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Daily Newsletter, Saturday, 3/10/2012

Table of Contents

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

Market Wrap

Greece Defaults, Jobs Strong

by Jim Brown

Click here to email Jim Brown

Nonfarm Payrolls came in stronger than expected to boost the market but the Greek CDS news deflated those gains.

Market Statistics

In theory Greece won its second bailout of 130 billion euros by forcing private sector creditors to absorb heavy losses. Enough of the private creditors (85.8%) voted to accept the cram down and enable Greece to enact the collective action clauses to force those who did not accept the deal into the same losses. Art Cashin believes the numbers may have been manipulated. He wrote that some creditors may have offered sweeteners to hold outs in order to get a positive vote and put the problem behind them. If you were holding a CDS on your debt and knew you were going to get 100 cents on the dollar, if triggered, it might have been worth it to offer a few dollars to the holdouts to get the acceptance percentage high enough to trigger the CDS payments.

Late Friday the International Swaps and Derivatives Association (ISDA) declared the forced restructuring of the private sector creditors represented a default and credit default swaps would be triggered. Because this has been expected for such a long time it was not a major event. Reportedly there are only about 3.2 billion euros of unhedged credit default swaps outstanding out of a total of 4,323 contracts. Another 66.8 billion euros of swaps are said to be fully hedged or collateralized and no longer a threat.

The problem with the ISDA declaring a default and triggering the swaps was not related as much to the Greek debt but the swap business in general. If the ISDA had not accepted the Greek default as a "credit event" and not triggered the swaps the financial sector could have imploded. According to The Depository Trust and Clearing Corporation (DTCC) the notional value of outstanding CDS contracts is over $15.7 trillion. A lot of those contracts are written against other European sovereign debt such as Italy, Spain, Portugal, Ireland, etc. If the swaps were not triggered using the Greek cram down model then a CDS contract as insurance for a sovereign default would be void. All those outstanding swaps would be worthless but that is still not the real problem. That would mean that the practice of insuring sovereign debt with a swap would cease and so would the purchasing of that sovereign debt. Weak credits like the rest of the European PIIGS would never be able to sell debt again until their country had paid down existing debt and again become credit worthy. That would not happen in any real life scenario because without access to the public debt markets they would go bankrupt.

The DTCC began tracking CDS in 2003. The only other sovereign debt default to trigger swaps since 2003 was Ecuador in Jan-2009 with a notional value of $473 million. The DTCC provides clearing and settlement operations for financial transactions. They claim the amount of sovereign debt covered by CDS as of March 2nd was $236.5 billion.

By officially calling the Greek debt swap a default and triggering the CDS the market will breathe easier and go back to business as usual in buying and selling debt. The auction date for the Greek debt covered by the CDS has been set for March 19th. The bonds will be auctioned off with the current value around 20 cents, making the CDS payments in the range of 80 cents on the dollar. The vast majority of the CDS contracts have already been collateralized. Since the Lehman failure owners of CDS have required writers of those contracts to begin putting up collateral once it appeared there might be danger of a default. When Greece confessed in 2009 they were in trouble anyone holding a valid CDS contract would have required the writer to begin putting up collateral equivalent to the perceived risk. That means anyone holding a contract today should have required roughly 80% of the contract to be collateralized.

Before Lehman the contracts were allowed to go to default before the writer had to put up money. Everyone just assumed the big banks and brokers would be there to pay up when the default occurred. After the Lehman disaster that assumption went away and now the CDS owners want collateral when conditions begin to turn negative.

When the CDS trigger was announced by ISDA at 2:30 ET the market began losing its gains and sank to the lows of the day. When a monster black hole did not appear in the middle of the financial universe the dip buyers returned just before the close to ensure the markets ended in the green.

Greece should now qualify for its next tranche of funding from the new bailout on March 20th. There will probably be more sticking points but they should be minor. Once that funding occurs Greece should fall off the market radar for several weeks. It will reappear after the April elections as the various commentators begin speculating on whether the newly elected officials will actually follow through on the bailout terms. The general consensus is no. Greece is likely to default on the bailout terms and that will lead to another showdown in the Sept/Oct timeframe.

Most analysts still believe Greece will default in total and eventually leave the euro sometime in 2013. Even the countries providing the bailout funds believe this. They are providing the funds to buy time to recapitalize their banks and allow all the short term sovereign debt they own to mature and be paid off. The same thing happened when Argentina failed in 2002. Short term bailouts gave the financial markets time to prepare by hedging their loans and raising additional capital so the eventual default would not bankrupt the banks as well. The 1.0 trillion euros of cheap three year money the ECB just gave the banks was designed to provide liquidity to keep them afloat until after the eventual Greek default.

Payrolls Increase Again

In the U.S. the Nonfarm Payrolls for February came in better than expected and the prior months saw significant upward revisions. The February headline number showed a gain of +227,000 jobs. The December number was revised higher from +203,000 to +223,000 and the January number rose from +243,000 to +284,000. The trend for the last several months has been upward revisions and that suggests the February number will be revised higher as well. Including the revisions Friday's report showed a gain of +288,000 jobs. The separate Household Survey showed a gain of +428,000 jobs. It was a good day for payrolls.

However, the official U3 unemployment rate did not change at 8.3% despite the spike in new jobs. This is because of an increase of 476,000 people in the workforce. As I have explained in the past the commonly used U3 unemployment rate ONLY counts those people who are still receiving unemployment benefits or are actively looking for work. When the 99 weeks of unemployment insurance expires they drop off the Bureau of Labor Statistics (Nonfarm Payrolls) list. They are assumed to have given up looking for work.

I don't know the mechanics for how the household survey decides they have gone back to looking for work but the survey showed an increase of 476,000 job seekers for February. These are people who have looked for a job in the last five weeks and were moved from the "not looking for work" category to "looking for work" based on responses to the household survey. That meant 12.8 million people were unemployed and looking for work.

Officially there were 154,871,000 people in the labor force at the end of February. 12,806,000 were unemployed and still receiving benefits producing an 8.3% unemployment rate. The U6 unemployment rate declined from 15.1% in January to 14.9% in February and represents 23,075,779 people unemployed or underemployed today. Underemployed means they were forced to take a part time job to pay the bills while they look for full time work. There is a lot of difference between the 12.8 million, 8.3% reported in the news headlines and the 23.1 million actually out of work. In February 2009 there were 12.86 million unemployed. Employment has recovered from the 2010 dip to more than 9% unemployment but we are just now starting to return to levels seen before the recession.

Analysts believe that even with strong job gains in the coming months the actual unemployment rate may not change much before year end. It may even rise as more discouraged workers begin looking for jobs again and return to a status that puts them back in the count.

If the February jobs number if revised higher next month we will have the start of a very nice trend. Getting across that 250,000 jobs per month threshold will be critical for sentiment and for a lasting recovery. More than 150,000 jobs need to be created every month just to cover the increase in the labor force from recent graduates and immigration. At February's +227,000 gain that represents only a nominal +77,000 increase over that new worker requirement. Of course this is only the nonfarm payrolls.

The market liked the jobs numbers with the Dow rising to 12,968 (+57) in early trading. The Greek news reduced that to a +14 point gain. The S&P actually traded over its multiyear high close at 1374.09 but could not hold the gains.

In the chart below the spike in March-May 2010 was part-time census workers.

Payroll Chart

Jobless claims have flattened over the last several weeks at just over 350,000 per week. The slight uptick to 362,000 last week could have been related to the big winter storm that caused havoc across the Midwest and Northeast. We need to see claims dip to the 300,000 range to really improve sentiment. That is a level that equates to above average hiring growth.

Jobless Claims Chart

The Monster Employment Index rebounded strongly from the January drop to 133 with a headline number at 143 for February. This was expected. The index measures the number of help-wanted ads and early January is not normally a strong period for ads. The first couple weeks are slow as everyone recovers from the holidays but then ads ramp up as hiring for the new year begins. The number of ads increased by 11% over the same period in 2011.

Transportation and warehousing saw a +36% increase, agriculture and forestry ads rose +32% and retail trade +22%. The only sector seeing a decline in ads was public administration at -8%.

The International Trade Deficit for January widened to -$52.6 billion and the third consecutive monthly increase. This is the largest deficit since October 2008. The goods deficit has increased more than $9 billion over the last three months and the most for any three-month period since 2005. You can thank the high cost of crude and imported gasoline for much of that increase with petroleum accounting for $12.1 billion. Automakers were doing their best to lower the deficit with a +8.8% increase in exports. Unfortunately there was a +9.1% increase in foreign auto imports to offset those U.S. exports.

The economic calendar for next week has two important events. The Fed meeting on Tuesday could be a significant problem. The sudden improvement in economic activity may cause the Fed to rethink their "low rates until 2014" scenario. Even if the Fed is thinking about making a change in the statement I would expect them to wait until the two-day meeting in late April to announce it. That will give them another month of data, give them two days to discuss it and the quarterly Bernanke press conference afterwards to explain any change.

The Tuesday announcement will be scoured for any sign of a QE3 or Twist-2. With this being an election year the timeframe is quickly passing for any changes to policy. The Fed does not like to make changes in an election year. This one is especially troublesome with some of the presidential candidates running on a platform hostile to the Fed. Ron Paul is openly hostile and while there is little chance of him being elected the message is still being preached to millions of voters. To put it bluntly I think Bernanke's days are numbered. Odds are about 100% that his appointment will not be renewed in January 2014.

Knowing he will likely lose his job may put Bernanke in the position of wanting to take one more big step to make sure the economy is going to recover. He will want to leave a legacy that is marked by a strong recovery rather than years of a plodding economy. That step could be another QE program of some type or some new program to stimulate investment in the economy. Since the Fed will be sidelined after the April in order to avoid political impact his time is running short. You may remember he alluded to QE2 in August 2010 but refrained from actually announcing it until the day after the elections in November of that year.

The second event of note for next week is the Philly Fed Manufacturing Survey. The Philly Fed is seen as the most important of the regional Fed reports. It tracks closely with the monthly ISM Manufacturing report. Expectations are for a strong gain that pushes it to an 11-month high at 12.0. The Index was as low as -22.7 in August.

I put the Greek CDS auction on the calendar but I doubt it will have any market impact. The press coverage will be minimal since the result is already known.

Economic Calendar

The strong jobs report pushed the dollar to a new two month high and a gain of more than 1%. That is a monster one day move for a currency. This should have depressed stocks and commodities but they were also up on hopes for a stronger economy.

The euro dropped sharply after the EU reported the economy contracted last quarter. That should have been no surprise. The ECB also held its benchmark interest rate at 1.0%. With the EU economy weakening and the U.S. economy improving the dollar rise, euro decline trend could continue in the weeks ahead.

Dollar Index Chart

Euro Chart

Brent crude traded over $125 intraday and WTI over $108 despite the spike in the dollar. This is very rare to have both oil and dollars moving in the same direction and that suggests investors were bullish on the economic outlook.

China reported oil imports that hit record highs of 5.95 million barrels per day in February and +18.5% higher than February 2011. The previous high of 5.67 mbpd was set in September 2010. On a side note China's iron ore imports rose +9.5% from January to 65 million tonnes and +33% higher than February 2011. Copper imports rose +17% from January to 484,569 tonnes and DOUBLE the February 2011 level. China warned that growth could decline to 7.5% for 2012 but their imports are definitely not slacking off.

If China's oil demand remains at the same growth rate in 2012 they would add more than 1.0 mbpd raising demand to more than 7.0 mbpd. That 18% growth in oil demand is not expected to slow appreciably. At only a +15% rate of annual growth their demand will double to 14.25 mbpd in 2017. Of course that assumes that much oil is available. With China's growing wealth it is not China that will be doing without but dozens of smaller, less financially capable countries will be left out in the cold and unable to afford the high price of oil. America will be able to afford it but paying the price will be painful and it will produce a significant economic burden. The only thing that will prevent a significantly higher price for oil by 2017, as in $150-$175 per barrel is the resulting fuel price recession long before we get to those lofty levels.

OPEC production for February rose to 30.97 mbpd and nearly a million barrels more than their stated production target of 30.0 mbpd. This was the highest rate of OPEC production since November 2008. OPEC lowered its non-OPEC production growth estimates to +600,000 bpd in 2012, down -160,000 from estimates just last month. OPEC also said Iran produced 3.42 mbpd in February compared to 3.46 mbpd in January. Apparently the impact from sanctions has not yet been felt as much as outsiders believed, OR, Iran is simply misstating the numbers. I believe that is the most likely explanation. Eventually their continued production at these levels will fill all available storage and they will be forced to cut back.

WTI Crude Oil Chart

Brent Crude Chart

In stock news Green Mountain Coffee Roasters (GMCR) was roasted after Starbucks (SBUX) announced a single serve coffee machine. Shares of GMCR fell -16% on the news. GMCR is one of those stocks that you either love or hate or maybe love to hate. Their control of the single serve coffee market is unshaken despite the Starbucks entry.

The Starbucks machine is called Verismo and is primarily an espresso-based single cup brewer. However, it is thought besides complex drinks like lattes the machine will also be able to brew regular coffee. Starbucks said it did not think the Verismo would hurt its relationship with GMCR. In their announcement Starbucks only mentioned lattes, not regular coffee.
Verismo Announcement

Green Mountain filed a comment with the SEC saying espresso machines only represented 2.7% of the total coffee units sold in the U.S. in 2011. "Prior to the press release issued by Starbucks yesterday and their subsequent public comments, we were not made aware of any additional capabilities of their planned espresso system. We look forward to learning more about Starbucks' new espresso system as it moves toward launch and to continuing to grow the single-serve filtered-coffee opportunity in North America with our Keurig system partners, including Starbucks." GMCR also said they were working with Luigi Lavazza SPA to co-develop a new single-serve espresso-based machine that would complement the Keurig Single Cup Brewers.

Wal-Mart will soon sell a single serve machine called the Nestle's Nespresso. They are currently the world leader in single serve coffee sales if you believe the advertising.

When I started researching the facts on the GMCR/SBUX news I had thought about recommending GMCR as a buy the dip play. I have a Keurig brewer and love it. However, while I do think GMCR will bounce short term I did find more reasons not to be bullish on GMCR than I expected. With a PE of 45 and strong competitors coming out of the woodwork I had to rethink my position.

Starbucks is going to be a strong competitor. Even if their machine is not a straight 1:1 replacement for the Keurig they still have the Starbucks name behind them and that is a fanatical following. Also, quite a large percentage of Starbucks coffee sales are not plain coffee but complex drinks. If they have a machine that can make brewing those drinks as simple as the Keurig brews simple coffee then it will be a major hit.

I think SBUX is the long term play. The machine will not be out until September so we have plenty of time. I would buy GMCR in anticipation of a quick bounce and then bail with a quick profit. I would look for a return to the 50-day average on SBUX and buy them for a long term hold. They are a buy just for their brick and mortar store expansion and the Verismo will be one more profit center for them.

GMCR Chart

Starbucks Chart

Texas Instruments (TXN) warned for Q1 and blamed the earnings miss on Amazon (AMZN) and Research in Motion (RIMM). TI said a shortfall in sales of its OMAP application processor was to blame for the decline in estimates. This processor is used in tablets including the Kindle Fire and the tablets from RIMM and Nokia. TXN said they saw a rapid ramp in sales in Q4 as those companies added to inventory ahead of the holiday season and they expected sales to slow in Q1. However, TI said "the Q1 demand is lower than we expected as customers (AMZN, RIMM, etc) are now rationalizing their ongoing expectations against their existing inventory." Several analysts blamed a sharp slowdown in post holiday Kindle Fire sales as the main reason for the warning.

TXN shares were flat on Friday but Amazon shares lost $3 on the news. With a PE of 133 Amazon is another stock traders love to hate. Billions have been lost trying to short it over the years but everyone keeps trying. The post earnings decline in Q4 was the best run for the shorts in recent memory but you have to have nerves of steel to maintain a short or long position in Amazon. Volatility is extreme and like this warning from Texas Instruments the news can come from anywhere. Eventually Amazon will have to give up growth and start making profits but that does not appear to be on Jeff Bezos radar today. He is still building like Amazon is going to dominate the entire retail word and laughing all the way to the bank.

Amazon Chart

Altera (ALTR) also warned that slow Q1 sales would cause them to miss prior estimates. Altera said revenue would be down 7-9% sequentially compared to prior estimates of 5-9%. Altera said programmable chip sales would be at the low end of prior guidance due to slow demand and high customer inventory. Surprisingly shares of ALTR rose +1.5%.

Apple (AAPL) shares fell from $547 to $521 the two days before the iPad announcement with help by the market drop early in the week. The announcement was as expected but no further selling appeared. Even news the iPad website was down for hours on Wednesday afternoon and evening failed to dull investor enthusiasm. I wanted to order one but my excitement faded after trying for hours to reach the site.

Apple shares returned to $547 on Friday and came to the same dead stop that we saw last week. This level appears to be decent resistance and there are not enough buyers with conviction to push the stock higher.

Apple iPad Order Page

Apple Chart

Friday was the third anniversary of the bear market bottom on March 9th, 2009. The rebound from that low has been dramatic but not without a lot of volatility along the way. The summer doldrums in 2010 and 2011 saw several months of gains erased but eventually recovered. The tables below show the gains of various indexes, commodities and stocks. While equities and indexes hit their lows on March 9th the price of oil bottomed on Feb 12th. I am sure wishing I had that time machine I spoke about before. Buying a few thousand shares of Fossil or International Paper would have certainly helped a retirement account.

Index & Commodity Gains

Stock Gains From 2009 Lows

The S&P rebounded to temporarily trade over the 1374.09 high close from March 1st but it could not hold the gains. The news about the credit default swaps being triggered caused a knee jerk reaction even though everyone already assumed it would happen. I am sure there was also a fair amount of profit taking from the three day bounce. Going into the weekend with the Greek CDS unknown with a lot of paper profits was not something a lot of traders wanted to do.

Next week is going to be very interesting. The FOMC meeting can be a blessing or a curse and it is a quadruple witching expiration. With resistance so well defined it may take a new headline to push us higher. With daily earnings warnings I don't know where that headline will come from unless it is the Fed.

Support is 1340 but retesting it again soon would probably see it fail. A move over 1380 could trigger a new leg higher but volume is not showing any conviction. The last three days have produced gains but the average volume was only 5.9 billion shares per day. That is very anemic for the market to be back at the recent highs. On Friday up volume was only 2:1 over down volume. Of course it was a Friday with high headline risk. I would not have expected a lot of buyers.

Hopefully, with the CDS headline behind us and the EU saying they would distribute the first tranche of the 130 billion euro bailout immediately, the Greek cloud will be temporarily lifted from the market.

S&P Chart

The Dow chart is far less bullish than the S&P. The Dow has a rounding top pattern from late February and the Friday high appeared to be a continuation of that pattern. Support at 12,750 held on the Tuesday dip but the rebound was lackluster. The Dow needs to gain another 100 points to put it back at the resistance that held for the prior two weeks. Just getting to that level could be a struggle and moving higher from there could be a serious challenge.

Support at 12,750 may not hold if tested again. If the Dow was to breakout the next resistance would be in the 13,125-13,150 range.

Dow Chart - 180 Min

Dow Chart - Daily

The Nasdaq mirrored the S&P with a return to prior resistance just below 3,000. Apple helped on Thursday but was flat on Friday with only a $3 gain. Google lost -$7. It is amazing the Nasdaq made any gains at all after the Texas Instruments and Altera earnings warnings on Thursday night. The Semiconductor Index ($SOX) actually gained more than +1% on Friday so conventional wisdom would have been wrong in anticipating a semiconductor decline.

Nasdaq volume was nearly 3:1 positive for the last three days so evidently those investors coming back to the market after Tuesday's dip were looking for tech stocks.

Support is well back at 2,900 and like the other indexes if that level is tested again I would not expect it to hold. Resistance is the large round number at 3,000 and what would be a psychological victory if it is broken.

Nasdaq Chart - 180 Min

The Russell 2000 chart looks like the Dow. The rebound stalled at 820 and well below the strong resistance that held for all of February. The rebound from 785 was slow to start on Wednesday but accelerated on Thursday. I would have been much happier if the Russell had recovered to the 830 resistance level similar to the S&P and Nasdaq. This stall at 820 suggests the willing buyers have run out of money. It is one thing to buy a dip but it requires a different type of conviction to buy just under resistance. That conviction appears to be lacking.

Russell 2000 Chart

Will the Greece bailout funding grease the market wheels and allow the Dow to move over 13,000? Who knows since the eventual bailout conclusion has been baked into the market for some time? Everyone assumed it would eventually get done simply because the impact of a disorderly default was too dramatic to allow.

Maybe the real question is who will be the next Greece? Did you really think now that Greece is about to fade from the headlines that another country would not take their place? Portugal appears to be heading for the cliff. The yield on the Portuguese 5-year bonds is now at record highs of 19.8%. A year ago they were only 6%. A year ago the yield on the 5-year Greek bonds was 12%. Today those yields are more than 50%. FYI - the new Greek debt that is going to be swapped for the old debt is trading in the when-issued market at 71% to 79% of face value. Apparently investors are not confident that debt will survive the eventual Greek default on all debt. Spain and Italy are right behind Portugal although Italy has firmed up slightly.

Spain told the EU last week its budget deficit for 2012 would be 5.8% of GDP rather than the 4.4% they had promised. That was a day after they signed the new fiscal pact vowing even lower deficits in the future. The EU is demanding they stick to the 4.4% number but that is impossible. Last year their agreed target was a 6.0% deficit and the actual deficit was 8.5% before the year was over. They will be very lucky if the actual 2012 deficit is not 8.5% again. Unemployment rose +2.4% month over month in February. Under age 25 unemployment is 50% and that is the part of the population that is causing trouble with riots and civil unrest. Spain is too big to save unless the ECB decides to loan them unlimited amounts of money over the next ten years. The private sector is not going to want to loan any PIIGS country money after the haircut in Greece. There is already talk of a haircut process in Portugal. What works for one country is quickly seized as a possibility by others.

The LTRO 1&2 of 1.1 trillion euros has solved the liquidity problem for Europe for the next several months. Eventually those cash reserves will dry up and the sovereign yield problems will start to make headlines again.

Everyone has probably forgotten the liquidity swap program the Federal Reserve announced back in November. The Fed, the Bank of Canada, Bank of England, Bank of Japan, ECB and the Swiss National Bank announced on November 30th they were opening unlimited currency swap lines from Dec 5th through February 1st 2013. Basically the Fed makes dollars available to the other central banks to cover "liquidity shortfalls" in their member banks. They announced it as a six bank deal but in reality it was five banks supporting the ECB. This is another QE program. The Fed loans newly created digital dollars to the ECB, which in turn loans those dollars to European banks to cover the outflow of funds to depositors. In theory those member banks will eventually become liquid again and repay the ECB and the ECB will repay the Fed. I am not holding my breath on that. This is one more European problem that can come back and bite us in 2013.

The equity market will probably overlook those future concerns over the next Greece and instead focus on the FOMC meeting and the potential for QE3 or Twist-2. The strong jobs numbers should have improved investor sentiment and the strongest homebuyer traffic since 2005 suggests consumer sentiment is also improving. Both of those factors should help the equity market assuming there is not a new headline on Monday to give traders something else to worry about.

If you don't set your clock forward an hour this weekend you will miss the first hour of trading on Monday. This is the weekend daylight savings time forces you to touch every clock in your house and car to account for that time shift. Spring one hour forward Saturday night.

Jim Brown

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Index Wrap

Nice Rebound But Not Out of the Woods

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

On the decline, two of the major Indexes (COMP and RUT) reversed and rebounded from their up trendlines, maintaining bullish charts. Still, the likelihood of another downswing to complete the recent correction looks like more than 50 percent.

After prolonged run ups that reach overbought RSI extremes, corrections are often two-pronged. The first downswing is often short-lived, with a snap back rally to the area of prior highs or a bit higher. From there a second decline ends up carrying farther than the first sell off.

Absent a decisive upside penetration of near resistance levels seen on my major stock index charts, I'm anticipating lower levels than seen at Tuesday's (3/6) lows.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart remains bullish in terms of its major uptrend, but an intermediate correction looks to be underway. I don't anticipate that this recent correction has run its course.

As I note above in my initial comments: After prolonged run ups that reach overbought RSI extremes, corrections are often two-pronged. The first downswing is often short-lived due to a snap back rally to the area of prior highs or a bit higher. From there a second decline ends up carrying farther than the first sell off. That's the general pattern. How might this go with SPX?

If an extension of the recent snap-back rally again gets capped in the 1375 area OR goes a bit higher such as to around 1385, there's some likelihood of another decline developing; one that could take SPX to below 1340, such as to near 1300.

Above 1385, next resistance is 1400-1410, with further resistance at the high end of the highlighted uptrend channel at 1433.

Support levels are the 21-day moving average at 1360, then around 20 points lower at 1340, with further support extending to the low-1300 area.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart had of course been in a very strong uptrend. However, once OEX pierced its up trendline, a sharp but short-lived sell off followed. As with the broader S&P 500, OEX might not be able to climb above the line of prior highs in the 623 area; or, the index goes nominally higher, such as to 630 and resistance implied by its previously broken up trendline, then comes down again in a second down leg. A second downswing in a pattern like this one often carries lower than the first and implies that 610 may not be a 'final' low for this correction.

While the 21-day average was briefly pierced, I would count the average, at 615.8, as initial support. More pivotal support is implied by the recent 610 low, with support extending to 605. A break below 605-600, could carry to 590.

Very near resistance is at 623, then at 630, extending to the 650 area.

DOW 30 (INDU) AVERAGE; DAILY CHART:

I noted last week that the Dow 30 (INDU) continued overall bullish in terms of its chart but also noted that "the recent sideways trend formed a minor sideways rectangle formation which could warn of an interim top. The rectangle formed after INDU fell under its prior up trendline."

In a 'bottoms up' technical approach with the Dow, since there are relatively few (30) charts to peruse, I only see still-strong or very strong uptrends in AXP, HD, IBM, INTC, and KFT. These 5 probably can't pull the Dow higher, or much higher, than INDU's recent line of highs at 13000-13050. An extension of the most recent rally could carry to 13100, maybe 13150, with the Average possibly starting another decline from this area.

A key point is that we can't trust that the recent 12750 low is a 'final' low for the recent sideways stall and downside correction. I've noted 12750 as potential support of course, being the prior low, with next support highlighted at 12600 and extending to 12500.

Resistance is at 13000-13050; 13150; then around 13300.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) chart remains bullish as the index rebounded from the low end of its uptrend channel or from its bullish up trendline. To continue to 'hold' its up trendline, COMP would need to find support around 2920 in early trade in the week coming. Next support is assumed at the prior 2900 low, with further technical support at 2850.

As with the other major indexes, I anticipate another downswing ahead to complete a 'typical' down-up-down (or, 'a-b-c') correction; one where the second downswing carries lower than the first. This expectation is based on the recent rebound not being able to pierce prior highs or by much; e.g., COMP goes a bit higher (and bullish sentiment rises), but with the index having another decline after nominal new highs that 'completes' the common a-b-c corrective pattern. Stay tuned on this outcome!

The 3000 level is a key resistance for COMP, although I've noted resistance extending to 3030. The last time COMP traded above 3000 was late-2000. 3000 is a benchmark big even round number level in COMP, like 13000 is currently in the Dow. I've highlighted next resistance in the Composite approximately a 100 points higher, at 3115 per its intersection at the upper end of COMP's uptrend price channel.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) pierced its steep up trendline finally this past week, falling to the area of its 21-day moving average, after which the index rebounded. The rally from Tuesday's (3/6) low carried the index back above its up trendline. I don't want to discount this being bullish action. However, the key test is still ahead as NDX needs to climb above the line of its recent highs at 2645-2650. Above 2650, resistance looks like 2700, extending to 2730.

As corrections are so often have two down legs, one shallow and short and the second deeper and longer, I don't consider the Nas 100 to be out of the bearish woods. Another sell off to the 2600-2580 area is a possibility, and then perhaps lower still, such as to support in the 2540 area or even to a retest of 2500.

While it's bullish that the index rebounded quickly and strongly, the pattern for bull market corrections is often that the first rebound is not the last simply because the first low is not the last. This is especially true after an index has gotten to overbought extremes. If this view isn't the way it's going to go, then NDX will continue higher WITHIN its uptrend channel.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) has key near resistance at 65.1; a move above this level keeps QQQ above its up trendline again. If instead, the Q's fall to the 64 or below, this could be on the way to lower correction lows, such as to support at 63.2-63.0. Fairly major support begins at 62.

If QQQ continues on its merry way again and again following its prior trajectory within the highlighted uptrend price channel, there's potential for a next move up toward the 67-67.2 area.

With QQQ, we have the added input of daily volume levels that can be easily charted and compared. On Balance Volume (OBV) is pointed higher but daily trading volume on the rebound this past week didn't also climb; not surprisingly, as bullish sentiment has been falling off.

I don't currently anticipate buyers chasing prices higher here and foresee a better than even chance of another downswing ahead to 'complete' a correction that began after prices stalled around 65 recently.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) stalled in the 833 area and started trendline gradually lower, culminating in a decline to 796 this past week but which found support at RUT's up trendline. Solid bullish action as far as RUT rebounding from technical support.

However, I'm not convinced that the small-cap index is done correcting. It depends on whether RUT can now climb above 833 resistance. I base this on the common pattern of a first decline not being the last just as it was the second downswing in RUT that formed a final correction low back in Oct-November. The common down-up-down ('a-b-c') corrective pattern could be unfolding here.

Conversely, if RUT achieves a decisive upside penetration of the line of prior highs (833), it would suggest potential for the Index to carry up to the 870 area next.



GOOD TRADING SUCCESS!


New Option Plays

Specialty Retail & Railroads

by James Brown

Click here to email James Brown

Editor's Note:

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

(bullish candidates): WHR, NKE, NUS, ESRX, COH, CVX, MLM, UPS, TUP, CPT, WLL, and UNH


NEW DIRECTIONAL CALL PLAYS

Tractor Supply Co. - TSCO - close: 87.37 change: -0.10

Stop Loss: 84.90
Target(s): 94.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The threat of higher gasoline prices is not slowing down the rally in retail stocks. The RLX retail index has surged to new record highs. Shares of TSCO are also trading near record, all-time highs. Currently the stock is consolidating in the $85-88 zone. I am suggesting we buy calls if TSCO can trade at $88.50 or higher. If triggered we'll use a stop at $84.90. Our exit target is $94.00. More aggressive trades could aim higher. If you have enough patience you could aim for the $99-100 area instead. The Point & Figure chart for TSCO is bullish with a $109 target.

Trigger @ $88.50

- Suggested Positions -

buy the Apr $90 call (TSCO1221D90) current ask $2.00

Annotated Chart:

Entry on March xx at $ xx.xx
Earnings Date 04/19/12 (unconfirmed)
Average Daily Volume = 566 thousand
Listed on March 10, 2012


NEW DIRECTIONAL PUT PLAYS

Union Pacific - UNP - close: 107.64 change: -1.63

Stop Loss: 110.25
Target(s): 101.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Rising gasoline prices should be bullish for the railroad since they are more efficient at moving freight. Yet some of the railroad stocks are trading lower as investors worry about slowing demand for coal and how that will negatively impact the rail business. The most recent data showed that coal volumes fell 15.2% year over year.

UNP's recent oversold bounce off of technical support at its 100-dma, which at the time was also near price support near $105, has already begun to fail. Friday's move looked like a bearish reversal under $110 and its 10-dma. I am suggesting small bearish positions at the open on Monday with a stop at $110.25. Our target is $101.50 since the $100 level and its 200-dma could be support.

*Small Positions* - Suggested Positions -

buy the Apr $105 PUT (UNP1221P105) current ask $2.51

Annotated Chart:

Entry on March 12 at $ xx.xx
Earnings Date 04/19/12 (unconfirmed)
Average Daily Volume = 2.9 million
Listed on March 10, 2012



In Play Updates and Reviews

Three Days In A Row

by James Brown

Click here to email James Brown

Editor's Note:

Traders continue to buy stocks following Tuesday's dip and the major indices are up three days in a row.

Our new CLR trade was triggered on Friday. Meanwhile I am suggesting an early exit on ALXN and PII.

Current Portfolio:


CALL Play Updates

Airgas Inc. - ARG - close: 83.04 change: -0.13

Stop Loss: 79.90
Target(s): 87.00
Current Option Gain/Loss: -20.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/10 update: ARG tagged another new high on Friday morning at $83.77 and then faded lower. We only have five trading days left on our March calls. I am not suggesting new positions at this time.

- Suggested Positions -

Long Mar $82.50 call (ARG1217C82.5) Entry $1.00

03/03/12 new stop loss @ 79.90
02/28/12 trade opened @ 82.21
02/27/12 not open yet, buy calls at the open tomorrow
02/24/12 not open yet, try again.

chart:

Entry on February 28 at $82.21
Earnings Date 05/07/12 (unconfirmed)
Average Daily Volume = 528 thousand
Listed on February 23, 2012


AthenaHealth, Inc. - ATHN - close: 76.00 change: +1.10

Stop Loss: 71.75
Target(s): 77.50
Current Option Gain/Loss: +55.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/10 update: ATHN hit another new record high on Friday at $77.20. Shares pared their gains by the closing bell but still settled with a +1.4% gain. Our exit target is only $77.50. More conservative traders may want to go ahead and exit now with the bid on our call at $3.70 (+55%). I am raising our stop loss up to $71.75. I am not suggesting new positions at this time.

Earlier Comments:
There is a good chance that ATHN could see a short squeeze if it breaks out past its 2011 high at $72.70. The most recent data listed short interest at 34% of the small 34.7 million-share float. FYI: The Point & Figure chart for ATHN is bullish with a $105 target.

- Suggested Positions -

Long Apr $75 call (ATHN1221D75) Entry $2.38

03/10/12 new stop loss @ $71.75, readers may want to go ahead and take profits now.

chart:

Entry on March 08 at $72.75
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 577 thousand
Listed on March 07, 2012


American Express Co - AXP - close: 53.20 change: +0.25

Stop Loss: 51.40
Target(s): 57.50
Current Option Gain/Loss: -23.7%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/10 update: Financial stocks continued to help lead the rebound higher on Friday but momentum in AXP slowed a little bit. Shares only managed a +0.4% gain. The stock remains inside its bullish channel but I am cautious on launching new positions at this time.

Earlier Comments:
The plan was to keep our position size small. Our multi-week target is $56.50. Keep in mind that AXP doesn't move super fast. FYI: The Point & Figure chart for AXP is bullish with a $75 target.

- Suggested Positions - (Small Positions)

Long Apr 52.50 call (AXP1221D52.5) Entry $2.40

03/03/12 new stop loss @ 51.40
02/29/12 AXP gapped down at $53.46
02/28/12 not open yet. buy calls at the open tomorrow.
02/27/12 not open yet, try again.

chart:

Entry on February 29 at $53.46
Earnings Date 04/19/12 (unconfirmed)
Average Daily Volume = 5.7 million
Listed on February 25, 2012


Clean Harbors, Inc. - CLH - close: 69.52 change: +0.33

Stop Loss: 64.75
Target(s): 71.50
Current Option Gain/Loss: +57.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/10 update: CLH has seen a strong bounce from $65 to $70. Shares hit $69.97 on Friday. It might be time for a little pullback. Readers may want to go ahead and take profits now. Officially we are still aiming for $71.50. I am not suggesting new positions at this time.

Earlier Comments:
Our target is $71.50 but more conservative traders may want to exit near $70.00. Aggressive trades could aim higher.

- Suggested Positions -

Long Apr $70 call (CLH1221D70) Entry $1.30

03/10/12 CLH is testing the $70.00 level. Readers may want to take profits now.

chart:

Entry on March 08 at $67.77
Earnings Date 05/02/12 (unconfirmed)
Average Daily Volume = 344 thousand
Listed on March 07, 2012


Continental Resources - CLR - close: 88.71 change: -0.78

Stop Loss: 86.75
Target(s): 99.00
Current Option Gain/Loss: -23.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/10 update: Trading action in CLR on Friday was disappointing. Shares did rally past $90.00 and hit our trigger to buy calls at $90.25 but the stock reversed at its 10-dma. Technically Friday's move is both a failed rally near short-term resistance and a bearish engulfing candlestick reversal pattern.

I am not suggesting new bullish positions until CLR trades over $90.50 again.

Earlier Comments:
The stock could see a short squeeze. The most recent data listed short interest at 19% of the small 40.9 million-share float. We will set our exit target at $99.00 since the trend of higher highs should lead CLR toward the $100 area. FYI: The Point & Figure chart for CLR is bullish with a long-term $140 target.

- Suggested Positions -

Long Apr $95 call (CLR1221D95) Entry $2.95

03/09/12 triggered at $90.25 but shares reversed and painted a bearish reversal candlestick.

chart:

Entry on March 09 at $90.25
Earnings Date 05/03/12 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on March 08, 2012


Capital One Financial - COF - close: 49.82 change: +0.39

Stop Loss: 47.75
Target(s): 54.75
Current Option Gain/Loss: Mar$50c: -56.1% & Apr$50c: -23.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/10 update: COF continues to bounce and hit $50.38 intraday. It's a little disappointing to see shares fail to close over $50.00 but the larger trend is still higher. We only have five trading days left on our March calls. I am not suggesting new positions at this time.

Earlier Comments:
We want to keep our position size small to limit our risk. Our multi-week exit target is $54.75.

(small positions)

- Suggested Positions -

Long Mar $50 call (COF1217C50) entry $1.30

- or -

Long Apr $50 call (COF1221D50) entry $2.30

03/03/12 new stop loss at $47.95
02/28/12 triggered at $50.25

chart:

Entry on February 28 at $50.25
Earnings Date 04/23/12 (unconfirmed)
Average Daily Volume = 6.4 million
Listed on February 15, 2012


Whole Foods Market - WFM - close: 83.87 change: +0.03

Stop Loss: 79.95
Target(s): 87.50
Current Option Gain/Loss: + 7.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/10 update: WFM failed to make much progress on Friday. Shares closed almost unchanged albeit at record highs. More conservative traders may want to start inching up their stop loss. I am not suggesting new positions at this time.

- Suggested Positions -

Long Apr $85 call (WFM1221D85) Entry $1.88

chart:

Entry on March 02 at $82.55
Earnings Date 05/03/12 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on March 01, 2012


PUT Play Updates

Apple Inc. - AAPL - close: 545.17 change: + 3.18

Stop Loss: n/a
Target(s): see below.
Current Option Gain/Loss: Mar$520P: -90.4% & weekly Mar$525p: -100%
Time Frame: 1 to 2 weeks
New Positions: see below

Comments:
03/10 update: AAPL continues to thwart the bears. News this past week that the Justice Department could sue AAPL and other e-book publishers had no impact on the stock price. Normally AAPl sees a sell-the-news move lower following a major product announcement but that didn't happen this time. Friday saw AAPL bounce back toward its all-time highs set a week ago near $548 a share. If we see shares close over $548 readers may want to abandon ship although most of the damage to our put options has already been done. Our very aggressive, weekly March $525 puts expired at $0.00 this weekend. I am not suggesting new positions at this time.

- Suggested (Small) Positions -

Long Mar $520 PUT (AAPL1217o520) Entry $9.90
Exit target: when the option bid hits $14.50

- or -

Very Aggressive - these have expired
Mar $525 PUT (AAPL1209o525) Entry $9.05, exit $0.00 (-100%)

03/10/12 our very aggressive weekly March $525 puts have expired
03/06/12 AAPL gapped down -$10, which hurt our entry point on these short-term puts. I've adjusted our exit targets!

chart:

Entry on March 06 at $523.66
Earnings Date 04/24/12 (unconfirmed)
Average Daily Volume = 22.1 million
Listed on March 05, 2012


AMERIGROUP Corp. - AGP - close: 66.19 change: +0.52

Stop Loss: 68.75
Target(s): 61.00
Current Option Gain/Loss: Mar$65P: -53.5% & Apr$60P: -16.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/10 update: AGP is still hovering near $66 and under technical resistance at its 50-dma. Readers may want to look for another failed rally in the $67.00-67.50 zone as a new entry point or look for a new drop under $65.00. Our target is $61.00.

- Suggested Positions -

Long Mar $65 PUT (AGP1217o65) entry $1.40

- or -

Long Apr $60 PUT (AGP1221p60) entry $1.20 <-- 1.00/1.20 -->

03/06/12 AGP gapped open lower at $66.00

chart:

Entry on March 06 at $66.00
Earnings Date 05/02/12 (unconfirmed)
Average Daily Volume = 950 thousand
Listed on March 05, 2012


Cliffs Natural Resources - CLF - close: 63.99 change: +2.38

Stop Loss: 65.25
Target(s): 57.50
Current Option Gain/Loss: Mar$65p: -36.8% & Apr$60p: -17.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/10 update: Ouch! An analyst upgrade on Friday produced a big bounce in CLF. Shares outperformed the market with a +3.8% gain. The rally stalled at overhead resistance near $65.00. The rebound cut our March puts in half. If the rally continues we should see CLF hit our stop loss at $65.25. I'm not suggesting new positions at this time.

- Suggested (Small) Positions -

Long Mar $65 put (CLF1217o65) Entry $2.85

- or -

Long Apr $60 put (CLF1221p60) Entry $2.02

03/08/12 sold half at the open. CLF gapped higher at $61.17
exit half of March $65 put @ $4.70 (+64.9%)
exit half of April $60 put @ $2.40 (+18.8%)
03/07/12 prepare to sell half of our positions at the open tomorrow to lock in a gain.
03/07/12 new stop loss @ 65.25

chart:

Entry on March 05 at $63.57
Earnings Date 04/30/12 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on March 03, 2012


Edwards Lifesciences - EW - close: 68.92 change: +0.39

Stop Loss: 72.25
Target(s): 63.00
Current Option Gain/Loss: -12.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/10 update: EW managed a +0.5% gain on Friday but still closed near its lows for the week. The stock remains short-term oversold. I would not be surprised to see a bounce toward $70.00 or even its simple 10-dma near $70.90. I am not suggesting new positions at this time.

- Suggested (Small) Positions -

Long Apr $65 PUT (EW1221p65) Entry $1.65

chart:

Entry on March 07 at $68.76
Earnings Date 04/19/12 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on March 06, 2012


WellPoint, Inc. - WLP - close: 64.88 change: +0.47

Stop Loss: 65.25
Target(s): 60.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
03/10 update: WOLP produced a little oversold bounce from support but the overall pattern has not changed. WLP is still underperforming the broader market. The stock is still at risk for a breakdown under key support in the $63.50 area.

I am suggesting a trigger to open small bearish positions at $63.40 with a stop loss at $65.25. Our target is $60.25.

Trigger @ 63.40 (small positions)

- Suggested Positions -

buy the Apr $62.50 PUT (WLP1221p62.5)

chart:

Entry on March xx at $ xx.xx
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 2.5 million
Listed on March 06, 2012


CLOSED BULLISH PLAYS

Alexion Pharma. - ALXN - close: 84.73 change: -0.18

Stop Loss: 82.45
Target(s): 89.50
Current Option Gain/Loss: Apri$85c: -18.0% & Aprl$90c: -30.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/10 update: The stock market has seen three days of decent gains off its Tuesday lows. While ALXN is up of its lows of the week the stock is not making that much progress. Shares continue to trade sideways under resistance near the $86.00 level. We are suggesting an early exit now.

I do want to point out that the larger trend for ALXN is still bullish and more aggressive traders may want to hang on to their April calls and ride it out for a few more days to see if ALXN can breakout past $86.00.

Earlier Comments:
We want to keep our position size small to limit our risk.

- Suggested (SMALL) Positions -

Apr $85 call (ALXN1221D85) Entry $4.15, exit $3.40 (-18.0%)

- or -

Apr $90 call (AXLN1221D90) Entry $2.00, exit $1.40 (-30.0%)

03/10/12 suggesting an early exit
03/05/12 triggered at $85.55, adjust stop to $82.45
03/03/12 adjust entry strategy: buy calls at $85.55, stop loss @ 82.75
03/01/12 adjust entry strategy. buy calls if both ALXN and S&P 500 open positive tomorrow
02/29/12 trade not open yet. Adjust entry to use a buy the dip trigger at $82.50 with a stop loss at $81.45

chart:

Entry on March 05 at $85.55
Earnings Date 04/23/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on February 28, 2012


CLOSED BEARISH PLAYS

Polaris Industries Inc. - PII - close: 67.16 change: +0.26

Stop Loss: 68.05
Target(s): 60.25
Current Option Gain/Loss: Mar65P: -78.5% & Apr65P: -31.7%
Time Frame: 3 to 4 weeks
New Positions: , see below

Comments:
03/10 update: I am not convinced this bounce in PII is for real but shares are not cooperating. The $66.00 level should have been stronger resistance. The much larger, longer-term trend is higher but PII could dip toward the 200-dma near $58 and still maintain that long-term up trend. As of tonight I am suggesting an early exit now.

- Suggested Positions -

Mar $65 PUT (PII1217o65) Entry $1.40, exit $0.30 (-78.5%)

- or -

Apr $65 PUT (PII1221P65) Entry $3.15, exit $2.15 (-31.7%)

03/10/12 exit early.

chart:

Entry on March 05 at $65.45
Earnings Date 04/19/12 (unconfirmed)
Average Daily Volume = 580 thousand
Listed on March 03, 2012