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Newsletter

Daily Newsletter, Wednesday, 1/18/2012

Table of Contents

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

Market Wrap

More Hopium for A Bigger Bailout Plan

by Keene Little

Click here to email Keene Little
Market Stats

Today's rally was brought to us, in part, by Goldman Sachs (GS) and their "less bad" earnings report. They reported income and earnings well below last year but slightly better than their lowered forecast. Wow, call me impressed. The other positive factor for the market was the news that the IMF is going begging for about $500B from various countries so that they can lend it to the countries that are in trouble. Wow, call me doubly impressed. More hopium on IMF's plan to find more money, somehow, somewhere. Hopium is a wonderful thing but not for the stock market.

And then not to be outdone, a member of the ECB told a German website that the European central bank is looking for a possible alternative to its bond-buying program. With all this good news breaking out all over, the bears didn't have a chance today. All these concrete plans for helping Europe deal with its debt problem (cough).

I won't even bother with GS's numbers since they're not to be trusted. The only thing that matters is the market's reaction and at least for now the positive reaction is bullish. It's also bullish, but dangerous, that the market found the IMF's "plan" to raise its lending capability to $835B from its current $335B after identifying the potential for the need for an additional $1T over the next two years. Oops, that's double their recent and previous forecast. Hey, what's a trillion dollars amongst friends. To maintain a cash buffer the IMF will actually be looking for handouts from other countries amounting to about $600B.

The most recent meetings over the IMF's need for more money left the G20 group with no agreement and the U.S. said it had no plans to make new bilateral loans (which perhaps prompted the Fed to step in and make more dollars available at reduced swap rates, effectively kicking off the ECB's back-door QE3). That leaves the IMF "studying options to increase funds available for lending". They will be going hat in hand to China, Brazil, Russia, India, Japan (has anyone seen their debt problem?) and oil-exporting countries to be the next top contributors. The hope, I mean plan is to have an agreement in place by the time the G20 gets together at their next meeting in Mexico City on February 25-26. Just what the market needed -- another plan to create a plan to get more money to throw down the debt sinkhole. But the market liked the news and rallied.

Opposing the hopeful message from the IMF was a prediction from the World Bank yesterday that said global growth would drop as much as -0.3% in Europe this year. It was the largest cut in predicted growth in three years. The rest of the world could grow about +2.5%, which I find hard to believe, knowing how integrated the global economy is. But the market ignored this news and would rather pin its chances for a higher stock market on the shot of hopium that was delivered by the IMF. A plan to make a plan -- you've got to admire the bull's optimism and tenacity. Just don't get sucked into their hope-based rally without your eyes wide open and one foot holding the exit door open.

I've shown long-term projections in the past for where I think the current bear market is going to take us, which is based primarily on chart patterns and previous history (fractal patterns tend to repeat). I use technical analysis first and fundamental analysis second, to help confirm or negate what I'm seeing on the charts. I've also discussed a multitude of reasons why I think the stock market (which is a reflection of the economy) has to work off the sins of the past before it will be healthy again. As Todd Harrison likes to say, we have to get through it in order to get to the other side.

We have way too much debt as a result of a few decades of maxing out our credit cards (government and personal) and the bill is due. The debt will be taken care of through either paying it down or defaulting on it. And a credit contraction, which is the process we're going through (even while central banks fight it every step of the way), is a deflationary process. Stock markets don't do well in a deflationary environment. I came across another reason why we could see a contraction in the economy and a drop in the stock market.

Doug Short (dshort.com) showed an interesting chart that has more to do with demographics, specifically a reduction in spending and investing due to a reduction in the number of people aged 45-49, an age group that is peaking in their spending (raising families, putting kids through school, buying bigger houses, putting money into retirement accounts, etc.). The chart below shows this age group peaked in 2006-2009 and will be dropping into a low around 2022.

Americans in the 45 to 49-year-old group, chart courtesy dshort.com

With the reduction in this age group there will not be the same level of support in the consumer spending department, which will have a depressing effect on the economy. While they move into a higher-investing group (saving towards retirement), the depressive effect on the economy will likely create more problems for local and state governments that are dependent on sales tax and business tax revenues. It's one factor among many that will be thwarting the government's effort to get people to spend more and save less (you know, to spend our way to wealth). Doug Short is predicting a 30%-50% haircut for the stock market in 2012, a far cry from most analysts predicting a positive year.

The housing market will continue to suffer as the baby boomer group ages and looks to downsize their housing needs. The high inventory of houses will likely be with us for many years to come and that will continue to depress the value of real estate. The reduction in the "wealth effect" from people seeing the value of their homes drop so much cannot be overstated when it comes to the effect on the overall economy. It has created another group that feels less secure about the future and less likely to overspend.

So we have many fundamental factors supporting my view that 2012 will be a down year and that the secular bear market that we've been in will likely continue into at least 2016, if not beyond. It doesn't mean there will be no opportunities to make money on the long side. Depending on your trading time frame there will be several buying opportunities along the way. But the more immediate opportunity that I see from here will be on the short side, potentially for a good ride down into the end of March.

I'll get my longer-term charts updated and try to get them to you next week. For now we're focusing on the shorter term to see where the current bounce might finish so that we can climb aboard the southbound train for a nice ride to warmer climes (some bulls might say that would be Hell). Keep in mind that playing the short side is actually more difficult than the long side but you can make more money in a shorter period of time. So let's start off tonight's review with the DOW to see what's setting up.

The DOW's weekly chart shows it testing its broken H&S neckline from last year for the 3rd week in a row. It's breaking it slightly as it reaches up to tag its downtrend line from 2007-2011, currently near 12600 (today's high is 12582). It's a very good setup for a reversal so we'll see if the bulls take advantage of it this week. The week's closing price is the important one.

Dow Industrials, INDU, Weekly chart

Moving in closer to the DOW's rally, the daily chart below shows it had stalled since the beginning of January below its May-July downtrend line, as well as its broken H&S neckline, until today's break above them. Now it's running into the top of a small rising wedge from the January 3rd high and is less than 20 points away from its 2007-2011 downtrend line near 12600. It can certainly press higher but with slowing momentum and volume behind this move I think it would be pressing your luck to bet on a rally much above 12600. But a rally above 12600 that holds above would be a bullish move and would indicate that as slow as the trading volume is, there would obviously be enough money flowing into the market (the central banks have been busy again) to keep the stock market elevated.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,650
- bearish below 12,311

Before moving on to the other charts I wanted to show a couple of reasons why I think it's smarter to be turning bearish here rather than holding out for more upside. I'm looking at sentiment, short interest and volume and the picture is not bullish, even (or maybe I should say especially) if we see the market move marginally higher into the end of the week.

Last week I showed the AAII survey results for trader sentiment, showing a significant widening of the spread between bullish and bearish sentiment. This week's numbers didn't change much but widened slightly further. As a reminder, the spread is now as wide as it was at the May 2011 high.

Following the 1st wave down, which was the May-October decline, we've been in a 2nd wave bounce correction since the October 4th low. It's very common for bullish sentiment at the top of the 2nd wave correction, which is a lower high, to be in excess of that seen at the previous high and that's what we currently have. The lower high is being met with more bullishness and fewer bears because the belief is so strong that the market is heading for new highs above last May's high. The sentiment picture fits the wave count and both say we should be looking for a market high rather than a continuation higher.

The 2nd leg of the bounce off the October low, from the end of November, has been driven to a large degree by short covering, which makes sense when you see the significant drop in bearish sentiment. The chart below shows the sharp drop in short interest (black bars) vs. the stock market's rise since October (SPY in red).

NYSE Short Interest vs. SPY, chart courtesy zerohedge.com

It's hard to see the dates at the bottom so I added the years. Each bar is two weeks' of data. The last bar is for the first two weeks of January. I suspect there will be a lot of bearish options positions that will expire this Friday and most of those bears will not initiate new bearish positions. That will make next week particularly vulnerable since the lack of short interest and other bearish positions will make the market more vulnerable, not less, to a downside disconnect.

The short interest in the techs shows the same picture. The chart below shows short interest in QQQ dropped off the cliff at the end of December and I suspect it's much lower today. It sits at a level not seen in 11 years. The level of short interest is below the 2010 low and at a level not seen since early 2001 when most in the market were still feeling very bullish. The lack of support under the current market is very scary. The HFT traders drive this market (they're essentially momentum players) so the short covering combined with the hopeful bulls has been pounced on by the HFT traders. When this market reverses, and it eventually will, the market will likely drop fast, exacerbated by the HFT traders and no support underneath. It could be a fun ride.

QQQ short interest, 2000-2012, chart courtesy zerohedge.com

The very low trading volume that we've seen as the rally has progressed can be seen on the SPY chart below. Notice that many of the higher volume days are the red bars, meaning SPY closed below its opening price. Today's rally has volume only slightly stronger than yesterday's and considerably less than Friday's, which closed down for the day but above its gap down opening price. As for the price pattern, I'm showing an idea for a pullback and then a final high around early to mid February and near 133. This is just an idea that I'll be watching for once the pullback gets started.

S&P 500 ETF, SPY, Daily chart, looking for rally conclusion

The next SPY daily chart is the same as the one above but with an EW (Elliott Wave) count that calls the rally near complete if it did not complete today. Today's high at 130.84 came very close to the 131.09 projection for two equal legs up from November 25th. This is a potentially important level because of the a-b-c count from that low. Notice how close it is to the downtrend line from May-July as well. The bearish divergence at the new high supports the idea that resistance will hold.

S&P 500 ETF, SPY, Daily chart, looking for final high in February

Now we move to the SPX daily chart to show another level that was achieved today -- the 78.6% retracement of the May-October decline, at 1307.28. This is a deep retracement that has been common in this market. Today's high is about 6 points above its broken H&S neckline, about the same amount of the throw-over at the October 27th high. The market has been rallying steady since mid December and closed at the high today, but with little volume and waning momentum. This has often been followed by an immediate reversal the following day as the mini-capitulation of shorts (and longs chasing the market higher) into the close leaves nothing for follow through the next day. Based on where the indexes are, treat a reversal tomorrow, whether immediately or after a minor new high, as a potentially very important reversal. Only after a decline gets started will we be able to get some clues as to whether or not there could be another press higher into February.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1310
- bearish below 1277

Slightly above the 1307.28 Fib retracement is another potentially important level. Two equal legs up from the November 25th low, for the 2nd a-b-c in the double zigzag count shown on the daily chart, projects to 1310.76. That projection crosses the top of a rising wedge pattern tomorrow morning and makes for a very good setup for a reversal (if not immediately lower from here). Any higher than 1311 that holds above, would be a bullish statement, in which case the upside projection is to the downtrend line from 2007, near 1330. We could see a minor throw-over above the top of the wedge and then drop back inside, which would be the first reversal signal.

S&P 500, SPX, 60-min chart

NDX pushed above its price projection near 2402 where it achieved two equal legs up for the a-b-c move up from November 25th. It stopped at the top of a parallel up-channel based off the uptrend line from October 4th and is only about 12 points away from testing its July high near 2438. But keep an eye on 2429.45, less than 4 points above today's close -- that's where it would close the gap left on July 27th (the big down day following its high on July 26th). It would obviously be bullish above but it could be setting up a double top pattern. One thing we've seen at major market highs is a new high for NDX not matched by the other indexes, including its late July high, which sets up a bearish non-confirmation. It's possible the market is going to do it again.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2440
- bearish below 2352

The next three charts are just examples of some of the things I'm noticing as the indexes hit what could be significant resistance. Looking for the drivers behind the rally I've pulled three examples -- NFLX, CMG and the SOX. As the leaders of the pack this month, it will be instructive watching what they do from here. NFLX's weekly chart shows the steep decline from July to the low on November 30th. It has bounced up in a 3-wave move to its broken uptrend line from November 2008 through the January 2010 low, currently near 101. Slightly below that trend line are its 20 and 200-week MA's, near 99. On the daily chart it's looking like NFLX could form a double top with last week's high with bearish divergence. Normally I prefer to use the log price scale with a longer-term chart and a big price move but I noticed price respecting the trend line and MA's and I like the setup here for a reversal back down (with a stop slightly above 101).

Netflix, NFLX, Weekly chart

Chipotle Mexican Grill has also been doing well but as can be seen on its daily chart below, the rally from last August has created a bearish rising wedge pattern, with bearish divergence supporting the bearish interpretation of the pattern. It has now pushed up to the top of the rising wedge and its broken uptrend line from July 2010. If resistance holds and CMG drops from here it will be a good signal that traders are moving to "risk off."

Chipotle Mexican Grill, CMG, Daily chart

The semiconductors were strong today and the SOX was up +5%. That certainly gave the tech indexes a boost and when the SOX and NDX are bullish it tends to carry over into the broader market, which it did today. But the SOX has now rallied up to resistance and the big move up might have been a capitulation with more bears throwing in the towel. That's just a guess and it would not be confirmed until today's rally is retraced. But the SOX has now achieved a Fib projection for the 3-wave move up from November 25th where the 2nd leg is 162% of the 1st leg at 405.52 (today's high at 405.25 is actually 27 cents shy of that target). It also hit its April 2010 high at 404.70. This 405 area could be tough resistance and potentially the conclusion to its rally.

Semiconductor index, SOX, Weekly chart

The RUT's rally from the November low looks very similar to SPX. Even though the squiggles are a little different, the wave count for an a-b-c move up and an ending diagonal c-wave (rising wedge from December's low) looks very solid. Today's rally up to the top of the rising wedge, near 779, looks like a good finish. So a rally above its 760-770 resistance zone looks bullish but only if it can continue higher from here. If we get a brief throw-over above the top of the wedge, near 779, followed by a drop back inside the wedge we'll have a reversal signal. Short with a stop at the daily high would be the suggested play. A drop below Tuesday's low near 764 would confirm the top is in place.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 770
- bearish below 763

At first the banks were AWOL in today's rally. But they joined up with the bulls in the afternoon and helped them out with a further rally. But while the other indexes are making new highs the banks are lagging. I see the potential for the banks to make it at least a little higher and drive the BKX index up to 44.22-44.43. This would have it achieving a 50% retracement of its February-October decline and two equal legs up from the October low. But a close back below its 200-dma at 42.84 could spell trouble for the bulls. Follow the money.

KBW Bank index, BKX, Daily chart

While the Transports had a positive day the index is still struggling with the Fib projection at 5222, which is where the 2nd leg of the move up from October is 62% of the 1st leg up. For the 2nd a-b-c up, which is the move up from November's low, it would have two equal legs up at 5285. A 78.6% retracement of the May-October decline is at 5269. So there's tough resistance in the 5222-5285 area and that's where it's currently stuck. Above 5300 would be bullish and back below 5094 would be bearish.

Transportation Index, TRAN, Daily chart

As one who has been bullish on the dollar, I'm getting worried about it. As reported last week, the commercial position is huge net long the euro, which in turn is net short the dollar. On top of that, the rally in the dollar is losing momentum and the rally has been choppy, which is more indicative of an ending pattern. I'm showing a continuation higher in a choppy move up to the top of a parallel up-channel from August, near 83 by early February, but I'm not feeling confident about it. A break much below 80.50 would have me looking for at least a pullback to its 50-dma at 79.52 and the mid line of its up-channel. Below that would be even more bearish and potentially a move back down to the bottom of the channel and its 200-dma near 76.60. Below that and it will be lights out for the dollar. What impact a declining dollar would have on the stock and commodity markets would then be the next big question. Both the dollar and the stock and commodity markets look like they're ready for a decline and that means everything will decline together or one of them is not bearish. Trade each chart on its own merits is about the only thing I can recommend at the moment. We'll figure out the intermarket relationship as it develops from here.

U.S. Dollar contract, DX, Daily chart

If the dollar does pull back a little more, such as to its 50-dma, it would support what I see as a little more upside for the metals and oil. Gold's bounce is struggling at the 50% retracement of the leg down from November but I see at least a little more upside potential to its downtrend line from September, currently near 1687. Once the current bounce is finished I'm expecting another leg down for a larger decline in gold (below 1400).

Gold continuous contract, GC, Daily chart

Silver has broken and retested its downtrend line from September, which is a bullish move. I see a little more upside potential to 32.13 where the bounce off the December low would achieve two equal legs up. A drop back below its 20-dma near 29.17 would be bearish.

Silver continuous contract, SI, Daily chart

Oil has pulled back from its January high in a choppy corrective pattern, which points to a higher move. I've got its broken uptrend line from February 2009 low, which it tested in November, December and January, for an upside target, near 105. Perhaps it will tag its 78.6% retracement of its May-October decline, at 106.30. Unless it rallies above that level I am looking for another leg down once the bounce off the October low finishes (like the stock market).

Oil continuous contract, CL, Daily chart

With a slew of big earnings reports tomorrow and a full slate of economic reports, there's likely going to be a market reaction. The CPI data, housing starts, building permits and Philly Fed, all before the market opens, could move the futures enough to start the day's direction. As for the unemployment claims data, no one believes the numbers anyway.

Economic reports, summary and Key Trading Levels

The indexes (and a couple of stocks that I used as examples) all show the market has now rallied up to potentially strong resistance. The market has been rallying steadily since mid December and closed at the highs today. That kind of setup in the past, especially when at resistance, has resulted in an immediate reversal the following day. I call these days mini-capitulation days where the bears throw in the towel and cover their shorts, disgusted that the market simply won't drop.

We've got near record low short interest and a wide spread between bullish and bearish sentiment. We've got low volume and waning momentum to the upside and stronger volume on selling days. And now we've got the indexes pressing against upside targets and resistance. It's a recipe only the bears could love (what few remain that is). If the resistance levels can be broken, preferably with increasing volume, and pullbacks hold above resistance, we'll have a confirmed bullish breakout. In the meantime, shorting resistance is a trading tactic and that's where we are right now. Obviously picking a top is risky (and has been frustrating) as they take much longer to get put in. Bottoms are easier to identify and they reverse quickly. Tops are grinding affairs.

The market could hold up into the end of opex as there's been a strong effort in the overnight sessions to keep the bears back on their heels. Any threat of a selloff is immediately followed by another buy program. There's an agenda and it seems this week's agenda has been to negate the high probability for a decline (10 of the past 13 years have seen a decline during January's opex week). With the sudden drop in short interest and with the excessive bullish vs. bearish sentiment, next week is going to be a challenge for the market if it's held up into the end of the week. Trade carefully over the next few days.

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

Key Levels for SPX:
- bullish above 1310
- bearish below 1277

Key Levels for DOW:
- bullish above 12,650
- bearish below 12,311

Key Levels for NDX:
- bullish above 2440
- bearish below 2352

Key Levels for RUT:
- bullish above 770
- bearish below 763

Keene H. Little, CMT

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


New Option Plays

Small Caps & Defense

by James Brown

Click here to email James Brown

Editor's Note:

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

MCK - If you're looking for a bearish trade then check out MCK, which is underperforming the market today and appears to be breaking down from its sideways consolidation.

INTU - the stock is in the process of breaking out past resistance at its 2011 highs.

MMM - shares are about to breakout past technical resistance at the 200-dma.

SNDK - this stock just broke through a two-month trendline of lower highs.

RIG - this oil services stock may have put in a bottom but I'd probably look for a little pull back first.

PVH - I am tempted to buy today's bounce near its 10-dma.

NFLX - aggressive traders might want to consider buying a breakout past resistance at $100.00. It could spark more short covering. I would not want to hold over earnings on Jan. 25th.

DLTR - this retail name is showing relative strength and hitting new record highs.

ORLY - also hitting new all-time highs.

MCD - I am tempted to buy calls on MCD here with a stop just under $100 but earnings are coming up on January 24th.


NEW DIRECTIONAL CALL PLAYS

iShares Russell 2000 ETF - IWM - close: 77.72 change: +1.36

Stop Loss: 75.45
Target(s): 82.50
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The stock market is in breakout mode. The Dow Industrial average is above resistance near 12,500. The S&P 500 index is above resistance near 1,300. The NASDAQ composite is hitting new five-month highs. The small cap Russell 2000 index is also breaking out to new relative highs.

As investors grow more confident in the rally the small caps should outperform. Traders bought the dip in the IWM near its 10 and 200-dma this morning. I am suggesting we buy calls tomorrow morning. We will use a stop at $75.45. You may want to consider a stop closer to the 10-dma instead (currently 75.95). Our multi-week target is $82.50. Keep in mind the $80.00 level might offer some overhead resistance. FYI: The Point & Figure chart for IWM is bullish with a $90 target.

- Suggested Positions -

buy the Feb $80 call (IWM1218B80) current ask $1.05

Annotated Chart:

Entry on January 19 at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 40 million
Listed on January 18, 2012


Northrop Gruman - NOC - close: 60.17 change: +0.54

Stop Loss: 57.90
Target(s): 64.00
Current Option Gain/Loss: Unopened
Time Frame: up to NOC's early February earnings report.
New Positions: Yes, see below

Company Description

Why We Like It:
Defense stocks have continued to rally and the group is building on a strong pattern of higher lows. NOC recently broke out past technical resistance at its simple 200-dma. Now it's pushing past round-number resistance at $60.00.

I am suggesting new bullish positions tomorrow morning but only if both NOC and the S&P 500 index both open positive. If opened we'll use a stop at $57.90. Our target is $64.00 but we plan to exit prior to NOC's earnings report in early February. FYI: The Point & Figure chart for NOC is bullish with a $71 target.

*See Entry Details Above*

- Suggested Positions -

buy the Feb $60 call (NOC1218B60) current ask $1.60

Annotated Chart:

Entry on January xx at $ xx.xx
Earnings Date 02/01/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on January 18, 2012



In Play Updates and Reviews

CSH Hit Our Target

by James Brown

Click here to email James Brown

Editor's Note:

Cash America (CSH) hits our bearish target thanks to the earnings warning last night.

The stock market's widespread strength helped trigger our BRK.B and IOC trades. It also pushed bearish play ACN to our stop loss. New put play OPNT has been opened. We took profits on TJX January calls.

Current Portfolio:


CALL Play Updates

Boeing Co. - BA - close: 75.06 change: -0.18

Stop Loss: 73.65
Target(s): 76.00
Current Option Gain/Loss: -53.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/18 update: Uh-oh! BA failed to rally with the rest of the market today. That's a really bad sign when we only have two trading days left on our January calls. At this point readers have to decide how much capital can you salvage? You could exit now for a -53% drop. Fortunately with the S&P 500 over resistance at the 1300 level I would expect another up day tomorrow. I am adjusting our exit target down to $76.00.

- Suggested Positions -

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

01/18/12 adjust exit target to $76.00, only 2 days left
01/17/12 only three trading days left
01/12/12 new stop loss @ 73.65
01/07/12 new stop loss @ 72.65
01/05/12 new stop loss @ 72.25
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.

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


Berkshire Hathaway Inc. - BRK.B - close: 78.92 change: +0.95

Stop Loss: 76.75
Target(s): 83.50
Current Option Gain/Loss: + 4.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/18 update: Our BRK.B trade has been triggered. Shares hit our entry point at $78.75 this afternoon. I would still open new positions now at current levels. Our multi-week target is $83.50. We do not want to hold over the late February earnings report.

- Suggested Positions -

Long Feb $80 call (BRKB1218B80) entry $0.90

01/18/12 triggered at $78.75
01/14/12 adjusted entry point strategy to use a trigger @ 78.75
01/13/12 BRK.B gapped lower, negating our entry point. Trade did not open.

Entry on January 18 at $78.75
Earnings Date 02/27/12 (unconfirmed)
Average Daily Volume = 4.4 million
Listed on January 12, 2012


Starwood Hotel & Resorts - HOT - close: 51.97 change: +1.34

Stop Loss: 49.75
Target(s): 55.75
Current Option Gain/Loss: +14.3%
Time Frame: exit prior to earnings
New Positions: see below

Comments:
01/18 update: After underperforming yesterday HOT bounced back with a strong +2.6% gain. Traders bought the dip near its 200-dma. We can use this move as a new entry point. I am raising our stop loss to $49.75. FYI: The Point & Figure chart for HOT is bullish with a $64 target.

Don't forget that we plan to exit prior to the Feb. 2nd earnings.

- Suggested Positions -

Long Feb $52.50 call (HOT1218B52.5) entry: 1.67

01/18/12 new stop loss @ $49.75
01/13/12 Triggered on a dip at $51.00
01/10/12 initial entry point did not work. New strategy: buy a dip at $51.00.

Entry on January 13 at $51.00
Earnings Date 02/02/12 (confirmed)
Average Daily Volume = 2.4 million
Listed on January 09, 2012


Humana Inc. - HUM - close: 94.52 change: -0.98

Stop Loss: 92.95
Target(s): 99.75
Current Option Gain/Loss: -42.3%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
01/18 update: Hmm... healthcare stocks underperformed the market on Wednesday and HUM was no exception. Shares lost -1.0%. At this point I would look for a bounce near $93.00 or its simple 10-dma before considering new positions.

Our target is $99.75 since the $100 level might be round-number, psychological resistance. We do not want to hold over the early February earnings report. FYI: The Point & Figure chart for HUM is bullish with a $109 target.

- Suggested Positions -

Long Feb $100 call (HUM1218B100) entry $1.30

01/17/12 HUM gapped open higher at $95.75, above our trigger at $95.25

Entry on January 17 at $95.75
Earnings Date 02/06/12 (confirmed)
Average Daily Volume = 1.2 million
Listed on January 14, 2012


InterOil Corp. - IOC - close: 62.50 change: +2.39

Stop Loss: 58.40
Target(s): 66.00
Current Option Gain/Loss: - 0.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/18 update: Our new play on IOC has been triggered. Shares opened at $60.30 but quickly surged toward the $63.00 level, hitting our trigger to open positions at $61.00. I am raising our stop loss to $58.40.

Earlier Comments:
If IOC breaks out higher it could see a big move. That's because IOC could see a possible short squeeze. The most recent data listed short interest at more than 22% of the 33.4 million share float. Our target is $66.00. FYI: The Point & Figure chart for IOC is bullish with a long-term $91 target.

- Suggested Positions -

Long Feb $65 call (IOC1218B65) Entry $5.60*

01/18/12 new stop loss @ 58.40
* entry price is an estimate based on when IOC hit our trigger.

Entry on January 18 at $61.00
Earnings Date 03/22/12 (unconfirmed)
Average Daily Volume = 537 thousand
Listed on January 17, 2012


iShares Transportation - IYT - close: 92.99 change: +0.93

Stop Loss: 89.45
Target(s): 94.75 or 98.50
Current Option Gain/Loss: Jan$95c: - 100% & Feb$95c: -13.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
01/18 update: Traders bought the dip near IYT's rising 10-dma and the ETF continues to move higher. Unfortunately it's not moving fast enough for our options. The ETF is up $1.80 from our entry point but our options are still underwater. I'm still tempted to buy February calls on today's move or you could wait for a new relative high over $93.20.

We only have two days left on January options and the IYT would have to be above $95.00 for our options to have any value, which is unlikely to happen.

- Suggested Positions -

Long Jan $95 call (IYT1221A95) entry $0.20

- or -

Long Feb $95 call (IYT1218B95) entry $1.45
target 98.50

01/12/12 new stop loss @ 89.45
01/07/12 new stop loss @ 88.75
01/03/12 IYT gapped open higher at $91.20, above our trigger at $90.75

Entry on January 03 at $91.20
Earnings Date --/--/--
Average Daily Volume = 582 thousand
Listed on December 22, 2011


Laboratory Corp. - LH - close: 88.47 change: -0.07

Stop Loss: 85.95
Target(s): 94.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
01/18 update: Resistance near $89.00 and the simple 200-dma is proving to be a tough cookie to crack. LH displayed some volatility this morning but the intraday high was only $88.86. If we don't see LH breakout higher by the weekend I'll likely drop it as a candidate for lack of movement.

I am suggesting a trigger to buy calls at $89.00. We'll aim for the $94.75 mark. More aggressive traders could aim for the $97-100 zone instead. FYI: The Point & Figure chart for LH is bullish with a $105 target.

NOTE: We do not want to hold over the earnings report around Feb. 9th (still an unconfirmed date).

Trigger @ 89.00

- Suggested Positions -

buy the Feb $90 call (LH1218B90)

Entry on January xx at $ xx.xx
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 564 thousand
Listed on January 10, 2012


Mohawk Industries - MHK - close: 65.31 change: +1.02

Stop Loss: 59.90
Target(s): 67.50
Current Option Gain/Loss: - 1.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/18 update: MHK delivered another strong session with a +1.5% gain in spite of a downgrade by J.P.Morgan this morning. MHK has stalled twice now near the $66.00 level so this is new short-term resistance. More conservative traders may want to start raising their stop loss.

Our target is $67.50 but we do not want to hold over the February earnings report. More aggressive traders could aim higher.

Investors will be interested to note that the most recent data listed short interest at 5% of the 57 million share float. That's not excessive but it's a bit high and could boost any new gains as bears cover their shorts. FYI: The Point & Figure chart for MHK is bullish with a $90 target.

- Suggested Positions -

Long Feb $65 call (MHK1218B65) Entry $2.48

01/17/12 MHK gapped open higher at $63.99

Entry on January 17 at $63.99
Earnings Date 02/21/12 (unconfirmed)
Average Daily Volume = 621 thousand
Listed on January 14, 2012


Omnicom Group - OMC - close: 47.09 change: +0.50

Stop Loss: 44.75
Target(s): 49.00
Current Option Gain/Loss: +44.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/18 update: OMC quickly rallied off its morning lows but volume is definitely fading. The stock might look a little bit short-term overbought here. I am not suggesting new positions at this time. Look for support in the $46.00-45.00 zone. Please note our new stop loss at $44.75.

More conservative traders could take profits early right now.

Our target is $49.00. We do not want to hold over the mid February earnings report. FYI: The Point & Figure chart for OMC is bullish with a $64 target.

- Suggested Positions -

Long Feb $45 call (OMC1218B45) entry $1.80

01/18/12 new stop loss @ 44.75

Entry on January 12 at $45.75
Earnings Date 02/14/12 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on January 11, 2012


Teva Pharmaceuticals - TEVA - close: 45.40 change: +0.53

Stop Loss: 43.75
Target(s): 49.50
Current Option Gain/Loss: + 1.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/18 update: Today's rebound in TEVA has renewed my faith in the trend. We can use today's gain and close over $45.00 as a new entry point for bullish positions.

Our target is $49.50 but we'll plan to exit prior to the earnings report in early February. FYI: The Point & Figure chart for TEVA is bullish with a $57 target.

(Small Positions)- Suggested Positions -

Long Feb $45 call (TEVA1218B45) entry $1.50

01/18/12 TEVA has rebounded. Use it as a new entry point.
01/17/12 Be careful. TEVA hit our trigger and reversed to close back under $45.00

Entry on January 17 at $45.25
Earnings Date 02/08/12 (unconfirmed)
Average Daily Volume = 5.9 million
Listed on January 14, 2012


TJX Companies - TJX - close: 66.85 change: +0.87

Stop Loss: 64.75
Target(s): 68.50
Current Option Gain/Loss:(Jan$65c: +85.0%) & Feb$65c: +54.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
01/18 update: The trading gods have smiled on our January TJX calls. The stock rallied +1.3% to close near its highs for the session. Our plan was to exit our January $65 calls at the closing bell tonight. These closed with a bid of $1.85 (+85%).

TJX is now trading just under the $67.00 level, which is where it reversed two weeks ago. A breakout could send it toward the $69-70 zone. I am adjusting our exit target for our February calls from $68.00 to $68.50.

Earlier Comments:
On January 5th, management announced a 2-for-1 stock split payable on February 2nd, 2012.

- Suggested Positions -

2012Jan $65 call (TJX1221A65) Entry $1.00, exit $1.85 (+85.0%)

- or -

Long Feb $65 call (TJX1218B65) Entry $1.75

01/18/12 adjusted exit target to $68.50
01/18/12 closed Jan $65 calls @ $1.85 (+85.0%)
01/17/12 prepare to exit January calls at close tomorrow
01/17/12 new stop loss @ 64.75
01/12/12 new stop loss @ 63.75
01/07/12 readers may want to take profits now (Jan$65call +90%, Feb$65call +57%)
01/05/12 new stop loss @ 63.25, TJX announced strong same-store sales and a 2:1 split.
12/31/11 new stop loss @ 62.75

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


PUT Play Updates

OPNET Technologies - OPNT - close: 32.90 change: -0.36

Stop Loss: 33.85
Target(s): 30.00
Current Option Gain/Loss: -22.7% (wide spreads)
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/18 update: OPNT continues to underperform the market. Shares slipped to new relative lows before paring its losses by the closing bell. Our trigger to buy puts was hit at $32.70. Given the stock's weakness I am tempted to open positions again tomorrow but with the market's major indices in breakout mode I would be cautious launching new bearish positions.

Earlier Comments:
Our target is $30.00. More aggressive traders may want to aim lower but I am concerned the 2011 summer lows could be support.

We want to keep our position size small because OPNT has above average short interest at 11.7% of the 14.8 million share float. That raises the risk of a short squeeze should the stock reverse higher. FYI: The Point & Figure chart for OPNT is bearish with a $20 target.

The spreads are a little wide as well, which is another reason to keep our position size small.

(small positions) - Suggested Positions -

Long Feb $30 PUT (OPNT1218B30) Entry $1.10

Entry on January 18 at $32.70
Earnings Date 02/07/12 (confirmed)
Average Daily Volume = 252 thousand
Listed on January 17, 2012


CLOSED BEARISH PLAYS

Accenture Plc, - ACN - close: 54.95 change: +1.46

Stop Loss: 54.15
Target(s): 48.50
Current Option Gain/Loss: -96.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/18 update: With the market in breakout mode I am not surprised to see ACN finally break through resistance at the $54.00 level. Our stop loss was hit at $54.15 this morning.

(small positions) - Suggested Positions -

Long 2012Jan $52.50 PUT (ACN1221M52.5) Entry $1.35, exit $0.05 (-96.2%)

01/18/12 stopped out at $54.15
01/14/12 resistance at $54.00 is holding so far but readers may want to consider an early exit anyway.

chart:

Entry on January 06 at $51.91
Earnings Date 03/26/12 (unconfirmed)
Average Daily Volume = 4.6 million
Listed on January 05, 2012


Cash America Intl. - CSH - close: 41.50 change: -2.60

Stop Loss: 46.10
Target(s): 40.50
Current Option Gain/Loss: Jan $45 put: +223.8% & Feb$45put: +64.5%
Time Frame: up to the earnings report.
New Positions: see below

Comments:
01/18 update: Target achieved.

As expected CSH saw a sharp drop on Wednesday in reaction to its lowered earnings guidance released last night. The stock gapped open lower at $41.49 and plunged to $40.00 a couple of times before finally paring its losses. Our exit target was hit at $40.50.

- Suggested Positions -

Jan $45 PUT (CSH1221M45) Entry $1.05, exit $3.40 (+223.8%)

- or -

Feb $45PUT (CSH1218N45) Entry $2.40 exit $3.95 (+ 64.5%)

01/18/12 Target hit at $40.50
01/17/12 prepare to exit Jan. $45 puts at the close tomorrow.
01/17/12 new stop loss @ 46.10
01/17/12 CSH issued lowered guidance after the closing bell.

chart:

Entry on January 11 at $44.75
Earnings Date 01/26/12 (confirmed)
Average Daily Volume = 292 thousand
Listed on January 05, 2012