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Daily Newsletter, Saturday, 12/24/2011

Table of Contents

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

Market Wrap

Santa Melt Up

by Jim Brown

Click here to email Jim Brown

A lack of volume and nice timing on a buy program combined to push the Dow to 12,294 and the S&P exactly to resistance at 1265.

Market Statistics

Volume died after 12:00 on Friday and barely 3.7 billion shares traded for the entire day. Nothing happened after lunch until about 3:40 when a buy program hit the tape and added about 50 points to the Dow. It was strange someone would purposely launch a buy program going into the close on almost nonexistent volume but somebody did it. Perhaps it was somebody short and throwing in the towel to avoid gap up risk on Monday.

The Dow managed to close positive for four consecutive days but a couple of those were in doubt until the end. The melt up rally came on positive economics and a lack of bad news from Europe. Traders were also positioning themselves for the historical Santa Claus rally. The rally is talked about constantly and every blip for the entire month of December is sometimes attributed to the Santa rally. Unfortunately most reporters are wrong.

The official Santa Claus rally period is the last five trading days of the year plus the first two days of the New Year. The Stock Trader's Almanac has tracked this period since 1969 and the average S&P gain is +1.6%. Unfortunately the markets rebounded +3.5% last week so that puts further gains in doubt for next week.

The advance put the Dow up +6.2% for the year and the S&P roughly flat with only a minor +0.61% gain. There was a lot of pain in 2011 to only end the year flat. Sentiment would improve significantly if the Dow could add another +500 points and close at the highs for the year.

Friday's economics were mostly positive and did not give traders any reason to sell ahead of Santa. The Durable Goods for November rose +3.8% compared to -0.7% in October and -1.4% decline in September. Estimates were for a gain of +2.0%. Fortunately most investors only see the headline number and did not look under the hood.

Orders ex-aircraft actually rose only +0.3%. Core capital orders declined -1.2% and shipments subtracted another -1%. The impact from aircraft orders was dramatic because aircraft orders rose +73.3% and mostly from Boeing.

Backorders rose +1.3% and the 11th monthly increase. Analysts believe business investment over the next year will slow as pent up demand weakens. Orders took a big jump after the recession ended and that demand is fading.

The durable goods orders will be a big plus for Q4 GDP which is now being quoted between +3.5% and 4.0% growth.

Personal Income for November rose by +0.1%. That was a disappointment compared to the +0.4% in October and the +0.2% estimates. Consumer spending rose by +0.2%. The savings rate declined slightly to 3.5% from 3.6%. With YTD inflation at the lowest rate since April (+2.5%) consumers are catching a break from the low increases in income.

New home sales in November increased by +1.6% to an annualized pace of 315,000. Sales are up over the same period in 2010 by +9.8%. Of specific importance was the drop in months of inventory on hand to six months. That is the lowest inventory level since 2006. Prices declined by -6% to an average of $214,600.

The headline number was better than expected and caused a minor uptick in market sentiment but the homebuilders lost ground on the overall slow rate of sales. Even if December is a blowout month for sales the total for the year could be at the lowest rate since records were started in 1963. Builders are selling homes but they are doing it by not building and forcing buyers to select from existing inventory. However we did see starts and permits pick up in the last report so they do appear to be planning on having new inventory ready in the spring.

Overall the number of homes for sale has decreased by -20% from a year ago and is still trending lower. Despite record low mortgage rates the number of people who can qualify for a home continues to decline. It could be years before that metric reverses. There is also the overhang from Europe's uncertainty and the U.S. unemployment.

There is a long way to go to return to prior building levels and I doubt it will happen in this decade. Without the loose money lending it could be 7-10 years before consumers rebuild their credit, repossessions fall off their credit report and they can qualify for tight money loans again. Since recessions appear every 3-5 years that could be two recessions from now. Despite that gloomy prediction we are starting to see the sector improve slightly.

New Home Sales Chart

Next week will be another period of low volume and the economic calendar has some decent events that could move the market in light trading. The market is closed on Monday. Tuesday has Consumer Confidence and the Richmond Fed Manufacturing Survey. Neither should rock the market but unexpected surprises could produce moves.

The biggest event for the week is the Italian 3-year bond auction on Wednesday. Rates on the 10-year climbed back to the critical 7% level on Friday and that puts the spotlight on Wednesday's auction. Italy is trying to sell up to 8.5 billion euros in debt. In 2012 Italy has to sell a total of 440 billion euros of debt ($574 billion). Prime Minister Mario Monti was plugging the bonds on Friday saying "It is essential that Italians buy government bonds and treasury bills, whose yields are very high. We must trust ourselves." Good luck with that! Italians are joining other Europeans in withdrawing cash from banks. I seriously doubt they will be using that cash to buy government debt.

Thursday and Friday have the preliminary ISM reports ahead of the national ISM the first week in January. Chicago activity is expected to have declined due to parts shortages from the Thailand flood.

Economic Calendar

In stock news Yahoo (YHOO) said the board was exploring a plan to sell off its Asian assets in a complex deal valued at $17 billion. The deal would transfer Yahoo's 40% ownership in Alibaba back to that company. The 35% stake in Yahoo Japan would be sold to Japan's Softbank Corp. In order to avoid a serious tax bite the buyers would create new companies where they would deposit cash and some other "yet to be named" assets. They would then swap those companies to Yahoo in exchange for the Yahoo assets. That would make the deal tax free if done correctly. Yahoo is trying to structure a deal where it retains 15% of Alibaba.

Private equity firms TPG and Silver Lake have each made separate proposals to Yahoo that would involve those companies buying a minority stake in Yahoo. Those proposals have been fiercely opposed by several major shareholders of Yahoo. Essentially the PE firms would acquire the stake and they leverage up Yahoo and have the company buy back the rest of its stock. This is favored by Jerry Yang because he believes the leveraged buyout would return him to control.

Yahoo shares spiked on the news on Thursday and again at the close on Friday. At Friday's close Yahoo was valued at $20 billion. If $17 billion of that is the Asian assets then the LBO guys could be looking to acquire the U.S. operations on the cheap. I see a shareholder lawsuit ahead.

Yahoo Chart

Shutterfly (SFLY) fell -5% after warning on Q4 earnings. Shutterfly now sees Q4 revenue ranging from $259-$264 million, down from the prior forecast of $270-$275 million. The EBITDA projections fell to a range of $84-$88 million from a prior range of $96-$101 million. CEO Jeffrey Household said, "The uncertain economic environment combined with heavy competitor discounting throughout the peak holiday shopping season, contributed to the shortfalls." Shares declined but failed to give back all of Thursday's gains.

Shutterfly Chart

United Continental (UAL) was weak after analysts cut profit estimates citing weaker than expected revenue. UAL said in a SEC filing on Thursday that it expects consolidated passenger revenue per available seat mile (revpar) to rise from 8.5% to 9.5% in Q4. Analysts were expecting something in the double digits. Analysts said concerns about a recession in Europe were depressing estimates. Dahlman Rose cut Q4 profit estimates to 25-cents from 50-cents to account for lower capacity and traffic. The analyst did say they expected UAL to benefit from the AMR bankruptcy. Ticonderoga Securities cut estimates to 16-cents from 43-cents. The average consensus prior to Friday was 46-cents. UAL dropped sharply on the news but rebounded to close nearly flat.

Delta said last week it was cutting capacity to Europe by 7% due to declining business activity there.

UAL Chart

Mead Johnson (MJN) shares took a serious hit after several other chains announced they were removing the Enfamil Newborn formula from store shelves. A 10-day old Missouri newborn died of a rare bacterial infection that may have been linked to Enfamil. The lot number is ZP1K7G. Wal-Mart, Supervalu, Walgreens, Kroger and Safeway said they have removed the 12.5 ounce cans of that lot. Goldman lowered estimates and price targets for MJN and reiterated a neutral rating.

The source of the bacteria has not been located and so far samples of the formula have tested negative. However, the results of the key tests from formula in the infant's home have not been completed.

Mead Johnson Chart

Rambus rallied +12% on Friday after they announced a patent license agreement with Broadcom (BRCM). The agreement covers the use of Rambus patented innovations in a broad range of products offered by Broadcom. The +12% rally was slim consolation to RMBS shareholders after the huge decline in November. Rambus lost a $4 billion patent suit in mid November against Micron and Hynix Semiconductor. RMBS shares dropped from $18 to $7 on the news.

Rambus Chart

The dollar has been flat for the last three days and that has allowed the commodities to flat line as well. Silver closed at $29.10, gold $1,608 and copper $3.45. That is actually a rally for copper from $3.25 just over a week ago.

Crude oil has managed to rally over the last week to close just below $100 with resistance at $102. The positive economics are helping but this remains a security rally. Iran is in the news every day with some new threat. They are holding 10-days of war games in the Strait of Hormuz starting this weekend. Syria is shifting into massacre mode plus protests in Egypt, tribal fighting in Libya and riots in Nigeria. Massive bombings are now hitting Iraq nearly every day claiming hundreds of lives and disrupting the fragile peace. How can you expect international oil companies to completely renovate the oil fields with 25-50 people getting killed by terrorists every day? Global inventories are at multiyear lows for this time of year and U.S. inventories could decline next week to levels not seen since December 2008. If economic conditions continue to improve and China shows a new spark in activity we could see oil break through that $102 barrier. It is very close already and all we need is a little more in the way of headlines. Energy stocks are pretty close to the top of every list produced by analysts for 2012. On Friday one analyst called oil a "storehouse of wealth" that is being consumed faster than it is being found with no change in sight.

More than 30% of Americans are expected to travel this weekend. That is 92 million people using planes, trains and automobiles and all powered by crude products.

Crude Oil Chart

The risk to the Santa Claus rally will come from Europe. S&P, Moody's and Fitch have all warned of potential downgrades to European countries and banks. In this race for headlines you have to believe at least one of them will issue a press release soon with a wholesale set of downgrades. The only thing keeping them from doing it next week is because nobody is paying attention and they could find themselves in trouble for downgrading in a light volume week. That does not mean the threat of downgrades won't keep a lid on the market.

The stocks making new highs are not the normal stocks you would expect to rally in December. Some making new highs on Friday were WMT, MCD, KFT and MRK. I would call those defensive stocks and that suggests the market tone is still cautious and deservedly so.

Despite the defensive posture the Dow and S&P posted their best four day winning streak since mid September. The Dow closed at a new five month high and is apparently in breakout mode. The S&P rallied over downtrend resistance and the 200-day average and came to a dead stop on early December resistance at 1265. That is pretty much the last hurdle to cross before breaking out to new five month highs as well. That would require a close over 1285 and that is entirely possible next week. Unfortunately "possible" and "probable" are two different concepts.

Last week was a holiday sentiment week. The coming week will be a portfolio positioning week for any traders actually at work and that will be a very small number. This would be a good week for the Fed's Plunge Protection Team (PPT) to juice the equity markets with some key buying in the futures and make sure the S&P moves over 1285. The positive sentiment created by a market making new relative highs is enormous.

Without the Fed we could still see a continued melt up into yearend but I am very concerned about January. The new highs in defensive stocks and the comparative underperformance in the Nasdaq suggests managers are just passing time until the new year begins. If nothing spectacular has appeared in Europe or jobless claims start rising dramatically we could see managers fleeing back to cash.

Nobody wants to have a year like John Paulson in 2012. Paulson's Advantage Plus fund is down another -9% through Dec-16th to push losses for the year to 52%. The Paulson Advantage fund declined -6% pushing the total losses for the year to 36%. The average non Paulson fund was down -4.37% through November.

If a superstar like Paulson can lose that kind of money the rest of the fund community must be scared to death to put money at risk. That suggests we could see a mass exodus in January if we get more bad headlines out of Europe. The reverse of that situation could be a better than expected payroll report for December (Jan-6th) and another gain in the national ISM (Jan-3rd). If managers really believe the U.S. recovery is accelerating they might be willing to stick with the market a little longer.

Lastly, the horrible market volatility over the last six months may have shaken out the weak holders and managers with a longer term view may be willing to add to positions in January. There are numerous potential scenarios for January and next week will be the opening act.

A famous Wall Street saying goes like this. If Santa should fail to call, bears may come to Broad and Wall. Historically when there is no Santa Claus rally the next several months are negative. As a macro analyst I believe it is impossible to count up all the different events over the last year and those facing us today and then compare them "historically" to any other late December rally, BUT historical trends are trends for a reason. They tend to repeat often enough to become recognized. The Santa rally comes from managers investing year end retirement contributions and individuals putting their holiday bonuses to work. Bonuses this year have seen a significant haircut.

I think investors want to believe there are better times ahead and may be willing to put some money on the line in hopes they are right. Unfortunately hope is not a valid trading strategy. However, if you analyze the facts and then make an educated guess it is not called hope. It is called investing. Of course we all hope our investments work out well but that is after we intelligently weigh the facts and predicted the outcome.

I believe the facts are jumbled today. Europe is not going away although last week's ECB loan program made a significant dent in the liquidity problem. The proof will be in the Italian debt auction on Wednesday. A successful auction could go a long way towards improving European sentiment. A failed auction puts us right back in trouble again.

The U.S. is improving but at a snail's pace. Random economic reports still show unexpected declines while others are improving rapidly. We need ALL the reports to improve in order to increase investor confidence.

All of these individual data points are factored into the market. We are told the market looks six months into the future. Lately I sometimes think six days would be a stretch. Every new data point works to adjust that future outlook. That outlook today is still cloudy. There are signs of sunlight peeking through but visibility is still limited.

Numerous companies have warned on earnings and guidance. We are only three weeks from the start of the Q4 earnings cycle. We could see some additional warnings next week from companies hoping the holiday week will provide them limited exposure and they can escape the stock losses normally following a confession.

Bottom line, I would love to see the S&P move higher to a new five month high but I remain skeptical. Hopeful but skeptical. January has a bad record of unexpected declines for whatever reason. For that reason I would trade any Santa Claus rally but be prepared to exit quickly if the markets turn against us in January.

S&P Chart

The Dow broke over Nov/Dec resistance and closed at a new five month high at 12,294. In theory this is bullish confirmation of the rally and the breakout by the Dow transports is further evidence. Several Dow components are setting new highs and the Dow is only 519 points from a new high for the year. Adding +500 points in a holiday week on thin volume would be no small feat. If it did happen it would be headline news. I am not suggesting this will happen but I would be thrilled if it did.

Support is 12,200 followed by 12,000. The next major resistance level is 12,750.

Dow Chart

Dow Transport Chart

The Nasdaq is a serious negative for next week. The Nasdaq has been lagging the big cap indexes by a material amount. Granted this is related to the problems in Thailand but it is still relative to market health. The markets are supported by the three legged stool of techs, financials and energy. Techs are not participating and that leaves us with a short leg and an unstable stool.

The Nasdaq did move over initial resistance at 2600 but it needs to add another 100 points to bring it to the same level as the Dow. The weak Nasdaq chart is a caution flag for next week and into January.

Nasdaq Chart

If the Nasdaq is a caution flag the Russell is a storm warning. The Russell managed only a +0.3% gain on Friday of only 2.47 points. Clearly the blue chips are seeing money flows as they act as the safe deposit boxes for fund cash. Easy in, easy out and a fat dividend while they wait. The Russell small caps are the riskier assets and nobody wanted to play in that arena on Friday.

Resistance is 750 and again at 763 and neither were touched on Friday. The Santa Rally is typically in small cap stocks. Santa was a no-show on Friday despite the gains in the other indexes.

Russell Chart

The broader indexes are lagging the blue chips. The Wilshire 5000 (TMSI or $DWC) is about to test strong resistance at the 200-day (13,239) and the December highs at 13,250. The Dow, S&P and Dow Transports are already above their 200-day levels.

If the TMSI can move over 13,250 it would be bullish for market sentiment. Many traders use the Wilshire/TMSI as their key directional indicator because of its breadth. The Dow can distort the true picture because of its narrow 30 stock base. The TMSI is 5,000 stocks consisting of large and small and all sectors. This is the market.

Wilshire 5000 Chart

Another broad index is the NYSE Composite with 2700+ stocks. It is also lagging the blue chip indexes because of its breadth. It has multiple resistance levels to overcome before catching up to the Dow/S&P.

NYSE Composite Chart

The broader indexes are lagging because there is no conviction in the market. When fund managers and retail traders have faith in market direction they tend to buy the smaller stocks because the returns are greater. As you can tell by the Russell, Wilshire and NYSE the small caps in every flavor are lagging. That means no conviction.

Further evidence can be found in the energy sector. Crude rose intraday on Friday to a two week high of more than $100. However, of the 250 energy stocks I follow every day 75 of them were negative on Friday. With crude in rally mode you would expect the energy sector to follow. There is no conviction.

The lack of conviction is troubling. With no bad news from Europe and mostly positive economic news from the U.S. you would think investors would be adding equities to their portfolio. The volatility of the last six months has scared investors away from the market. They have been hammered with major drops so many times they are shell shocked and waiting in cash. Eventually something is going to wake them up and bring them back to equities. That could be a better than expected payroll report or a successful debt auction by Italy. More than likely it will be a collection of multiple events. That means time must pass while investors collect those events like S&H Green Stamps and once they have their confidence book filled they can start looking for bargains in the market.

Investors expect more volatility despite the VIX at five month lows. Fortunately investor memory is short once the market reaches new highs. Those new high headlines tend to erase large blocks of memory referring to prior losses. Once the markets hit new highs the hopium will begin to flow. I will revisit this line of thought in mid January and try to predict the rest of the quarter.

 

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"Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it."
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Index Wrap

S&P 'Breakout', Nasdaq Not or Not Yet

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The S&P indices plus the Dow broke out above key down trendlines with strong rallies this past week. The Nasdaq, in a switch, is lagging and hasn't or hasn't yet achieved similar upside breakouts above bearish (down) trendlines. The S&P reflected a good-sized rebound in the financial stocks; e.g., the Bank Sector Index (BIX), stocks represented in the S&P, experienced a strong rally.

The upside breakout in the S&P 500 (SPX) came as the Index pierced 1247. The Dow pierced technical resistance when the Average crossed above 12200.

The Nasdaq Composite and Nas 100 once again lagged the S&P in terms of lacking a similar upside breakout above its down trendlines. It looks like the S&P can pull the Nasdaq higher although the market is now 'overbought' on a short-term basis and a short-term correction could be coming up after the 3-day holiday weekend.

Pullbacks should be well supported. The "Santa Claus" rally has a fairly well established history and we've got an end of the quarter/end of the year 'window dressing' period over the upcoming final 4 trading days of 2011.

INDUSTRY GROUP INDEXES:

Relevant as a bellwether for the tech heavy Nasdaq, the Philly Semiconductor Index (SOX) held above its key up trendline at 346. SOX would achieve a bullish breakout above its down trendline at 378; SOX Friday Close: 368.

The Bank Sector Index (BIX) accelerated some to the upside as it moves up and away from a recent bounce from support implied by a key weekly up trendline. One reason for the S&P strength of this past week was a good-sized rally in BIX.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart has regained its bullish footing with the upside breakout above a well-defined and sizable symmetrical triangle. This type formation doesn't forecast a directional move until there's a decisive and sustained breakout above or below the converging upper and lower trendlines. SPX fell under its 21-day moving average which was mildly bearish. However, key technical support was at the up trendline and prices didn't touch or test this trendline before rallying.

The two (Thursday and Friday) Closes above the 200-day moving average was a definite bullish plus also. For the period seen on my SPX daily chart, there's only one prior instance of two consecutive days above this key longer-term moving average; a 3rd and 4th day above the 200-day average would give credence to a shift in momentum to the upside.

Pivotal next resistance is at the prior 1292 intraday high; the prior high Close was 1285 and the 1285-1292 price zone looks like it may get at least retested if not exceeded. For the current move, the 1300 area should offer tough resistance.

Key near support is at 1244, at the prior down trendline; what was resistance, once penetrated, 'becoming' subsequent support. The chart maintains a bullish pattern by holding above the upper trendline. I've highlighted next support at 1200; I'd also note intervening support at 1220, extending to around 1209. Major support comes in around 1160.

Bullish sentiment as seen above had fallen to a low, potentially bullish, level coming into the past week. I wrote last time that... "The most recent daily readings fell enough to get the 5-day moving average close to bullish territory in a 'contrary opinion' sense."

While my equities call to put daily volume ratio ALONE wasn't enough to take a plunge into calls, it was a definite bullish harbinger of the rally that followed. Bullish sentiment then rose fast, but my indicator isn't yet in high-bullish 'overbought' territory. If traders get increasingly bullish, as suggested by further upward spikes in the CPRATIO line, I'm likely to want to cash in some index calls.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX), like big brother SPX, turned bullish after the strong rebound that developed after OEX retraced 50% of the prior advance. The decisive upside penetration of the down trendline was a 'confirming' bullish chart development.

I anticipate at least a retest of the prior high at 580. It wouldn't be surprising to see a move to the 590 area, where I've highlighted potential next resistance. The 600 level is the start of fairly major resistance.

565 as near support is suggested by the prior down trendline and the chart maintains a bullish pattern above this line. Next support comes in around 554, extending to the 546 low of the recent downswing.

DOW 30 (INDU) AVERAGE; DAILY CHART:

I assessed the Dow 30 (INDU) chart last week as having established "the high end of a well-defined trading range." As it turns out, this prior line of resistance was just waiting to be exceeded. There was a dip below the 21 and 200-day moving averages, but only one Close below the 21-day average followed by a strong rally. When this advance took out the prior 4-day high, it was bullish game afoot.

I did note last week that a case could be made for a rally back above 12000 and an eventual move above 12200, but not anytime soon. Well, INDU realized sooner rather than later the bullish potential of what I counted week before last as 22 of the 30 stocks having potential for further gains.

Where to from here? Assuming the 12200 area holds as support on dips, there's potential to 12400 or higher, such as to 12600.

Below 12200, support should be found at 12000. 11800 is next support which I don't see being retested anytime soon. There's that 'time' forecast again!

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

Unlike the S&P, the Nasdaq Composite (COMP) hasn't achieved a bullish breakout above its down trendline, currently intersecting at 2615, or to above its prior (up) swing high at 2674; Closing high at the time, 2655. So, does the S&P pull COMP higher or does COMP act as a drag on further gains for SPX, OEX and INDU? If past experience when the two markets play leap frog is true, COMP gets pulled gradually higher; but the strongest market play is not so much in tech currently.

A bullish chart breakout starts with COMP piercing its down trendline, then retesting its 2674 intraday high, 2655 Closing high. Next resistance is 2700, extending up to the 2750 area.

Near support looks like 2580, extending to 2550-2545; next support and a key one is at COMP's up trendline, currently intersecting at 2517. Fairly major support begins at 2450.

Bullish sentiment numbers jumped this past week, with one day at or near a typical bullish 'extreme' as the market outlook continues to swing from bullish to bearish and back again.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) chart is near to what could be a bullish breakout above its down trendline. Current resistance implied by the bearish trendline is just under 2300, at 2291. The NDX close at its intraday high bodes well for a breakout above its resistance trendline and to back above its 200-day moving average. Next resistance levels are at 2335, then at 2365. 2400 begins fairly major resistance.

I mentioned before that Apple (AAPL) is a bellwether stock to watch for how NDX could fare. The fact that AAPL cleared resistance at 393-395 is a good omen for NDX at least getting up to the 2335 area and extending its recent gains. (The next challenge for Apple is at 410 resistance.)

NDX support is highlighted (by green up arrows) at 2250, then at its up trendline, currently intersecting at 2212. A decline to below 2250 at this juncture would suggest that NDX isn't going anywhere fast on the upside.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) chart exactly mirrors the underlying (NDX) index; only the levels are different of course. The upside 'breakout' point for QQQ (to above its down trendline and the 200-day moving average) is at 56.2. Next resistance then comes in substantially higher, at 57.4-57.6, with resistance extending to 58-58.2.

Support is highlighted at 55.4, then in the 54-54.1 area.

I anticipate QQQ working higher, but not if the stock can't clear its trendline on a Closing basis and for more than a day. The existing down trendline I'm working with has several instances of intraday highs that carried a bit above the resistance trendline but with no real traction and upside follow through.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) chart is still somewhat mixed. Bullish in that RUT rebounded from support implied by its previously broken down trendline and has made a new Closing high relative to peak levels seen on its rally into an early-December peak.

The chart is somewhat 'mixed' in that RUT hasn't yet pierced its prior 753 intraday high. Resistance then extends to the late-October highs at 769 on an intraday basis, 765 in terms of its prior Closing high in that period.

RUT has a 'measured move' objective to around 780, so I think the index has potential to go to a new high for the current move but not by a lot based on what I'm seeing currently. Still, it's better than a kick in the head as an options market maker I worked with used to say; quite often said in fact.



GOOD TRADING SUCCESS & HAPPY HOLIDAYS!


New Option Plays

Leading the Industry Higher

by James Brown

Click here to email James Brown

Editor's Note:

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

DLTR - shares have been consolidating sideways for three weeks. A breakout past resistance at $84.00 could be a bullish entry point.

UNP - the transportation sector is showing strength. A rally past $106.00 could be a bullish entry point on UNP. I am somewhat concerned that UNP might already be short-term overbought with a +8% move from the $98 area.

ALXN - traders can use a breakout past resistance near $70.00 as a new bullish entry point.

CERN - Friday's rally in CERN is a bullish breakout past its 200-dma and the three-month trend of lower highs. The stock could be changing directions.

FDX - the action in FDX looks a lot like the transportation average and the IYT. A rally past $86.00 could be a bullish entry point on FDX.

- James


NEW DIRECTIONAL CALL PLAYS

O'Reilly Automotive - ORLY - close: 81.55 change: +1.44

Stop Loss: 79.75
Target(s): 87.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Most of the major auto parts stocks have been strong performers in 2011. PBY seems to be the exception. ORLY probably has the strongest chart in the group. Shares are consistently building on their bullish trend of higher lows. Now ORLY is poised to breakout past resistance near $82.00 and hit new record highs.

I am suggesting at trigger to buy calls at $82.05. We'll use a stop loss at 79.75. Our multi-week target is $87.00 but the $85.00 level might be round-number resistance so we'll need to stay flexible. FYI: The Point & Figure chart for ORLY is bullish with a $103 target.

Trigger @ 82.05

- Suggested Positions -

buy the Jan $85 call (ORLY1221A85) ask $0.55

- or -

buy the Feb $85 call (ORLY1218B85) ask $1.60

Annotated Chart:

Entry on December xx at $ xx.xx
Earnings Date 02/15/12 (unconfirmed)
Average Daily Volume = 941 thousand
Listed on December 24, 2011



In Play Updates and Reviews

S&P 500 Sees A 200-dma Breakout

by James Brown

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Editor's Note:

Looks like Santa Claus did come this year with the S&P 500 up four days in a row. Friday saw a technical breakout past its simple 200-dma.

-James

Current Portfolio:


CALL Play Updates

The Andersons, Inc. - ANDE - close: 45.30 change: +0.41

Stop Loss: 42.45
Target(s): 49.75
Current Option Gain/Loss: - 9.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/24 update: ANDE finally broke out past resistance at the $45.00 level albeit on very low holiday volume. Shares did hit our trigger to buy calls at $45.25. I would still consider new positions today. FYI: The Point & Figure chart for ANDE is bullish with a $74 target.

(small positions) - Suggested Positions -

Long Jan $45 call (ANDE1221A45) entry $1.60
(readers might want to consider buying February calls instead)

12/23/11 triggered at $45.25

chart:

Entry on December 23 at $45.25
Earnings Date 02/01/12 (unconfirmed)
Average Daily Volume = 211 thousand
Listed on December 21, 2011


Boeing Co. - BA - close: 73.97 change: -0.32

Stop Loss: 69.85
Target(s): 77.00
Current Option Gain/Loss: +18.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/24 update: After a strong three-day bounce shares of BA stalled. The stock could be struggling with resistance near $75.00. I wouldn't be surprised to see a dip back toward old resistance and what should be new support in the $72.50 area. More conservative traders might want to raise their stop loss somewhere into the $71-72 zone.

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

12/22/11 new stop loss @ 69.85
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


Hi Tech Pharmacal Co. - HITK - close: 38.15 change: -0.26

Stop Loss: 36.70
Target(s): 44.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/24 update: HITK continues to underperform the market and posted its third loss in a row. Again the relative weakness is a concern but the larger trend is still intact. HITK did seem to find some support near $38.00 today. Our new entry point is at $37.25 with a stop at $36.70. We want to keep our position size small to limit our risk.

Earlier Comments:
The most recent data listed short interest at more than 13% of the very small 10 million share float. Our target is $44.50. Readers might want to aim higher. The Point & Figure chart for HITK is bullish with a $58 target.

New Trigger, buy the dip: 37.25, stop loss @ 36.70 (small positions)

- Suggested Positions -

buy the 2012Jan $40 call (HITK1221A40)

12/22/11 not open yet. New Trigger @ 37.25, stop 36.70
12/21/11 trade not open yet. (SP500 opened lower) Try again. New stop loss @ 37.90

chart:

Entry on December xx at $ xx.xx
Earnings Date 03/12/12 (unconfirmed)
Average Daily Volume = 298 thousand
Listed on December 20, 2011


iShares Transportation - IYT - close: 90.13 change: +0.44

Stop Loss: 87.45
Target(s): 94.75 or 98.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
12/24 update: It was a quiet day for the transport sector and the IYT. Shares spent almost the entire day drifting sideways under resistance at $90. Then in the last few minutes of trading the IYT saw a rally past this resistance. More aggressive traders may want to launch positions now. The newsletter is suggesting a trigger to open positions at $90.75. I have listed individual targets depending on which month you choose to play.

Trigger @ 90.75

- Suggested Positions -

buy the Jan $95 call (IYT1221A95)
target 94.75

- or -

buy the Feb $95 call (IYT1218B95)
target 98.50

chart:

Entry on December xx at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 582 thousand
Listed on December 22, 2011


JPMorgan Chase & Co - JPM - close: 33.57 change: +0.12

Stop Loss: 30.35
Target(s): 37.50
Current Option Gain/Loss: Jan$33c: +43.8% & Feb$35c: +27.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/24 update: The rally in financials seemed to stall a bit. The banking indices still ended the day with gains but the gains are slowing down. JPM spent most of the day moving sideways in a 40-cent range. Readers can choose to buy calls now or try and buy a dip in the $33.00-32.50 zone.

Our multi-week target is $37.50.

- Suggested Positions -

Long 2012Jan $33 call (JPM1221A33) entry $1.05

- or -

Long February $35 call (JPM1218B35) entry $0.90

chart:

Entry on December 22 at $32.75
Earnings Date 01/13/12 (unconfirmed)
Average Daily Volume = 45.3 million
Listed on December 20, 2011


OpenTable, Inc. - OPEN - close: 40.78 change: -0.80

Stop Loss: 39.45
Target(s): 48.50
Current Option Gain/Loss: - 23.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/24 update: OPEN is still struggling. The stock has the bullish breakout on Tuesday. Shares have spent the last three days digesting news out Tuesday night regarding a high-level executive leaving. The stock is hovering near support at the 50-dma and the $40.00 level.

Readers might want to wait for a bounce off the $40.00 mark or its simple 10-dma before considering new bullish positions.

Earlier Comments:
The most recent data listed short interest at 53% of the very small 16.2 million-share float. This can be a volatile stock. 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.

(small positions) - Suggested Positions -

Long 2012Jan $45 call (OPEN1221A45) entry $1.50

12/20/11 new stop loss @ 39.40

chart:

Entry on December 20 at $41.55
Earnings Date 02/07/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on December 17, 2011


Phillip Morris Intl. - PM - close: 78.75 change: +0.90

Stop Loss: 75.75
Target(s): 79.50
Current Option Gain/Loss: +261.6%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
12/24 update: PM rallied to another new high on Friday. Readers may want to take profits now. I am adjusting the newsletter's exit target down to $79.50. We will raise our stop loss to $75.75.

Earlier Comments:
FYI: The Point & Figure chart for PM is bullish with a $95 target.

- Suggested Positions -

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

12/24 new stop loss @ 75.75, adjusted target to $79.50
12/21 new stop loss @ 74.90, readers may want to take profits now (+225%)
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


TJX Companies - TJX - close: 65.31 change: +1.07

Stop Loss: 61.90
Target(s): 68.00
Current Option Gain/Loss: Jan$65c: +45.0% & Feb$65c: +25.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/24 update: TJX is accelerating higher. The stock rallied +1.6% on Friday to new record highs. More conservative traders may want to start adjusting their stop loss higher. I am not suggesting new positions at this time but a dip or a bounce near $64.00 would work as an entry point.

Earlier Comments:
TJX doesn't move super fast so we'll need some patience. Our target is $68.00. FYI: The Point & Figure chart for TJX is bullish with a $78 target.

- Suggested Positions -

Long 2012Jan $65 call (TJX1221A65) Entry $1.00

- or -

Long Feb $65 call (TJX1218B65) Entry $1.75

chart:

Entry on December 22 at $64.10
Earnings Date 02/23/12 (unconfirmed)
Average Daily Volume = 2.7 million
Listed on December 21, 2011


Trimble Navigation Ltd. - TRMB - close: 44.63 change: -0.09

Stop Loss: 42.70
Target(s): 49.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
12/24 update: Friday morning was a little volatile with a $1.00 move from $45 to $44 but TRMB pared its losses. Essentially the stock is stuck consolidating sideways under resistance at $45.00.

I am suggesting a trigger to buy calls at $45.25 with a stop loss at $42.70. Our target is $49.50. FYI: The Point & Figure chart for TRMB is bullish with a $63 target.

Trigger @ 45.25

- Suggested Positions -

buy the Jan $45 call (TRMB1221A45)

chart:

Entry on December xx at $ xx.xx
Earnings Date 02/02/12 (unconfirmed)
Average Daily Volume = 544 thousand
Listed on December 22, 2011


Varian Medical Sys. - VAR - close: 66.21 change: +0.62

Stop Loss: 62.49
Target(s): 69.75
Current Option Gain/Loss: - 7.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/24 update: VAR is slowly making progress. Broken resistance near $65.00 should be new support. Readers can look for dips near $65 as a new entry point. Traders should be aware that the bottom of the late July gap down near $67.00 could be technical resistance.

- 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


Waters Corp. - WAT - close: 74.59 change: +0.07

Stop Loss: 70.75
Target(s): 79.50
Current Option Gain/Loss: -13.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/24 update: Hmm... Friday looked a lot like Thursday with a failed rally attempt near $75.00 in the morning and a sideways consolidation the rest of the session. Readers may want to wait for WAT to breakout past $75.00 before considering new positions. More conservative traders may want to adjust their stop loss higher.

- Suggested Positions -

Long Jan $75 call (WAT1221A75) entry $2.25

chart:

Entry on December 22 at $74.55
Earnings Date 01/24/12 (unconfirmed)
Average Daily Volume = 787 thousand
Listed on December 20, 2011


PUT Play Updates

BMC Software Inc. - BMC - close: 33.11 change: +0.12

Stop Loss: 35.05
Target(s): 30.05
Current Option Gain/Loss: -28.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/24 update: Friday proved to be another quiet session for BMC. I don't see any changes from my Thursday night comments. Readers may want to wait for a new relative low, under $32.70, before initiating new positions.

- Suggested Positions -

Long 2012Jan $32.50 PUT (BMC1221M32.5) entry $1.05

12/21/11 trigger hit at $32.75

chart:

Entry on December 21 at $32.75
Earnings Date 02/01/12 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on December 14, 2011


Watson Pharmaceuticals - WPI - close: 62.08 change: -0.02

Stop Loss: 63.05
Target(s): 56.00
Current Option Gain/Loss: Dec$60p: -12.5% & Jan$60p: -57.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/24 update: The oversold bounce in WPI appears to have stalled near short-term resistance at $62.00. We are not suggesting new positions at this time. The market's recent strength makes bearish trades a challenging task.

- 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

12/19/11 new stop loss @ 63.05
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 BEARISH PLAYS

Thermo Fisher Scientific - TMO - close: 45.69 change: +0.08

Stop Loss: 46.15
Target(s): 42.75
Current Option Gain/Loss: Dec$45p: +111.1% & Jan$45P: -39.2%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
12/24 update: TMO's gains on Friday were not that big and shares appear to have resistance near $46.00 but we're choosing to exit early anyway. Readers could watch for a new bearish reversal near $48 and the 50-dma as a possible entry point for new bearish positions.

- Suggested Positions -

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

- or -

JAN $45 put (TMO1221M45) Entry $1.40 exit $0.85 (-39.2%)

12/22/11 readers may want to exit early
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