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Newsletter

Daily Newsletter, Saturday, 12/10/2011

Table of Contents

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

Market Wrap

Another Plan to Make a Plan

by Jim Brown

Click here to email Jim Brown

There was no grand plan as a result of the EU summit but in true European fashion they were all smiles about their new plan to make another plan.

Market Statistics

I am not surprised the EU leaders came up with another plan suggestion. It was better than throwing up their hands and achieving nothing like our super committee did last month. What I am surprised about is the market reaction. Obviously maximum pessimism was priced into the market and Friday was a relief rally the euro zone did not self destruct.

Did everyone forget about S&P and their threat to downgrade everything in Europe including countries, banks and bailout vehicles if a grand plan was not achieved? Friday's rally on the hope for future improvement in Europe almost makes you wonder if the Fed was in the market buying futures at the open.

What really happened in Brussels on Friday? Basically the leaders cobbled together a "potential" fiscal stability pact for "up to" 26 of the 27 nations. The UK said absolutely not and will not take part in future discussions. Late Thursday night it was like a play by play announcement of progress in the meeting. There are 23 of the 27 nations agreeing to the pact. An hour later there were 24 of 27. A couple hours later 25 of 27, etc. The official tally at the end of the meeting was 26 of 27 with the UK the sole objector. However, just because a country's representative loosely agreed to go along with the plan to make a plan it does not mean they will actually vote for it later.

The EU leaders now have three months to actually put a plan together to be signed in March. Depending on what gets added to the rough draft there may be far less than 26 countries agreeing to put it to a vote. That also does not guarantee that the individual governments of each country will actually approve it once a final plan is presented. Ireland, Hungary and the Czech Republic are already voicing concern over potential provisions. Surprisingly nine of the non euro zone countries agreed to go along with the plan to force fiscal responsibility.

Under the proposed plan each country would agree to pursue a tougher budget discipline with automatic sanctions for those with deficits over the allowed 3% of GDP. Nobody knows what those sanctions will be or how they will be enforced. The original Maastricht treaty 20 years ago to the day had rules for fiscal responsibility but everyone ignored them when budgets grew tight and politicians needed votes. Under the proposed plan each country would have to present their budgets to the European Commission for approval.

Obviously if the 26 countries can actually institute a budget with only 3% deficit spending across the entire European Union it would create tremendous financial stability. However, as we all know just having a rule does not make everyone follow it. I still can't conceive of countries like Greece, Italy, Spain, Portugal, etc actually living in a 3% world. I think we will see some really novel ways develop for getting around the rules. The plan would require individual countries to make constitutional changes to implement an "automatic correction mechanism" that forces spending cuts when budgets exceeded the deficit targets. Good luck with that! The blueprint would require "more intrusive control" of taxing and spending by the European Commission on governments that exceed the 3% limits. I can't even imagine that actually working at any point in the future. FYI, Germany was the first country to violate the spending limits in the first treaty but since Germany was the strongest in the euro zone the debt limit sanctions were never applied. When Germany got away with it everyone else followed suit.

They are going to do this with an intergovernmental treaty in hopes of speeding up the approval process rather than modifying the original treaty, which would be blocked by the UK. The EU leaders could meet again in January to go over the first draft and then meet again in March to approve the final draft.

As part of the deal the European Stability Mechanism (ESM) will be capped at 500 billion euros and launched in July. However, Finland and Slovakia are already talking about pulling out of the agreement if the requirement for unanimous approval on all actions is removed. The originators want to lower the approval process to a qualified majority of 85% to avoid problems like they had earlier this year. Finland would not approve the bailout of Greece unless the country put up collateral for the bailout loan. That was eventually resolved but they don't want to fight that battle again in the future.

The EU countries in total also agreed to provide up to 200 billion euros in bilateral loans to the IMF with 150 billion coming from euro zone countries.

The EU leaders also affirmed there will not be any further haircuts for private sector involvement in the debt markets. They agreed the 50% haircut required of private investors in Greek debt was handled badly and adversely impacted the market for debt from all European countries. In the future they will follow the IMF guidelines for debt restructuring. This was a positive for European debt. Investors had been fleeing the debt on worries a further decline in economic conditions could see their investments be restructured as part of some new bailout. EU President Herman Van Rompuy said, "To put it more bluntly: our first approach to private sector involvement, which had a very negative effect on the debt markets, is now over."

ECB president Mario Draghi said the overall agreement was a "very good outcome" and that is a dramatic change from his very pessimistic expectations for a deal only the day before.

The EU leaders need to accelerate these plans as quickly as possible. Euro-area countries have to repay more than 1.1 trillion euros of debt in 2012 and about 519 billion consists of Italian, French and German debt in the first six months alone. European banks have 600 billion euros of debt coming due over the next six months. If leaders can't get the treaty signed quickly all of those debtors will be paying much higher interest rates to renew that debt.

Official press release of the European Council

There is still the threat of the S&P downgrade. The company said it would study the summit implications and "impact on the growing systemic stresses we identified." While a "unified stance" could prompt a delay in our decision, rating cuts remain possible.

To bottom line the summit results the countries KNEW there were downgrades coming soon if they didn't enact something. This plan to make a plan sounds good in theory but I foresee major problems in getting it enacted. What this did was buy another three months of time if they are lucky. They succeeded in kicking the can a little further down the road but the loose agreement is a very long way from a done deal. This is a broad agreement in principal only and negotiating the actual details will be a really contentious task.

I think the market rebounded in relief the meeting did not deteriorate into a breakup of the euro zone. The zone gained another three months of life and that was good enough for traders to abandon short positions. I believe most traders believed as I did that it would be increasingly harder to get 17 countries to agree to anything, much less all 27. The potential for failure was huge.

The market wants to rally and any excuse to kick Europe out of the headlines was all that was needed. Frankly I would be thrilled at any plan that kept Europe out of our headlines and I would not have to write about it again until March.

In the U.S. soaring Consumer Sentiment boosted the market at the open and helped to overcome the earnings warnings by DuPont and Texas Instruments.

Consumer sentiment for December rose +3.6 points to 67.7 and the highest level since June. That is also well off the 55.7 low in August. The present conditions component was basically flat at 77.9 vs 77.6 in November. The expectations component rose nearly +6 points to 61.1 from 55.4.

Jobs are starting to increase as we saw in the nonfarm payroll report last week. Gasoline prices are still relatively low compared to the highs back in May. During this survey period there were many headlines suggesting Europe was going to find a solution. Holidays also tend to improve sentiment but that tends to decline in Jan/Feb when the credit card bills come due.

Consumer Sentiment Chart

The economic calendar for next week is headlined by the FOMC meeting on Tuesday and the Philly Fed Manufacturing Survey on Thursday. The Fed is expected to remain on hold and not change their current monetary policy. The improving U.S. economy gives them that option. The lack of a disaster in Europe will also allow them to wait until January and see how the new fiscal compact formation is progressing.

The Philly Fed Survey is seen as a proxy for the national ISM released at the beginning of every month. The headline number ticked down slightly last month from 8.7 to 3.6 and analysts are mixed on the outlook this month. The Philly headline dipped to -30.7 in August, -17.5 in Sept and +8.7 in October. It was due for a rest after that strong rebound.

OPEC meets on Wednesday and no change in production is expected. The last meeting ended in a brawl with no official quota change announced. Iran and Venezuela wanted a cut in production and Saudi Arabia, Kuwait and the UAE wanted to expand quotas to offset the decline in production by Libya. They could not agree and with Iran holding the rotating OPEC presidency at the last meeting it became a battle of wills. Iran and Saudi Arabia are enemies. Iran took the opportunity to enforce its will at the meeting but could not arrive at a consensus. After the meeting Saudi, Kuwait and the UAE raised production on their own to compensate for the lack of Libyan supply. There is no change expected at this meeting. Countries are able to sell all the oil they can produce at high prices and Saudi is actually getting record prices for some of its lower grades due to high demand. Some analysts will claim there is an excess of production but producers could not sell their oil at record prices if there was a surplus. The facts speak for themselves.

Economic Calendar

Du Pont (DD) joined the list of disappointments when they warned on Friday of lower earnings because of slower than anticipated sales growth in Q4. They reduced their profit guidance to $3.87 to $3.95 from $3.90 to $4.05. The company said they were seeing slower growth in certain segments during the fourth quarter, driven by global uncertainty. The uncertainty is contributing to conservative cash management in some supply chains.

A Jefferies analyst lowered his 2011 guidance and his 2012 guidance saying DuPont will probably warn as did 3M (MMM) for the first half of 2012. 3M cautioned on the outlook for consumer electronics in early 2012. Companies are starting to react to the outlook for slower growth in Europe as a result of forced austerity and cash hoarding by European consumers afraid of future bank disasters. DuPont will hold an investor conference next Monday and Tuesday. DuPont shares fell -3% on the news.

DuPont Chart

Morgan Stanley (MS) downgraded expectations for Potash (POT) and Mosaic (MOS) saying farmers are apparently becoming more conservative in their fertilizer buying patterns. The analyst said conversations with farmers did not indicate there was a sudden drop in buying but they were just unsure when those buys would take place and in what amount. The analyst said farmers were hoarding cash and holding off on purchases until they could see the outlook for the 2012 growing season. However, some farmers would prepay in 2011 in order to reduce taxes from record 2011 profits. The analyst cut the price target on POT to $66 and MOS to $85.

Stocks of both companies have been depressed due to sporadic sales influenced by bad weather over the 2011 growing season.

Potash Chart

Mosaic Chart

Altera (ALTR) cut its earnings guidance again and said revenue would decline by -13% to -16% in Q4. In October they said to expect declines of -7% to -11%. Altera shares dropped sharply at the open to $33.84 but rebounded to close positive at $35.89.

Lattice Semiconductor (LSCC) warned they saw "further softening of demand primarily in the communications business" in December. They now see revenue down -14% to -17% sequentially compared to a -4% to -9% decline. Lattice shares declined -4%.

Earnings warnings are helping to push estimates for Q4 earnings even lower. The current outlook for S&P earnings for Q4 is 10.1% growth and very close to falling into single digits. On July 1st the estimate was for +17.6% growth and on Oct-1st that had declined to +15% growth. Earnings in Q3 were up +17.9%. Estimates are plunging thanks to some of the big names with big profit declines. Expected revenue growth has declined to +6.6% from +11.1% in Q3.

The materials sector is taking the biggest hit. Earnings for materials are now expected to decline by -1.4% compared to early October estimates for a gain of +25.6%. Financials are now expected to see earnings growth of 18.3% compared to October estimates of 26.6%. Sears Holdings (SHLD) was cut to a sell at Imperial Capital. The company put a $6 price target on Sears with the current price at $56. That is a seriously negative outlook. The analyst said the pension plan was significantly underfunded and operating performance was deteriorating. Sears posted a larger Q3 loss than anticipated on sharply higher raw material costs and rising economic fears. Personally I don't see $6 in my lifetime simply because their real estate is worth several times that amount. Sears is taking steps to rejuvenate operations. One of those steps is the spinoff of the Orchard Supply Hardware Stores chain. The 89 store chain will trade under the symbol OSH on the Nasdaq. The distribution will occur on Dec 30th and every 22.14 shares of sears stock will receive one Class A share and one preferred share of the new company.

Sears Holdings Chart

GE rallied +3% on Friday after raising their dividend by +2 cents to 17-cents for the quarter. That is the fourth increase in two years. That is still lower than the 31-cents paid in April 2009 before they had to slash the dividend to conserve $9 billion in cash. That was the first dividend cut since 1938. The dividend is payable on Jan 25th to holders on Dec 27th.

GE Chart

Financial stocks rallied on Friday as worries eased about a breakup of the euro zone and a European banking disaster. Since you can't short European bank stocks the U.S stocks were shorted instead to hedge risk in Europe. When Europe didn't self destruct those shorts were closed. Also, the increased liquidity through the coordinated central bank currency swaps and the new ECB rules and three year loans means there is far less counterparty risk from overseas banks. Large U.S. banks rallied about 3% each but that was still less than they declined on Thursday.

U.S. banks should benefit from the banking distress in Europe. The 115 billion euro recapitalization means less lending and the sale of assets and loan portfolios by European banks. U.S. banks are very well capitalized today and well positioned to benefit from those distressed sales and create new customer relationships as a result.

Warren Buffett named his successor during a 60-minutes interview this week. Warren said he wants his son, Howard Buffett, to succeed him as nonexecutive chairman of Berkshire Hathaway. Howard, a farmer with no college degree, would be a good successor according to Warren, because he understands the values of the company. Howard said he was open to the idea as long as he does not have to quit farming corn and soybeans. It will be interesting to see what shareholders think of that succession plan when Berkshire opens for trading on Monday. I know they love Warren but turning over the chairmanship of a $200 billion company to an uneducated bean farmer may not be the plan they had in mind. Obviously the chairman is not responsible for running the day to day company and making decisions on spending tens of billions of dollars on the next acquisition but he does have clout on the board. It should be interesting.

Berkshire A Chart

The IPO market could be hot next week if those scheduled come off as planned. There are 13 IPOs scheduled and the most since November 2007. JIVE Software will launch on Tuesday with an estimated share price of $8-$10. Michael Kors will open on Wednesday with an expected price of $17-$19. Zynga will trade on Friday with a price of $8-$10.

If the markets exist to confound the wise they are fulfilling their purpose. The S&P rebounded on Friday from what seemed on Thursday night to be the brink of disaster. However, despite the rebound the S&P failed to recover all the losses from Thursday. The close at 1255 was well below solid resistance at 1265 and the market was losing momentum at the close.

Europe did not actually change anything. They simply kicked the can farther down the road using an elaborate scheme long on principle and short on details. Why the U.S. markets rebounded on this charade is a mystery. Obviously the hopium supply is overflowing. Were traders so sick of worrying about Europe they were willing to accept any news on face value and immediately dump their shorts?

Whatever the reason for the rally, Monday starts a new week. I continue to hear 1,300-1,350 as yearend targets for the S&P. I think the market reporters have mentioned those numbers so much they are becoming a sell fulfilling prophecy. Unfortunately, before traders can go skipping merrily down the yellow brick road to 1350 they have to get past the toll booth at 1265 first.

What is going to be the major headline that pushes us over that level next week? The Fed should not produce any surprises. They rarely make any moves in December and this meeting has even more reasons why they will likely stand pat. The opening paragraph of the 2:15 announcement will probably say the economy has improved somewhat but I expect the "significant risks remain" statement to also be repeated.

I suppose if the markets can rally +200 points on the bogus EU deal they could rally another 200 points if the Fed removed the significant risk statement. The bulls will read the announcement with rose colored glasses and only see bullish comments.

When the market wants to run you either get out of the way or go along for the ride. I would buy a breakout over 1265 but I will always be looking out for that headline out of Europe that shatters the illusion of an iron clad agreement.

Support on the S&P is 1,235 and resistance 1,265. That gives us a broad 30-point range to wander while we wait for that next headline.

S&P Chart

The Dow closed less than 50 points from a five month closing high at 12,231. Considering all the negative news from Europe and earnings warnings this is a minor miracle. If anything it is an illustration of how strongly the markets want to rally into yearend. Bad news is being ignored and every dip quickly bought. A move over 12,231 should trigger short covering and price chasing by funds anxious to own winners at month end.

Support at 12,000 held and the next move could easily be a test of overhead resistance to see if a breakout can succeed.

Dow Chart

The Nasdaq rebounded off critical support at 2600 to post a +50 point gain past resistance at 2625. The 200-day at 2670 is the next resistance battle. That 200-day resistance has held for two months.

There were only two Nasdaq stocks that lost more than $2. Those were PCYC and OYOG. On the plus side there were more than 100 gaining more than $2 with DMND, GOOG and ISRG gaining more than $10 each.

With three warnings in the chip sector you would have expected the Nasdaq to be negative or at least lackluster. If you want logic don't look in the stock market because the semiconductor index also closed higher for the day. This is another example of traders buying bad news. What will happen if we actually get a day without bad news?

Support is 2600, resistance 2670.

Nasdaq Chart

The Russell rebounded more than 3% and was the best performing index on Friday. I believe this was a result of the heavy shorting on Thursday when it appeared the EU summit was spinning out of control. The small caps are normally the best performers in December and a break over 750 would be a buyable event.

Russell Chart

Europe is out of the headlines. At least that is what most investors will think. For next week I suspect the number of articles will decline sharply and be replaced by U.S. news, OPEC and China. That does not mean the European problem has been solved. It just means without an active summit in progress there will be few high profile events to report. The real work will now be done by the staff working for the public figures and they don't normally generate headlines.

If Europe is out of the headlines next week we should see buyers return unless of course some new disaster appears. The FOMC meeting would be the likely place but I don't see anything coming from the Fed except an upgraded statement on the economic progress. They rarely make any kind of move at the December meeting.

The market will be left to its find direction on its own and with investors and funds trying to find a place to put the yearend bonuses and retirement contributions to work the most likely market direction will be a retest of resistance at 1265 on the S&P. There are multiple analyst meetings next week hosted by UTX, HON, GE, DD and CSX. Best Buy (BBY) has earnings on Tuesday before the open. FedEx (FDX) has earnings on Thursday along with Adobe (ADBE), Discover (DFS), Accenture (CAN) and Pier One (PIR). Darden Restaurants (DRI) has earnings on Friday.

The Ultimate Investor Newsletter

We are adding a new publication to the End of Year special this year. Option Investor and Premier Investor have gravitated over the years to shorter term trades. I am launching a different type of newsletter for longer term investors that don't want to be managing trades every day. The types of positions in the Ultimate Investor could last from weeks to months depending on the position. These will be lower volatility "investments" rather than trades.

This newsletter will focus on "story stocks" and special situations that provide us with a low risk opportunity to profit. An example would be a long term call option on Hewlett Packard when they fired their CEO and hired Meg Whitman to turn the company around. That would be a 3-6 month position. Another example would have been taking a position in Yahoo when Carol Bartz was fired and the company put up for sale. We will also take positions in stocks ripe for a takeover as we have seen in the oil sector with Global Industries (GLBL) and Brigham Exploration (BEXP).

Click here for Full Description of Ultimate Investor

Ultimate Investor will use all investment strategies including stocks, options of all types, spreads, etc. The type of strategy used will fit the special situation we are targeting.

This will be an investment newsletter rather than a trading newsletter. If market volatility has gotten you down then maybe something with a longer focus is what you need.

Subscribers to the End of Year Special below will receive six months of the Ultimate Investor Newsletter as well.

Have You Renewed Yet?

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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"There can be no return to prosperity while the government believes that taking money from the people who have earned it and giving it away to the people who haven't, in exchange for their votes."
Conrad Black


Index Wrap

Holding Gains

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The market this past week has been in a congestion zone or a narrow price range where buying and selling have been in relative balance. The big cap S&P 100 (OEX), the Dow 30 (INDU) and the Nas 100 (NDX) are trading above support suggested by their 200-day moving averages. ALL the major indexes held at or above support implied by their 21-day moving averages and their previously broken up trendlines. I'd rate the likelihood of some further gains as greater than another downturn provided that the aforementioned technical support continues to hold up. Further comments on the individual indexes are seen below with the relevant charts. INDUSTRY GROUP INDEXES:

No noteworthy technical developments 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). The SOX trading range is narrowing in within the apex of a triangle formation. A fall below SOX 345 would be a bearish break, whereas a sustained advance above 383 suggests a bullish chart breakout; Friday SOX close: 375.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart is bullish as price dips this past week held above technical support implied by the previously broken up trendline. Generally, the subsequent dip after the last spurt higher hasn't given back much of those gains, which suggests that we're seeing a consolidation ahead of another attempt to retest resistance at 1290-1300.

A more bearish chart is seen if SPX can't hold above 1220 support. 1200 looks like a next support floor. 1200-1220 was the prior top end of the Aug-Sept price range and this area has 'become' new support.

The 200-day moving average has been 'acting as' immediate overhead resistance; this average currently stands at 1263. Next resistance has to be assumed for the prior 1292 intraday high; the prior Closing high was 1285. Fairly major resistance may come into play around 1300.

Bullish sentiment is relatively low in the face of the major indexes holding most of recent gains. This is a bullish plus in a contrary opinion sense.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) is bullish in its pattern as prices have consolidated above 560, near the high end of its last sharp run up in late-November/early-December. Moreover, OEX managed to end the week above its 200-day moving average, which was a bullish plus.

The 570-573 area is immediate overhead resistance which needs to be pierced to suggest that the prior 580 high will get retested. Fairly major resistance then is seen in the 600 area.

Key support is at 550-553. The chart would start looking bearish with OEX under 550. If so, next support is at 540.

I'm anticipating a move higher. The most bullish chart interpretation suggests that OEX could reach the 600 area again, but if so I don't see the index getting above this resistance anytime soon.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow has a bullish chart as strong gains made late last month into early-December have mostly been held. INDU dipped to near support in the 12000 area but held this easily and stayed above its 200-day moving average. I've pegged near support at 12000-11950 with next support at 11800. The chart looks most bullish if the Average holds above 12000-11950.

Supporting the view that the Dow can push still higher are bullish charts seen with AXP, BA, CAT, CSCO, CVX, DIS, GE, HD, HPQ, IBM, INTC, KFT, MCD, MMM, MRK, PFE, PG, TRV, UTX, VZ, WMT, and XOM. Some of these 22 stocks are in strong uptrends; others of this group look like they are consolidating ahead of potential further gains. Not all of these stocks are 'equal' in their bullish potential but all look capable of making further gains.

Pivotal overhead resistance based on a line of prior highs is still apparent at 12200, extending to 12280. Next resistance starts in the 12400 area, with fairly tough resistance beginning around 12600, extending to the 12750 area.

Below 11800 support and where the chart would turn bearish, next support begins in the 11600 area.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) chart remains bullish, especially given that the Index rebounded from its 21-day moving average and has stayed above its previously penetrated (to the upside) down trendline. What remains is for COMP to climb above its 200-day moving average which has been acting as a kind of resistance; a visual indication of the struggle COMP is having in regaining the bullish momentum the Index had prior to its sharp late-July/early-August decline.

Near resistance is at 2670, at the 200-day average, then at 2750, the prior high for the move that began from the strong rally that started from the early-October bottom.

Near support is again the same as I indicated last week in the 2600 area; next support is at 2550.

COMP looks capable of a move up into 2750-2800 resistance in that the recent consolidation could be about half way in a move higher based on the pattern that's unfolded so far. This bullish view assumes that COMP continues to hold support in the 2600 area.

As I said in relation to the S&P 500 chart, the fact that my bullish 'sentiment' indicator (seen above) hasn't risen much yet, even with what looks to me like positive chart, is a bullish plus from a 'contrarian' point of view. Generally, it takes a clear cut break out, for example above prior highs, to get traders bullish. Most traders are 'momentum' players who FOLLOW a trend rather than ANTICIPATE the trend ahead. Of course, after the past weeks' volatility, you can understand this dynamic. Still, this pattern tends also to be true in less volatile times; human nature involving markets (cycles of fear and greed) hasn't changed much since Charles Dow's day.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) chart is marginally bullish in that our most recent weekly close saw NDX at a price holding just above its down trendline. NDX found support in the area of its 21 and 200-day moving averages, which are the pivotal bullish chart and indicator developments.

A primary technical consideration is the fact that the recent consolidation has been at the high end of the overall advance from the recent low occurring at 6 percent under NDX's 21-day moving average. A sharp index rally to above the 21-day average, then a pause, with the pause/consolidation not giving much ground, makes for a bullish chart; this pattern suggests that the recent pause might even be only half way in its advance. An extension of the prior rally could be less than one tacking another 150-200 points but I rate the odds of further gains to be good from a technical perspective. A bullish outlook of course assumes a breakout to come above recent congestion.

Bullish potential aside, NDX still has to pierce near resistance at 2340 to actualize a next leg up. Next resistance comes in around 2400-2412, extending to the prior July intraday high at 2438; prior Closing highs from this period were at 2429.

If NDX slips back under its 200 AND 21-day moving averages, further weakness is suggested. My highlighted support points this week are at 2280, with next lower support around 2240.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) chart has rebounded to, but not yet above, the QQQ down trendline. On the bullish side of its pattern is that like the underlying NDX, support of course was found at the 200 and 21-day moving averages. I'd like to see a decisive upside penetration of the aforementioned down trendline before putting on my bull hat (horns?).

Overhead resistance is seen first at the most recent high at 57.6; next, and highlighted below on my daily chart, is 58-58.3 resistance with further overhead resistance in the 59-59.2 area. Near support is seen in the 56 area, with next support at 55.

Daily trade volume has recently picked up a bit as prices held at and around 56 support, suggesting some fresh buying coming in; not a lot and nothing like the volume that comes in on sell offs, but there's minor bullish encouragement with this facet.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) held at and just over 720 or at its 21-day moving average, which was bullish. As with all the other major index charts, RUT hasn't given back much of the gains achieved in the rally off its recent lows which is the primary bullish aspect I'm drawn to on the chart. The rebound from the 21-day moving average is a bullish plus. My 'best case' outlook is RUT heads to 800 or a bit higher next. First up to be overcome however is near resistance at 752, extending to the 769 area.

Expected support is at 720-711, then at 700. If RUT doesn't hold above its previously broken down trendline the chart is not going to look especially bullish by the Index holding 700 support.

If RUT doesn't continue higher relatively soon, bullish potential implied by RUT's recent tight consolidation starts to fade some. The index looks poised for some further gains. I almost hesitate to predict further upside, for fear of another bearish wave perversely rolling in from European news. I'll go with the charts as I always have.



GOOD TRADING SUCCESS!


New Option Plays

Aerospace, Oil Services, & Networking

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Boeing Co. - BA - close: 71.93 change: +1.76

Stop Loss: 69.60
Target(s): 77.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
BA had some good news on Friday. The National Labor Relations Board (NLRB) has dropped its lawsuit again BA. Meanwhile the fight between BA and Airbus is heating up. The U.S. is threatening $7-to-$10 billion in sanctions if the EU doesn't comply with the WTO's previous ruling about government subsidies to Airbus.

Shares of BA delivered a nice bounce on Friday (+2.5%) after consolidating sideways in the $72-70 zone all week. I am suggesting we take advantage of this move. Buy calls on Monday morning but only if both BA and the S&P 500 index open positive. We'll use a stop loss at 69.60, just under last week's low. There is potential resistance at $75.00 and more conservative traders may want to exit there. I am aiming for $77.00. FYI: The Point & Figure chart for BA is bullish with a $79 target.

*See Entry Details Above*

- Suggested Positions -

buy the 2012Jan $75 call (BA1221A75) ask $1.39

Annotated Chart:

Entry on December xx at $ xx.xx
Earnings Date 02/01/12 (unconfirmed)
Average Daily Volume = 6.2 million
Listed on December 10, 2011


FMC Technologies, Inc. - FTI - close: 51.86 change: +1.58

Stop Loss: 49.90
Target(s): 58.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 5 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
FTI is an oil services stock that hit new all-time highs early last week. Shares have seen pulled back to prior resistance and what should be significant support near $50.00. Friday's bounce off this level looks like a new bullish entry point to buy calls.

I am suggesting bullish positions on Monday morning but only if both FTI and the S&P 500 index open positive. We'll use a stop loss at $49.90. Conservative traders will want to exit near $55.00. We are setting our target at $58.00. FYI: The Point & Figure chart for FTI is bullish with a $69 target.

*See Entry Details Above*

- Suggested Positions -

buy the Jan $55 call (FTI1221A55) ask $1.45

Annotated Chart:

Entry on December xx at $ xx.xx
Earnings Date 02/14/12 (unconfirmed)
Average Daily Volume = 2.9 million
Listed on December 10, 2011


NEW DIRECTIONAL PUT PLAYS

Juniper Networks - JNPR - close: 19.90 change: -0.15

Stop Loss: 21.05
Target(s): 16.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
JNPR is a networking stock. Shares have been underperforming both its peers and the wider market. The stock did not participate in the market-wide rebound on Friday. Shares actually hit new six-week lows and look poised to retest their early October lows.

You could argue that JNPR is short-term oversold here but that doesn't mean it can't get more oversold. We will want to keep our position size small to limit our risk. I am suggesting a trigger to open bearish positions at $19.60 and we'll target a drop to $16.75. We'll start with a stop loss at $20.75.

Trigger @ 19.60 (small positions)

- Suggested Positions -

buy the 2012Jan $17.50 PUT (JNPR1221M17.5) ask $0.50

Annotated Chart:

Entry on December xx at $ xx.xx
Earnings Date 01/24/12 (unconfirmed)
Average Daily Volume = 8.8 million
Listed on December 10, 2011



In Play Updates and Reviews

Buyers In the Mood

by James Brown

Click here to email James Brown

Editor's Note:

Any progress from the latest EU summit was widely panned by analysts but investors were in the mood to buy stocks anyway.

We did see EW hit our stop loss on Friday thanks to a volatile morning.

Don't forget that normal December options expire after this coming Friday (16th).

-James

Current Portfolio:


CALL Play Updates

Caterpillar - CAT - close: 95.97 change: +3.05

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

Comments:
12/10 update: CAT saw a pretty strong bounce on Friday (+3.2%) recouping a good chunk of last week's losses. Shares stalled right near the $96.00 level, which was the bottom edge (support) of its short-term $96-98 trading range. We don't want to buy calls with CAT at resistance especially since the $98 level and the simple 200-dma remain overhead resistance as well.

We still think CAT offers opportunity if shares can breakout past the $98.00 level. We will leave our trigger to open bullish positions at $98.55.

Trigger @ 98.55

- Suggested Positions -

buy the 2012Jan $100 call (CAT1221A100)

12/10/11 No change to our strategy. Use a trigger to buy calls at $98.55
12/08/11 CAT continues to slip. We will re-evaluate our entry point strategy this weekend and make adjustments or drop CAT as a candidate.

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


Cooper Industries - CBE - close: 55.05 change: +1.21

Stop Loss: 54.65
Target(s): 62.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
12/10 update: CBE saw an oversold bounce on Friday with a +2.2% gain. Shares appear to be rebounding near a trend line of higher lows. Yet we don't want to buy calls yet. CBE still has resistance at its simple 200-dma near $56.50 and last week's high at $56.85.

It is worth noting that Bloomberg published a list on Friday of stocks with the largest increase in short interest from Nov. 15th to Nov. 30th. The short interest in CBE surged from 2.2 million shares to 5.3 million. We need to keep in mind that CBE has a float of 156.7 million shares. Given an average daily volume of 3.7 million that's less than two days worth of short interest. If the stock can hit new relative highs it could definitely see some short covering, which could accelerate any gains.

More aggressive traders could buy Friday's bounce with a tight stop under Thursday's low. I am suggesting we stick to our original plan and wait for CBE to hit 57.05 as our entry point to buy calls.

Trigger @ 57.05

- Suggested Positions -

buy the Jan $60 call (CBE1221A60)

12/10/11 We will keep our trigger to buy calls @ 57.05
12/08/11 We will re-evaluate our entry point strategy this weekend and make adjustments or drop CBE as a candidate.

chart:

Entry on December xx at $ xx.xx
Earnings Date 01/25/12 (unconfirmed)
Average Daily Volume = 3.7 million
Listed on December 06, 2011


Family Dollar Stores - FDO - close: 57.86 change: +0.12

Stop Loss: 56.75
Target(s): 64.00
Current Option Gain/Loss: - 32.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/10 update: I am urging caution with our FDO trade. The stock failed to fully participate in the stock market's rebound on Friday. The S&P 500 index gained +1.6% but FDO only gained +0.2%. At this point readers may want to wait for a rally past $58.50 or $59.00 before considering new bullish positions.

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.

(small positions) - Suggested Positions -

Long JAN $60 call (FDO1221A60) Entry $1.40

12/07/11 trade opened at $58.00 trigger
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 December 07 at $58.00
Earnings Date 01/04/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on November 21, 2011


Hewlett-Packard Co. - HPQ - close: 27.90 change: +0.24

Stop Loss: 27.20
Target(s): 32.00
Current Option Gain/Loss: -31.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/10 update: HPQ made headlines on Friday with news the company would make its webOS mobile operating system an open source platform. This new failed to lift the stock price. HPQ rebounded off the bottom of its $27.50-28.50 trading range but rolled over again late in the day. Shares settled up +0.8%.

Nimble traders could try and buy dips near $27.50. I suggest most readers wait for a new breakout past $28.65.

Earlier Comments:
This is an aggressive entry point. The top of the August gap down near $29.50 could be resistance. Plus HPQ could find round-number resistance at $30.00 and technical resistance at the 150-dma, simple 200-dma and exponential 200-dma all above in the $30.00-34.00 zone. Thus we want to keep our position size small to limit our risk. FYI: The Point & Figure chart for HPQ is bullish with a $41 target.

(small positions) - Suggested Positions -

Long 2012Jan $30 call (HPQ1221A30) Entry $0.80

12/08/11 HPQ broke out past resistance, hit our trigger at $28.65, and promptly reversed lower to close near the bottom of its recent trading range.

chart:

Entry on December 08 at $28.65
Earnings Date 02/22/12 (unconfirmed)
Average Daily Volume = 22.4 million
Listed on December 05, 2011


NetApp, Inc. - NTAP - close: 38.01 change: +0.91

Stop Loss: 36.25
Target(s): 39.50
Current Option Gain/Loss: +49.4%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
12/10 update: NTAP managed to outperform the wide market with a +2.4% gain. Yet shares remain under technical resistance at their 50-dma. I am not suggesting new positions at this time. We will try and reduce our risk by raising the stop loss to $36.25.

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

12/10/11 new stop loss @ 36.25
12/08/11 new stop loss @ 35.75, more conservative traders may want to exit immediately.
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: 81.04 change: +2.12

Stop Loss: 76.90
Target(s): 84.00
Current Option Gain/Loss:(Dec$75c: +61.4%)& Jan$80c: +86.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/10 update: ORLY outperformed the market on Friday with a +2.6% gain and a new record high. More conservative traders may want to exit early now to lock in a gain. We are raising our stop loss to $76.90. Cautious traders might want to consider a stop closer to the $78 level instead. I am not suggesting new positions at this time.

- Suggested Positions -

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

12/10/11 new stop loss @ 76.90
12/08/11 new stop loss @ 76.40, more conservative traders may want to exit early.
12/06/11 Planned exit Dec. calls at the open. The Bid on the Dec. $75 call was $4.52 (+61.4%)
12/05/11 Strategy change: Exit the December calls tomorrow at the open. Move the exit target for the January calls from $82.50 to $84.00.
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: 75.58 change: +1.02

Stop Loss: 73.75
Target(s): 78.50
Current Option Gain/Loss: + 66.0%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
12/10 update: Wall Street continues to love the high-dividend stocks. PM weathered last week's volatility relatively well. Shares saw a bounce back to short-term resistance near $76.00 on Friday. 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

12/05 Call is up +100%, readers may want to exit now!
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: 103.97 change: +3.91

Stop Loss: 98.75
Target(s): 109.50
Current Option Gain/Loss: + 4.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/10 update: SAM was showing some relative strength on Friday with a strong rebound off round-number support at the $100 level. The stock rallied +3.9% on Friday and closed near its highs for the session. I wouldn't chase it here.

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 02 at $102.00
Earnings Date 03/08/12 (unconfirmed)
Average Daily Volume = 72.3 thousand
Listed on December 01, 2011


Watsco Inc. - WSO - close: 65.17 change: +1.09

Stop Loss: 63.25
Target(s): 69.50
Current Option Gain/Loss: Jan$65: -42.0% & Jan$70c: -39.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/10 update: Our WSO is open. Shares rallied to a new multi-month high on Friday at $65.98. Our trigger to buy calls was hit at $65.55. WSO did pull back from its session highs but still managed a +1.7% gain. If both WSO and the S&P 500 index opened positive on Monday then I would still consider new positions here.

FYI: The Point & Figure chart for WSO is bullish with an $80 target. NOTE: Readers may want to keep positions small, the spreads on WSO have widened significantly.

- Suggested Positions - These options are suffering from wide spreads!

Long Jan $65 call (WSO1221A65) Entry $3.45*

- or -

Long Jan $70 call (WSO1221A70) Entry $1.15*

*12/09/11 entry prices are estimates. options did not trade at the time WSO hit our entry point.

chart:

Entry on December 09 at $65.55
Earnings Date 02/14/12 (unconfirmed)
Average Daily Volume = 227 thousand
Listed on December 07, 2011


PUT Play Updates

Check Point Software - CHKP - close: 54.68 change: +1.75

Stop Loss: 56.11
Target(s): 48.00
Current Option Gain/Loss: -45.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/10 update: The stock market's widespread gains on Friday made it a tough day for bearish plays. CHKP opened higher at $53.29 and rallied past resistance near $54.00 to close up +3.3%. The close over its simple 200-dma is also a technically bullish development. I am not suggesting new positions at this time. More conservative traders may want to lower their stop loss.

Earlier Comments:
There is potential support near $51.00 but we're aiming for the $48.00 level. More aggressive traders could aim lower. FYI: The Point & Figure chart for CHKP is bearish with a $46 target.

(Small Positions) - Suggested Positions -

Long Jan $50 PUT (CHKP1221M50) Entry $1.20

chart:

Entry on December 09 at $53.29
Earnings Date 01/30/12 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on December 08, 2011


SPDR S&P 500 ETF - SPY - close: 126.05 change: +2.10

Stop Loss: 127.55
Target(s): 120.50
Current Option Gain/Loss: -18.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/10 update: The SPY managed to recoup more than 2/3rds of Thursday's decline with a +1.7% gain on Friday. The S&P 500 index is still trading under resistance at 1265 and the SPY is still trading under a bearish trendline of lower highs. Odds would suggest the index will roll over but a breakout would be very bullish. Look for this bounce to stall or roll over as our next entry point for puts.

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


Thermo Fisher Scientific - TMO - close: 45.64 change: +0.35

Stop Loss: 48.01
Target(s): 42.75
Current Option Gain/Loss: Dec$45p: + 11.1% & Jan$45P: +10.7%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
12/10 update: TMO dipped to new two-week lows at $44.65 before bouncing on Friday morning. Technically Friday's rebound almost looks like a short-term bullish reversal pattern. That's dangerous for our December puts. Those same December puts that were up +100% on Thursday are now down to just +11%. If the bounce in TMO continues next week these will turn negative.

I am not suggesting new positions at this time.

Our target is $42.75. FYI: The Point & Figure chart for TMO is bearish with a $41 target.

- Suggested Positions -

Long DEC $45 put (TMO1117X45) Entry $0.45
(less than 2 weeks left for Decembers)

- or -

Long JAN $45 put (TMO1221M45) Entry $1.40

12/05/11 TMO gapped open higher at $47.10

chart:

Entry on December 05 at $47.10
Earnings Date 02/01/12 (unconfirmed)
Average Daily Volume = 3.5 million
Listed on December 03, 2011


Watson Pharmaceuticals - WPI - close: 61.52 change: +0.46

Stop Loss: 64.25
Target(s): 56.00
Current Option Gain/Loss: Dec$60p: -43.7% & Jan$60p: -10.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/10 update: Positive analyst comments on Friday morning helped WPI gapped open higher. Shares spiked to $62.61 intraday before fading back under short-term resistance at the $62.00 level. WPI spent the rest of the session drifting sideways. I would still consider new positions now at current levels.

Keep in mind that December options expire in five trading days.

Earlier Comments:
There is potential support at $60.00 but I am aiming for the $56.00 level.

- Suggested Positions -

Long DEC $60 PUT (WPI1117X60) Entry $0.80
(only 5 trading days left for Decembers)

- or -

Long JAN $60 PUT (WPI1221M60) Entry $2.00

chart:

Entry on December 07 at $61.75
Earnings Date 02/14/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on December 03, 2011


Market Neutral Play Updates

iShares Russell 2000 ETF - IWM - close: 74.54 change: +2.18

Stop Loss: n/a
Target(s): TBD
Current Option Gain/Loss: -41.1%
Time Frame: up to December options expiration
New Positions: Must Be Opened on Thursday 12/08

Comments:
12/10 update: The IWM almost completely erased Thursday's decline with a big bounce on Friday. This small cap ETF rallied +3.0% and closed right under resistance near $75.00, its 150-dma, and its trendline of lower highs.

We need the market to pick a direction and move. Any more sideways back and forth is going to kill this strangle trade. I am not suggesting new positions at this time.

Just a reminder, December options expire after December 16th.

- Market Neutral Strangle - cost: 2.04 value: 1.20 (-41.1%)

Long DEC $77 call (IWM1117L77) Entry $0.58, current bid/ask $0.46/0.49

- Also Buy the -

Long DEC $73 put (IWM1117X73) Entry $1.46, current bid/ask $0.74/0.77

chart:

Entry on December 08 at $73.90
Earnings Date --/--/--
Average Daily Volume = 61 million
Listed on December 07, 2011


CLOSED BULLISH PLAYS

Edwards Lifesciences - EW - close: 64.53 change: +0.71

Stop Loss: 63.25
Target(s): 69.50
Current Option Gain/Loss: Dec$65c: -69.2% & Jan$70c: -47.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/10 update: EW reaffirmed its earnings guidance on Friday morning. It looks like investors were unsure of how to interpret this data even though guidance was in-line with analysts estimates. The stock opened higher and spike toward $65.50 before immediately plunging to $62.69 only to reverse again. It was a volatile Friday morning. Our stop loss was hit at $63.25.

- Suggested Positions -

DEC $65 call (EW1117L65) Entry $1.95 exit $0.60 (-69.2%)

- or -

2012Jan $70 call (EW1221A70) Entry $1.70 exit $0.90 (-47.0%)

12/09 stopped out at $63.25
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