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Daily Newsletter, Saturday, 2/4/2012

Table of Contents

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

Market Wrap

Economic Surprise Creates New Highs

by Jim Brown

Click here to email Jim Brown

A blowout jobs number, blowout ISM Services and strong Factory Orders caught investors by surprise and those who were short had a very bad day.

Market Statistics

The Nonfarm Payrolls for January exploded well past consensus estimates to show the addition of +243,000 jobs. Most analysts believed the number would decline sharply from the +203,000 added in December to something in the 100-125K range for January. The explosion of hiring in a month known for seasonal layoffs really caught investors and analysts off guard.

The private sector created +257,000 jobs and the government workforce was cut by -14,000 jobs. Goods producing firms added +81,000 and service firms added +162,000. The diffusion index increased from 62.4 to 64.1 indicating nearly two thirds of private businesses were hiring. The unemployment rate declined to 8.3% from 8.5%. That is the lowest level since February 2009.

However, all was not rosy in the reports. The labor force participation rate declined to 63.7% and that is the lowest level since the recession. The drop in the participation rate was blamed on the conversion to the 2010 census data that showed high population levels than in prior surveys. This was the first month using the new census data. The companion Household Employment Survey also switched to the new census data and that showed an increase in population over prior estimates of 1.51 million people and increased the labor force by 258,000, employment by 216,000 and unemployment by 42,000.

The January benchmark revisions to prior months added +266,000 jobs for all of 2011. Gains were strongest in early 2011 and in the last quarter.

Forecasters and analysts were perplexed by the huge gains when the ADP and Challenger reports were predicting smaller numbers. Job gains were broad based across all industries so one sector did not produce outsized gains to skew the numbers. Construction did see a larger than expected increase and analysts believe it was due to the warmer weather allowing builders to get a head start on spring construction.

Now analysts are forced to reconsider the factors which had been weighing on hiring for the last year. That was slowing global growth, the European debt crisis, weak economics in the USA, weak home prices and restricted credit availability that prevented business expansion. Suddenly those factors appear to have weakened.

Obviously one month does not make a trend and the switch to the most current census data could have produced an accounting anomaly although those reviewing the data claim that is not the case. Over the last six months one million jobs have been created. If the current pace holds we could add another million over the next four months and three million for all of 2012. That would nearly double the number of jobs created in all of 2011. Again, one month does not make a trend but in the chart below there is a definite uptick since the low of 53,000 new jobs in May. Maybe there is hope for the economy and the market.

Nonfarm Payroll Chart

The ISM Services for January was also a significant surprise. The headline number spiked to 56.8 from 52.6. To put this in perspective the headline number has averaged 52.8 for the last six months with the high for that period 53.3 in August. This was a major improvement and well over analyst estimates for a rise to 53.0. This was the highest level since March.

All the major components posted decent gains. New orders rose from 53.2 to 59.4 and the largest increase since April 2009. Backorders rose from 45.5 to 49.5 and very close to moving into expansion territory for the first time since September. Employment rose a whopping +8 points to 57.4 from 49.4 and the largest gain since records were started in July 1997.

New export orders rose from 51.0 to 56.5 and that suggests the economic downturn in Europe is not impacting U.S. companies as bad as previously expected.

The sharp increase in new jobs and the sudden uptick in the ISM Services suggests the economy may be growing well above the current +2% GDP forecasts for Q1. The vehicle sales for January were also much stronger than expected at a rate of 14.1 million compared to 13.5 million in December. This suggests increased hiring in the parts supply chain and stronger consumer confidence than what was reported. You have to be pretty sure about your job before you commit to spend tens of thousands of dollars on a new car or truck.

ISM Services Chart

Lastly the Factory Orders for December rose +1.1% compared to Moody's estimate of 0.6% and consensus estimates of +1.5%. Orders in November rose by +2.2% so this was a slight decline but December is not normally a big month for orders. To have two strong months back to back was a real positive after the prior three months averaged -0.1%. New orders for durable goods rose +3%. Core capital goods orders rose by +3.1% from the prior month and +10% year over year.

The combination of these three reports, Jobs, ISM and Factory Orders, suggests the first quarter is off to a roaring start. Those predicting gloom and doom just a couple weeks ago are being forced to rethink their outlooks.

After a flurry of big reports we have a very weak economic calendar in the days ahead. There is literally nothing on the calendar that should have any market moving potential. The Jobless Claims and Consumer Sentiment are the only reports of any interest and those are light. The Wholesale Trade and International Trade reports are lagging data for December and will likely be ignored as will home prices. Anyone who does not know home prices are weak should not be in charge of investing their own money.

Economic Calendar

Not on the economic calendar but still a factor is the Greek debt disaster. Thursday's "imminent" deal on the debt swap is still imminent. Apparently the private sector debt owners don't want to agree to a deal until the EU and Greece agree on the final terms of the second 130 billion euro bailout. If that deal fails the debt swap talks are meaningless. The 130 billion deal is now thought to be at 150 billion but various EU members are holding up approval until they get more assurances of further austerity and further accountability from Greece. If the big deal is not done soon there won't be enough time to keep Greece from defaulting on 14.5 billion in debt payments on March 20th. The deal has to be approved, the details worked out, pass a final vote and then have funds distributed by March 20th. Officials claim the deal must be finalized this week for all of that to happen by March 20th.

Unions in Greece have rejected any further pay cuts or layoffs and the EU wants another 150,000 workers to be fired. The key point here is when Greece runs out of money all the public workers will be out of a job or at least working for free. The unions are quickly running out of bargaining power.

The Greek Finance Minister said Friday that many tough economic issues had been solved but other crucial issues remain. He also said something to the effect of "If these issues cannot be resolved and Greece elects to withdraw from the euro…" The fact he is even talking about that in public suggests there is a long way to go before everything is resolved favorably. I reported last weekend about an article in the Financial Times quoting Greek officials saying a withdrawal plan had been prepared and would be announced in early March. That news did not get much play in the press but those comments from the FM seem to indicate there is an alternative plan if they can't get the concessions they want from the EU. I believe Germany knows this is going to happen and that is why they don't want to give Greece any more money. The four remaining AAA credits, Germany, Finland, the Netherlands and Luxembourg are against loaning any more money without very strict rules. Why string an addict along for additional months or even years when the future outcome is already known. If they can't go cold turkey and kick the habit today then giving them a monthly fix is just postponing the pain.

There was a meeting scheduled for Saturday with the Troika officials and Greece will propose the terms of the potential debt swap agreement along with its terms for the second bailout. Representatives for the private banks and insurers taking the 70% haircut will also be back in Athens on Saturday to work out any final details. There are rumors Prime Minister Papademos might resign this weekend if he can't get the three parties in his coalition to go along with the stringent terms. "There is no other option" is the message. Accept the terms or subject Greece to a messy default and withdrawal from the euro. All three major coalition parties have rejected the terms. Greece is in its fifth year of recession and will post a budget deficit in 2012 of 9.1% of GDP.

Greece has NOT gone away as a market influence. We are reaching the point where something significant is about to happen. If by some chance Europe decides to open the purse strings again and goes through with the second bailout it would be VERY positive for our markets. If Greece announces it is going to default and withdraw from the euro it would be very negative on a short term basis. I believe a default is already priced in but there would definitely be a severe knee jerk reaction that could be dramatic. Greece is smaller than Houston in economic activity. Its GDP was only $330 billion in 2010. The impact of a Greek default would be harder on Greece than anyone else. Just be aware that we are approaching a critical point in this story where the outcome can produce a significant move in the U.S. markets. Hopefully the EU will buckle and commit to loan the money and by doing so kick the can well down the road where Greece won't be a problem for many months.

Also helping the markets last week was the vote by 25 out of 27 EU members for a stronger fiscal discipline plan. That took some of the focus off Greece. On Thursday Bernanke testified before the House Budget Committee and gave an optimistic outlook for the economy despite the "frustratingly slow pace of the recovery." He did not rule out QE3 but he did distance himself from any new stimulus in the short term. After Friday's economic reports we can kiss that potential QE3 goodbye and probably the plan to keep rates low until late 2014. If the economics in February mirror those in January we will be looking at a quick change of stance by the Fed.

Evidence of this could be seen in the ten and thirty year bond yields after the reports. The 10-year yield spiked +6.79% to a yield of 1.94% from a low of 1.80% Tuesday. The 30-year yield is very close to breaking to a new three month high.

30-Year Bond Yield Chart

Ten Year Note Yield Chart

Crude prices rallied on the jobs news because more people working will increase oil demand. Iran also played into the mix after Supreme Leader Ali Khamenei warned again about halting oil shipments to Europe and causing ten times the trouble for the U.S. and its allies if there was an attack on Iran for any reason. Khamenei also admitted to helping third parties attack Israel and said "From now on, in any place, if any nation or any group confronts the Zionist regime, we will endorse and we will help. We have no fear expressing this."

Israel is moving closer to a unilateral attack and comments like those by Khamenei will only hasten the decision. In the U.S. the threat level surrounding potential Israeli targets like synagogues, restaurants, etc, has been increased. Police forces have stepped up patrols and surveillance after a security document from Israel predicted attacks against soft targets in the USA.

In another speech Khamenei warned "Of a great event" where Zionists and the Great Satan (USA) would be defeated. Of course that plays into the master plan to keep followers in line and tease them with future victory. Who doesn't want to win?

The increasing openness by Iran in expressing hostility and threats is seen as accelerating decisions about preemptive strikes against Iran and the resulting loss of oil shipments. Several articles last week predicted Israel would attack within three months because Iran would reach a point in about six months where attacks would be less effective. Apparently Iran is rapidly moving installations and people in anticipation of an attack. Iran also launched new military exercises in the south to participate in winter war games against a "hypothetical enemy." U.S. forces are just over the border from the games in Afghanistan. Plans for new naval exercises in the Strait of Hormuz have been in the works for weeks.

Iran's oil minister Rostam Qassemi said Saturday Iran would "definitely" cut off oil supplies to "hostile" European countries, without specifying which ones they were. Brent crude rallied to a six month high on Friday in response to the escalating threats.

Brent Oil Chart

WTI Oil Chart

Gold lost $31 after the jobs report. Gold had been rising on the falling dollar and expectations for a weaker economy in 2012. Commodities in general had been in rally mode for several weeks and Goldman and JP Morgan warned on Friday they had come too far, too fast. While Goldman still expects higher prices by year end they felt the sector was due for a pullback.

The number of open contracts on 24 commodities rose by 9.3% in January and the most since January 2006. Speculators are the most bullish since November according to CFTC data. Hedge funds and other large speculators are holding 742,902 net long contracts across 18 U.S. futures products. That is up from 454,512 in December. Open interest across the 24 commodity group rose to 10.43 million contracts on Jan 31st, up from 9.54 million on Dec-30th.

However, this is also a seasonal event. Commodity funds normally liquidate positions in Q4 and then reenter new positions in January.

Gold Chart

Silver Chart

I believe we just heard the starter's gun for a strong rally in equities. With the majority of the investing public heavily invested in bonds there is going to be a flood of money coming back into equities once bonds begin to collapse. Given the dramatic economics and the dramatic sell off in bonds on Friday I believe we have seen a top in bonds. When that 30-year yield breaks to a new three month high the race will be on to dump bonds and buy stocks.

I am sure quite a few investors will believe the payroll report was a fluke and they will remain in bonds until the next few reports confirm. If they don't confirm then there is no harm and the existing strategies remain in place. If they do confirm an accelerating recovery then get out of the way. The herd will stampede and stocks will move higher, possibly much higher.

Of course the key here is that the future economic reports must confirm the improvement. However, if you are a fund manager with millions or even billions under management are you going to wait several weeks before you start reallocating your portfolio? Probably not. Odds are good you will start moving some money in order to be ready for the change in strategy.

Obviously Friday was a giant short squeeze. The difference was the new closing highs well over resistance and a strong reason why investing conditions may have changed. Investors and analysts have been waiting for three years for this moment.

On the NYSE there were 295 new 52-week highs and many of those were all time highs. On the Nasdaq there were 263 new highs. There were only 5 new lows on the NYSE and 14 on the Nasdaq. Advancers were nearly 4:1 over decliners but that is expected in a major short squeeze.

Monday is going to be the key. Asia should open higher on our news. Europe should also open higher but it depends on the events in Greece over the weekend. If Greece was to somehow be magically resolved over the weekend we would be in blast off mode.

I believe the change in sentiment has been underway for several days. For evidence I will use the Russell Microcap Index ($RUMIC). This is an index of 1000 stocks with an average market cap of $310 million. These stocks are traded on the major exchanges and not the OTC bulletin board. These are the smallest stocks in the Russell universe. You would recognize very few of these names. They are very illiquid and fund managers would not be throwing money at these stocks unless they were confident of the market direction. There is an ETF for it called the IWC. The RUMIC has been moving up steadily since the beginning of the year but look at the acceleration that started on Wednesday. That was when the auto sales came in at 14.1 million and the highest pace since mid-2008. The ISM Manufacturing rose for the third consecutive month to a 7-month high and construction spending rose +1.5% and the fastest rate in four months.

Russell Microcap Index Chart

Also fueling the sudden change in market sentiment is some good news from around the world. Germany's employment rate hit a record low and the economy grew faster than expected in Q4. The consumer confidence in the UK rose to seven month highs. Russia reported a Q4 GDP of 4.3% which was better than expected. Japan's industrial production spiked by +4% which was much more than expected.

China's services PMI fell to 52.9 from 56 and the second lowest on record. Wu Qing, a finance researcher with the State Council Development Center, warned of deflation ahead if China did not immediately increase stimulus and remove restrictive monetary policy. Qing warned China needed to cut rates ASAP. Zhang Chenghui, an economic researcher with The Economic Times, also warned the PBOC must cut rates "many times" in 2012 to avoid a hard landing. Reuters conducted a poll that showed economists expect the PBOC to cut the reserve rate four times in 2012 by half a point in each cut. The point to this paragraph is that China is under extreme pressure to cut rates and provide other stimulus for the economy. The odds are very good this will happen soon.

Don't forget the sharp decline in yields on sovereign debt in Europe after the nearly 500 billion euros in LTRO loans from the ECB. That program changed the outlook for Europe almost overnight. Now they are getting ready to do it again in February and the expectations are for as much as one trillion euros. This is QE at its finest despite the fact they "sterilize" it by taking liquidity out elsewhere. You give 900 banks 1.5 trillion euros for three years at 1% interest and you could float the Costa Concordia on that much liquidity. This is the ECB acting like the Fed and the program is working.

The downside to this bullish scenario is the weak earnings. Only 44% of companies have beaten on revenue for Q4. Guidance has been lousy with numerous high profile companies guiding lower. Just one week ago nearly every analyst was predicting profits that would barely grow in Q1 and Q2. That has not changed. However, those earnings reports had failed to dampen investor spirits. Stocks getting crushed on earnings were rebounding 2-3 days later. Investors were buying the hope rather than the reality. Now they have increased hope thanks to the payroll report.

The Dow and Nasdaq broke out to multi-year highs. The S&P and the Russell indexes are lagging that breakout. Since the Dow is the milepost by which the market is measured the headlines in the weekend papers will be "Markets hit Three Year High." If they use the Nasdaq Composite that headline would read "Tech Stocks at 11-year high." Regardless of the reasons those headlines will be bullish for sentiment.

The S&P gained +1.5% to close at 1345 and exactly at strong resistance dating back to February 18th. The range from 1345 to 1370 should be very strong resistance but with the Dow and Nasdaq in blue sky territory that resistance should weaken. If Europe and Asia trade up Sunday night we could see the S&P launch right to the top of that range at the open.

Of course the S&P is the most overbought on the RSI as it has been since Feb-2011. The beauty about rallies is they can remain in overbought territory for a long time.

Support is now well back at 1325 and I am sure a dip to that level would be instantly bought assuming of course there were no catastrophic headlines from Europe.

S&P Chart

The Dow closed well over the high close for 2011 at 12,810 to breakout to a new three year high. One market technician suggested using the 3% rule on breakouts. Be cautious until the index has moved +3% over the prior resistance level before committing large amounts of money. Breakouts that only exceed the prior levels by only a handful of points tend to backtrack.

The next material resistance is 14,000-14,100 and the highs from 2007. Just typing those numbers causes me to pause. I would have thought a return to those levels would be due to a strong recovery in the range of 4.5% GDP, low unemployment and strong profits for corporations. Obviously we are not there yet but even 13,000 should have been a result of those conditions. You never know what the future may bring.

The Dow's gains over the last month was produced by ten stocks that accounted for 58% of the gain.

Support is 12,700.

Dow Chart

The Dow Jones Total Stock Market Index, formerly Wilshire 5000, is only 200 points below strong resistance at 14,350 and a breakout there would confirm the broad market rally. This is not a narrow breadth index where a few stocks can account for the majority of the gains. This is the broadest index and a true representation of the entire market.

Wilshire 5000 - Dow Total Stock Market Index Chart

The Nasdaq has been the favorite of retail investors in 2012 and Friday was no different. There was a strong 1.6% gain with 263 stocks making new 52-week highs. Apple, Microsoft, Intuitive Surgical, Panera, Gilead Sciences, Peet Coffee, F5 Networks, Medivation and Fiserv were some of the companies making new highs. Google and Amazon were obviously missing from that list thanks to their earnings disappointments.

The Nasdaq vaulted over resistance by about 30 points so that was a pretty solid confirmation. Support is well back at 2800.

The Nasdaq 100 ($NFX) continued its breakout to new 11-year highs and it is now +125 points over prior resistance.

Nasdaq Chart

Nasdaq 100 Chart

The Russell 2000 continued its breakout over resistance at 800 and has now stretched those gains to 31 points with a huge +2.24% gain on Friday. The index ran into uptrend resistance at 830 and would be due for a decent dip but that depends on how much cash investors are planning on moving from bonds to stocks.

Support is well back at 800-805.

Russell 2000 Chart

The Dow Transports are inching higher but with far less conviction because of the high fuel prices. With oil still hovering around $100 that is a weight on profits.

Dow Transports Chart

As I stated earlier I think the jobs numbers, if they are to be believed, suggest the U.S. is growing faster than estimates from just a couple weeks ago. Charles Biderman from TrimTabs.com is highly skeptical of the payroll numbers produced by the BLS because they don't relate to real data collected in real time in the form of tax collections. The government could produce a real time number based on the number of employees being paid every week and the tax deposits by the employer. The government has steadfastly refused to change over the years for various reasons.

The Nonfarm Payroll numbers have been politicized in the past with various administrations changing the way they are calculated in order to paint a better picture of their economic success. Clinton was the last person to change the calculation but at least the new rules were clear. Since 99.9% of the public has no clue why or how the numbers are derived the only piece of the puzzle they see is the headline number. A strong number improves consumer sentiment and happy consumers buy more goods and spend more money.

Charles Biderman produced a short video explaining his position on what he says was a drop of -2.9 million jobs that miraculously turned into a gain of 446,000 new jobs over the last two months. See Video

Biderman's claims should be ignored by the market because most investors don't care. The will see the +243,000 new jobs headline and immediately form the opinion that the economy is accelerating. In theory this should produce more market gains as fund managers and investors begin to shift money out of bonds and back into equities.

The fly in the market soup is still Greece. As of late Saturday the battle is still raging between Greek politicians and the troika (EU, IMF, ECB). The demands by the troika are reportedly chiseled in stone and they are not giving an inch in the negotiations. Headlines were being updated continuously with claims and counter claims over who was to blame for the delays and lack of an agreement. The meeting of all Greek party chiefs was postponed until Sunday. The troika is requiring leaders of all the political parties to sign off on the new austerity measures. Several are dead set against it. Greece is supposed to present its final proposal to the troika on Monday and the EU Finance Ministers are expected to vote on Wednesday. These dates are subject to revision at any time.

The outcome in Greece should be known over the next three days. I know, we have been expecting the outcome every three days for the last three months. This time may be different. That outcome will play against the background of a potentially accelerating recovery in the USA and stronger economic numbers in Europe and possible economic stimulus in Asia.

The market appears to be setting up for what could be a strong continued rally "IF" all the parts in Europe and Asia come together as expected. The trend remains our friend and I would not bet against it next week. I was cautious over the last couple weeks but that caution is ebbing. I still believe Greece will eventually default but I have hopes the meetings this weekend end in an agreement that allows the EU to kick the can far enough down the road that Greece is not a daily headline for all of February.

Jim Brown

Send Jim an email

"Technical analysis exists to make "stock pickers" feel better about their gambling problem."
Anonymous


Index Wrap

Into Overdrive

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

Instead of even a short-term pause, the market powered ahead, with the Dow and the Nasdaq closing at new weekly highs. Not many weeks ago I wrote that the Nas Composite's breakout above a bullish triangle suggested upside potential to 3000; a faraway target then but not today.

Another topic you may have heard from me before (probably, too many times) is that the 'pressure' of an overbought condition gets relieved so to speak, by EITHER a dip in price OR a sideways move. I like to talk about a sideways move 'throwing off' an overbought condition.

It wasn't too much of a surprise to see at least a short-term rally after the sideways move seen on the hourly chart below caused the important 21-hour oscillator to drop back into a neutral to lower range. Assuming a strong trend, when the 21-hour RSI drops back to 45 to 40 this will be about as low as its going to go; next up is the next buying wave. This rule of thumb applies to the indexes only since stocks are all over the place.

The S&P 500 (SPX) and the other major indexes such as the Dow had appeared to be forming 'Head & Shoulder (H&S) Tops' on an hourly chart basis, so I 'flagged' that last week as a concern for a minor pullback; minor being the operative word here. The Head and Shoulder's top pattern was negated so to speak when prices rebounded to above the assumed Right Shoulder of this kind of 3-prong top figure. INDU looks headed still higher and the key test will come in the 12950-13000 area.

This past week saw the Dow 30 Industrials (INDU) going to new Weekly Closing high. In terms of Dow Theory benchmarks, the Dow Transportation (TRAN) will need to Close above 5548 to 'confirm' INDU as pointing to still higher prices for stocks longer-term. With TRAN closing the week at 5368, a move above 5548 is some distance to cover. Overall, the key thing is that INDU, what so many consider to be 'the' market, is still in very strong move.

OTHER INDEXES:

The Semiconductor Index (SOX) say further strength this past week and closed well above a key resistance at 420. The SOX index is a bellwether for COMP and NDX. It's rare for a major move in the broader tech indexes without help from the semiconductor stocks.

The S&P Bank Sector Index (BIX) had a strong move and closed at its highs for the week. This was helping boost the S&P of course and can some more. The 150 area may offer next BIX resistance.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) renewed its strong uptrend and then some this past week as it decisively cleared prior highs at 1325-1330.

The highs of May and July 2011 in the 1350-1370 area form the big potential resistance. But then next resistance is implied by the prior up trendline, intersecting currently just overhead, at 1375-1380. I don't rule out a move to big even round number '1400' but the current rally has been a prolonged one without much of a dip. I'd guess we get a sell off before 1400 but the bull is loose. I'd tend to exit any bullish trades if 1380 is seen and not wait for whether 1400 is too on this current rise.

Key near support is the 1310-1307 area, then back at the trendline at 1285.

The RSI seen above is at more of an overbought extreme than it was last week but my CPRATIO sentiment indicator is not yet at a similar extreme so my guess is there's no immediate top.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart is strongly bullish but is now entering its key resistance zone at 607-611. Above this band next resistance looks like 620 which the index looks capable of reching.

Key support is in the low-590 area, then at 580. OEX looks to be headed still higher even though 'conventional' technical measures would say the rally is living on 'borrowed time' without a significant correction setting in.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) is strongly bullish in its pattern, as INDU accelerated in its advance above prior key resistance at 12800. I think it's a no brainer to think the Average will see 13000 tested. When is the question. The Dow is pretty overbought but strong rallies often get more overbought and stay there for periods sometimes long ones.

Next projected resistance above the important 13000 level looks like 13150-132200.

Key support is at 12600, then at 12400. A decisive break of 12600 says to me potential to carry at least 200 points lower.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) chart is strongly bullish. I wrote last of COMP's potential to test or reach 'pivotal' resistance at 2900, making the 2905 daily and weekly Close an important breakout; assuming this wasn't a closing 1-day wonder. The fact that my sentiment indicator hasn't run up to bullish extremes (not yet) suggests more upside potential.

Last week I also wrote of potential for at least a minor pullback. Instead tech stocks went into an accelerated run up which was wild. When COMP pierced the top end of a triangle a few weeks back, a 'measured' objective suggested the Index could go to 3000; I didn't believe that kind of objective realistic at the time, but here COMP is nearly at that technical target.

I've highlighted 'resistance' in the 2965 area and this should easily extend to 3000. Whether this current barnburner rally makes it to the top end of the projected uptrend channel and to the upper 'overbought' envelope line is a hard guess but this past week was a bullish surprise and more may be in store.

Near support is 2825, extending to 2775.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) big cap index of course has seen and in fact as led this last even more accelerated advance in the tech heavy Nasdaq. When the rate of advance or decline already forms a STEEP angle trendline and the move accelerates still noticeably more, there's also a much greater likelihood of a sharper and rougher than usual shakeout.

NDX's advance to date has been impressive but you would be hard pressed to know what a strong trend its been in from listening to most media; a power move led by a power company, Apple (AAPL) of course. I project NDX bellwether AAPL hitting resistance around 470, more at the pivotal $500 level.

Next NDX resistance may come around 2550 and more strongly at 2600. Key technical support is seen at 2470, the current crossing point for NDX's up trendline. Next support is 2400.

NDX is overbought now on BOTH a daily and weekly chart basis although the Index is showing a greater extreme in terms of the 13-day RSI. On a weekly chart (not shown), the 8-week RSI is high but has annually gone higher for a few weeks or more in the past two year period.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nas 100 tracking stock QQQ offered me some thrills and chills in trying to short the stock, but at 61.6 I was out of that notion. The strong close for the week suggests that people are putting some more cash to work and/or re-allocating into more tech. QQQ offers a good way to move into or out of this tech segment, the 100 biggest Nasdaq stocks in capitalization terms. Capitalization of course can reflect an overinflated price for the stock; hmm, some social network IPO comes to mind.

That volume fell off at week's end on a further sharp run up, suggests some others with the notion of throwing in the towel on ideas of shorting this thing and threw in the towel ahead of the weekend; short squeeze! Otherwise, there aren't a lot of buyers chasing stocks at these levels; bearishness is still too engrained and the Q's so far off their bottom. On Balance Volume (OBV) has mirrored and 'confirmed' the very strong advance.

I've highlighted 62.6-63 as potential resistance, especially 63. Key technical support is at 60 even currently.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) accelerated to the upside this past week. It's a very bullish chart but one that looks like its gone/going into a runaway 'straight up' kind of move; for awhile anyway.

The risk of a shakeout grows with this latest spurt higher after what had already been a strong advance. A move like we're seeing with RUT and its sharply curving arc higher is both exciting to watch or profit from, but it also makes for scary shakeouts.

I can't suggest potential technical resistance at new highs like this except by reference to the upper end of my re-drawn and broadest uptrend channel at 860.

Key support is at 800-793.



GOOD TRADING SUCCESS!


New Option Plays

Industrials & Oil Services

by James Brown

Click here to email James Brown

Editor's Note:

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

(bullish candidates) FOSL, BBBY, AMGN, UTHR, UA, QCOM, LLL, GPC, COL, VTR IDXX, FFIV


NEW DIRECTIONAL CALL PLAYS

Chicago Bridge & Iron - CBI - close: 44.90 change: +0.92

Stop Loss: 43.25
Target(s): 49.25
Current Option Gain/Loss: Unopened
Time Frame: up to the Feb. 23rd earnings report
New Positions: Yes, see below

Company Description

Why We Like It:
The stock market's rally has helped lift CBI to major resistance at the $45.00 level. A failure here would look like a huge bearish double top. Yet a breakout could signal a run to the next level of significant resistance near $50.00.

I am suggesting a trigger to open bullish positions at $45.25. If triggered we'll use a stop at $43.25. Our exit target is $49.25. We do not want to hold over the Feb 23rd earnings report. FYI: The Point & Figure chart for CBI is bullish with a long-term $70 target.

(Buy Calls) Trigger @ $45.25

- Suggested Positions -

buy the MAR $45 call (CBI1217C45) current ask $2.10

Annotated Chart:

Entry on February xx at $ xx.xx
Earnings Date 02/23/12 (unconfirmed)
Average Daily Volume = 852 thousand
Listed on February 04, 2012


S&P Oil ETF - XES - close: 37.55 change: +0.62

Stop Loss: 36.45
Target(s): 43.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The XES is an oil services ETF. The industry is poised to breakout past major resistance and appears to be in the process of doing that right now. The XES just rally past its simple 200-dma and price resistance near $37.50. I want to see a little more confirmation. I am suggesting we buy calls at $37.75 or higher. More conservative traders may want to consider waiting for XES to close over $38.00 before initiating new positions. The Point & Figure chart for XES is currently bearish but a rally past $38.00 would create a brand new quadruple top breakout buy signal.

The option spreads on the XES a bit wide, which makes this a higher-risk trade. I am suggesting we keep our position size small to limit our risk. Our multi-week exit target is $43.00. I prefer the March calls but short-term traders can use February options but these expire in two weeks.

Trigger @ 37.75 (small positions)

- Suggested Positions -

buy the Feb $37 call (XES1218B37) current ask $1.05

- or -

buy the Mar $36 call (XES1217C36) current ask $2.55

Annotated Chart:

Entry on February xx at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 177 thousand
Listed on February 04, 2012



In Play Updates and Reviews

IWM Small Cap ETF Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:

The stock market surged to new relative highs on Friday fueled by better than expected job numbers.

IWM hit our exit target. FLS also hit our exit target for the February calls. LNN was triggered. XEC was stopped out. We closed BRK.B, ESRX, LUFK, and PVH on Friday morning.

Current Portfolio:


CALL Play Updates

Cognizant Technology - CTSH - close: 73.35 change: +0.74

Stop Loss: 71.45
Target(s): 76.50
Current Option Gain/Loss: +23.5%
Time Frame: exit prior to the Feb. 8th earnings
New Positions: see below

Comments:
02/04 update: We only have two days left. CTSH is due to report earnings on Feb. 8th before the opening bell. We will plan to exit on Tuesday at the close unless shares hit our stop or exit target first. I am raising our stop loss to $71.45. No new positions at this time.

- Suggested Positions -

Long Feb $75 call (CTSH1218B75) Entry $0.85

02/04/12 new stop loss @ 71.45
02/01/12 new stop loss @ 69.75
01/24/12 trade opened at $71.05

chart:

Entry on January 24 at $71.05
Earnings Date 02/08/12 (confirmed)
Average Daily Volume = 2.3 million
Listed on January 21, 2012


Dollar Tree - DLTR - close: 86.03 change: +0.35

Stop Loss: 84.75
Target(s): 89.75 & 92.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
02/04 update: DLTR's performance on Friday was very disappointing. If shares can't breakout to new highs while the market is surging higher then when will DLTR move higher? I am suggesting we only open small positions if DLTR hits our trigger at $86.75.

Earlier Comments:
I am setting individual targets for our options below. Keep a wary eye on the $90.00 level since it might be round-number resistance. FYI: The Point & Figure chart for DLTR is bullish with a long-term $113 target.

(Buy Calls) Trigger @ 86.75 (small positions)

- Suggested Positions -

buy the Feb $87.50 call (DLTR1218B87.5)
exit target: 89.75

- or -

buy the Mar $87.50 call (DLTR1217C87.5)
exit target: 92.50

02/04/12 Only open small (half-sized) positions if DLTR hits our entry point at $86.75

chart:

Entry on February xx at $ xx.xx
Earnings Date 02/22/12 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on February 02, 2012


Flowserve Corp. - FLS - close: 114.43 change: +2.46

Stop Loss: 109.45
Target(s): 114.50 for Feb call & 118.00 for April call
Current Option Gain/Loss: Feb $110c: +48.2% & Apr$115c: +45.0%.
Time Frame: 3 to 4 weeks
New Positions: , see below

Comments:
02/04 update: Target achieved. FLS gapped open higher at $113.63 and rallied to a new multi-month high above $114.00. Our exit target for the February calls was hit at $114.50. The bid on the Feb. $110 call was $5.00 (+48.2%).

We still have the April $115 calls. I am not suggesting new positions at this time. We are raising our stop loss to $109.45. Readers may want to raise their stop even higher but I wouldn't be surprised to see a dip back toward the 10-dma. FYI: The Point & Figure chart for FLS is bullish with a $139 target.

- Suggested Positions -

FEB $110 call (FLS1218B110) Entry $2.59, Exit $5.00 (+48.2%)
exit target: $114.50

- or -

Long APR $115 call (FLS1221D115) Entry $4.00
exit target: $118.00

02/04/12 new stop loss @ 109.45
02/03/12 exit target hit at $114.50 for Feb. $110 calls. exit $5.00 (+48.2%)
02/02/12 new stop loss @ 107.95
02/01/12 new stop loss @ 106.95
02/01/12 adjusted exit targets: $114.50 for Feb call, $118.00 for Apr call
01/30/12 new stop loss at $105.75
01/26/12 trade opened on FLS' gap open higher at $109.21.
01/25/12 adjusted entry point strategy to buy calls when FLS hits $109.05, and use a stop loss at $105.45

chart:

Entry on January 26 at $109.21
Earnings Date 02/23/12 (unconfirmed)
Average Daily Volume = 400 thousand
Listed on January 21, 2012


iShares Transportation - IYT - close: 95.82 change: +1.07

Stop Loss: 93.40
Target(s): 98.50
Current Option Gain/Loss:(Jan$95c: -100%) Feb$95c: +20.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/04 update: IYT rallied +1.1% to close at new six-month highs. The trend is definitely up but the transports might have done better on Friday if oil prices hadn't seen a bounce as well.

I am not suggesting new positions at this time. We are raising the stop loss to $93.40. More conservative traders may want to adjust their stop closer to $94.00 instead.

- Suggested Positions -

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

02/04/12 new stop loss @ 93.40
01/31/12 new stop loss @ 92.45
01/28/12 new stop loss @ 91.75
01/21/12 new stop loss @ 91.40
01/21/12 January $95 calls have expired.
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

chart:

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


Laboratory Corp. - LH - close: 93.09 change: +0.67

Stop Loss: 90.75
Target(s): 94.00
Current Option Gain/Loss: +140.0%
Time Frame: up to the Feb. 10th earnings report.
New Positions: see below

Comments:
02/04 update: LH closed at new six-month highs. We only have four trading days left on this trade. More conservative traders may want to exit early now. I am adjusting our exit target down to $94.00 and our stop loss up to $90.75. I am not suggesting new positions at this time. Remember, we plan to exit prior to the Feb. 10th earnings report.

- Suggested Positions -

Long Feb $90 call (LH1218B90) Entry $1.50

02/04/12 new stop loss @ 90.75, adjust target to $94.00
02/01/12 new stop loss @ 89.65
01/31/12 If you haven't done so yet readers may want to take profits now (+80%)
01/28/12 new stop loss @ 88.40
01/26/12 sold half @ the open, bid @ $2.65 (+76.6%)
01/25/12 sell half at the open tomorrow. Bid on the Feb. $90 call is at $3.10 (+106%).
01/25/12 new stop loss @ 87.90
01/24/12 rival DGX delivers a strong earnings report
01/23/12 trade triggered at $89.00
01/21/12 new stop loss at $86.90. Still waiting for LH to hit our entry point at $89.00.

chart:

Entry on January 23 at $89.00
Earnings Date 02/10/12 (confirmed)
Average Daily Volume = 564 thousand
Listed on January 10, 2012


Lindsay Corp. - LNN - close: 65.68 change: +2.13

Stop Loss: 61.75
Target(s): 69.75
Current Option Gain/Loss: Feb65c: +68.1% & Mar65c: +32.0%
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
02/04 update: Our new trade on LNN is off to a strong start. Shares gapped higher on Friday at $64.75 and surged to $66.58 (+4.7%) before paring its gains to just +3.3%. We had a trigger to buy calls at $64.50 so the play was opened on Friday morning. Our exit target is $69.75. FYI: The Point & Figure chart for LNN is bullish with a long-term $87 target.

(small positions) - Suggested Positions -

Long Feb $65 call (LNN1218B65) Entry $1.10

- or -

Long Mar $65 call (LNN1217C65) Entry $2.50

02/03/12 LNN gapped open higher at $64.75, above our trigger at $64.50

chart:

Entry on February 03 at $64.75
Earnings Date 03/29/12 (unconfirmed)
Average Daily Volume = 150 thousand
Listed on February 02, 2012


Monsanto - MON - close: 82.15 change: +0.02

Stop Loss: 78.99
Target(s): 86.90
Current Option Gain/Loss: Feb85c: -40.0% & Mar$85c: -18.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
02/04 update: Warning! MON did not participate in the market-wide rally on Friday. I find this lack of strength worrisome. We will plan to cut our losses on Monday morning and exit at the open.

Earlier Comments:
MON can be somewhat volatile so we want to keep our position size small. If triggered our target is $86.90. FYI: The Point & Figure chart for MON is bullish with a long-term $113 target.

(small positions) - Suggested Positions -

Long FEB $85 call (MON1218B85) Entry $0.80

- or -

Long MAR $85 call (MON1217C85) Entry $1.80

02/04/12 MON did not participate with the market rally on Friday. Plan to exit early on Monday morning at the open

chart:

Entry on January 31 at $82.75
Earnings Date 01/05/12
Average Daily Volume = 4.8 million
Listed on January 30, 2012


Pall Corp. - PLL - close: 62.19 change: +1.36

Stop Loss: 59.45
Target(s): 64.75
Current Option Gain/Loss: Feb$60c: +22.8% & Mar$60c: +20.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/04 update: PLL produced a strong surge to new all-time highs on Friday. Shares hit $62.76 before paring its gains. I am raising our stop loss up to $59.45. Our target is $64.75.

FYI: The Point & Figure chart for PLL is bullish with an $83 target.

- Suggested Positions -

Long FEB $60 call (PLL1218B60) Entry $1.75

- or -

Long MAR $60 call (PLL1217C60) Entry $2.90

02/04/12 new stop loss @ 59.45

chart:

Entry on February 02 at $61.00
Earnings Date 03/12/12 (unconfirmed)
Average Daily Volume = 769 thousand
Listed on January 31, 2012


SPX Corp. - SPW - close: 73.64 change: +2.94

Stop Loss: 69.90
Target(s): 74.75
Current Option Gain/Loss: +91.1%
Time Frame: up to the Feb. 16 earnings report
New Positions: see below

Comments:
02/04 update: SPW was a strong outperformer on Friday with a +4.1% gain. The stock surged to $74.31 intraday. Our exit target is $74.75 but more conservative traders may want to go ahead and exit early now. I am not suggesting new positions at this time. We are raising our stop loss to $69.90.

Earlier Comments:
Our target is the $74.75 mark but more aggressive traders could aim higher. We do not want to hold over the Feb. 16th earnings report. FYI: The Point & Figure chart for SPW is bullish with an $82 target.

- Suggested Positions -

Long Feb $70 call (SPW1218B70) Entry $2.25

02/04/12 new stop loss @ 69.90, readers may want to exit now to lock in gains.

chart:

Entry on January 31 at $70.50
Earnings Date 02/16/12 (unconfirmed)
Average Daily Volume = 711 thousand
Listed on January 26, 2012


Wellcare Health Plans - WCG - close: 60.55 change: -0.70

Stop Loss: 59.45
Target(s): 64.50
Current Option Gain/Loss: - 3.2%
Time Frame: exit prior to earnings on Feb. 15th
New Positions: see below

Comments:
02/04 update: WCG and many of its peers underperformed the market on Friday. I couldn't find any specific news for the group's underperformance. WCG's failure to participate in the market's rally is troubling. More consrevative traders may want to go ahead and exit now. I am not suggesting new positions although technically broken resistance near $60.00 should be new support. Please note our new stop loss at $59.45.

Earlier Comments:
Our target is $64.50. We do not want to hold over the Feb. 15th earnings report. FYI: The Point & Figure chart for WCG is bullish with a long-term $74 target.

- Suggested Positions -

Long Feb $60 call (WCG1218B60) Entry $2.79

02/04/12 new stop loss @ 59.45. Cautious traders may want to exit early now since WCG did not rise with the market on Friday
02/01/12 trade opened on gap higher at $60.28, above our trigger of $60.25

chart:

Entry on February 01 at $60.28
Earnings Date 02/15/12 (confirmed)
Average Daily Volume = 485 thousand
Listed on January 31, 2012


PUT Play Updates

Currently we do not have any active put trades.


CLOSED BULLISH PLAYS

Berkshire Hathaway Inc. - BRK.B - close: 80.00 change: +1.27

Stop Loss: 77.75
Target(s): 84.00
Current Option Gain/Loss: -48.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
02/04 update: BRK.B had been underperforming and on Thursday night we decided to close BRK.B at the open on Friday. Shares opened at $79.56 and rallied to resistance at $80.00. If the stock can breakout and close over $80.00 I would be tempted to buy calls again.

- Suggested Positions -

Feb $80 call (BRKB1218B80) entry $0.90, exit $0.46 (-48.8%)

02/03/12 closed at the open $79.56
02/02/12 prepare to exit at the open tomorrow morning.
01/28/12 new stop loss @ 77.75, adjusted exit to $84.00
01/25/12 new stop loss @ 77.45
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.

chart:

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


Express Scripts, Inc. - ESRX - close: 52.08 change: +0.33

Stop Loss: 49.95
Target(s): 57.00
Current Option Gain/Loss: -39.0%
Time Frame: exit prior to February earnings
New Positions: see below

Comments:
02/04 update: The plan was to exit our ESRX positions at the open on Friday. Shares gapped higher at $52.12 and spent the rest of the day drifting sideways. The overall pattern is bullish but short-term momentum has stalled.

- Suggested Positions -

Feb $52.50 call (ESRX1218B52.5) Entry $2.00 exit $1.22 (-39.0%)

02/03/12 exit at the open
02/02/12 ESRX is not performing. We want to exit early at the open tomorrow.

chart:

Entry on January 26 at $52.67
Earnings Date 02/16/12 (unconfirmed)
Average Daily Volume = 6.6 million
Listed on January 25, 2012


iShares Russell 2000 ETF - IWM - close: 82.95 change: +1.77

Stop Loss: 77.95
Target(s): 82.50
Current Option Gain/Loss: +154.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
02/04 update: Target achieved.

The IWM gapped open higher at $82.47 and surged to $83.22 before trimming its gains. Our exit target was hit at $82.50 early Friday morning.

- Suggested Positions -

Feb $80 call (IWM1218B80) Entry $1.14 exit $2.90 (+154.3%)

02/03/12 target hit at $82.50
02/02/12 new stop loss @ 78.75
02/01/12 new stop loss @ 77.95
01/31/12 new stop loss @ 77.45
01/19/12 IWM gapped open higher at $78.13

chart:

Entry on January 19 at $78.13
Earnings Date --/--/--
Average Daily Volume = 40 million
Listed on January 18, 2012


Lufkin Industries - LUFK - close: 77.93 change: +1.82

Stop Loss: 73.40
Target(s): 82.00
Current Option Gain/Loss: - 42.3%
Time Frame: up to the Feb. 9th earnings report.
New Positions: see below

Comments:
02/04 update: The stock market's big rally on Friday pushed LUFK to gap open higher at $77.41. The stock has broken out to new relative highs. Shares are facing potential resistance at $80.00. It was our plan to exit positions on Friday at the open.

- Suggested Positions -

Feb $80 call (LUFK1218B80) Entry $2.95 exit $1.70 (-42.3%)

02/03/12 closed on Friday morning
02/02/12 exit tomorrow at the open.
01/25/12 triggered @ 76.60

chart:

Entry on January 25 at $76.60
Earnings Date 02/09/12 (confirmed)
Average Daily Volume = 300 thousand
Listed on January 24, 2012


PVH Corp. - PVH - close: 78.11 change: +1.85

Stop Loss: 74.75
Target(s): 83.50
Current Option Gain/Loss: Feb77.50c: -75.0% & Mar$80c: -29.4%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
02/04 update: The stock market's widespread gains on Friday finally produced the move we have been looking for in PVH. Shares broke out past resistance near $78.00 to close at new highs. Yet we had already decided to close our position on Friday morning for PVH's lack of movement. Nimble traders may want to reconsider new positions here if PVH sees any follow through higher on Monday. Our trade was closed with the open on Friday at $77.11.

Earlier Comments:
The plan was to keep our position size small to limit risk. FYI: The Point & Figure chart for PVH is bullish with a $92 target.

- Suggested Positions - (small positions)

Feb $77.50 call (PVH1218B77.5) Entry $2.40 exit $0.60 (-75.0%)

- or -

Mar $80 call (PVH1217C80) Entry $2.55 exit $1.80 (-29.4%)

02/03/12 exit at the open
02/02/12 prepare to exit at the open tomorrow.
01/24/12 trade triggered at $77.60
01/23/12 trade still not open
new entry point strategy to use a trigger at $77.60, stop loss at $74.75
01/21/12 trade not open yet. try again.

chart:

Entry on January 24 at $77.60
Earnings Date 03/28/12 (unconfirmed)
Average Daily Volume = 867 million
Listed on January 19, 2012


CLOSED BEARISH PLAYS

Cimarex Energy Co - XEC - close: 61.45 change: +1.68

Stop Loss: 60.25
Target(s): 51.00
Current Option Gain/Loss: -74.5%
Time Frame: exit prior to earnings on Feb. 15th
New Positions: see below

Comments:
02/04 update: The rally in XEC continued thanks to the market-wide surge fueled by better than expected jobs data. Shares of XEC gapped open higher at $60.56 before climbing toward its 50-dma. Our stop loss was $60.25 so the trade was closed at the opening bell.

- Suggested Positions -

Long FEB $55 PUT (XEC1218N55) Entry $1.85 exit $0.47 (-74.5%)

02/03/12 stopped out at gap open $60.56
01/30/12 Trade opened on XEC gap down at $56.57

chart:

Entry on January 30 at $56.57
Earnings Date 02/15/12 (confirmed)
Average Daily Volume = 1.0 million
Listed on January 28, 2012