Option Investor
Newsletter

Daily Newsletter, Saturday, 12/31/2011

Table of Contents

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

Market Wrap

S&P Declines -0.003181% For 2011

by Jim Brown

Click here to email Jim Brown

The S&P had the lowest YTD change in 61 years with a close only -0.04 points below where it started 2011. That is the smallest change since 1950 when the S&P closed exactly even.

Market Statistics

The S&P closed at 1,257.60 for 2011. That was only -0.04 points below the close for 2010 at 1,257.64. Considering 2011 was a year of record volatility we should probably be grateful for the rebound rather than frustrated about the lack of gains. If you take the longer term view the S&P closed 1999 at 1,272. That means there has been zero market appreciation over the last 11 years. That is not very encouraging. However, Friday's close is still almost 89% above the 666 low in March 2009. An 89% market rally in less than three years is still a decent rally when the average S&P gain is only 8% per year.

S&P Chart Quarterly

Over that same period Abbey Joseph Cohen has been consistently wrong in her predictions for S&P growth. Her prediction for 2011 was 1,500 and she only missed it by a mile in technical terms. The lowest analyst prediction at the start of 2011 was 1,333 and the average was between 1400 and 1500.

Since this is the New Year newsletter I will cover more on predictions and history later.

There were only a couple economic reports on Friday and neither were market moving. The ISM-NY rose ever so slightly to 534.0 from 533.5. After setting a high of 538.8 back in July the business conditions in New York have cooled. The internal components were not exciting. The six month outlook declined to 63.7 from 71.0, while the current conditions component rose slightly to 51.1 from 47.2. Normally the six month outlook is the bullish of the two and that suggests respondents are starting to factor in things like a recession in Europe and the next installment in the U.S. debt limit saga.

The quantity of purchase component declined to 48.3 from 54.3. People were buying less. The employment component declined sharply to 46.6 from 52.1. The urge to hire is fading and the decline into contraction territory suggests the service sector is actually laying off workers.

Moody's ISM-NY Chart

The ECRI weekly leading index declined slightly to 120.9 from 121.3. Not a big move but the index has been weak since the middle of November. The 120.9 is only 0.1 point away from a two month low. The index, which is powered by accumulated results of other reports, is suggesting there are some clouds forming on the horizon for 2012.

Moody's ECRI Chart

The calendar for next week has some serious economic land mines. The first is the estimates of China's GDP on Monday. The consensus is for 8.5% growth but conditions in China are starting to attract attention because of the negative news. I would not expect China to shock the world by guiding lower but analysts will be reading between the lines of the release. This could be the start of a shift of attention from Europe to China as the next big problem.

The national ISM on Tuesday is officially expected to rise slightly but several recent regional reports have shown some weakness. If the national ISM were to decline the bears would come out to celebrate.

The FOMC minutes will give us a clue on what to expect at the FOMC meeting in late January. Some expected a QE3 announcement but recent commentary suggests a "wait and see" approach by the Fed. They want to keep their remaining bullets intact in case there is a new event in Europe. The market may not be excited about language in the minutes that suggest no QE3.

This is the payroll week and that starts on Thursday with the ADP, Challenger and Monster Employment reports. The estimates for the ADP report are showing a decline in the number of new jobs for December but they are still expecting decent growth at +180,000. There is no estimate for the Challenger report or the Monster report. However, the Monster Employment Index declined in November from 151 to 147. Another decline would not be greeted warmly even though we should expect a decline in employment advertising in December. Seasonal workers have already been hired and nobody runs any serious ads ahead of the holidays. That process will begin again in January. This means the Monster index "should" decline for December.

Lastly the Nonfarm Payrolls on Friday are expected to show a gain of +150,000 jobs compared to +120,000 in November. Personally I think this is overly optimistic. However, since the survey was conducted between Dec 11th - 17th it is probably too soon to capture the terminations of the seasonal workers. That means the real change in the recent trend may not be reported until the end of January and all the seasonal workers will have been terminated. Several of the regional reports have shown weakness in the employment components so it will be interesting to see how that translates to the nonfarm payroll survey. A number under 100,000 would not be well received and it might take a number over 165,000 to get traders excited. It seems to me that traders seem to get overly optimistic about the payroll numbers so they always have bigger expectations than the official consensus. The majority of the time those expectations are dashed by the real numbers.

Economic Chart

There was very little stock news on Friday because there was nobody around to report it. Volume was only 3.9 billion shares. The high volume day for the last five trading days was Wednesday at 4.2 billion and that was only about 60% of normal and 45% below the three month average. The lights were on and the tickers moving but nobody was participating.

Leap Wireless and MetroPCS both rallied on comments from JP Morgan that either one could become an acquisition target of AT&T now that the T-Mobile acquisition is dead. AT&T needs additional wireless spectrum in order to compete with Verizon and Sprint and to build out its 4G LTE network. There are 327.6 million wireless subscriber connections in the U.S. compared to a population of only 315.5 million. Cellphones and tablets are sucking up bandwidth and companies like Verizon and AT&T are scrambling to find more. Verizon has been buying unused spectrum from the cable companies while AT&T had hoped to get it from T-Mobile. JP Morgan believes LEAP and/or PCS would not have the same regulatory hurdles for AT&T and they could complete an acquisition. JPM felt that LEAP could be worth $13 and PCS spectrum alone could be worth $6 a share. Shares of LEAP reacted the most with a +1.50 spike intraday that sold off for only an 80-cent gain by the close at $9.29.

LEAP Chart

American Airlines parent AMR is going to be delisted from the NYSE before the start of trading on Jan 5th. The stock is down -93% for the year and has been trading under $1 since Dec 8th. Any company with an average closing price under $1 over a 30 day period is subject to delisting. The notice gives any shorts the opportunity to cover their positions before the stock disappears to the pink sheets.

AMR Chart

Walgreens (WAG) is facing a major deadline on Sunday when it can no longer process prescriptions for Express Scripts. They have been unable to agree on a new contract and the current contract expires on Saturday. Last year Walgreens filled 88 million prescriptions for Express Scripts worth more than $5.3 billion. Walgreens has 7,810 stores. The contract battle has been going on for many months. Express Scripts said Walgreens made a serious effort in mid December to patch up their differences but could not come to an agreement. Walgreens has been offering customers discount prescription cards to try and get them to stay with Walgreens but according to Express Scripts very few have made the commitment.

I have an Anthem health plan and they sent me a list of pharmacies since the Walgreens contract was cancelling. Millions of consumers will be forced to change pharmacies. When I drove by Wal-Mart on Friday they had signs on the street saying "Are you being forced to change pharmacies? We are authorized to process.." and a list of the companies being forced to leave Walgreens. I don't know what the deal killer was with Walgreens and Express Scripts but apparently Walgreens thought they could use their weight to force a deal. It appears they were wrong and it could be a costly decision. Walgreen's shares have been relatively flat since the initial conflict was announced several months ago but if they can't reach an agreement quickly I would expect shares of WAG to head lower soon.

Walgreens Chart

The decline in gold has really generated a lot of market opinion. If you look hard enough you can find 2012 estimates from $800 to $2500. Some people are calling it the ultimate bubble and others are calling it a buying opportunity. Gold has fallen about $400 off its $1,923 high and has reached bear market territory. It closed on Friday at $1567.

Numerous analysts have suggested the $1,485-$1,530 level was the key support level where they expected a bounce. Others are a little more bearish at $1,250-$1,300. Almost all believe gold will rise again and quite a few expect a new high over the next 18 months. Only a couple are expecting a real implosion.

Dennis Gartman said he would begin adding to positions at $1,525 and above. Personally I would feel more comfortable with a touch and rebound from $1,485 but the difference between those numbers is insignificant.

Charles Biderman from TrimTabs.com was out on Friday saying gold has no choice but to go higher long term because of the trillions in QE still ahead of us in Europe and the USA. He said it could go lower in the short term so he advised average costing into positions on a weekly or monthly basis.

I have no doubt about the future for gold and silver but I think the biggest headwind is the rising dollar. As long as Europe continues to circle the drain the euro will decline and the dollar will rise. That is negative for gold and other commodities. I think the long term outlook for the dollar is very weak once Europe starts to heal. For that reason I will continue to buy silver on the dips and leave gold for those with deeper pockets.

Gold Chart

Silver Chart

The market in 2011 was like a roller coaster ride. We started and stopped at the same place but the ride in between was extremely frightful. 2011 broke several records and the one most disconcerting was the four consecutive days in August with 4% Dow moves. That was the first time that has happened. Hopefully we won't see it again in 2012.

August Volatility

More than $6.3 trillion was wiped off the global markets in 2011. Global capitalization declined -12.1% to $45.7 trillion. Relatively speaking the U.S. markets performed rather well. Of the major markets only Ireland did better.

Global Markets

The reason for the declines was of course Europe and the sovereign debt crisis. Unfortunately it is not over. The forced austerity on top of an already weak global economy is going to weigh heavily on Europe in 2012. As many as 10 of the 17 countries in the euro zone are falling into a recession that will be extremely deep and painful for several of them.

The debt problems could get worse before they get better. According to Citigroup there are 457 billion euros of euro zone sovereign debt due to be repaid in Q1. Italy will account for 113 billion of that total. Italy is facing record high yields with the 10-year bonds sold last week at a yield of 6.98% an indication of more trouble ahead. A yield of 7% is considered unsustainable and that is especially true for refinancing 113 billion euros of debt in the first quarter alone. That means they will have to sell short term debt of 6-mo to 2-years and keep rolling it over in order to keep the rates lower. That puts Italy at even greater risk because any change in outlook and they would not be able to constantly roll over the debt. Relying on short term funding is very dangerous and puts you at the mercy of the bond vigilantes.

Italy is only one problem. Greece is not done and Spain is rapidly approaching critical mass as well. Greece has not finalized the 50% haircut for its debt. Bond holders continue to walk out of meetings over changes in the terms. It is far from a done deal and that would only bring their debt down from 160% of GDP to 120% by 2020. That is not a sustainable level.

Europe will continue to be a problem in 2012 but at least there is progress with the central banks swap lines announced last month and the ECB low interest loans. Those measures improved liquidity but did not solve the problem. Europe is like a boat with dozens of leaks. Each measure plugs a couple of leaks but the boat is still sinking but only at a slower rate. Until the ECB commits to buy enough sovereign debt on the open market to solve the problem permanently we will continue to have these routine flare ups.

The banking sector in Europe is the next problem for our markets. The nearly 500 billion euros borrowed from the ECB the prior week was just a down payment. Some believe it could take two trillion in these three year loans to keep the banks afloat. Spain's Banco Santander (STD) and Italy's Unicredit (UNCFF) are constantly mentioned as the next banks likely to fail. Fortunately the U.S. economy has started to improve and continued improvement in 2012 could focus attention on the U.S. and away from Europe. The earnings cycle begins in one week with Alcoa earnings on Jan-9th. If Q4 earnings continue to show improvement and the employment numbers next week don't disappoint the market could breathe a sigh of relief and move higher.

The economic picture from China could be the fly in our soup. I have been reporting for the last couple months about the deteriorating conditions in China. So far the government has not taken any drastic actions to halt the economic decline. Early last year they tightened economic policy several times in an attempt to slow inflation. They have yet to remove much of that tight money policy so they have a full arsenal of weapons they can use to stimulate the economy and avoid a hard landing. In the U.S. we know from experience the central bank and the government have a very bad track record for managing economic cycles. They always seem to be late to the party. Let's hope China is not late to their party and they are able to avoid a crash landing. Bad news from China could easily cause serious trouble in our markets.

One thing we know for sure is that something is going to change in 2012. The chances are slim the USA will have a boring old 8% gain for the year on low volatility. There are far too many factors at play. By the time you factor in some new sovereign debt issues, European bank failures, oil embargo on Iran, a resurgence of the Arab spring, a hard landing in China, the 2012 election cycle and sluggish economic growth the outlook is anything but boring.

The U.S. markets definitely favored conservative stocks over the last year. Dividends were the new buzzword and those stocks with decent growth and a big dividend were buyer favorites. Utilities are the most conservative stocks you can buy and it was the hot sector for 2011. That should tell you a lot about the investor mindset.

Airlines were the worst performers as higher fuel prices and intense competition kept profits low despite high load factors. This sector will continue to decline as the decade progresses thanks to higher oil prices. The technology sector was flat at +1% gain despite the tens of millions of iPhones, iPads and Androids being sold. Tablets cut into PC sales and warnings from chip companies depressed the outlook. The Thailand floods just increased the depression due to shortages of parts and hard drives.

Energy started off the year strong but the crash of oil prices in April and the stock market decline in August knocked even the strongest energy stocks back to 2010 price levels. Were it not for the Oct/Nov rebound in crude the sector would have been down for the year instead of the mediocre +3% gain.

Financials were knocked for a -18% loss on worries over contagion from Europe, the new Dodd Frank legislation, the Basel accounting rules and the impact of too big too fail restrictions. Suits over subprime mortgages and their packaging into mortgage backed securities resulted in multiple settlements in the hundreds of millions of dollars each. Lastly the short sale ban on financials in Europe meant that global investors were shorting U.S. banks to hedge against European risk. Banks forced to raise additional capital were issuing new stock and selling profitable assets. It was not a good year to be a bank investor.

Sector Performance

Bank Analyst Dick Bove said last week the banking sector is selling at bargain basement prices. There is $1.5 trillion in excess liquidity in the U.S. banks. Earnings are growing and business loans are rising at better than a 10% growth rate. Banks are starting to lend and businesses are starting to borrow. He said the current prices of bank stocks had no relation to the fundamental valuation of their businesses. He strongly recommended bank stocks across the board for 2012.

The S&P has closed positive on the last trading day of the year only one time in the last eight years. Fund managers tried very hard to keep the S&P in positive territory but a flurry of selling at the close and they just couldn't keep it in the green for the year. It was a valiant effort. The final decline to 1257.60 was minimal at -5 points but it was just enough to close under the 200-day average at 1259. Obviously the $64 question today is what will happen next week.

Of the last 15 years there have been an almost even number of up days and down days (8-7) on the first trading day of the year. It is hard to see a trend there. If we extend it to cover the first week it remains a dead heat. However, if we look at the end of January compared to the first day of the year the Dow is down 10 times and up only 5. Looking even closer there was a significant sell off in January 12 out of 15 years. In some cases they lasted only a week or so but they were normally significant program driven declines. Once the year end money was invested a sharp selloff appeared to capture profits. I speculate the hedge funds were invested ahead of the retirement fund pop for mutual funds and the hedge funds took profits when it was over. The pattern is very well defined.

Even though we have had some serious bouts of volatility over the last several months the Dow did finish near five month highs. That suggests a lot of funds were long into year end and with the European crisis alive and well they may not want to stay long next week. The payroll reports on Thr/Fri could be a pothole they would like to miss.

The S&P continues to struggle with resistance at 1265. There is a pattern of higher lows and we could be coiling for a breakout. A move over that level would be a buy signal if it came on higher volume. I doubt that higher volume will appear on Tuesday. Everyone will still be recuperating from the long weekend. We saw an opening spike to 1269 last Tuesday but it did not stick. For that reason I would like to see a move over 1270 for real confirmation of a breakout.

Initial support is now 1250 and then a long drop to 1210. We can do that without breaking the uptrend from the October lows. It will all depend on the headlines and the fund flows.

S&P Chart

IBM (+25%) and MCD (+31%) represented 50% of the Dow's gains for the year. Bank of America (BAC) was the biggest Dow loser for the year at -60%.

The Dow has a VERY clearly defined resistance level at 12,285. We have seen a dead stop on every attempt on each of the last five trading days. However, every attempt at resistance weakens that resistance. The minor 69 point decline on Friday was a setup for a running start on Tuesday if the bulls so desire. Remember, this is a three day weekend and there was severe event risk from Europe and China plus the FOMC minutes on Tuesday. There were good reasons to be cautious into the close and a -69 point pullback is just noise.

The Dow appears to be poised for a breakout. It has the highest penetration from the Nov/Dec consolidation phase. I believe this was due to fund managers buying large caps for safety rather than by choice. Next week should be interesting. Initial support is 12,150 then 12,000.

Dow Chart

The Nasdaq has closed higher on the last trading day of the year only once in the last 12 years.

The Nasdaq declined -8 points to come to rest just over critical support at 2600. The downtrend resistance is still intact. There is a series of higher lows and lower highs in what appears to be a consolidation pattern but the uptrend is weak. Resistance at 2625 held earlier in the week and a break back below 2600 would be negative.

The Nasdaq was handicapped over the last several months by several major decliners. The highest profile Nasdaq decliners for the year were RIMM -75%, FSLR -74% and NFLX -61%. At this point they are cheap enough they can't really impact the index going forward.

Helping the Nasdaq is the new buzz about the Apple products to be announced in the next couple of months and the breakout over $400 in AAPL shares. Google also closed at a new four year high on Friday at $645. Gains in those stocks are helping to overcome the declines in other sectors.

Since both GOOG and AAPL are highly liquid large caps the gains could have been fund managers hiding money over year end. We will know for sure by next weekend if those gains were temporary.

Nasdaq Chart

The Russell 2000 is facing strong resistance at 750 that appears rock solid. However, initial support is not far below at 735 so we have a tight range to give us a clear trading signal. Since the Russell is the real sentiment indicator for the market a break over 750 would be a strong buy and a decline below 735 a soft sell. A continued decline below 710 would be a strong sell.

Russell Chart

Tuesday could be frantic and move in either direction. There is no clear signal and like most of 2011 the market will be headline driven. China's GDP estimate for 2012 on Monday will be critical for the market open. In the afternoon the FOMC minutes will be the key point. There will probably be other European headlines as leaders position themselves for the January meeting to go over the new plan.

I do expect a significant dip in January. It could be sooner rather than later but I do expect it. I would also be a buyer of that dip assuming the nonfarm payrolls and ISM reports are not disasters. The USA is the strongest economy in the OECD even at our current 3.0% GDP estimate for Q4. The U.S. is attracting foreign capital because there is nowhere else that has the same relative safety. Europe is sliding into what could be a deep recession for as many as 10 countries and possibly more. Investors are fleeing Europe. China is a question mark until the next set of data is released. Emerging markets have been weak as are Latin American markets. The U.S. is the safe harbor and that will continue to help our markets and debt sales.

If you have not taken advantage of the Year End Subscription Special your time is running out. We normally extend it into the first week of the New Year for people who have already maxed out their deductions for 2011. If you want to take advantage of the steep discount and get the full package of newsletters plus the bonuses you need to act quickly. Don't be a terminal procrastinator like me. We only have a few silver dollars left. Don't be left out.

Jim Brown

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Index Wrap

STALLED (again)

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The S&P 500 (SPX) had achieved an upside 'breakout' above a symmetrical triangle which will be seen on my SPX daily chart further on. This pattern suggested that the market could work higher led by SPX and the Dow, provided SPX support at 1240 holds up. Other chart analysis suggests the market may again be topping out, making for a mixed bag technically.

We of course have earnings announcements coming up and this may reflect the 'indecision' pattern we're seeing in the major indexes as investors wait to see how the bottom line with key companies in Q4 has been.

Giving me pause here is the SPX hourly chart which was a highlight of the Trader's Corner article I also posted today. When I reviewed 2011 for this TC article which made use of the hourly chart, coupled with a 21-hour RSI, the pattern seen there suggested a possible double top; the RSI 'overbought' extremes have been fairly reliable during the year in assessing where the market has made tradable bottoms or tops. So, once again, it's a mixed bag in terms of assessing the trend.

Since the daily SPX chart still suggests some potential for some further upside, I'm reluctant to suggest buying puts on the major indexes. However, if I was absolutely forced (gun to my head) to choose a directional trade I would play the short side of the market and buy index puts over hanging on to index calls.

If I look only at the Dow chart, it looks like there's still some potential for INDU to lead the market higher given its breakout to above its well-defined line of resistance at 12200. However, the past 5 trading days have seen INDU stall in the 12290 area. If they can't take em up, they could next take em down!

Meanwhile the Nasdaq lags the main stream economy stocks as reflected in the S&P. The Nasdaq 100 (NDX) is especially struggling as Apple (AAPL) continues to find resistance at $410.

I'll hibernate rather than take on much in the way of new positions and exit any index calls I've been hanging on to. I hope early-2012 provides me reason to get more active due to a clearer trend picture. But I do lean bearish here. One pattern that has been pretty consistent in this market is that when several days pass without further upside or downside progress and tops (or lows) keep hitting the same price area, look for the prior trend to reverse.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart and indicator pattern is mixed. The recent advance above the highlighted down trendline was bullish. However, once again SPX has stalled at resistance, in this case in the 1267 area. The pattern of the last couple of months has been that 'stalling' out at prior resistance has led to a sell off and this market has been pretty consistent; if stocks can't gain traction around prior index highs, selling drives prices lower again.

1243-1240 is key support. A close under 1240 is bearish. Next support comes in around 1208, extending to 1200.

Near resistance is at 1267, extending to 1275, then finally in the area of the prior intraday high at 1292; the prior Closing highs were in the 1285 area. A close above 1290-1300 would be bullish although I'd want further gains to 'confirm' this.

The 13-day RSI is showing the same stalled momentum and a double top. My sentiment indicator shot up on the last day of the year which is a minor bearish note given poor price performance.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) is showing a mixed pattern like its big brother/big sister SPX index. OEX has stalled out at prior highs at 574; next resistance comes in around 580. S&P and Dow bellwether monster cap GE is stalled in the $18 area, where there appears to be a large supply overhang. A sustained close above 18 would be bullish for OEX, as would a move above 580 in OEX itself.

I've highlighted near support in the 563 area, then at 550. A close under 550 would be bearish, although we would need to see what happens the day following such a weak close.

If the market/index pattern continues to be like it's been in the past two months, stalling out is a 'signal' to at least exit call and other bullish positions if not to buy puts also, such as out to February.

We will soon have earnings announcements to trade off from and uncertainty about them may reflect the 'indecision' pattern we're seeing in the big cap S&P as investors wait to see how the bottom line with key companies in Q4 has been.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU), which looked to have further bullish potential when INDU achieved its upside penetration of 12200 resistance, but which was called into question given the subsequent stall at prior highs in the 12290-12300 area.

12200 is a key near support, with next support at 12200, then back down in the 11800 area.

Except for HD, KFT, MCD, MRK, PFE, T, VZ and WMT, reflecting 'consumer defensive' stocks (aka consumer 'staples'), big pharm and telecoms, there's not others of the 30 INDU stocks that look like they can take the Dow average to decisive new highs.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) is turning bearish in its pattern in that COMP has been unable to achieve a decisive upside penetration of its down trendline. The index is hanging by a thread so to speak in terms of another dip below its 21-day moving average. Near-term momentum is down.

Key near support is at 2600 and next at the intersection of the up trendline in the 2536 area; support then extends to the 2518 area of the prior downswing low.

Above the recent Closing high at 2625, resistance is seen in the 2674 area and next at 2700.

The sideways move in RSI shows the slowing upside momentum and, given the lack of upside progress, the most recent daily sentiment numbers are somewhat bearish in a contrary opinion sense.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) chart is bearish in that the index has stalled (again) at its down trendline as highlighted on the daily chart. Near resistance comes in at 2300, then at 2335. There's an upside 'progression' of resistance points implied by the declining rally highs.

Near support comes in around 2250, extending to 2225 with the 2150 area as the next lower support.

More often than not I've found the pattern of a symmetrical triangle will resolve itself with a breakout to the upside if the prior trend was higher; this, as prices narrow in to the apex or end point of the triangle. However, the general rule of thumb is to follow whichever move occurs; i.e., to above OR below the two converging trendlines. It could be that an upside breakout occurs during the upcoming earnings (announcement) season but we'll need to stay tuned on that.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) reflects the same 'indecision' pattern as the underlying index of course. Only the support/resistance numbers are different.

Near resistance is at 56.2; I've then pegged a next key resistance at the prior (up) swing high at 57.6; or at the prior Closing high at 57.2

Near support is in the 55-55.1 area, with next lower support around 54.1-54.0

This last rally in the Q's was on very low volume and that didn't bode well for any substantial upside progress. It may take some better than expected big cap tech Q4 earnings to create further buying interest. Right now tech is in the doldrums.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) chart is bearish in that the most recent rally in RUT created a minor double top in the 753, which become the key resistance; next resistance is at the prior rally high at 769 on an intraday basis, 765 in terms of its prior closing high.

Near support looks to be in the 728 area, extending to 720; support below 720 comes in around 708, extending to 700. I don't see RUT moving higher anytime soon until there's either some better than expected news out of Europe or better than expected earnings for the small to mid cap stock group of the Russell index.



GOOD TRADING SUCCESS & HAVE A HAPPY NEW YEAR!


New Option Plays

Consumer Goods & Specialty Retail

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Fossil, Inc. - FOSL - close: 79.36 change: -2.76

Stop Loss: 83.05
Target(s): 73.50
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
FOSL produces a wide assortment of fashion accessories. Unfortunately it seems that owning shares of FOSL is becoming unfashionable. The stock has been struggling with a bearish trend of lower highs. Friday saw shares breakdown under key support near $80.00.

I am suggesting we buy put options at the open. We'll use a stop at $83.05. Our target is $73.50. More conservative traders may want to exit in the $75 area instead. FYI: The Point & Figure chart for FOSL is bearish with a $71 target.

- Suggested Positions -

buy the 2012Jan $75 PUT (FOSL1221M75) ask $1.55

Annotated Chart:

Entry on December xx at $ xx.xx
Earnings Date 02/15/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on December 31, 2011


Tractor Supply Company - TSCO - close: 70.15 change: -1.20

Stop Loss: 72.55
Target(s): 65.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes

Company Description

Why We Like It:
The up trend in TSCO could be in serious trouble. The stock has a short-term bearish trend of lower highs and has been testing support near $70.00. The bullish pattern of higher lows is on the verge of getting broken.

I am suggesting we use a trigger at $69.50 to buy puts. We will aim for a drop to $65.50 but more aggressive traders may want to aim for the $62-60 zone instead.

Trigger @ 69.50

- Suggested Positions -

buy the Jan $70 PUT (TSCO1221M70) ask $2.00

Annotated Chart:

Entry on December xx at $ xx.xx
Earnings Date 01/26/12 (unconfirmed)
Average Daily Volume = 550 thousand
Listed on December 31, 2011



In Play Updates and Reviews

Good bye, 2011

by James Brown

Click here to email James Brown

Editor's Note:

The trading year for 2011 ended on a quiet note. Stocks drifted lower. We are updating some stop losses and suggesting some early exits on ANDE, ORLY, and PM. We've also removed TRMB as a candidate.

-James

Current Portfolio:


CALL Play Updates

Boeing Co. - BA - close: 73.35 change: -0.76

Stop Loss: 71.75
Target(s): 77.00
Current Option Gain/Loss: -14.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/31 update: BA did not make any progress this week. Shares are consolidating sideways in the $73-75 zone. I am growing cautious on this stock and we are raising our stop loss to $71.75. More conservative traders may want to raise their stop closer to $73.00 instead. I am not suggesting new positions at this time.

Earlier Comments:
There is potential resistance at $75.00 and more conservative traders may want to exit there. I am aiming for $77.00. FYI: The Point & Figure chart for BA is bullish with a $79 target.

- Suggested Positions -

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

12/31/11 new stop loss @ 71.75
12/28/11 new stop loss @ 71.40
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


Dover Corp. - DOV - close: 58.05 change: -0.37

Stop Loss: 56.75
Target(s): 64.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
12/31 update: Friday proved to be another quiet session with DOV consolidating sideways under resistance at its 200-dma. There is no change from my prior comments. I am suggesting readers wait for a breakout higher with a trigger to buy calls at $59.55.

Earlier Comments:
More conservative traders may want to wait for DOV to rally past the $60.00 level instead since $60.00 might be considered round-number resistance. If we are triggered at $59.55 our target is $64.50. FYI: The Point & Figure chart for DOV is bullish with a $75 target.

Trigger @ 59.55

- Suggested Positions -

buy the Jan $60 call (DOV1221A60)

chart:

Entry on December xx at $ xx.xx
Earnings Date 01/27/12 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on December 27, 2011


Hi Tech Pharmacal Co. - HITK - close: 38.89 change: -0.07

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

Comments:
12/31 update: HITK tried to rally midday on Friday but reversed at resistance near $40.00. We are still waiting for a breakout. The current plan is to buy calls (small positions) at $40.15 with a stop at $38.85. 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 calls @ 40.15, stop loss @ 38.85 (small positions)

- Suggested Positions -

buy the 2012Jan $40 call (HITK1221A40)

12/27/11 new trigger @ 40.15, stop loss 38.85
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: 89.47 change: -0.39

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:
12/31 update: The mid-December rally in transports has stalled. The IYT has been consolidating sideways near resistance at its simple 200-dma and near the $90.00 level. We are still waiting for a breakout to new relative highs. Our plan is to use a trigger at $90.75 to open bullish positions. 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: 33.25 change: -0.17

Stop Loss: 31.70
Target(s): 37.50
Current Option Gain/Loss: Jan$33c: +14.2% & Feb$35c: + 8.8%
Time Frame: exit prior to earnings
New Positions: see below

Comments:
12/31 update: The bounce in JPM has also stalled. Shares spent this past week consolidating sideways. JPM should do well if the financials rally but I am growing concerned with our time frame, which needs to be adjusted. JPM is due to report earnings on January 13th. We do not want to hold over the report. That only gives us eight more trading days. I am suggesting investors turn cautious. We are raising our stop loss up to $31.70. No new positions at this time.

- Suggested Positions -

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

- or -

Long February $35 call (JPM1218B35) entry $0.90

12/31/11 new stop loss @ 31.70
12/31/11 adjust our time frame. We want to exit prior to the January 13th earnings report.

chart:

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


TJX Companies - TJX - close: 64.55 change: -0.83

Stop Loss: 62.75
Target(s): 68.00
Current Option Gain/Loss: Jan$65c: + 5.0% & Feb$65c: + 5.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/31 update: Shares of TJX underperformed on Friday with a -1.2% decline. This has taken a chunk out of our January calls. I am growing cautious here after a week of TJX failing at the $65.50 level. We will raise our stop loss up to $62.75. More aggressive traders will want to keep their stop wider. I am not suggesting new positions at this time but we can look for short-term support in the $64.00-63.00 zone.

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

12/31/11 new stop loss @ 62.75

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


Varian Medical Sys. - VAR - close: 66.83 change: +1.06

Stop Loss: 65.35
Target(s): 69.25
Current Option Gain/Loss: +11.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/31 update: Readers may want to consider an early exit on our VAR trade. The stock outperformed the market with a +0.4% gain on Friday. Yet shares were retreating sharply from their intraday high at $67.82. I am growing cautious here. We are raising our stop loss up to $65.35. I am not suggesting new positions at this time.

- Suggested Positions -

Long JAN $65 call (VAR1221A65) entry $2.65

12/31/11 new stop loss @ 65.35
12/29/11 new stop loss @ 64.40
12/27/11 adjust exit target to $69.25
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: 74.05 change: -0.09

Stop Loss: 70.75
Target(s): 79.50
Current Option Gain/Loss: -31.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/31 update: I remain cautious on WAT. The bounce from the bottom of its trading range has stalled. You could argue the bounce has reversed. We're not quite ready to give up just yet. We're not suggesting new positions at this time. WAT needs to produce a convincing move past resistance near $75.00. Readers may want to raise their stop loss.

- Suggested Positions -

Long Jan $75 call (WAT1221A75) entry $2.25

12/28/11 Traders may want to exit early now.

chart:

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


Whole Foods Market, Inc. - WFM - close: 69.58 change: -0.36

Stop Loss: 67.75
Target(s): 74.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
12/31 update: WFM failed to make any progress on Friday. Shares were content to drift sideways under resistance near $70.00. We are waiting for a breakout higher. I am suggesting a trigger to open bullish positions at $70.25. If triggered we'll use a stop loss at $67.75. Our target is $74.00. More aggressive traders may want to aim higher. FYI: The Point & Figure chart for WFM is bullish with an $85 target.

Trigger @ 70.25

- Suggested Positions -

buy the 2012Jan $70 call (WFM1221A70)

chart:

Entry on December xx at $ xx.xx
Earnings Date 02/08/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on December 28, 2011


PUT Play Updates

Autodesk, Inc. - ADSK - close: 30.33 change: -0.07

Stop Loss: 31.25
Target(s): 25.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
12/31 update: Friday was also a quiet day for ADSK with the stock moving sideways in a narrow range. Nothing has changed for us. We are waiting for a breakdown. The late November low was $29.76. I am suggesting a trigger to buy puts at $29.65 with a stop loss at $31.25, which is just above this week's high.

Our exit target is $25.50. FYI: The Point & Figure chart for ADSK is bearish with a $23 target.

Trigger @ 29.65

- Suggested Positions -

buy the 2012Jan $30 PUT (ADSK1221M30)

- or -

buy the Feb $28 PUT (ADSK1218N28)

chart:

Entry on December xx at $ xx.xx
Earnings Date 02/23/12 (unconfirmed)
Average Daily Volume = 2.9 million
Listed on December 29, 2011


BMC Software Inc. - BMC - close: 32.78 change: +0.17

Stop Loss: 33.55
Target(s): 30.05
Current Option Gain/Loss: -19.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/31 update: The oversold bounce in BMC continued for a second day but gains were mild. Shares struggled with prior support and now new resistance at $33.00 plus the 10-dma. I would still consider new positions now. We are going to try and reduce our risk by adjusting the stop loss down to $33.55.

- Suggested Positions -

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

12/31/11 new stop loss @ 33.55
12/28/11 new stop loss @ 34.55
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: 60.34 change: -0.27

Stop Loss: 62.55
Target(s): 56.00
Current Option Gain/Loss: Dec$60p: -12.5% & Jan$60p: -30.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/31 update: Thursday's bounce from the $60 level has already stalled and WPI drifted lower on Friday. I would not open new positions here. We can look for a new lower high near $62 or wait for a breakdown to new relative lows before considering new positions.

- 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

12/28/11 new stop loss @ 62.55
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 BULLISH PLAYS

The Andersons, Inc. - ANDE - close: 43.66 change: -0.73

Stop Loss: 43.40
Target(s): 49.75
Current Option Gain/Loss: -62.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/31 update: We are giving up on ANDE. The stock underperformed the market again on Friday with a -1.6% decline. The breakdown under what should have been short-term support near $44.00 is bearish. We're suggesting an early exit immediately.

(small positions) - Suggested Positions -

Jan $45 call (ANDE1221A45) entry $1.60 exit $0.60 (-62.5%)
(readers might want to consider buying February calls instead)

12/31/11 exit early
12/29/11 new stop loss @ 43.40
12/28/11 new stop loss @ 42.75
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


O'Reilly Automotive - ORLY - close: 79.95 change: -1.04

Stop Loss: 79.75
Target(s): 87.00
Current Option Gain/Loss: Jan$85c: -80.0% & Feb$85c: -40.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/31 update: ORLY underperformed the market again with a -1.2% drop on Friday. The stock's bullish trend is in jeopardy. Friday's close under $80.00, which should have been short-term support, is bearish. The low on Friday was $79.94. I am suggesting we exit positions immediately.

- Suggested Positions -

Jan $85 call (ORLY1221A85) entry $0.50 exit $0.10 (-80.0%)

- or -

Feb $85 call (ORLY1218B85) entry $1.60 exit $0.95 (-40.6%)

12/31/11 exit positions immediately.

chart:

Entry on December 27 at $82.05
Earnings Date 02/15/12 (unconfirmed)
Average Daily Volume = 941 thousand
Listed on December 24, 2011


Phillip Morris Intl. - PM - close: 78.48 change: -0.62

Stop Loss: 76.75
Target(s): 79.50
Current Option Gain/Loss: +239.2%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
12/31 update: I am suggesting we take profits and exit our PM trade. The stock hit a Friday morning high of $79.25 and then dropped toward its lows for the week to settle with a -0.7% decline. We want to exit positions immediately.

- Suggested Positions -

2012 Jan $75 call (PM1221A75) Entry $1.12 exit 3.80 (+239.2%)

12/31 exit early
12/29 new stop loss @ 76.75
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


Trimble Navigation Ltd. - TRMB - close: 43.40 change: -0.32

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

Comments:
12/31 update: We are growing impatient with TRMB. The last few days we've been waiting for a breakout past resistance near $45.00 but that hasn't happened yet. Tonight we are removing TRMB as a candidate with the trade unopened. Readers may want to keep TRMB on their watch list for a close over resistance at $45.00 as a potential bullish entry point.

Trigger @ 45.25

Trade did not open.

12/31/11 TRMB removed as an active candidate.

chart:

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