reviews

Updated Stop Losses

by James Brown

Click here to email James Brown

Editor's Note:

Traders should be cautious here. The S&P 500 index rallied toward resistance and reversed on Friday. We had a handful of stocks produce bearish engulfing candlestick patterns (ALXN, DCI, EW, FDO, NTAP, and ORLY). These patterns are normally seen as potential bearish reversals.

We are taking a more conservative stance tonight so we've updated several stop losses. I am suggesting an early exit for DCI and we're dropping ARLP with the trade unopened. FYI: Our SPY trade was opened on Friday morning.

-James

Current Portfolio:


CALL Play Updates

Alexion Pharmaceuticals - ALXN - close: 66.98 change: -2.28

Stop Loss: 67.40
Target(s): 74.75 or 79.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
12/03 update: ALXN produced a sharp reversal at resistance on Friday. The stock rallied to $69.72 and then dropped to a -3.2% decline. It could be just fear of the weekend profit taking. We are still waiting for a breakout. Currently our plan calls for a trigger to open small bullish positions at $70.55.

I am setting our exit target at $74.75 but if you're patient I could see ALXN make a run towards $80. FYI: The Point & Figure chart for ALXN is bullish with an $82 target.

Trigger @ $70.55 (Small Positions)

- Suggested Positions -

buy the Jan $75 call (ALXN1221A75)

chart:

Entry on December xx at $ xx.xx
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on December 01, 2011


Edwards Lifesciences - EW - close: 64.99 change: -1.84

Stop Loss: 63.25
Target(s): 69.50
Current Option Gain/Loss: Dec$65c: + 0.0% & Jan$70c: -14.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/03 update: Warning! EW underperformed the market on Friday with a -2.7% decline. Furthermore Friday's move looks like a failed rally under the 20-dma and shares did paint a bearish engulfing candlestick pattern. I am expecting a dip back to the 10-dma near $64.00. We will try and limit our risk by raising the stop loss to $63.25. I am not suggesting new positions at this time.

More conservative traders may want to exit early now to avoid or limit any losses.

- Suggested Positions -

Long DEC $65 call (EW1117L65) Entry $1.95

- or -

Long 2012Jan $70 call (EW1221A70) Entry $1.70

12/03 new stop loss @ 63.25
11/30 new stop loss @ 61.95
11/28 trade opened. EW gapped higher at $63.97
11/26 trade still not open. Adjusting stop loss to $59.90
11/23 still not open
11/22 not open yet

chart:

Entry on November 28 at $63.97
Earnings Date 02/02/12 (unconfirmed)
Average Daily Volume = 1.2 million
Listed on November 21, 2011


Family Dollar Stores - FDO - close: 58.70 change: -0.36

Stop Loss: 56.75
Target(s): 64.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
12/03 update: FDO looks poised for a little pull back. We are adjusting our buy-the-dip entry point from $58.50 to $58.00 and we'll move our stop loss higher to $56.75.

Earlier Comments:
We want to keep our position size small because the spreads on the options below are getting wide, making this trade more risky.

buy the dip Trigger @ 58.00 (small positions)

- Suggested Positions -

buy the DEC $60 call (FDO1117L60)

- or -

buy the JAN $60 call (FDO1221A60)

12/03/11 Adjust buy-the-dip trigger to $58.00
12/03/11 new stop loss @ 56.75
11/30 New strategy to account for FDO's bullish breakout higher. We want to use a trigger at $58.50 to open bullish positions with a stop at $56.45. New target is $64.00. I've updated our option strikes.
11/26 new strategy. buy a dip at $54.50, stop loss @ 53.75. Keep positions small because option spreads are wide.
11/22 not open yet

chart:

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: 45.69 change: +0.22

Stop Loss: 44.75
Target(s): 48.25
Current Option Gain/Loss: +17.0%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
12/03 update: The Dow Jones Transportation index managed to eke out a +0.7% gain. Shares of JBHT were not far behind with a +0.4% gain on Friday. This stock managed a rally to $46.47 intraday. It's very possible that JBHT could correct back toward the $44.00 level, which as broken resistance should be new support. More aggressive traders will want to keep their stop loss under $44.00. We are taking a more cautious approach and raising our stop loss up to $44.75 instead. No new positions at this time.

Earlier Comments:
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.

- Suggested Positions -

Long 2012JAN $45 call (JBHT1221A45) Entry $2.05

12/03/11 new stop loss @ 44.75. More aggressive traders may want to leave their stop under $44.00 instead
11/30/11 new stop loss @ 42.45
11/29/11 triggered at $44.35

chart:

Entry on November 29 at $44.35
Earnings Date 01/30/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on November 22, 2011


NetApp, Inc. - NTAP - close: 36.54 change: -0.38

Stop Loss: 34.95
Target(s): 39.50
Current Option Gain/Loss: +13.9%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
12/03 update: There was some minor profit taking in NTAP on Friday. Unfortunately the stock has produced a bearish engulfing candlestick pattern. On a short-term basis we might see NTAP dip back to test its 10-dma near $35.53. We'll try and reduce our risk by raising the stop loss to $34.95. I am not suggesting new positions at this time.

Earlier Comments:
I do consider a more aggressive trade. We want to keep our position size small to limit risk. FYI: Readers should note that there is a risk that NTAP might make an acquisition soon. There are rumors floating around that NTAP could buy Quantum (QTM) or CommVault (CVLT) in an effort to better compete with rival EMC. If NTAP does make a bid for either company typically shares of the buyer go down while shares of the target go up.

- Suggested Positions - (small positions)

Long JAN $35 call (NTAP1221A35) Entry $2.51

12/03/11 new stop loss @ 34.95

chart:

Entry on November 29 at $35.82
Earnings Date 02/16/12 (unconfirmed)
Average Daily Volume = 9.2 million
Listed on November 28, 2011


O'Reilly Automotive - ORLY - close: 77.03 change: -0.67

Stop Loss: 74.90
Target(s): 82.50
Current Option Gain/Loss: Dec$75c: -10.7% & Jan$80c: -26.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/03 update: We need to be careful here. There was some normal profit taking in ORLY on Friday with a -0.8% decline. Unfortunately the stock has produced a bearish engulfing candlestick pattern. This is a potential reversal signal but it usually needs to see confirmation first. We are raising our stop loss up to $74.90. I am not suggesting new positions at this time.

Earlier Comments:
Our target is $82.50 but more conservative traders may want to exit in the $79.50-80.00 zone instead. FYI: The Point & Figure chart for ORLY is bullish with a $103 target.

- Suggested Positions -

Long DEC $75 call (ORLY1117L75) Entry $2.80

- or -

Long JAN $80 call (ORLY1221A80) Entry $1.50*

12/03/11 new stop loss @ 74.90
11/28/11 ORLY gapped open higher at $76.96, which was above our trigger to buy calls at $76.15.
*Jan $80 call did not trade today. Entry price is an estimate.

chart:

Entry on November 28 at $76.96
Earnings Date 02/16/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on November 26, 2011


Phillip Morris Intl. - PM - close: 75.47 change: -0.22

Stop Loss: 73.75
Target(s): 78.50
Current Option Gain/Loss: + 87.5%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
12/03 update: Last week PM rallied to new all-time highs. Our call option more than doubled. Thus far shares have seen two days of mild profit taking. I wouldn't be surprised to see a dip back toward the $74.00 level. More conservative traders may want to go ahead and exit now, especially now since we've seen or option gain fade to +87%. We're raising our stop loss up to $73.75. I am not suggesting new positions at this time.

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

12/03 new stop loss @ 73.75
11/30 new stop loss @ 71.40
11/23 adjusted stop loss to $69.49
11/22 trade opened. PM opened at $72.11

chart:

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


Boston Beer Co. Inc. - SAM - close: 102.51 change: +1.61

Stop Loss: 98.75
Target(s): 109.50
Current Option Gain/Loss: - 7.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/03 update: Our new trade on SAM has been triggered. The stock gapped higher at $101.96 and rallied to $105.08 before paring its gains. This is a new all-time high for the stock. Unfortunately the sharp pull back is a bit short-term worrisome. I would expect a dip back toward the $101-1000 zone soon. Look for that dip or a bounce from the same area as a new entry point to buy calls. We are raising our stop loss up to $98.75.

Earlier Comments:
Our exit target is $109.50. More aggressive traders may want to aim higher. FYI: The Point & Figure chart for SAM is bullish with a $117 target. NOTE: The most recent data listed short interest at 20% of SAM's extremely small 8.3 million-share float. That's definitely a recipe for a short squeeze.

(small positions) - Suggested Positions -

Long JAN $105 call (SAM1221A105) Entry $2.05

12/03/11 new stop loss @ 98.75
12/02/11 trade triggered at $102.00

chart:

Entry on December xx at $ xx.xx
Earnings Date 03/08/12 (unconfirmed)
Average Daily Volume = 72.3 thousand
Listed on December 01, 2011


PUT Play Updates

SPDR S&P 500 ETF - SPY - close: 124.97 change: -0.02

Stop Loss: 127.55
Target(s): 120.50
Current Option Gain/Loss: +13.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/03 update: We have been concerned that the S&P 500 index might roll over at resistance near 1260 or the 200-dma near 1265. On Friday this index hit 1260.08 before reversing into negative territory. It doesn't bode well for the bulls. The market is still short-term overbought. Our SPY trade was opened on Friday. We had a trigger to buy puts at $126.00 and the SPY opened at $126.12 and hit $126.50. Currently we have a stop loss at $127.55. More aggressive traders may want to inch their stop higher so it's just above $128.00 instead.

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

- Suggested Positions -

Long 2012Jan $120 PUT (SPY1221M120) Entry $2.67

12/02/11 trade opened at $126.12 (gap higher), trigger was 126.00

chart:

Entry on December 02 at $126.12
Earnings Date --/--/--
Average Daily Volume = 224 million
Listed on November 30, 2011


CLOSED BULLISH PLAYS

Donaldson Company - DCI - close: 66.85 change: -0.79

Stop Loss: 63.80
Target(s): 69.50
Current Option Gain/Loss: -13.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/03 update: Our new trade on DCI is not performing very well. I warned readers on Thursday that the stock might be forming a bearish reversal. Friday's bearish engulfing candlestick pattern didn't improve matters. I am suggesting we go ahead and exit early now.

NOTE: the wide spreads on DCI's options are definitely impacting our performance. We may not trade DCI again until the spreads improve.

(small positions) - Suggested Positions -

Long JAN $65 call (DCI1221A65) Entry $4.50*, exit $3.90 (-13.3%)

12/03/11 exit early
12/01/11 DCI hit $69.43. Our target is 69.50. The reversal looks bearish. Readers may want to go ahead and exit early now
11/30/11 new stop loss @ 63.80
11/30/11 DCI gapped higher at $66.15. Our trigger was $65.55.
*entry price is an estimate. Option did not trade on Wednesday morning.

chart:

Entry on November 30 at $66.15
Earnings Date 02/16/12 (unconfirmed)
Average Daily Volume = 306 thousand
Listed on November 29, 2011


CLOSED BEARISH PLAYS

Alliance Resource Partners - ARLP - close: 74.15 chg: +1.46

Stop Loss: 72.55
Target(s): 60.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/03 update: We are giving up on ARLP as a bearish candidate. The stock's long-term trend is still one of lower highs and lower lows (just look at the weekly chart) but on a short-term basis this past week has produced some bullish developments. Friday's +2% gain is a bullish breakout past the four-week trend of lower highs and it's a breakout past technical resistance at the simple 200-dma.

Our trigger to open bearish positions was never hit. I am removing it from the play list unopened.

Trade Did Not Open

chart:

Entry on November xx at $ xx.xx
Earnings Date 01/30/12 (unconfirmed)
Average Daily Volume = 45 thousand
Listed on November 26, 2011