Option Investor
Newsletter

Daily Newsletter, Wednesday, 12/14/2011

Table of Contents

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

Market Wrap

Disappointment Everywhere

by Keene Little

Click here to email Keene Little
Market Stats

The stock market has rallied on hope that Europe was going to get serious about fixing its debt problems. By fixing, the market of course had been hoping for more debt to solve the debt problem (huh?). All the king's horses, and all the Fed's money, can't seem to put Humpty together again. Shattered confidence shows up as selling as market participants become more concerned that the problems are going to get worse before they get better (and they will get better but fixing the problems is going to be either painful or more painful).

The lack of progress in Europe is showing up in Italian bond yields again. The ECB has been attempting to hold yields down by buying their bonds and then selling them in the secondary market. The ECB has already borrowed $50B from the Fed since the new swap agreement between central banks was implemented and quite likely is using the money in an attempt to support the weaker European countries and their bond auctions. As you can in the chart below, they're losing the battle.

Italian Government Bonds

I drew in red lines to indicate what was resistance turned into support when the ECB drove yields back down in their attempt to support their bond auctions. Bond yields are on their way back up (closing at 6.88% today) and the bond spread between the Italian and German bonds is widening again. Italy also has to pay higher yields to sell their 5-year notes -- today's sales hit a euro-era high of 6.47%. This is of course a reflection of the bond market's concern about the EU leaders' failure to create a better plan to make a plan and can only agree that they need to hold more meetings in order to develop that better plan.

In the meantime we're to trust the ECB and EU leaders that they know what they're doing. The bond market is in effect saying "Yea, I don't think so." And speaking of lack of trust, the LIBOR rate is at a 52-week high, which says banks don't trust each other either and want higher rates to compensate for added risks. The TED spread is also at its highs. If you want to know what's really happening in the world of finance, keep your ears and eyes open to what the bond market is doing. The stock market is like a spoiled child that gets lost easily. The one area of strength in bonds is the U.S. Treasury market, which is perceived as less risky. U.S. Treasury rates have dropped this week

Speaking of U.S. Treasuries, the 30-year yield, TYX, lost support of its 20 and 50-dma's today, which had been supporting it since the beginning of this month. It now looks like it will head down to at least retest the October 4th low at 2.69%. Its price pattern leaves me guessing a bit as to where it might be headed next but as long as it stays below its downtrend line from October 27th (coinciding with stock indexes) it will remain bearish (bullish for bond prices). It takes a rally above Tuesday's high at 3.1% to turn the pattern at least short-term bullish.

30-Year Treasury Yield, TYX, Daily chart

The negative reaction to the Fed's doing-nothing-more policy announcement yesterday continued into today. There was an effort to lift equity futures overnight but that was lost after the European markets opened. Traders are clearly not happy with the Fed's FOMC announcement yesterday. They're disappointed that the Fed did not signal that they're ready to start a larger QE program. One thing to keep in mind about the Fed is that they are not proactive; they're reactive. And if you look at the past when they've made decisions to "help" the stock market, um, I mean the economy it's been when the stock market has taken a real hit. The Fed then rushes to the rescue with another bailout plan.

What the Fed has been doing lately is attempting to jawbone the market higher with statements about having the ability to implement further quantitative easing (such as purchasing more mortgage-backed securities) as a way to thwart the negative reactions to what's happening in Europe. But without the stock market in serious trouble it remains highly unlikely the Fed will use that tool now and risk not having more when it's really needed. Therefore it should have come as no surprise that the Fed didn't change a thing with yesterday's FOMC announcement.

I came across a very interesting piece by John Hussman who had this to say about the market and financial institutions and the dependence on Fed handouts:

"Frankly, I am concerned that Wall Street is becoming little more than a glorified crack house. Day after day, the sole focus of Wall Street is on more sugar, stronger sugar, Big Bazookas of sugar, unlimited sugar, and anything that will get somebody to deliver the sugar faster. This is like offering a lollipop to quiet down a 2-year old throwing a tantrum, and expecting that the result will be fewer tantrums.

"What we have increasingly observed over the past decade is nothing but the gradual destruction of the ability of the financial markets to allocate capital for the benefit of future growth. By preventing the natural discipline of the markets to impose losses on poor stewards of capital, and to impose interest rates high enough to force debtors to allocate the capital usefully, the world's policy makers are increasingly wrecking the prospects for long-term economic growth. The world's standard of living (what we can consume for the work we do) is intimately tied to its productivity (what we can produce for the work we do). That productivity requires our scarce savings to be allocated to productive physical capital, and to productive human capital (primarily education).

"Nietzsche famously said 'What does not kill me makes me stronger.' The corollary is 'What constantly rescues me makes me weaker.' The world will only stop looking for bailouts when policy makers stop handing them out."

Me thinks we'll be waiting a while for the Fed to stop trying to hand out more goodies to their banker buddies, probably when the Federal Reserve is abolished. The Fed clearly has some significant issues to worry about, not the least of which is Europe and the contagion that could spread to U.S. financial institutions. We already know the Fed will do everything it can, including stealing the American public blind, to help support the banksters. Their efforts to support the collapsing financial structure are far from over and every time the stock market thinks Mighty Mouse is here again, it will rally on hopium. It's the market we have and need to try to predict.

The other thing the Fed has to worry about is of course the economy and the job picture. But I think even they recognize there's not much more they can do about that. And now compounding the problem is China. It's bad enough with Europe sliding into a recession (already in a recession probably, especially with the required austerity programs to slow their spending) but with China's economy hitting the wall we could see another global slowdown and clearly that will not help the financial situation. Gauging the Chinese economy through their stock market, the Shanghai Composite index, we've already got our answer and it's bearish.

Shanghai Composite index, $SSEC, Daily chart

As noted on the chart above, yesterday's decline broke below the October low, which itself was a test of the July 2010 low. The October rally had many thinking it made a successful double bottom. Today's decline put an exclamation point on yesterday's break of both its July 2010 and October 2011 lows. In the chart I show a comparison of SPX to the Shanghai index ($SSEC on stockcharts.com). Note the similar pattern of the price movements and note the exaggerated bounce in SPX off the October low and how it has held up better than SSEC.

So, does the SSEC come bouncing back up to join SPX or will it be the other way around? Considering the lack-of-substance rally in the U.S. (and European) markets, I strongly believe SPX will follow SSEC, not the other way around. The only question is when -- SPX could head for new lows this month or it might hold up (even rally) into the end of the month and start down in earnest in January.

And with that let's get into what our market looks like. Following last week's candlestick at the 50-week MA, which looks a bit like a spinning top doji, this week's big red candle is not encouraging for the bulls. A little lower now is its 20-week MA, near 1200. The bearish price path calls for the next bear market leg down, one which should take it much lower next quarter. But the bullish price path (dashed green line), calling for an end-of-year rally is not dead yet. We could still get an upside surprise and need to trade accordingly.

S&P 500, SPX, Weekly chart

The daily chart below is getting busy with a bunch of trend lines, Fibs, etc. but until the price pattern clears up some more, we've got to consider the bullish and bearish possibilities with price paths and targets for each. If SPX finds support at or above 1200 there is still the possibility for another rally leg. If another rally leg is launched from 1200, two equal legs up from November 25th would target 1307, which is also the 78.6% retracement of the May-October decline and it would be back up to the broken H&S neckline. For now I'm saying stay bearish below 1226, its 50-dma, but don't turn aggressively bullish until it gets above 1250. In the meantime we could see the market work its way lower and for SPX to break its uptrend line from October 4th before the end of the month and then use it to back test in early January.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1250
- stay bearish below 1226

This morning SPX dropped below a trend line along its lows since December 2nd and then back tested it this afternoon, leaving a bearish kiss goodbye. At the moment I'm thinking we might see a little lower or a choppy sideways consolidation before dropping lower again. The bearish wave count calls for the market to stair-step its way lower into early next week before setting up at least a larger bounce. If SPX drops lower tomorrow, and gets below 1200, watch for support at its uptrend line from October 4th, near 1190 at the end of the day. A rally above Monday's low, near 1227, would be the first bullish sign (especially since it would also be back above its 20 and 50-dma's) since it would be the first indication that a tradable bottom is in.

S&P 500, SPX, 30-min chart

While SPX has broken its 20 and 50-dma's, the DOW has only broken its 20-dma but continues to hold its 50-dma at 11774 (today's low is 11786). The bearish price pattern calls for a continuation lower with a break of its uptrend line from October 4th early next week and then a bounce into the end of the year (not the kind of Santa Claus rally most were hoping for). Following the bounce we should see a strong selloff in January. The bullish wave count, which is looking a little less probable at this point but remains a possibility, is for the 50-dma (or near it) to hold and then start the next rally leg. Fib projections and trend lines point to 12400-12500 for an upside target if the bulls take the reins away from the bears. The first thing the bulls need to do is get the DOW back above 12150 although a push above 12K would be a bullish heads up.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,150
- bearish below 11,940

NDX would close its November 30th gap at 2211.55 so a break below 2200 would be more bearish than what we're seeing so far. In the meantime we should see support in the 2200-2210 area but the bearish wave pattern calls for just a small bounce before heading lower again next week, potentially down to its uptrend line from July 2010, near 2150 by the end of the month, before a bigger bounce to correct the decline from this month's high. The bullish pattern says we're going to get the end-of-year rally, which could conceivably drive it up to its downtrend line from July and achieve two equal legs up near 2390 (2nd leg starting from about 2200). I have no idea what could drive the bulls into a feeding frenzy like that but we've seen stranger things happen in this market. Above 2275 would have me looking to trade the long side.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2275
- bearish below 2200

The bearish pattern for the RUT calls for it to stair-step its way lower into next week and get down to 685 (78.6% retracement of the rally off the November low) before a larger bounce into the end of the month. The bounce could take the RUT back up to the 720 area before heading much lower in January. The bullish wave count calls for another rally leg and two equal legs up from November 25th would be to the 770 area (if the 2nd leg starts from 785), which is also a Fib projection for the 2nd leg of the rally off the October 4th low, and it would be near its 200-dma. A rally above 726 would have me thinking more bullishly but for the moment I think the bears are in charge.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 726
- stay bearish below 720

The banks held up well today and I'm not sure why. There wasn't any especially good news for them but there seems to be some support. And that support has been somewhat evident this month as it has pulled back from last week's highs in what looks like a corrective pattern. That points to another rally leg and if the banks rally, the broader market will rally. Follow the money. BIX is holding its 20 and 50-dma's, both near 121, and closed marginally in the green at 122.48. It's also holding at its broken downtrend line from February, which it broke above on December 5th. It could bounce back up from here and into the end of the month with an attempt to hit the top of a parallel up-channel from August (bear flag pattern) and its 200-dma near 130.

S&P Banks index, BIX, Daily chart

The TRAN is showing weakness by breaking back below its downtrend line from July, leaving a head-fake break above it this month. It has also now closed both its 20 and 50-dma's. The break of the 50-dma's, while below the 200-dma's, is what catches fund managers' attention and causes them to think more about selling rather than worrying about missing any upside move. Of course, as wicked as this market is, it would be typical for the breaks of these important moving averages to be reversed to the upside, catching both the bears and bulls flat footed. Watch the uptrend line, near today's low (4750), for support (or not).

Transportation Index, TRAN, Daily chart

Depending on which charting package you're using you'll see either the December 2011 contract prices (as QCharts is still using and is reflected in the chart below) or the March 2012 contract which should be the front-month contract now. But for analysis purposes, I'm using the December contract. The dollar made a strong move above its downtrend line from October 4th and added to those gains today. The broken downtrend line and the bottom of its up-channel from October 27th cross near 79.55 next Wednesday so as long as either line holds a pullback, the dollar should head higher. That would of course continue the downward pressure on stocks and commodities.

U.S. Dollar contract, DX, Daily chart

When gold decides to break down it doesn't waste any time. The break of its uptrend line from September has been followed by three days of heavy liquidation. Most were looking at the sideways triangle and licking their chops to get long. As discussed last week, I thought just the opposite. It has now dropped to support in the 1535-1568 area, starting with the Fib projection near 1568 (2nd leg of decline from August is 62% of the 1st leg down). That was reached today. Then there's an uptrend line from October 2008 (arithmetic price scale) that's near 1559. For the move down from November 8th, the 2nd leg down would be 162% of the 1st leg down near 1545. And then there's the September 26th low at 1535. That's a lot of support for the bears to bust through and I believe it will hold for a bounce/consolidation before breaking lower. Gold stays bearish below 1670, potentially bullish above 1670 and then clearly bullish back above 1761. In the meantime I expect to see gold work its way lower into January.

Gold continuous contract, GC, Daily chart

It's the same pattern for silver although surprisingly (to me), not quite as strong a selloff. Usually silver leads as it's more volatile. Silver had been showing relative weakness and now it's showing relative strength. Not sure what to make of that at the moment. Silver should work its way down to its uptrend line from October 2008, near 25 (arithmetic price scale), with lower potential.

Silver continuous contract, SI, Daily chart

Last Thursday oil had broken its uptrend line from October 4th. It then consolidated for a couple of days and then spiked up yesterday and tagged its broken uptrend line. It then fell away, leaving a bearish kiss goodbye. That was a beauty of a setup to short oil and today's decline shows why. It closed below its 200-dma for the first time since breaking back above it on November 7th. It did hold at its 50-dma and 50% retracement of its May-October decline, at 94.89. It should be good for at least a little consolidation before dropping lower again. Oil bears would be in potential trouble if oil gets back above 98.

Oil continuous contract, CL, Daily chart

There wasn't much in the way of economic reports today but tomorrow will be a lot busier. Other than the weekly unemployment claims, the PPI data (not much, if any, of a change is expected) and the Empire Manufacturing index (which is expected to improve) will be released before the bell. After the opening bell we'll get Industrial Production, Capacity Utilization and the Philly Fed numbers, which could bounce the market if there are no negative surprises.

Economic reports, summary and Key Trading Levels

I've often heard that the market will rally if only given the chance (stop with the negative European news, etc.). The reason given is because of so much cash on the sidelines. I've argued that cash as a percent of total assets in mutual funds is actually at an historically low point, one that has correlated with major stock market highs. But let's say there's lots of cash in other institutions and traders just waiting to get put to work. It still doesn't matter. Rather than lots of cash being available what matters is sentiment. Bear markets come from bearish sentiment, which is what creates recessions. Tom McClellan recently posted his take on the cash vs. sentiment issue and I thought it was worth passing along as food for thought:

"Please let me correct a couple of definitional items.

"The first point is that when mutual funds (or any other entities) hold cash, they don't actually hold real cash. They hold representations of cash, in the form of money market assets, short term commercial paper, etc. If anyone wanted to "cash" out of their cash position, they would have to go to a bank that had "cash" cash, and convince the bank to accept the representation of cash in exchange for that real cash.

"Second, stock prices do not get driven up by cash in the same way that a 747 gets aloft through the consumption of jet fuel. Stock prices are really just exchange rates, defining how much of one asset you can get when you exchange it for another asset. Changes in those exchange rates come about not through the consumption of cash, but through changes in the beliefs of the people involved. Having said that, the amount of cash that is laying around can have an effect on those beliefs, but the cash itself is not what does the work of moving prices. Changing beliefs is what does that.

"When I give seminars, I like to survey the crowd with a trick question. I ask them to estimate the total amount of money in the New York Stock Exchange. I let them offer guesses, usually involving a lot of zeroes, but the real answer is that you only need one zero to answer that question. There is no money in the stock market*. Any time you put money into the stock market, that money immediately comes out the other side and into the "pocket" of the guy who sold you those shares. You only think you have money in your stock market investments (or other assets). You don't. What you have is confidence that you can get money from someone who has it, in exchange for those assets. When that confidence changes, so does the exchange rate.

"*Actually, there may be a few quarters in the Coke machine that get left there overnight."

It's what two traders think the current value is -- that's what drives prices. And every time the market gets another injection of hopium we have inflated values on the expectation that things will get better and then deflated values when we worry that things are going to get worse. It doesn't matter how much "cash" the Fed prints; the only thing that matters is what we think things are worth. It's a very interesting perspective to keep in mind.

As for my expectations for the market, we are now near the time where the bulls need to have some higher expectations and like these low prices. If SPX finds support at or above 1200 there is still a chance, even if it's dwindling, for an end-of-year rally. The Santa Claus rally doesn't normally start until just before Christmas.

One bearish warning comes from the VIX, which had been dropping for the past 3 days even while the market dropped. We were seeing a lot of bullish complacency and while opex can skew the results of VIX, making the readings unreliable, it was a warning that the decline could get worse. Yesterday the VIX dropped below the bottom of its Bollinger Band and today it bounced back inside the band. The last time that happened was on October 27th, which was a market high. This time it could point to an accelerated move lower in the market so keep that possibility in mind.

Helping the bears is the bearish price pattern that suggests even if we do get a bounce into the end of the year, it will be an outstanding opportunity to short it. We'll evaluate the patterns some more next week and in the meantime be careful through the rest of opex week. There's a good chance the market will start quieting down (consolidating) for the rest of the week, which by the way would be a bearish continuation pattern. The bulls need to do more than let this market consolidate.

Good luck and I'll be back with you next Wednesday.

Key Levels for SPX:
- bullish above 1250
- stay bearish below 1226

Key Levels for DOW:
- bullish above 12,150
- bearish below 11,940

Key Levels for NDX:
- bullish above 2275
- bearish below 2200

Key Levels for RUT:
- bullish above 726
- stay bearish below 720

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying

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!


New Option Plays

Sinking Software

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate, consider these stocks as possible trades:

ALK - this airline stock is showing relative strength. Falling oil prices is helping the industry. ALK is on the verge of breaking out past resistance near $72.00 to hit new record highs.

CMP - shares have fallen from $77 in early December to their late November lows near $69. A drop under today's low (68.88) might be a new bearish entry point. The stock is arguably short-term oversold here, which is a concern.

- James


NEW DIRECTIONAL PUT PLAYS

BMC Software Inc. - BMC - close: 33.33 change: -0.40

Stop Loss: 35.05
Target(s): 30.05
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
BMC is a software stock that has been building on a bearish trend of lower highs. Now shares are testing support near $33.00 and look poised to breakdown to new two-year lows. I am suggesting a trigger to open bearish put positions at $32.75. We'll start this trade with a wide stop at $35.05. More conservative traders may want to use a tighter stop loss instead. Our target is $30.50. FYI: The Point & Figure chart for BMC is bearish with a $29 target.

Trigger @ 32.75

- Suggested Positions -

buy the 2012Jan $32.50 PUT (BMC1221M32.5) ask $1.10

Annotated Chart:

Entry on December xx at $ xx.xx
Earnings Date 02/01/12 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on December 14, 2011



In Play Updates and Reviews

Decline Reaches 3 Days in a Row

by James Brown

Click here to email James Brown
Current Portfolio:


CALL Play Updates

Boeing Co. - BA - close: 69.94 change: -0.96

Stop Loss: 69.25
Target(s): 77.00
Current Option Gain/Loss: -33.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/14 update: The stock market's widespread decline pulled BA to the bottom of its recent trading range. Shares are hovering near support at the $70 level and its 200-dma is just below at $69.34. We have a stop loss at $69.25 but more conservative traders may want to abandon ship and exit early. I am not suggesting new positions in BA at this time.

Earlier Comments:
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.

- Suggested Positions -

Long 2012Jan $75 call (BA1221A75) entry $1.08

12/13/11 trade opened
12/12/11 adjusted stop loss to $69.25
12/12/11 trade did not open, try again.

Entry on December 13 at $71.67
Earnings Date 02/01/12 (unconfirmed)
Average Daily Volume = 6.2 million
Listed on December 10, 2011


NetApp, Inc. - NTAP - close: 37.13 change: -0.79

Stop Loss: 36.25
Target(s): 39.50
Current Option Gain/Loss: +21.5%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
12/14 update: Gains in NTAP are fading. Readers may want to exit early. If the market continues to drop tomorrow we could see NTAP h it our stop loss. 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

12/10/11 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

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


Phillip Morris Intl. - PM - close: 74.86 change: -0.65

Stop Loss: 73.75
Target(s): 78.50
Current Option Gain/Loss: + 25.8%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
12/14 update: PM tried to rally this morning but failed near yesterday's highs. The stock settled near the bottom of its recent trading range. More conservative traders may want to raise their stop loss toward the $74.40 area. 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

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: 102.00 change: +0.33

Stop Loss: 98.75
Target(s): 109.50
Current Option Gain/Loss: -29.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/14 update: SAM continues to show some relative strength. Traders bought the dip near round-number, psychological support at $100 this morning. While normally I might be tempted to buy calls on a bounce from support I am not suggesting new positions tonight.

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

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


Varian Medical Sys. - VAR - close: 63.09 change: -0.93

Stop Loss: 62.49
Target(s): 69.75
Current Option Gain/Loss: -43.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/14 update: VAR has sunk toward last week's low near $63.00. Yesterday's move is starting to look like a bull trap pattern. We are tweaking our stop loss and moving it from $62.80 down to $62.49 so that it's under the simple 200-dma. However, if the market continues to drop tomorrow we'll probably see VAR get stopped out.

No new positions at this time.

- Suggested Positions -

Long JAN $65 call (VAR1221A65) entry $2.65

12/14/11 adjust stop loss to $62.49

Entry on December 13 at $65.25
Earnings Date 01/25/12 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on December 12, 2011


PUT Play Updates

Check Point Software - CHKP - close: 51.97 change: -0.95

Stop Loss: 55.05
Target(s): 48.00
Current Option Gain/Loss: -16.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/14 update: CHKP finally broke support near $52.80. The stock fell to $50.74 before paring its losses. I am not suggesting new positions at this time.

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

12/13/11 new stop loss @ 55.05

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


Fluor Corp. - FLR - close: 48.31 change: -1.69

Stop Loss: 52.05
Target(s): 45.15
Current Option Gain/Loss: + 8.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/14 update: Our new play on FLR has been triggered. Shares hit our entry point to buy puts at $49.35 this morning. The stock closed down -3.3%, underperforming the market's major indices.

Earlier Comments:
We want to keep our position size small because FLR is arguably already oversold here with a drop from $56 to $50 over the last several days but that doesn't mean it can't get more oversold. FYI: The Point & Figure chart for FLR is bearish with a $43 target.

- Suggested Positions - (Small Positions)

Long 2012Jan $45 PUT (FLR1221M45) entry $1.20

Entry on December 14 at $49.35
Earnings Date 02/23/12 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on December 13, 2011


Juniper Networks - JNPR - close: 18.88 change: -0.11

Stop Loss: 20.55
Target(s): 16.75
Current Option Gain/Loss: + 14.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/14 update: JNPR continues to drop but it seems to be fighting every step. The stock dipped to $18.26 before bouncing back and reducing its loss to just -0.5%. The stock continues to look short-term oversold. I am adjusting our stop loss down to $20.55. I am not suggesting new positions at this time.

(small positions) - Suggested Positions -

Long 2012Jan $17.50 PUT (JNPR1221M17.5) entry $0.57

12/14/11 new stop loss @ 20.55
12/12/11 JNPR gapped open lower at $19.58, opening our trade. Stop loss at $20.75

Entry on December 12 at $19.58
Earnings Date 01/24/12 (unconfirmed)
Average Daily Volume = 8.8 million
Listed on December 10, 2011


Monsanto Co - MON - close: 67.72 change: -0.33

Stop Loss: 71.05
Target(s): 60.50
Current Option Gain/Loss: - 3.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/14 update: Our new trade on MON has been opened but I am immediately concerned. Shares dipped to $67.09 this morning but bounced back and limited its losses to just -0.5%. The lack of follow through lower in the breakdown to new relative lows is worrisome. After today's performance I would probably wait for MON to fall under $67.00 or see a failed rally near $70.00 before considering new positions.

Earlier Comments:
Our target is $60.50. More conservative traders may want to exit near $63.00 instead. FYI: The Point & Figure chart for MON is bearish with a $60 target.

(small positions) - Suggested Positions -

Long 2012Jan $65 PUT (MON1221M65) entry $2.05

Entry on December 14 at $67.35
Earnings Date 01/05/12 (unconfirmed)
Average Daily Volume = 3.7 million
Listed on December 13, 2011


SPDR S&P 500 ETF - SPY - close: 121.74 change: -1.31

Stop Loss: 127.55
Target(s): 120.50
Current Option Gain/Loss: +24.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/14 update: The market sell-off is picking up speed. The SPY broke down under its simple 50-dma today. The newsletter is planning to exit this position at $120.50. More aggressive traders may want to choose a lower exit target.

I am not suggesting new positions at this time.

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

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


Thermo Fisher Scientific - TMO - close: 43.75 change: -0.94

Stop Loss: 46.15
Target(s): 42.75
Current Option Gain/Loss: Dec$45p: +166.6% & Jan$45P: +64.2%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
12/14 update: TMO has broken down to new 52-week lows. We are quickly running out of time on our December $45 puts. I am suggesting we exit these puts at the open tomorrow morning. Currently these Dec. $45 puts have a bid of $1.20 (position +166.6%). We'll keep our exit target for the January puts at $42.75.

Please note that I am adjusting our stop loss down to $46.15.

- 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

12/14/11 Prepare to exit Dec. $45 puts at the open tomorrow, current bid on these puts is $1.20 (+166.6%)
12/14/11 new stop loss @ 46.15
12/05/11 TMO gapped open higher at $47.10

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: 59.97 change: -0.60

Stop Loss: 64.25
Target(s): 56.00
Current Option Gain/Loss: Dec$60p: -18.7% & Jan$60p: +12.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/14 update: WPI has fallen to round-number support at $60.00. This is a good spot for this stock to bounce so we're not suggesting new positions at this time.

NOTE: Our December puts expire in two days. I am suggesting we exit our Dec. $60 puts at the open tomorrow morning. The current bid is $0.65.

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

- Suggested Positions -

Long DEC $60 PUT (WPI1117X60) Entry $0.80
(only 2 trading days left for Decembers)

- or -

Long JAN $60 PUT (WPI1221M60) Entry $2.00

12/14/11 Prepare to exit Dec. $60 puts at the open tomorrow, current bid on these puts is $0.65

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: 71.04 change: -0.90

Stop Loss: n/a
Target(s): TBD
Current Option Gain/Loss: + 6.8%
Time Frame: up to December options expiration
New Positions: Must Be Opened on Thursday 12/08

Comments:
12/14 update: The small cap Russell 2000 index and the IWM have both broken down under their simple 50-dma with today's drop. This index is nearing potential support near the 700 level (70.00 for the IWM). Will it bounce or will it breakdown? The value on our strangle play has risen to $2.18 (+6.8%).

Traders have a decision to make. Do you exit at the open tomorrow to preserve capital? You could exit tomorrow at the close instead. We are taking an aggressive stance on this trade. Stocks are likely to decline into the weekend. We'll plan on exiting on Friday at the closing bell.

- Market Neutral Strangle - cost: 2.04 value: 2.18 (+ 6.8%)

Long DEC $77 call (IWM1117L77) Entry $0.58, current bid/ask $0.00/0.01

- Also Buy the -

Long DEC $73 put (IWM1117X73) Entry $1.46, current bid/ask $2.18/2.28

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


CLOSED BULLISH PLAYS

O'Reilly Automotive - ORLY - close: 78.58 change: -0.33

Stop Loss: 77.85
Target(s): 84.00
Current Option Gain/Loss:(Dec$75c: +61.4%)& Jan$80c: -10.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/14 update: Our ORLY trade has been stopped out. I warned readers that the recent action looked like a reversal pattern. Today saw a drop to $77.69 before bouncing. Our stop loss was hit at $77.85. The larger trend for ORLY is still up but readers may want to wait for shares to bounce off the 50-dma before considering new bullish positions.

- Suggested Positions -

JAN $80 call (ORLY1221A80) Entry $1.50* exit 1.35 (-10.0%)

12/14/11 stopped out @ 77.85
12/13/11 caution! readers may want to exit immediately
12/12/11 new stop loss @ 77.85
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