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Daily Newsletter, Saturday, 2/25/2012

Table of Contents

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

Market Wrap

Close But No Cigar

by Jim Brown

Click here to email Jim Brown

The Dow flirted with 13,000 for most of the day but ended about 18 points short of that psychological level.

Market Statistics

It was touch and go all day with the Dow trading as high as 13,013 and as low as 12,950 but in the end the Dow closed only 18 points away from the psychological 13,000 level. The Dow fought that level for the last four days and it is only a matter of time before we see a close over that millennium marker. The S&P finally closed over the April high close of 1363.61 but only by a couple of points at 1365. Every little bit counts.

The market got some help from the U.S. economics with the Consumer Sentiment for February rising to 75.3 and a new 12 month high. The survey posted a 55.7 low back in August and that was only 0.4 points from a 28-year low. Conditions have definitely improved in just the last six months. The final reading for the month was +3 points above the initial reading at 72.5 and that suggests sentiment is accelerating higher. Gas prices will kill that move eventually but as of month end the apparent good news on Greece has boosted sentiment.

The present conditions component did decline to 83.0 from 84.2 but the expectations component rose from 69.1 to 70.3.

More importantly this was only the second February since 2000 that sentiment posted a gain in February. Normally there is a sentiment decline as the holiday bills come due and consumers start worrying about paying their income tax. This was the sixth consecutive monthly improvement in sentiment.

Gasoline prices averaged $3.69 on Thursday, up +39 cents over the last six weeks. Analysts are expecting prices to continue rising to well over $4 and this is going to put a serious squeeze on sentiment in the months ahead.

Consumer Sentiment Chart

New home sales for January declined slightly to an annualized rate of 321,000 from 324,000 in December. January is not normally a big month for new home sales and analysts were only expecting 315,000 so the number was market positive. Sales are up +3.5% year over year and accelerating at their fastest pace in more than a year. Months of supply fell to 5.6 and the lowest level since early 2006.

The median home price rose significantly from $207,000 in December to $221,200 in January and that is another sign of an improving market.

In the "everything is relative" category we are getting excited about a pace of annual sales over 320,000 when sales at the 2006 peak were over 1.4 million. We have a very long way to go before the homebuilder sector is healthy again.

Home Sales Chart

The economic calendar for next week has several high profile reports. The GDP revision, Fed Beige Book and the ISM Manufacturing will be the attention getters. The GDP is expected to be revised higher to +3.0% growth. The ISM is expected to post a minor gain to 54.6 but there are whisper numbers in the 56.0 range. The Fed Beige Book is expected to show continued growth in at least ten of the twelve Fed regions. This is a preview of what the Fed statement might say when they meet on March 13th.

The ECB will hold their second LTRO loan offering on Feb 29th. The first one in December injected 489 billion euros into the market in the form of three year loans to European banks at a 1% interest rate. That immediately lowered the yield on short term sovereign debt as those banks bought the short term bonds for a guaranteed profit. There is significant anticipation over how much European banks will actually request in the second offering. Some estimates are as low as 250 billion euros and some are guessing it could be as high as one trillion euros. I think that is well out of the range because it would suggest the European banking system was still under a lot of stress. I think a lot of that stress was relieved in the first LTRO and banks are rather calm at present. It should be interesting. If there is a low number, say in the 250 billion range, the euro currency should spike significantly because a low number would provide assurance the danger is over. If the number is over 500 billion the euro could tank on worries there are still some underlying challenges for banks.

The next day the EU leaders will hold another summit with the EU Finance Ministers meeting the day before. With the Greek deal underway there should not be any major headlines from either event but you never can tell. We could see something erupt at any time. There is a G20 meeting in Mexico this weekend and the IMF is going to be lobbying for a bigger firewall around Europe's weak countries and for larger contributions to the IMF to create a bigger firewall from that institution as well.

Germany and Finland parliaments will be voting on the Greek bailout next week and that could provide some headline risk. There is no guarantee the votes will pass but it would be a big mistake if they were allowed to fail and restart the entire bailout discussion.

Economic Calendar

The markets traded sideways for the week with the Dow only adding 33 points and the S&P less than 3. The Nasdaq added 11. The major winner for the week was the energy sector with a +2% gain on a +6% gain in oil prices. Crude oil closed for the week at $109.62 with Brent at $125. Analysts are now targeting $120 for WTI and $140 for Brent thanks to Iran and problems in Syria, Egypt, Nigeria and the Sudan.

WTI Crude Oil Chart

Brent Crude Chart

Unfortunately a strong rally to new highs in crude tends to have the opposite impact on the markets. Initially strong crude prices lifts energy stocks and that lifts the S&P. Energy stocks account for more than 15% of the S&P. So what does that say for the S&P with a +3 point gain and the energy sector is up more than +2%? It says the rest of the S&P was seriously lagging and that included the help from Apple.

Apple gained another $6 to a new closing high at $522. The S&P can thank Apple for pushing it over that 1363 April high close that everyone has been worrying about. Apple is 3.7% of the S&P by weight. Apple was responsible for 50% of the S&P gains for the week. If Apple had been added to the Dow on January 1st it would be over 14,000 today.

Personally I believe the rally in crude is overdone in the short term. While I would love to see the sector continue higher I would rather it be with a stealth rally rather than daily $2 spikes in crude. The $6 move last week to $109 brought out the politicians clamoring for the president to open the Strategic Petroleum Reserve (SPR) to bring down prices. Clearly they don't understand the word strategic. When there is a strong potential for a shooting contest with Iran I don't think that is the time to be drawing down the strategic reserve to lower gas prices 10-cents. If Iran goes hostile on the Strait of Hormuz and WTI spikes to $150 then opening the SPR would make sense. Iran can't control the strait for more than a few days so the spike would be temporary.

While I expect crude prices to cool next week we can expect Iran to stoke the fires in an effort to push prices higher in the weeks ahead. If they are seeing oil sales decline then inflating the price of oil with some heated rhetoric is a good way to raise more revenue.

The IAEA team that visited Iran last week said Iran had tripled its enrichment of uranium, refused to allow them access to the Parchin military testing site near Tehran and has not resolved outstanding questions about weapons-related work. The IAEA said it "continues to have serious concerns regarding possible military dimensions to Iran's nuclear program." Iran has also provided four conflicting versions of the research and work being done at the Fordow nuclear site. However, the IAEA also said no diversion of nuclear material had occurred from Iran's "declared" nuclear facilities. The key is declared. If Iran does not declare a facility is a nuclear facility then the IAEA can't investigate it. The Parchin military facility is suspected of being the site of weapons testing for future nuclear weapons but since it is not a declared nuclear facility it can't be visited.

All this sleight of hand by Iran and the huffing and puffing by the IAEA, Israel and the U.S. should keep support under oil prices for the rest of the summer. Iran will attempt to keep those prices as high as possible using the media and staging war games every couple of weeks.

That suggests any dip in oil prices would be a buyable event since demand and prices tend to rise in the spring and summer months anyway. If there is an economic depression from the high fuel prices it will take several months to be felt. Obviously the transportation sector will be the hardest hit as prices move higher. Gasoline averaged $3.67 on Thursday and jet fuel $3.42 per gallon. With the spike in oil prices last week we could see another +15 cents rise in those prices next week.

I continually get emails complaining about big oil gouging consumers with high gas prices. The big story last week was Bill O'Reilly and Lou Dobbs complaining about refiners exporting gasoline and diesel overseas so inventories would be low and prices higher in America. Also mentioned in that episode was a complaint against President Obama and his anti-oil policies. They complained the president wanted gasoline prices as high as possible in order to force people to buy green vehicles.

Both of those complaints had a thread of truth but plenty of misinformation to go along with it. Coastal refineries around the Gulf of Mexico do export some gasoline and diesel. This is because there are more refineries in the area producing more refined products than are being used. There is a surplus of crude oil in the coastal Gulf and there is a lack of demand for refined products. Gasoline demand in the U.S. is -6% below year ago levels. Rather than shutdown capacity those coastal refineries export some refined products. If there was enough demand in the U.S. they would much rather sell them here because transporting, loading and shipping those products cuts into the profits. Despite these Gulf coast exports the U.S. "IMPORTED" 845,000 NET barrels of gasoline every day plus 122,000 bpd of diesel. That means they imported far more than they exported.

This fuel is imported on the east coast and the west coast where there is a shortage of refineries. This fuel has a higher cost because it started out life as Brent crude or some crude flavor indexed to Brent prices. The refineries on the east and west coast have to buy waterborne crude indexed to Brent to refine into fuel. Everyone in California and the east coast will be buying gasoline next week that was made from $125 Brent crude or some grade indexed to Brent. The refineries in the Midwest buy land locked crude indexed to WTI and that is why Colorado, Wyoming, Nebraska, etc, have $3.20 gasoline this weekend.

The problem with gas prices is not gouging by big oil companies. They have nothing to do with the price of oil or gasoline. In fact most refiners have lost money whenever the price of oil rises because the price of gasoline does not rise fast enough in the market to compensate. Read the earnings reports for the periods when oil prices spike. Big integrated oil companies like Exxon operate on extremely low margins in the range of 8%. That is far less than banks, manufacturing companies, tech companies, etc.

Lastly the president and his staff have said in years past they thought gasoline prices were too cheap and they needed to go higher in order to cause a shift in the purchasing patterns of consumers. He mentioned raising gas taxes to force that shift to economical cars. However, I guarantee you President Obama does not want high gasoline prices in an election year. If he could somehow push them back to $2.50 it would be done tomorrow. Given all the anti-energy policies he has pushed over the last three years the sharp rise in gasoline prices is the last thing he wants. That only draws attention to his policies and their results.

Whining over high gasoline prices will do no good. Buy some energy stocks on the next dip and earn some profits to help pay those prices. The biggest problem is going to be the recession that results from those high prices if they continue higher as expected.

For every $1 crude oil rises the U.S. airline industry loses $1.6 billion. With jet fuel at $3.42 and climbing it is already at the highs for 2011 and the worst months are ahead. Airlines are going to lose money, a lot of money. There have been 22 attempted fare hikes over the last year and only ten of them stuck. Most are quickly canceled when fliers begin booking elsewhere. The airline hurt the worst is US Airways (LCC). They don't hedge their fuel costs. The best airline for hedging is Southwest (LUV). Unfortunately the airline stocks have already begun showing the impact of the spike in oil prices. Buy puts on any airline if oil prices dip.

Airline Index Chart

The transportation sector is going to be crushed. Nearly all companies have fuel adjustment clauses in their rates but we saw in the last oil spike that rates did not adjust quick enough to protect companies like UPS (UPS) or CH Robinson (CHRW) to cover the increased costs. Cruise lines like Carnival (CCL) consume huge amounts of fuel and the spike will hurt their profits as well. After the ship disaster in Italy they are already going to be pressured to fill their cabins so raising prices will be a challenge.

The Dow Transports rolled over on Feb 3rd and should easily test support at 5075 or even lower at 4960 to 4800. This will be a classic battle between the economic hopefuls that expect the economy to continue improving and those that expect oil to go to $120 and crush the profits out of the transport sector.

Dow Transports Chart

U.S. consumers are going to start cutting back on driving and cutting back on non-essential purchases as gasoline prices cross over the $4 level. We know from recent history this is the threshold where spending decreases. Unfortunately there is nothing we can do about it other than plan ahead to profit from the rise in oil prices.

In stock news Hewlett Packard (HPQ) continued its decline to close at $26.64 after their disappointing earnings report after the close on Wednesday. HPQ has now lost about 8% since the $29 close before earnings.

Hewlett Packard Chart

Clearwire (CLWR) lost -7% after Google said it was selling its entire investment of 29.4 million shares for $1.60, a $453 million (-94%) loss. The WiMax technology never really caught on and the stake dumping by Google suggests the outlook is not good. The desperation sale by Google could be the beginning of the end for Clearwire. The company just got a shot in the arm when Sprint renewed their access agreements in December but that is a short term fix. The two major shareholders left are Sprint (S) and Comcast (CMCSA). With Google gone the hopes for a major acceptance of the WiMax technology appear slim.

Clearwire Chart

Shorts piling into Sears Holdings (SHLD) after its big run in January and February were crushed again on Friday. Sears announced earnings and said it was selling nine Great Indoors stores and spinning off more than 1,000 hometown and outlet stores to raise up to $500 million. The news prompted a +17% spike on Thursday and another +11% gain on Friday to close at $68 after trading as low as $29 in January. Shares weakened earlier in the week ahead of earnings but anyone who took that opportunity to add short positions was punished severely. There are almost no shares available to short and covering those shorts is a painful process.

Sears Holding Chart

Also making unbelievers pay the price was Salesforce.com (CRM) with a +9% gain. The company posted adjusted earnings of 43-cents after the close on Thursday. Analysts were expecting 40-cents. Revenue rose +38% to $632 million. That was better than the +36% gain in Q3. Deferred revenue rose by 48% to $1.38 billion. That is for prepaid orders for future delivery. Customers receive discounts by paying annually for service and CRM recognizes this revenue as it is earned. One analyst said, "You don't have to believe the CRM story, but just don't short it."

SalesForce.com Chart

On March 6th 2009 the Dow traded below 6,500. On two days last week the Dow traded over 13,000 intraday for a +100% rebound from those recession lows in slightly less than three years time. That 100% threshold on the S&P was 1332 and well behind us now. That 1332 number was strong resistance when touched on January 26th but we blew through it on Feb 3rd thanks to positive headlines from Europe.

The Dow also reacted on its first touch of 13,000 with two days of declines but it appears likely we will close above that resistance next week. This will be a crucial week for the market. Nearly every market commentator is predicting a pullback but those same analysts are also projecting higher highs ahead. This constant prediction of profit taking is preventing investors from going "all in" and pushing the indexes higher at a faster clip. Nobody wants to be the person to buy the highs just before the profit taking hits. The majority of investors are holding back in hopes of a dip but every shallow bump in the road is being bought and the anticipated 3% to 5% decline on profit taking has yet to appear.

The volume is terrible. The overall volume on Friday was 5.7 billion shares. The volume on the NYSE was the lowest since Jan 10th. Everyone is waiting for something to happen. That something is either a meaningful dip or a breakout over resistance on increasing volume. That volume increase is the key.

These back to back days of 2-3 point gains on the S&P is like watching grass grow. Friday's gain of +2 points to 1365 is not a breakout. It is technically a close over 1363.61 but still not a breakout in terms of sentiment. If we don't breakout this week and start stringing some bigger gains together the natives are going to get restless. Somebody will eventually give up on the rally and pull the sell program trigger when we least expect it.

When you look at the fundamentals the deck appears stacked against a continued rally. Earnings were terrible, the worst since the recession. The Q4 earnings cycle is over and 64% of the S&P lowered estimates for Q1. Oil prices are going to start squeezing the economy like a vise. We have already hit the year end S&P estimates for some analysts at 1350 and many more are just above at 1375 and it is only February. Morgan Stanley is holding firm for a sharp decline back to 1167 by year end.

They say bull markets are built by scaling a wall of worry. Greece is not yet behind us but in theory the potential for a catastrophic default has ended. They may no longer be the big obstacle in that wall of worry but there are plenty of Grecian thorns left on the wall until we get past the March 20th debt payment.

I am wondering if the big Greek default worry held investors back for so long that little things like crummy earnings are no longer important to the market. Investors are so happy Greece is going away that all they can see is blue sky ahead. Maybe the improving U.S. economics and some of the "less bad" European numbers are functioning as a security blanket for investors and insulating them from the cold earnings facts.

I can remember several rallies over the years that kept going and going and going just like the Energizer bunny despite constant calls for a correction. You know profit taking does not have come with triple digit declines on the Dow. Profit taking can also occur in the form of consolidation ranges where portfolios are adjusted, traders take profits and new money moves in from the sidelines. There has not been a triple digit Dow loss in 2012. The last -1% decline on the S&P was December 28th. Despite all the trouble in Europe this market has been digesting the headlines and inching slowly higher.

Dow Chart - 90 Min

This has been a stealth rally and one of the least loved rallies in history according to analysts. There has been no conviction along the way. No massive volume surges and relatively few days of decent point gains. However, if you could order the perfect rally this would be it. If you could order a rally would you want a one with a steady climb, no nerve racking declines to stop us out and one that continued for months while breaking out to new highs? I suspect the only problem is that it came when investors least expected it and they are frustrated they did not recognize it sooner.

Could the current rally be a duplicate of the one we saw in 1995? The rebound started in December 1994 and the market went straight up with barely any declines for 13 months until Jan 1996. Obviously we can always wish for a repeat performance.

S&P Chart for 1995

Now that Greece is almost behind us for at least a couple quarters the bond market is likely to help fuel future gains in equities. The urge to be in a safe and secure fixed income investment is going to fade fast if the Dow and S&P continue their moves to new highs. How much upside could you have left in bonds with the ten year yield already under 2%? I seriously doubt it is going much lower and if economics continue to improve the real value of your investment will decline.

Fixed income funds have been the favorite place to stash cash for the last couple years. Over the last several months bond funds received inflows of cash at the rate of 400% to 600% higher than equity funds. If equities continue to move higher next week and actually do move across current resistance levels on the Dow and S&P I suspect those fund flows are going to reverse and equities are going to be in favor again. It is not rational but new highs are the best attractant of new money. The herd always piles into the market after the majority of the gains have already been made. Hopefully, for those of us already long, the herd will push us higher for a couple more weeks.

Once past 13,000 the next material resistance is the May 2008 high close at 13,058 then it gets really choppy between 13,500-14,000. Current support appears to be 12,900.

Dow Chart - Weekly

The S&P bull market is now more than 1,000 days old. Since we did not decline -20% from the April 2011 high at 1363.61 and we closed above that level on Friday that means we are still in the bull market that started on March 9th 2009 at 676.53. Fridays close represents better than a +100% rebound in the S&P. The close above 1363.61 means this bull market has run for 1,082 days and makes it the ninth longest bull market in history. Statistics don't lie but they sure misrepresent reality. After two major bouts of selling in the summer of 2010 and 2011 it hardly feels like a three year bull market.

Support is 1355 followed by 1340. The next material resistance is 1425 and a lot of analysts will be very disappointed if we make it that far because it would take a bear market from that level for their yearend targets to be reached.

Year End Predictions from January

S&P Chart - Daily

The Nasdaq just keeps adding a handful of points nearly every day but there are no long candles after the breakout over 2885 in early February. It is two steps forward, one step back and repeat. Like the other charts the Nasdaq is consolidating in place as it moves slowly higher. I will have no complaints if this trend continues but the chart is definitely over extended. This is going to drive analysts crazy until a decent dip occurs.

Support is 2930 and you have to go back to December of 2000 to find resistance at 3,000. Those big round numbers tend to be a bump in the road but that resistance is 11-years old. How strong it will be is anybody's guess. IF investors suddenly start dumping bonds we could blow past that level and never look back. Unfortunately that is a capital IF. They have not shown any sudden urge to exit bonds in favor of stocks but this week could be the key if the Dow and S&P can tack on some points to their breakout.

Nasdaq Chart

Nasdaq Chart - Monthly

The Russell 2000 has been far weaker than the other indexes although several decent dips were bought on higher volume. Unfortunately it was not enough to produce a breakout over resistance at 830. Even if that resistance was broken there is even stronger resistance waiting at 860-865. The failure of the Russell to keep pace with the big cap indexes is another example of lack of conviction in the rally.

Russell Chart - 60 Min

Russell Chart - Daily

The broadest market index is a clone of the Dow with a dead stop right at strong resistance but also on the verge of a meaningful breakout. We need one good headline to punch through these resistance walls on the Dow, S&P and Wilshire and attract new money into the equity market.

Wilshire 5000, Total Stock Market Index Chart - Daily

This will be a pivotal week for the markets. The major indexes can't continue adding 3-5 points a day without moving into new high territory far enough to attract serious investor attention. A dip, regardless of how shallow, should be bought again. It appears a real breakout is in the cards and the only question is when?

We also need volume to pickup and for the Russell 2000 to confirm sentiment with a move over 830. As long as I am wishing for the seemingly impossible I would also like a 100 pound bag of $100 bills.

Jim Brown

Send Jim an email

"A democratic government is the only one in which those who vote for a tax can escape the obligation to pay it."
Alexis de Tocqueville


Index Wrap

More New Highs

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

While the pundits and business media indicate telling facts like the Nasdaq Composite (COMP) hasn't been this high on a weekly closing basis since 2000 (mid-December 2000). Or, that the S&P 500 (SPX) has now hit weekly closing levels last seen prior to the 2008 financial crisis (at 1425) as SPX has now exceeded 1363, the 2011 weekly closing high, versus 1365 recently. By the way, SPX hasn't yet cleared 1370, its prior intraday high of last year and that's a number I continue to watch closely.

If we want to look at statistics, of greater interest to us technical trader types is how long prior rallies similar to the current one have gone on and WHEN they ENDED.

1. From the mid-March 2009 low into late-April of 2010, the Market was advancing on balance for 60 weeks.

2. From early-July 2010 lows into May of last year, 2011, the Market advanced for 44 weeks.

3. Closing lows in SPX were made in August but the current rally began late-Sept/early-Oct for an advance lasting now 20 weeks.

In the aforementioned prior rallies, stocks advanced in the early part of the year and ran out of steam by May. Assuming the current rally of 20 weeks duration went on until early-May only, it would tack on another 9-10 week advance. If this rally extended to around 30 weeks, it would still be well under the duration of the two earlier advances cited.

Another key facet of the current advance from a technical perspective is how the major indexes have traced out such well-defined uptrend channels on both an hourly and daily chart basis, as you'll see from the highlights in my daily index charts. When this pattern ends, increasing volatility may follow.

An aspect of 'the' key Nasdaq stock (as well as within SPX) of Apple computer (AAPL) and now the biggest corporation (surpassing XOM) by capitalization, is its current P/E of 11, versus an average of 13 within SPX. The market is 'saying' here that AAPL has reached the limits of size, where continuing the same growth rate means company sales have to be increasingly ENORMOUS to maintain its current earnings growth rate. However, with China especially as a huge market for Apple, who knows for sure if current sales growth rates can't continue for another 1-2 or more years. It may be that, as it used to be said about GM, as AAPL goes, so goes the market.

Bottom line, there's no current reason technically (or fundamentally) why the Market advance can't continue at least through April, into May. Rising oil and gas prices could derail this prospect but I see more of summer impact there.

I suggest bullish strategies on dips, while of course setting appropriate exit points in case of a sizable downside reversal. I would monitor up trendlines in case prices break below these technical supports and there's follow through selling of more than 2-3 days duration. Corrections may continue to be more sideways than sharply lower. Sideways moves will also 'relieve' the pressures of an overbought market; not as dramatically as a sharp 1-2 week sell off, but lateral moves tend to be a moderating factor as extreme overbought readings fall off.

Another underlying fact is that bullish sentiment hasn't been extreme; e.g., extremes in equity options' call to put daily volume ratios that start hitting levels where call activity is 2 times or more that of daily equities put volume. This kind of 'moderate' bullishness is characteristic of a market that has more upside potential, even when coming after prolonged advances.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) continues in its bullish advance. Most recently SPX bounced off its up trendline in the 1350 area and continued higher. The Index has paused at the prior 1370 intraday high from last May. A correction could ensue or not. The S&P 100, where Apple's rise has provided a greater boost to the smaller group of 100 stocks, has already moved well above its intraday highs of last year.

SPX is overbought by conventional measures on a 2-week or 2-month basis. However, this is the kind of market where overbought measures may not provide much help in knowing if a pullback sizable or otherwise is very close.

As far as indicators, what I rely on more in this kind of strong bull move as to ringing the bell at an interim top is when traders get extremely bullish for a prolonged period. I measure 'extremely' by the number of days that CBOE equities call volume is running two times or more over daily put volume. This is when I get most nervous about a reversal if long calls for example. When my CPRATIO 5-day average hits 2.0 and above, this becomes a strong alert for a top within 5 trading days.

Seasonally and in keeping with the pattern of recent years [read my initial 'bottom line' comments] for risk tolerant folks I'd buy calls on a good sized dip, but more so in OEX or NDX calls; alternatively buying the NDX tracking stock QQQ unleveraged.

Key near resistance is at 1370 and next around 1400-1405, at the top of SPX's uptrend channel. Near support is 1350-1343 or around the 21-day average; next support looks like 1335, with fairly major support in the low-1300 area.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart continues bullish and the index has been recently finding support/buying interest on dips to its up trendline. If this trendline continues to 'define' support, there should be another rebound coming up. If not and this trendline finally gets pierced, I look for support in the area of the 21-day moving average which currently intersects in the 607 area per my chart highlights below. Next support comes in at 592-590.

The weekly chart (not shown) continues to look quite bullish and resistance isn't seen on that chart until around 635. On the daily chart below, resistance could come in around 628-630, with tougher resistance projected in the 640 area at the top end of OEX's uptrend channel. Apple's (AAPL) share price on the current trajectory it's on could get up to 580 or to around 625 before selling pressures might tip it lower. If the stock continues to these targets, it would provide a substantial further boost for OEX (and the Nasdaq 100, NDX).

As I noted with my earlier ('bottom line') comments, I could see the current 20 week advance extending another 10 weeks. There could of course be a heart-pounding sharp correction, but the bull has the floor here. Any good-sized pullback will be seen as a buying opportunity in stocks and I think that's right for a time, before maybe hitting those summertime whip-saws again.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) continues bullish in its pattern. The Average hasn't made it above the 13000 mark, a level both 'psychologically' important and in terms of INDU being at the low ('support') end of its uptrend channel. INDU should start to climb from the 13000 area if it's going to continue its prior pattern of rebounding from its up trendline.

To offset a couple of Dow stocks that got crushed this past week (WMT + HPQ) there are a number that are in bullish patterns and then some that are in very strong uptrends.

Looking to have moderate further upside potential are the Dow stocks CVX, DIS, GE, KO, MRK, PG, T, UTX and XOM.

Having very bullish weekly chart patterns are AXP, BA, CAT, CSCO, HD, IBM, INTC, KFT, MCD, MSFT and PFE. The aforementioned 9 plus these 11 and equaling 2/3rds of the Dow, suggest the Average is going still higher; perhaps next to the 13400-13500 zone. Resistance suggested by the high end of INDU's uptrend channel comes in around 13385-13400.

Near support is assumed at the 21-day moving average, currently at 12835. A decisive break below this key trading average that lasted more than 1-2 days, would suggest a possible target to the 12500 area, where I'd be considering risk on buying DJX calls. I think stocks have further upside potential in the next 6-8 weeks.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) chart is bullish and continued with mostly bullish price action above 2950 this past week. You can't really calculate particular resistances on the weekly chart now that COMP has so decisively cleared a cluster of prior weekly highs at 2860-2872.

In terms of the daily chart below, technical resistance is assumed at the top end of the COMP's uptrend channel, currently intersecting in the 3050 area. Sandwiched between here and there is likely resistance at 3000.

Tech is on a tear and if Apple (AAPL) gets to 580, perhaps 625 by my calculations, such a move would boost even the very broad based Composite.

Support is at 2900, extending to 2870 at COMP's up trendline and a pivotal point to keep COMP on its current bullish track.

In terms of the key indicators seen above COMP is at an overbought extreme, but as noted with SPX, this kind of strong advance keeps RSI high; not so much with my 'CPRATIO' sentiment model as its not hitting the 2.0 and above levels that get me more nervous as a bull.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) continues in its very strong move. It's not a common index pattern to track higher in such a well-defined uptrend channel. NDX has been tracing out a consistent pattern and I don't see why it won't continue technically; fundamentally too but I can't say I'm the expert.

Apple's (AAPL) share price on the current trajectory puts the stock at 580 or up to around 625 before selling pressures might tip it lower. If the stock continues to these targets, it would provide a substantial further boost for NDX (and OEX).

Resistance is anticipated at 2620, then around 2656-2660. Chart support is suggested at the up trendline, currently intersecting at 2570; next lower support and a key one for NDX is at the 21-day moving average.

I have some longer-term upside projections that suggest that NDX could get to the 3000 area before a significantly big correction sets in. Meanwhile NDX is quite 'overbought' according to the Relative Strength Index model on a 2-week basis, not yet so 'extreme' on a 13-week basis. This kind of run is fun. Just enjoy and if you've been a bull your pockets will be full. Or so they used to say in bull markets...just don't forget your exit strategy when the next bear bomb hits.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock has been a great performer, starting its run in 54 area. At 10 points higher on Friday, it makes for an 18% gain. How long can such a strong move go on? Some time longer by the lights of the current very strong upward trajectory QQQ is on.

Resistance/selling pressure may come in again if QQQ gets to the 65.5 area, at the upper end of QQQ's uptrend channel. Of course, like Apple did most recently, a new up leg can simply ratchet above 'normal' notions of resistance. Still, trendlines mostly 'work' although they may just project a RISING line of resistance versus a brick wall.

Near support comes in at the up trendline, currently intersecting at 63.2; next support is suggested at the moving average; at 62.3 at the start of the week. If QQQ falls below the 21-day average longer than 1-2 days it suggests a shift in the short-term trend to down. Just saying...

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) is bullish but also has been unable to clear resistance in the 831-832 area over the prior 3 weeks. A bad sign for the Nasdaq? Doubtful. To stay on its current bullish track would see RUT rally from the low end of its uptrend channel where it is currently, to the middle or upper end.

Resistance at the mid to upper end of RUT's uptrend price channel comes in around 848-850; in a more defined way, resistance around 865 is at the current intersection of the upper channel line.

Near support, as it was around Thursday's low, is at the 21-day moving average, currently 816. Pivotal support next comes in at 800. A break below 800 turns the short-term trend lower.



GOOD TRADING SUCCESS!


New Option Plays

Financials & Technology

by James Brown

Click here to email James Brown

Editor's Note:

Tonight we're adding a couple of bullish candidates. However, readers will want to keep an eye on the transports and the airline stocks. These groups could suffer as crude oil continues to go higher. Oil might see a little dip next week. That could produce a little oversold bounce in the airlines and transports, which might end up being an entry point for bearish put positions.


NEW DIRECTIONAL CALL PLAYS

American Express Co - AXP - close: 53.33 change: +0.66

Stop Loss: 51.25
Target(s): 57.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Financials have been chopping sideways the last couple of weeks. Yet AXP appears to be stair-stepping higher. The stock is on the verge of breaking out to new three-year highs. I am suggesting we open small bullish positions on Monday morning but only if both AXP and the S&P 500 index open positive. We'll use a stop loss at $51.25. Our multi-week target is $56.50. Keep in mind that AXP doesn't move super fast. Pick an option that gives you enough time. More conservative traders may want to wait for AXP to close over the $54.00 level before initiating new positions. FYI: The Point & Figure chart for AXP is bullish with a $75 target.

Do not enter position unless AXP and the S&P 500 are both positive at the open

- Suggested Positions - (Small Positions)

buy the Apr 52.50 call (AXP1221D52.5) current ask $2.21

Annotated Chart:

Entry on February xx at $ xx.xx
Earnings Date 04/19/12 (unconfirmed)
Average Daily Volume = 5.7 million
Listed on February 25, 2012


VMware, Inc. - VMW - close: 100.52 change: +0.90

Stop Loss: 97.25
Target(s): 108.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Technology stocks continue to show strength with the NASDAQ composite at multi-year highs. While VMW is not at multi-year highs the trend is definitely higher. The stock just broke out past round-number resistance at $100.00 on Friday. Shares also appear to have broken through a potential trend line of lower highs on the weekly chart (see below).

I am suggesting we open small bullish positions at the open on Monday morning but only if both VMW and the S&P 500 index both open positive. We'll use a stop loss at $97.25, which is just under Thursday's low. Our target is $108.50. FYI: The Point & Figure chart for VMW is bullish with a $117 target.

Do not enter position unless VMW and the S&P 500 are both positive at the open

- Suggested Positions - (Small Positions)

buy the Mar $105 call (VMW1217C105) current ask $1.30

- or -

buy the Apr $105 call (VMW1221D105) current ask $3.40

Annotated Chart:

Entry on February xx at $ xx.xx
Earnings Date 04/19/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on February 25, 2012



In Play Updates and Reviews

Energy Stocks Hit Relative Highs

by James Brown

Click here to email James Brown

Editor's Note:

Strength in crude oil has fueled new relative highs for many of the oil stocks.

Current Portfolio:


CALL Play Updates

Airgas Inc. - ARG - close: 81.85 change: +0.02

Stop Loss: 78.90
Target(s): 84.90 or 88.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
02/25 update: ARG opened slightly higher on Friday morning and then spent the rest of the day drifting sideways in a very narrow 28-cent range. Technically our play is not open yet because the S&P 500 index opened flat instead of positive. I am suggesting we try again. The plan is to open bullish positions on Monday morning if both ARG and the S&P 500 index open positive. However, more conservative traders may want to wait and buy a dip near $81 or $80 as an alternative entry point.

Please note I am setting a conservative target at $84.90 and an aggressive target at $88.50. FYI: The Point & Figure chart for ARG is bullish with a $92 target.

Do not enter position unless ARG and the S&P 500 are both positive at the open

- Suggested Positions -

buy the Mar $82.50 call (ARG1217C82.5)

02/24/12 not open yet, try again.

chart:

Entry on February xx at $ xx.xx
Earnings Date 05/07/12 (unconfirmed)
Average Daily Volume = 528 thousand
Listed on February 23, 2012


BorgWarner Inc. - BWA - close: 82.43 change: +1.68

Stop Loss: 79.25
Target(s): 89.00
Current Option Gain/Loss: -45.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/25 update: BWA displayed relative strength on Friday with a +2.0% gain. Shares hit a new relative high intraday at $83.45. I am raising our stop loss up to $79.25.

Earlier Comments:
A breakout would mean new record highs and could produce a some short covering in BWA. The most recent data listed short interest at 14% of the 108 million share float. FYI: The Point & Figure chart for BWA is bullish with a $108 target.

- Suggested Positions -

Long Mar $85 call (BWA1217C85) Entry $1.55

02/25/12 new stop loss @ 79.25
02/17/12 trade opened on BWA's gap open higher at $82.49

chart:

Entry on February 17 at $82.49
Earnings Date 04/30/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on February 16, 2012


Caterpillar, Inc. - CAT - close: 116.00 change: -0.20

Stop Loss: 112.75
Target(s): 122.50
Current Option Gain/Loss: -13.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
02/25 update: CAT continues to churn sideways under resistance near its 2011 highs (around $116.50). Shares did see a spike to $116.95 on Friday morning but the gains didn't last. Readers may want to wait for a rally past $117.00 before initiating new bullish positions. I am adjusting our bullish exit target to $122.50 but I am expecting the $120 level to act as short-term resistance.

The Point & Figure chart for CAT is bullish with a $165 target.

- Suggested Positions -

Long Mar $120 call (CAT1217C120) Entry $1.15

02/25/12 adjusted exit target to $122.50
02/23/12 new stop loss @ 112.75

chart:

Entry on February 21 at $115.25
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 7.5 million
Listed on February 14, 2012


Capital One Financial - COF - close: 49.29 change: -0.01

Stop Loss: 47.75
Target(s): 54.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
02/25 update: COF did not make much progress on Friday but shares still have a bullish trend of higher lows. The stock appears to be coiling for a breakout past resistance near $50.00. I am suggesting a trigger to buy calls at $50.25. We want to keep our position size small to limit our risk. Our multi-week exit target is $54.75.

Trigger @ $50.25 (small positions)

- Suggested Positions -

buy the Mar $50 call (COF1217C50)

chart:

Entry on February xx at $ xx.xx
Earnings Date 04/23/12 (unconfirmed)
Average Daily Volume = 6.4 million
Listed on February 15, 2012


Eastman Chemical Co. - EMN - close: 53.80 change: -0.25

Stop Loss: 53.25
Target(s): 59.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
02/25 update: The major U.S. big cap indices were hitting new relative highs on Friday. The fact that EMN is not participating is a caution signal. If we see shares of EMN close under $53.50 we will drop it as a bullish candidate. At the moment we are still waiting for a breakout past resistance.

I am suggesting a trigger to open small bullish positions at $55.05 with a stop loss at $53.25. Our target is $59.00. More conservative traders may want to wait for EMN to trade past its all-time high of $55.36 (set in 2011) before initiating positions. FYI: The Point & Figure chart for EMN is bullish with a long-term $91 target.

Trigger @ $55.05 (small positions)

- Suggested Positions -

buy the Mar $55 call (EMN1217C55)

chart:

Entry on February xx at $ xx.xx
Earnings Date 04/30/12 (unconfirmed)
Average Daily Volume = 2.6 million
Listed on February 18, 2012


Goldman Sachs - GS - close: 115.87 change: +0.07

Stop Loss: 114.75
Target(s): 125.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
02/25 update: Shares of GS are still consolidating under resistance near $118.00. We are waiting for a breakout higher. We have a trigger to buy calls at $118.25. GS can be a volatile stock at times so we want to keep our position size small. If triggered at $118.25 we will aim for $125.00.

Trigger @ $118.25 (small positions)

- Suggested Positions -

buy the Mar $120 call (GS1217C120)

chart:

Entry on February xx at $ xx.xx
Earnings Date 04/19/12 (unconfirmed)
Average Daily Volume = 6.2 million
Listed on February 21, 2012


Jones Lang LaSalle - JLL - close: 81.31 change: -1.14

Stop Loss: 79.95
Target(s): 89.50
Current Option Gain/Loss: -62.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/25 update: JLL's performance on Friday is troubling. There was no follow through on Thursday's bounce. More conservative traders may want to abandon ship and cut their losses now. For the moment JLL still has support near $80.00. I am not suggesting new positions at this time.

- Suggested Positions -

Long Mar $85 call (JLL1217C85) Entry $2.40

chart:

Entry on February 17 at $83.75
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 518 thousand
Listed on February 16, 2012


3M Co. - MMM - close: 88.20 change: +0.30

Stop Loss: 86.75
Target(s): 94.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
02/25 update: After more than three weeks of consolidating sideways shares of MMM might finally be ready to breakout higher. The stock was showing some relative strength on Friday. The intraday high was $88.46. I am adjusting our entry point trigger to buy calls to $88.75 and our stop loss to $86.75.

Earlier Comments:
The $90 level could be round-number resistance but we're setting our exit target at $94.00. FYI: The Point & Figure chart for MMM is bullish with a $109 target.

Breakout Trigger (buy calls) @ $88.75

- Suggested Positions -

buy the MAR $90 call (MMM1217C90) current ask $0.42

- or -

buy the Apr $90 call (MMM1221D90) current ask $1.35

02/25/12 adjusted trigger to $88.75 and stop to $86.75
Added the April $90 call
02/09/12 removed the February call.

chart:

Entry on February xx at $ xx.xx
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on February 07, 2012


Parker-Hannifin - PH - close: 89.63 change: -0.79

Stop Loss: 88.45
Target(s): 96.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
02/25 update: PH rallied to short-term resistance near $91.00 and failed. The larger trend is still bullish but I am adjusting our entry point strategy. We want to buy calls if PH hits $91.25 or higher. If triggered our target is $96.50. FYI: The Point & Figure chart for PH is bullish with a $111 target.

Trigger @ 91.25

- Suggested Positions -

buy the Mar $90 call (PH1217C90)

02/25/12 adjusted trigger to buy calls to $91.25

chart:

Entry on February xx at $ xx.xx
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on February 22, 2012


Rockwell Automation - ROK - close: 82.67 change: +1.03

Stop Loss: 79.90
Target(s): 89.50
Current Option Gain/Loss: -54.8%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
02/25 update: After a two-day pull back traders bought the dip in ROK and shares displayed relative strength on Friday with a +1.2% gain. If both ROK and the S&P 500 index open positive on Monday I would use it as a new bullish entry point.

FYI: The Point & Figure chart for ROK is bullish with a $98 target.

- Suggested Positions -

Long Mar $85 call (ROK1217C85) Entry $1.55

chart:

Entry on February 21 at $82.75
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 1.2 million
Listed on February 18, 2012


Sherwin-Williams - SHW - close: 101.06 change: +0.10

Stop Loss: 98.90
Target(s): 104.75
Current Option Gain/Loss: + 7.1%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
02/25 update: The drift higher in SHW continues. Traders can use the breakout past $100 as a bullish entry point but we want to keep our position size small. SHW is overbought with gains in 9 out of the last 10 weeks. Thursday's low was $99.10. I am adjusting our stop loss up to $98.90.

- Suggested Positions -

Long Mar $100 call (SHW1217C100) Entry $2.10

02/25/12 new stop loss @ 98.90
02/22/12 new stop loss @ 98.25

chart:

Entry on February 17 at $100.25
Earnings Date 04/23/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on February 14, 2012


Weight Waters Intl. - WTW - close: 79.61 change: -0.41

Stop Loss: 77.45
Target(s): 86.50
Current Option Gain/Loss: -39.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
02/25 update: WTW's performance on Friday was a bit disappointing. The stock rallied Friday morning, as we expected, but shares couldn't hold on to gains. The stock gapped open higher at $80.26, which was above our trigger to buy calls at $80.25, but WTW ended the session down -0.5%. The intraday high was $80.67. Our trade is open but I would wait for WTW to trade over $80.75 before considering new bullish positions. More nimble traders could try and buy a dip near the rising 10-dma approaching $78.00 instead.

Earlier Comments:
WTW could see a potential short squeeze. The most recent data listed short interest at 24.6% of the relatively small 35.1 million-share float. The stock has rallied to significant resistance near $80.00. A breakout could spark some short covering. FYI: The Point & Figure chart for WTW is bullish with a $106 target.

- Suggested Positions -

Long Mar $80 call (WTW1217C80) Entry $1.40

02/24/12 WTW gapped open higher at $80.26, which was above our trigger at $80.25.

chart:

Entry on February 24 at $80.26
Earnings Date 05/07/12 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on February 23, 2012


S&P Oil ETF - XES - close: 39.89 change: +0.15

Stop Loss: 36.90
Target(s): 43.00
Current Option Gain/Loss:(Feb37c: -48.1%) & Mar36c: +42.5%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
02/25 update: Strength in crude oil prices continues to fuel gains for the energy sector. The XES added another +0.3% on Friday. This ETF is now testing potential round-number resistance at the $40.00 mark. It might be time for a dip. We can look for the 10-dma to offer a little short-term support. I am not suggesting new positions at this time.

Earlier Comments:
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.

(small positions) - Suggested Positions -

Long Mar $36 call (XES1217C36) Entry $2.45

02/18/12 new stop loss @ $36.90
02/14/12 exited Feb. calls at the close: bid @ $0.70 (-48.1%)
02/13/12 prepare to exit our Feb. $37 calls at the closing bell tomorrow.

chart:

Entry on February 06 at $37.75
Earnings Date --/--/--
Average Daily Volume = 177 thousand
Listed on February 04, 2012


Oil & Gas Exploration ETF - XOP - close: 61.34 change: +0.20

Stop Loss: 57.85
Target(s): 63.00
Current Option Gain/Loss: Mar$60c: +38.2% & Jun$60c: +18.2%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
02/25 update: The XOP continues to drift higher thanks to strength in crude oil. Shares of this energy stock ETF hit new six-month highs on Friday morning. I am not suggesting new positions at this time. FYI: The Point & Figure chart for XOP is bullish with a $74 target.

- Suggested Positions -

Long Mar $60 call (XOP1217C60) Entry $1.70

- or -

Long Jun $60 call (XOP1216F60) Entry $4.10

02/23/12 new stop loss @ 57.85

chart:

Entry on February 14 at $58.75
Earnings Date --/--/--
Average Daily Volume = 3.8 million
Listed on February 13, 2012


PUT Play Updates

Currently we do not have any active put trades.