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Daily Newsletter, Saturday, 12/17/2011

Table of Contents

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

Market Wrap

Expiration Passes Quietly

by Jim Brown

Click here to email Jim Brown

The quadruple expiration failed to cause any volatility and the markets traded flat ahead of the weekend event risk.

Market Statistics

Index options, equity options, index futures and single stock futures expired peacefully on Friday but the damage was done earlier in the week to leave the markets down an average of -3% and the first weekly loss in three weeks.

The obligatory opening spike was instantly sold and the indexes faded quickly but with the exception of the Dow they managed to hold onto minimal gains. Trading was lackluster despite strong volume of 9.0 billion shares. The extra volume came from the option expiration and from the normal quarterly rebalancing of the S&P-500 and the Russell indexes.

The big news for the day came from ratings agency Fitch. The agency affirmed the AAA rating on France but said it could downgrade the country over the next two years. Fitch also warned it was placing Spain, Italy, Belgium, Solvenia, Ireland and Cyprus on ratings watch negative to be completed by the end of January. This suggests those countries will have their ratings lowered. Fitch said the change was due to Europe's failure to find a comprehensive solution to the crisis. S&P and Moody's both downgraded Belgium earlier in the week.

Fitch said without a full solution the crisis will persist, "punctuated by episodes of severe financial market volatility that is a particular source of risk to the sovereign governments of those countries with levels of public debt, contingent liabilities and fiscal and financial sector financing needs that are higher relative to rating peers."

Fitch also said,"A comprehensive solution to the euro zone crisis is technically and politically beyond reach." All the ratings agencies were disappointed with the EU plan announced last week. They said that is fine for the next crisis but it has no relevance to the current crisis. "Of particular concern is the absence of a credible financial backstop", "This requires more active and explicit commitment from the ECB." The agencies understand that without a lender of last resort with an active bailout strategy the problems of the individual countries will continue to get worse.

The worry all day on Friday was the potential for an S&P downgrade of European countries after the close. They downgraded the U.S. back on Friday August 5th after the close. The worry of specific and numerous S&P downgrades has troubled the market all week. They said they would review their ratings immediately after the EU summit concluded and analysts believe the result of that review could be announced any day now. S&P placed the ratings of 15 nations on review for a possible downgrade on Dec 5th. Moody's said on Dec 12th it will review the ratings of all EU countries because the Dec 9th summit did not produce "decisive policy measures." Late after the bell on Friday Moody's downgraded Belgium two notches from AA1 to AA3 with a negative outlook.

I think it is pretty obvious there will be downgrades to euro zone countries. The market is slowly factoring it in but nobody really knows how bad they will be and who will be affected. It is tough to fully price in an unknown.

Without spending too much time on Europe it is clear the plan to make a new plan was not well received. What they did right is being ignored. The dollar swap lines announced two weeks ago is relieving temporary liquidity problems. The ECB announced three year loans to any bank at very favorable rates. These two actions should act to reduce the pressure on the European banking system until Europe finally comes up with a plan that works. Unfortunately those actions don't have any impact on excessive sovereign debt. They only help the banks deal with the daily cash drain as customers continue to withdraw money to put under the mattress.

The ECB three year loans carry an interest rate of 1%. They also said they were going to relax the collateral rules currently set at A-. That means the banks put up loans, notes, bonds, etc rated at least A- as collateral for the loans. If the ECB relaxes those rules enough to allow sovereign debt with a slightly lower rating then the banks would have a sudden windfall. They could borrow three year money from the ECB and then buy short term sovereign debt currently yielding 3% to 6% and put that same debt up as collateral for the loan. Pay attention, this is a critical point. The ECB can't loan money directly to a country. However, if they are willing to loan to banks using sovereign debt as collateral it would be a major change in sentiment. Suddenly there would be a market for that high yielding sovereign debt. New debt sales would be heavily bid and yields would go down. Banks would make the spread and that would provide a strong infusion of cash. This is a very subtle change in stance by the ECB and it could be a game changer. It would be the ultimate carry trade and the possible end to the rising yields on sovereign debt. The new collateral guidelines are expected to be announced next week and be effective immediately. This is effectively a new version of quantitative easing by the ECB and there is no limit on the loans.

This would in theory expose the banks to "Private Sector Involvement" or PSI. You may remember that private holders of Greek debt are going to get a 50% haircut or worse. You may also remember the major comment from the EU summit. "We will never do a PSI haircut again. That was a bad idea and it won't happen again." (paraphrased) Was this a signal to the banks so they would jump back into the sovereign debt markets financed with ECB money? Strange this situation is not being reported in the mainstream press.

Fitch was in a downgrade mood and they also downgraded BAC, BCS, BNP Paribas, GS, CS, DB and Societe Generale. All finished marginally lower for the day.

On the economic front the Consumer Price Index (CPI) for November showed inflation at the consumer level was zero for the month. This compares to a decline of -0.1% in the prior month and +0.3%, +0.4% and +0.5% in Sep, Aug and July. However, the core CPI rose at a +0.2% pace. On a year over year basis the core rate is up +2.2% but still within the range comfortable with the Fed. Energy prices declined slightly from the prior months but remains up +12.4% over the same period in 2010.

There was nothing notable about the CPI other than suggesting the slump in Europe is migrating to the U.S. and reducing demand and therefore prices. The drop in crude prices last week should help push consumer prices lower over the coming months.

CPI Chart

The economic calendar for next week is also light. The only material report is the Chicago Fed Index and that is still not high on the importance scale. The consumer sentiment surged in the last report and analysts are targeting much lower numbers on thoughts that was a data error. Estimates are a full 10 points below the last reading.

Economic Calendar

In stock news it was all Zynga (ZNGA). Unfortunately the IPO pop was a flop. Shares were priced at $10 and opened over $11 but fell almost immediately to as low as $9 before closing at $9.50 and a loss of -5%. Zynga may have been the victim of IPO overload. Last week was the most active week for IPOs since 2007. Nobody had any specific problems with Zynga but the 100 million share offering put a lot of shares into the market on a week that saw a -3% market decline. Zynga has a valid business model with earnings of $31 million over the last nine months with revenue of $829 million. High marketing costs of $122 million are typical for a rapidly expanding business. Zynga has 54 million users.

Eighteen out of the last 30 Internet stock IPOs are trading below their issue price. I believe this is related to the weak market rather than weak IPO stocks. Granted some of them are dogs but some are not. After a rocky start Groupon (GRPN) is starting to find buyers and the stock has rebounded +$10 from its $15 low.

Research in Motion was the second most discussed (cussed) stock of the day. RIMM shares fell -11% after a disappointing earnings report Thursday night. The blogosphere is alive with calls for the company to be broken up. One investor representing better than 10% of the outstanding shares and hoping to get to 20% believes splitting out the handset business and concentrating on the communications service business and enterprise platform could free RIMM to even bigger things. He suggested RIMM should quit competing with Android and offer the Blackberry software for the Android platform as well. The Blackberry platform is much more focused on businesses and could allow corporations to integrate the multiple devices used by consumers into one secure platform. I am not holding my breath.

RIMM's co-CEOs, Jim Balsille and Mike Lazaridis, announced they are cutting their own annual salaries to $1 each. Many investors probably thought that was still too much with the stock of this former high flyer down -75% this year. According to Yahoo Finance they have recently exercised $3.63 million in stock options. That may be chicken feed in the corporate world but it was still a slap in the face for RIMM investors. There may be a dual lynching in Ontario very soon. The bigger event was the delay of the new Blackberry version from Q1 to Q4. That is a lifetime in the smartphone world. Apple could have two new iPhones out in that same period. Turn out the lights, the party is over unless they find new management soon and make some drastic changes.

RIMM Chart

MagicJack VocalTec Ltd (CALL) said it canceled a planned stock offering because the devices were selling so fast they no longer needed to raise outside money. The company said it sold 365,000 MagicJack Plus devices over the last 30 days. The new device is no longer $14.95 but $69.95 and is expected to raise $50 million in cash over the next month. The old device plugged into a PC. The new device works by plugging it into any Internet outlet like a router or switch. The company said instead of going ahead with its secondary offering it was cancelling the offering and resuming the stock buyback program while the stock was so "attractively" priced.

Does anyone else think this sounds like a cleverly designed advertising campaign? On Dec 1st they announced a 2:1 stock split for Dec-16th. On Dec 9th they announced they would offer 1.5 million ordinary shares, 300,000 of those would be sold by existing shareholders. Seven days later they cancel the offering because of a sudden surge in sales. Now they are buying back shares because the stock crashed from $26 to $20 on the secondary offering announcement. Was this a serious miscalculation by management or a cleverly designed advertising campaign to get the name MagicJack in the news? As ugly as their chart is they needed something to produce a trend.

CALL Chart

Sears Holdings (SHLD) is going to become the world's largest seller of printed books in January. Yes, you read that headline correctly. Sears will begin listing online in January the inventory from all the Alibris sellers. Alibris is a portal through which independent authors, small book sellers and rare book vendors all list their publications. They have portals in countries around the world and a consolidated shipping service. Obviously they are not going to give Amazon or Barnes & Noble a lot of competition but at least it is one more step out of their humdrum routine existence. Unfortunately it did not help their stock price with a -8% decline on Friday.

Sears Chart

Saturday Dec 17th is the second busiest shopping day of the year. Fortunately for terminal procrastinators like myself there is still a week left to mull over my potential purchases. My wife discovered Amazon this year and bought nearly all her gifts without leaving the house. I am in the doghouse because I never told her I had an Amazon Prime account and two day shipping was free. She compensated for that omission by seriously abusing that feature this year.

Unfortunately there are not enough spouses shopping on Amazon this year to rejuvenate the stock price. It remains stuck to support at $180 on multiple worries. Once of those worries comes around every December when those Prime accounts get used to the maximum and Amazon has to eat millions in shipping costs. Amazon charges that off to marketing while other retailers charge it to cost of sales. That helps Amazon's profit margin calculations.

The second problem this year is the explosion of Kindle Fire tablets. Amazon does not release numbers sold but analysts are predicting between 6-7 million in Q4. Amazon claims it is the number one seller on the website. At $199 each and less than the cost of manufacture many analysts are expecting Amazon to take a huge hit on Q4 profits. They will make up for it in the long run because the Kindle is the greatest sales tool Amazon has ever created. Each tablet will be responsible for dozens if not hundreds of downloaded books and purchases from the Amazon site of non-book items. What else could Amazon ask for but a direct website link forever to every Kindle Fire sold? I just wish they could split their stock before the next rally.

Amazon Chart

The broader market managed to make it two days without a major decline but still ended down -3% for the week. The S&P bounced off resistance at 1225 on Thursday and then broke through that level to hit 1231 on Friday but could not hold its gains. The S&P closed at 1219 and a minor four point gain for the day. Support at 1215 has held for two days but there was no serious test.

The nine billion shares of volume on Friday were either expiration activity or index rebalancing. There was minimal activity otherwise. Traders were in the malls not the market. I am afraid that is going to be the pattern for next week as well. Traders have lost the incentive to be in the market. Quite a few hedge funds and professional traders close their books after the December option expiration until after the holidays.

While everyone is hoping for a Santa Claus rally the money flows are suggesting Santa may be AWOL. According to new data from EPFR, global equity funds saw outflows of $9.5 billion in the week ended Dec 14th. That was the fourth consecutive week of redemptions. Bond funds saw inflows of $1.1 billion and money markets $3.2 billion. Money market funds now have 12 consecutive weeks of positive inflows. That is the longest streak since Q4-2008.

EPFR said there was positive inflows of cash to equity funds on the Friday the EU summit plan was announced. However, four days later when everyone began trashing the plan to make a new plan, equity funds saw outflows of nearly $7 billion in one day. That was the biggest one day outflow since August. Emerging market funds have seen outflows of $38.8 billion year to date on worries China is in for a hard landing. This time last year they were sitting on $91 billion in inflows.

I believe the volatility over the last six months has scared investors out of the market. Triple digit ranges on the Dow are an everyday occurrence and quite often it is triple digits in both directions. Most retail investors are probably nursing losing positions and contemplating closing more than usual before year end to capture the tax deductions.

We may not see investors come back to the market until January. Everyone wants to see a Santa Rally but few are willing or convicted enough to make it happen. Opening spikes the last two days were instantly sold. The buyers are notably absent but it was an expiration week. This coming week will be the key.

Resistance on the S&P is still 1225 followed by downtrend resistance at 1250 and the 200-day at 1260. Support is 1215, maybe 1200 as a round number, 1185 and 1160. With a growing number of analysts talking up 1160 it may keep buyers on the sidelines in hopes of getting a bigger dip.

The offset to the bearish sentiment will be the end of year retirement contributions and investment of year-end bonuses. That typically produces an end of December early January bounce. However, I fear for January. Once the year is over and managed funds are able to revert to cash we may see some move to the sidelines until the European crisis cools and China's economic picture becomes clear. The PMI for China was in contraction territory last week for the fifth consecutive month. They are still correcting and were it not for Europe grabbing the headlines every day the market would be a lot more worried about China.

S&P Chart

The Dow was the only major index to close negative thanks to IBM -$3.91 (-32 Dow points) and UTX -$1.55 (-12 Dow points). IBM said it was acquiring software vendor Emptoris for an undisclosed amount.

The Dow is not normally moving average sensitive because of its narrow 30 stock construction but it has come to a dead stop on the support of the 50-day average (11,807) for the last three trading sessions. The 200-day average (11,938) has been the limiting factor on the upside. The reason these averages are asserting themselves now is the thin volume and relative uncertainty about market direction.

The Dow is still mildly bullish until it breaks stronger support at 11,600 and a rebound over 12,200 would be strongly bullish.

Dow Chart

The Nasdaq is in a rut. It has traded in the same basic range for the last three days centered around 2550. The 100-day average (2565) is now solid resistance on the Nasdaq. The Nasdaq was knocked lower on Tue/Wed when Apple declined -$15, Priceline -$40 and Google -$20. Techs were hit hard on those two days and buyers have not returned. However, it was expiration. Monday starts a new week.

Nasdaq Chart

The Russell is holding above critical support and performing slightly better than the large cap indexes. This is probably related to the January effect where fund managers buy small caps for the coming year. Small caps typically rise in late December.

Russell 2000 Chart

The Dow transports have the best chart of all. The falling oil prices are stimulating the airlines and taking the pressures off the trucking sector. The transports have strong resistance at the 200-day at 4975 and a break over that level would be strongly bullish for the market.

Dow Transport Chart

I am neutral for next week. Belgium was downgraded Friday night but it was expected. That could increase the growing expectations for further downgrades of European nations. On the plus side expiration week is over and the institutional traders have left the building. This week is normally bullish as retail traders invest their bonuses and retirement contributions are put to work.

Normally bullish is like saying it normally snows in January. It almost always snows but that does not mean there may be weeks of sunshine. Normally bullish does not mean always bullish. Market sentiment has been damaged by Europe and by numerous earnings warnings. That means the rest of the year is a tossup. Volume should become increasingly light and that favors historical trends.

I would continue to suggest if you must be in the market to limit position size and quantity and exit early.

 

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Jim Brown

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You cannot bring about prosperity by discouraging thrift.
You cannot strengthen the weak by weakening the strong.
You cannot help little men by tearing down big men.
You cannot lift the wage earner by pulling down the wage payer.
You cannot help the poor by destroying the rich.
You cannot establish sound security on borrowed money.
You cannot further the brotherhood of man by inciting class hatred.
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You cannot build character and courage by destroying men's initiative and independence.
You cannot help men permanently by doing for them what they can and should do for themselves.


Commonly attributed to Abraham Lincoln but actually penned by John Henry Boetcker in 1916.


Index Wrap

Turned Back at Resistance Trendlines

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The S&P 500 (SPX) and Nasdaq Composite (COMP) had gotten to resistance implied by their weekly chart down trendlines in this past week and it was sharply downhill on Mon-Tues. Moreover, the slight 3-day rebound of Wednesday to Friday traced out a bear flag, so it looks quite possible that there there's another shot down coming; possibly down to a test of the longer-term up trendlines you'll see below. While I was seeing a daily chart with bullish potential last week in the 'lead' SPX index (it still exists), going back to the weekly chart confirmed the still present downtrend pattern seen on this longer-term basis. The up and down trendlines are narrowing in as in a triangle. Support and resistance are coming closer together.

A weekly (Friday) Close above 1260 in SPX suggests a bullish breakout, whereas a Friday Close below 1185 suggests a bearish breakdown. I would rate the weekly chart as mixed to bearish but hinging mostly on a move above or below the converging trendlines. A weekly Close above 1260 suggests a more bullish technical outlook, including a possible test of tough SPX resistance in the 1300 area. Conversely, a Friday close below 1185 suggests further weakness such as to the 1100 area again.

In the Nasdaq Composite (COMP), there is a similar triangular pattern apparent on its weekly chart although unlike the S&P the Composite didn't hit resistance implied by its weekly down trendline in the prior week. Still the pattern is the same and it gives a kind of 'benchmark' to the key resistance and key support points.

A weekly Close above 2685 is needed to get bullish again technically with the COMP index and the key tech stocks; as always, we'd have to see that this more buoyant trend continued into the week following. (This past week COMP only a third of the time above 2600 at all.) Conversely, a Friday close below 2540 in the coming week suggests a bearish pull to still lower levels.

Further comments on the individual indexes are seen below with the relevant charts.

INDUSTRY GROUP INDEXES:

Relevant as a bellwether for the tech heavy Nasdaq, the Philly Semiconductor Index (SOX) hasn't yet broken its key support either at a pivotal up trendline; although the 'break down' point so to speak is close at 345; SOX finished the week at 352. The Gold & Silver stocks index (XAU) continued its downward trend and would break some key support at 173; XAU finished the week at 183.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart has turned mixed with its fall to below the low end of its prior price range. A 'problem' technically for making a bullish case was the inability for SPX to break out above resistance implied by its down trendline. However, the consolidation after the last strong rally was tight and it looked like the index could bust out higher.

The Tuesday decline to a weak close AT the 21-day moving average was a warning of further weakness to come; in a still strong rally phase, expect a BOUNCE from from the Average. The little rebound (bear flag) pattern of Wed to Friday looks like more of short-covering rally that has petered out already and suggests further weakness ahead.

A strong bearish influence for occurs usually on an index break below the 21-day moving average. While SPX has struggled back to close in on the average at 1220, it's a still-bearish pattern.

Key support is at the lower up trendline, currently intersecting at 1190; pivotal next support in the 1160-1150 area. Key resistance is at the down trendline at 1250; next resistance 1280 to 1290.

Bullish sentiment as seen above has fallen substantially this past week. The most recent daily readings fell enough to get the 5-day moving average almost to bullish territory in a 'contrary opinion' sense. The theory of contrary opinion can't be 'proven' but its pretty much always true in my years of tracking this, that tradable lows come in a way that can often be measured with certain call/put trade volume ratio extremes.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart failed to achieve the bullish upside breakout that I thought was possible. The Tuesday break to well under the down trendline and then to under the 21-day average was demonstrating weakness. Showing greater relative strength than SPX, OEX has gotten back above this key moving average. Good by itself, but the recent rebound pattern looks like a bear flag so I'm anticipating another shot down.

A daily close back above 560 would be a bullish plus, but the key upside test comes in again at the down trendline, currently intersecting at 567; resistance then extends to 570. Only a close above 570 would suggest a move to resistance at 580 to 590.

Key support comes in at the trendline and moving average and I've pegged support a bit lower at 550. A close below this past week's Closing low at 550.3 would suggest another down leg was happening; next support comes in at 540-538. A move to the 520 area would suggest an oversold extreme; good place to exit puts.

Last week I was "anticipating a move higher" and this week I'm anticipating a move lower. Flip-flopping around anyone!? This has been a very difficult period for traders and forecasters. At times like these I can almost believe the 'random walk' crowd as regards the unpredictability of stock prices. I said 'almost' since I've made money and have especially stayed out of some serious trouble over the years using technical analysis.

DOW 30 (INDU) AVERAGE; DAILY CHART:

With the retreat from the 12200 area yet again, the Dow 30 (INDU) has again established the high end of a well-defined trading range. I look for support in the 11800 area; key support. A break of 11800 would suggest that 11600 will be tested. 11400 begins major support.

Near resistance is at 12000, then at 12200 of course. 12400 is where likely major resistance begins.

The chart turns definitely bearish with a fall under 11800 level. You could make the case that a rally back above 12000 is possible and an eventual move above 12200, but not anytime soon the way the pattern has unfolded especially with the break below 12000 of this past week.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Tuesday rally failure was the key to seeing that the downward pull on stocks was stronger than money flows in could take the tech-heavy COMP higher. A strong bearish influence for me tends to be always on an index break below the 21-day moving average and look to exit bullish positions.

Note how Friday resistance came on the rebound to the 21-day average; what was support had become resistance. The 21-day average is always my 'centered' moving average for my upper and lower envelope lines.

Key support at the trendline is at 2500 currently. Next support is 2450; fairly strong support comes in around 2400.

Bullish sentiment fell significantly lower this past week and my 'CPRATIO' model is almost in bullish territory on a 5-day moving average basis; see the CPRATIO indicator portion of the COMP chart below. If this sentiment trend continues and it looks likely if there's a move to the 2450 area, or possibly, 2400; this kind of extreme should mark a tradable bottom.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) chart which was "marginally bullish" in my comments of last week, has turned bearish period given the sharp retreat from its down trendline; when the index suddenly broke well under what had been a tight and limited consolidation after the powerful move from 2200 to above 2300 and when we had the pattern of lower daily highs for long enough, finally came the news that broke the bulls back. The 'set up' to it was showing on the chart.

2300 remains a key resistance. Prices look headed lower first as 2000 looks like a next potential target.

Below 2200 NDX suggests further downside potential to 2150, perhaps back to the 2100 area. Conversely, a move lasting more than a day back above the down trendline (currently intersecting at 2308) suggests upside to 2350 or higher; major resistance begins in the 2400 area.

A move in Apple (AAPL) to above 390 and climbing would do wonders for NDX; absent that its likely to continue to struggle.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) chart turned bearish and it looks like the next move is DOWN. A further decisive downside break would be to below the up trendline at 55; at that point downside potential is suggested to 54 or 53 again. 52 would be an 'extreme' low and more likely than not a buy for a bounce.

Key resistance is at 55.5 currently, extending to 56. A couple of closes above 56 would be mildly bullish; more so it there was a decisive upside penetration of the down trendline, currently intersecting at 56.6. Above 57 resistance is apparent at and above 58; major resistance is seen around 59.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) actually looks like it is in recovery mode after a bounce from support at the trendline. Can RUT buck the downward pressures suggested by the S&P and Nasdaq indices? Seem doubtful. We have to see how it goes.

Above 700 RUT has bullish potential, whereas below 700, 680 looks like a next objective and maybe lower from there. Conversely, above 740 RUT looks to have some further upside such as to test the 750-752 area; major resistance begins around 770.



GOOD TRADING SUCCESS!


New Option Plays

Restaurants & Luxury Goods

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

OpenTable, Inc. - OPEN - close: 40.15 change: +1.39

Stop Loss: 38.40
Target(s): 48.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of OPEN could see a short squeeze soon. This stock saw a rocket-like rise higher from early 2010 near $25 to hit $118 in early 2011. Now after a painful decline from those highs it looks like OPEN is on the verge of a breakout. The stock has consistently failed at its 30 or 50-dma for the last eight months. Now the stock has rallied back to resistance near $40 and its 50-dma.

A breakout could produce a short squeeze. The most recent data listed short interest at 53% of the very small 16.2 million-share float. I am suggesting we buy calls if OPEN trades at $41.55. This can be a volatile stock so we'll use a wide stop loss at $38.40. Our target is the simple 100-dma but we'll tentatively put our exit target at $48.50. We want to keep our position size small to limit our risk.

Trigger @ 41.55 (small positions)

- Suggested Positions -

buy the 2012Jan $45 call (OPEN1221A45) ask $1.20

Annotated Chart:

Entry on December xx at $ xx.xx
Earnings Date 02/07/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on December 17, 2011


NEW DIRECTIONAL PUT PLAYS

Coach, Inc. - COH - close: 57.59 change: -1.22

Stop Loss: 60.10
Target(s): 51.00
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Coach manufactures and sells a variety of luxury goods. It looks like investors are turning cautious on the stock. Shares just broke down below key support in the $60-58 zone and its 100-dma and 200-dma. I am suggesting bearish put positions at the open on Monday with a stop loss at $60.10. Our multi-week target is the $51.00 level. FYI: The Point & Figure chart for COH is bearish with a $52 target but this could grow.

- Suggested Positions -

buy the 2012Jan $55 PUT (COH1221M55) ask $1.55

Annotated Chart:

Entry on December xx at $ xx.xx
Earnings Date 01/25/12 (unconfirmed)
Average Daily Volume = 2.9 million
Listed on December 17, 2011



In Play Updates and Reviews

Seeing Red in December

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. stock market is now negative for December with this past week's decline. Stocks did pare their losses with the Thursday-Friday oversold bounce but gains were muted on Friday.

-James

Current Portfolio:


CALL Play Updates

Boeing Co. - BA - close: 71.01 change: +0.40

Stop Loss: 69.25
Target(s): 77.00
Current Option Gain/Loss: -34.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/17 update: BA gain on Friday managed to outpace the S&P 500 but shares remain stuck in their trading range. The stock has been consolidating sideways in the $69.70-72.50 zone for over two weeks. Readers can use a breakout past $72.50 as a new entry point to buy calls.

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.

chart:

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


Phillip Morris Intl. - PM - close: 75.60 change: -0.32

Stop Loss: 74.25
Target(s): 78.50
Current Option Gain/Loss: + 38.3%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
12/17 update: PM lost 32 cents on Friday after the early morning rally failed near its highs for the week. This stock has also been consolidating sideways for over two weeks. If PM can produce a breakout past resistance at $77.00 it could see a run into the low $80s. I am adjusting our exit target from $78.50 to $79.75. We will raise our stop loss up to $74.25.

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

12/17 new stop loss @ 74.25
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: 103.05 change: +0.78

Stop Loss: 98.75
Target(s): 109.50
Current Option Gain/Loss: -19.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/17 update: Wednesday's bounce off support near $100.00 continues albeit slowly. Shares are essentially consolidating sideways in the $100-105 zone. Readers can choose to try and buy dips near $100 or wait for a breakout past $105. If you choose the latter entry point you'll want to adjust your stop loss significantly higher.

FYI: The short interest has risen from 20% to 22% of the float.

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 22% 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


Varian Medical Sys. - VAR - close: 63.19 change: -0.37

Stop Loss: 62.49
Target(s): 69.75
Current Option Gain/Loss: -49.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/17 update: The trading action in VAR on Friday was a bit bearish. Shares are still hovering near the bottom of its $63-65 trading range. I am cautious on this stock and not suggesting new positions at this time.

- Suggested Positions -

Long JAN $65 call (VAR1221A65) entry $2.65

12/14/11 adjust stop loss to $62.49

chart:

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

AGCO Corp. - AGCO - close: 40.31 change: -0.36

Stop Loss: 42.75
Target(s): 35.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
12/17 update: The Friday morning rally in AGCO failed under its 50-dma. The stock continued to underperform the market with a -0.8% decline. Yet shares have not yet broken the $40.00 mark.

More aggressive traders may want to open bearish positions now. I want to see AGCO trade under what could be round-number support at $40.00. I am listing a trigger to buy puts at $39.90. You could argue that AGCO is already short-term oversold so we'll try and limit our risk by keeping position size small. We'll start with a stop loss at $42.75, just above Wednesday's high. Our target is $35.25.

Trigger @ 39.90

- Suggested Positions -

buy the Jan $40 PUT (AGCO1221M40)

chart:

Entry on December xx at $ xx.xx
Earnings Date 02/07/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on December 15, 2011


BMC Software Inc. - BMC - close: 33.17 change: -0.39

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

Comments:
12/17 update: BMC also saw its early morning Friday rally fail. Yet the stock is still trading above support near $33.00. I don't see any changes from my prior comments.

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)

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


Check Point Software - CHKP - close: 54.18 change: +1.46

Stop Loss: 55.05
Target(s): 48.00
Current Option Gain/Loss: -50.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/17 update: Hmm... Friday was not a good day for the bears. The reversal higher that appears to have started on Wednesday was gaining steam on Friday. CHKP managed to breakout over one trendline of lower highs. The stock remains under its simple 200-dma and additional bearish resistance. If the rally continues on Monday we could see CHKP hit our stop loss at $55.05. On the other hand if this rally fades, then a failure at the 200-dma could be used as a new bearish entry point.

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

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


Fluor Corp. - FLR - close: 48.09 change: -0.18

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:
12/17 update: Friday's session looks a lot like Thursday with the gap open rally fading by lunchtime. FLR has been able to find short-term support at the $48.00 level this week. A breakdown could signal a drop toward the October lows. I would hesitate to buy puts with FLR sitting on short-term support.

We have our stop loss at $52.05. More conservative traders may want to adjust theirs down toward $51 or $50 instead.

Earlier Comments:
We want to keep our position size small because FLR is arguably already oversold 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

chart:

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: 18.35 change: -0.25

Stop Loss: 20.55
Target(s): 16.75
Current Option Gain/Loss: + 24.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/17 update: Bearish analyst comments on JNPR helped the stock underperform on Friday. Shares lost -1.3% but failed to hit new lows for the week. I am concerned that JNPR is very short-term oversold here. Readers may want to go ahead and take profits early now. I am not suggesting new positions at this time.

(small positions) - Suggested Positions -

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

12/17/11 readers may want to take profits now. JNPR looks short-term oversold
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

chart:

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: 68.14 change: -0.27

Stop Loss: 71.05
Target(s): 60.50
Current Option Gain/Loss: -21.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/17 update: MON's oversold bounce failed to see much follow through on Friday and shares underperformed with a -0.3% decline. Shares are still trading under the trendline of lower highs and resistance near $70 and its 200-dma. I would consider new positions here or you could wait for a new relative low (67.00).

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

chart:

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: 121.59 change: +0.19

Stop Loss: 125.55
Target(s): 120.50
Current Option Gain/Loss: + 7.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/17 update: The SPY tagged a new low for the week early Friday afternoon but pared its losses to inch back into positive territory. After a -3% decline for the week you might argue that stocks are a bit oversold but the path of least resistance remains lower.

I am not suggesting new positions at this time but we are adjusting our stop loss down to $125.55. More conservative traders may want to move their stop closer to $124 instead. Our exit target is $120.50 but you may want to aim lower.

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

- Suggested Positions -

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

12/17/11 new stop loss @ 125.55
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: 43.84 change: -0.31

Stop Loss: 46.15
Target(s): 42.75
Current Option Gain/Loss: Dec$45p: +111.1% & Jan$45P: +50.0%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
12/17 update: Friday's early morning pop failed at $44.50 and TMO spent the rest of the day drifting lower. This failure is good news since Thursday's session had the potential for a bullish reversal higher. TMO is arguably oversold here so we're not suggesting new positions. Readers might want to lower their stops.

- Suggested Positions -

(December position closed 12/15/11)
DEC $45 put (TMO1117X45) Entry $0.45 exit $0.95 (+111.1%)

- or -

Long JAN $45 put (TMO1221M45) Entry $1.40

12/15/11 planned exit for Dec. $45 put. bid @ 0.95 (+111.1%)
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

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: 60.12 change: -0.79

Stop Loss: 64.25
Target(s): 56.00
Current Option Gain/Loss: Dec$60p: -12.5% & Jan$60p: + 2.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/17 update: Friday's move was good news for the bears. WPI's oversold bounce failed at the 10-dma. Shares were left hovering near round-number support at $60.00. It's possible that WPI could find support at the August low ($58.84) but we're aiming for a drop to $56.00 instead.

Currently we have a stop above $64.00 near its simple 200-dma.

- Suggested Positions -

(December position closed 12/15/11)
DEC $60 PUT (WPI1117X60) Entry $0.80 exit $0.70 (-12.5%)

- or -

Long JAN $60 PUT (WPI1221M60) Entry $2.00

12/15/11 planned exit for Dec. $60 puts, bid $0.70 (-12.5%)
12/14/11 Prepare to exit Dec. $60 puts at the open tomorrow, current bid on these puts is $0.65

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


CLOSED Market Neutral Plays

iShares Russell 2000 ETF - IWM - close: 72.26 change: +0.56

Stop Loss: n/a
Target(s): TBD
Current Option Gain/Loss: -67.6%
Time Frame: up to December options expiration
New Positions: Must Be Opened on Thursday 12/08

Comments:
12/17 update: Thursday's bounce continued into Friday and the small cap indices and ETFs were some of the better performers. That was unfortunate for our December strangle trade. It was our plan to exit at the closing bell on Friday.

- Market Neutral Strangle - cost: 2.04 value: 0.66 (-67.6%)

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 $0.66/0.78

12/15/11 prepare to exit at the closing bell tomorrow

chart:

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