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Newsletter

Daily Newsletter, Saturday, 3/17/2012

Table of Contents

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

Market Wrap

S&P Only 161 Points from Historic High

by Jim Brown

Click here to email Jim Brown

Talking about approaching historic highs is the best way to jinx them. Market reporters were doing their best on Friday to do just that.

Market Statistics

I have not read or heard so many comments about a new historic high since the first Dow 10,000 effort. You would think by talking about it they believe they can make it happen. In some cases that is true. The often repeated target eventually becomes an assumed event way before its time. Once the target has been hit the resulting profit taking can be ugly.

Personally I think it is far too early to be talking about new historic highs. That would be 1565 for the S&P and 14,164 on the Dow on a closing basis. That was achieved on Oct 9th, 2007. The S&P would have to gain +161 points and the Dow more than +900 points to close at a new high. I think we are better off worrying today about holding our gains through the Q1 earnings cycle than maybe hitting new highs.

Before we get to earnings let me cover the economic new first. The Consumer Price Index for February came in at +0.4% on the headline number and the largest rise in prices since April 2011. Nearly all of those price gains came from gasoline prices which rose +6%. Overall energy prices rose +3.2%. The core rate rose only +0.1% when you take out food and energy. Food prices were actually flat for the month.

The headline pace of inflation on a trailing 12-month basis was +2.9% and well below the high for the year at the 3.9% pace we saw in September. The core rate for the month at +0.1 is well within the Fed comfort zone but the 12 month rate at +2.2% is pressing the upper boundary. The Fed said last week they expected a temporary increase in inflation as a result of oil prices but they emphasized "temporary."

CPI Chart

Industrial Production was flat for February and less than the +0.4% analysts expected. The decline came from a slowdown in mining activity (coal) and lower production from utility companies. Both of these were a result of the fourth warmest winter on record. That limited demand for electricity for heating and demand for coal to supply that electricity.

Consumer Sentiment for March dropped unexpectedly to 74.3 from 75.3. Analysts were expecting a rise to 77.0. The present conditions component rose to 84.2 from 83.0 but the expectations component declined to 68.0 from 70.3. The decline in expectations caused the decline in the headline number.

Analysts said the rise in gasoline prices were the reason for the decline in expectations. The constant headlines about $4 or even $5 gasoline this summer caused an increase in worry over fuel bills. It also caused the survey's one year inflation expectations to rise to 4% from 3.3%.

This was the first decline in sentiment in seven months. Respondents were also worried that high gasoline prices would slow the recovery and possibly push the U.S. back into recession. Gasoline prices rose to average $3.83 and a record high for this time of year. That is an 18% gain over the last three months. Prices are over $4 in Alaska, California, Connecticut, Hawaii, Illinois and New York.

Despite the small decline in the headline number the overall sentiment is still improving. Jobs are improving and that has a direct impact on sentiment. The warmer winter and early spring is also a plus that will continue to support rising sentiment levels.

The wild card is clearly gasoline prices. Being an election year you can bet there is a strategic petroleum reserve release in our future. Even though there is no shortage of oil the price of producing and shipping that oil is rising as excess capacity declines.

Consumer Sentiment

If the president does release some reserves it will be a bad idea. We are about to go to war in Iran in the Persian Gulf. We could see an actual prolonged shortage of supplies depending on the extent of the conflict. Releasing our strategic inventory today to lower gas prices by 25-cents for a couple weeks is not a "strategic" use. It is a political gambit. The release will be justified by saying it is to prevent high gasoline prices from pushing us back into recession. Unfortunately that won't work.

When oil is released from the SPR it is a lengthy process. The administration determines how much they will release, say 30 million barrels, which is how much they released last August. They will post a notice of grades available and schedule a bidding process. This is a 3-4 week process. The refiners bid for X amount at Y dollars per barrel for a particular grade. It is normally $2-$3 under current market value so no real benefit as a result of buying it from the SPR. Many refiners will not bid because the mechanics to bid, pay and arrange delivery are too cumbersome.

After the administration reviews the bids they will announce the winners and open the payment process. After the refiners pay they can schedule delivery. That requires taking delivery at a SPR location and having the oil piped to their refinery. Rarely do they actually take delivery of the actual SPR oil they bought. They will swap the oil in the pipeline for oil in some other location closer to their refinery. Everything costs money. Transporting it costs money and time. Trading it for oil in another location costs money. By the end of the process the oil from the SPR does not cost significantly less than the oil a refinery normally receives and it is a lot more trouble. SPR oil simply does not make sense for lowering gasoline prices. It only makes sense for making up shortages like we could have in a war with Iran.

It took over 60 days to release the 30 million barrels last August in response to the "shortage" from Libya. Once all the bidding, awarding, paying processes were complete the SPR was only able to release an average of 743,000 bpd into the delivery system. The mechanics required to actually push 30 million barrels into the pipeline system is complicated and lengthy for the reasons I listed above. That release was due to a shortage of 1.6 mbpd of oil from Libya. Today there is no shortage.

Oil supplies have risen in the U.S. for seven of the last eight weeks and will continue to rise for the next 6-8 weeks. There is no shortage.

Inventory Snapshot

The blue area is the five year range. Note that supplies in red are at the high end of that range today and will probably move above that range as we move through April and the refinery maintenance period. In case I did not make myself clear there is no oil shortage that requires a release from the SPR!

Crude Oil Inventory Chart

The benefit for gasoline prices is the publicity. The announcement that 30 million barrels of oil are going to be sold creates a temporary dip in WTI prices. Gasoline prices will decline for a week or two and then the political exercise drops out of the headlines and prices return to whatever level Brent is selling for that day. It is only temporary and would be a stupid political move with an Iranian war moving closer every day. Remember, it is a "strategic petroleum" reserve not a strategic "political" reserve.

While on the topic of war with Iran there was a significant move closer last week. The Society for Worldwide Interbank Financial Telecommunication (SWIFT) announced on Thursday it would disconnect Iranian financial institutions from its wire transfer system as of 4:PM on Saturday. More than 80% of international wire transfers go through the SWIFT system. More than $6 trillion of wire transfers are handled daily by SWIFT. In 2010 44 Iranian banks and institutions exchanged more than two million cross border transactions using SWIFT. The SWIFT announcement effectively isolates Iran from any electronic transfer of funds. The Society said it was reacting to the EU sanctions over any form of funds transfer for Iran.

This is a huge blow since billions of dollars flow into Iran weekly from transactions around the world. This not only impacts the banks, institutions and Iran's central bank but also citizens. A large number of citizens receive money every week from relatives around the world sending home support. This will escalate tensions inside Iran as well as rhetoric by Iran directed at the outside world. This will further decrease their ability to sell oil and by doing so severely restrict their inflows of money.

In other news Israel's Prime Minister Netanyahu received the green light for attacking Iran by 8 cabinet members supporting an attack. The remaining six members are either opposed or prefer to wait. This means the Cabinet could vote at any time to approve the attack. Netanyahu said president Obama asked him not to attack Iran before the November elections in the USA. A Netanyahu aide said the prime minister believed it would be best not to wait because he did not trust Obama to support Israel after the elections. (I am just reporting the news.)

Lastly Secretary Clinton asked the Russians to give Iran a "Last Chance Warning" that the upcoming six nation talks are the last chance Iran has before military action. Iran formerly requested a date and location to resume the six party nuclear talks that have been on hold for a year but at the same time warned the West they will not put up with demands to halt uranium enrichment or allow their sensitive sites to be inspected.

Remember my wild animal analogy from several weeks ago. When a wild animal is backed into a corner as the West/EU has done to Iran there is always the potential for a fierce reaction.

The U.S. Navy announced it was sending four additional minesweepers to the Persian Gulf. This will double the number of minesweepers in the gulf. Iran has warned it will mine the Strait of Hormuz to close it if its own oil sales are hindered. The U.S carriers Abraham Lincoln and Carl Vinson currently in the Persian Gulf area will be joined by the carrier Enterprise sometime in the next week or so. Three carrier groups in a very small piece of ocean at the same time is a definite show of force.

Brent and WTI crude rallied sharply into Friday's close with Brent gaining $3.56 to $126 and WTI adding $2.04 to $107.15. Expect gasoline prices to go higher.

Brent Oil Chart

WTI Oil Chart

The economic calendar for next week is light with the major reports all relating to the housing sector. New home starts on Tuesday, new home sales on Friday and existing home sales on Wednesday. I expect positive numbers from all three reports. This could further stimulate the market, which is already in celebration mode over the banking stress test results.

Economic Calendar

We are closing in on the end of the quarter and we have a real challenge brewing. Fund managers were caught off guard by the quick market rebound in early March and could be chasing stock prices into the end of the quarter in order to dress up their statements. No fund manager wants to show they are in fixed income investments or cash with the markets setting new multiyear highs.

On the downside the Q1 earnings are not shaping up well. S&P expects earnings for the S&P 500 to only grow at +0.52% for the quarter. That is down from the +7.5% in Q4 and nine quarters of double digit earnings growth prior to that. The odds are very good that will decline to a negative number in the weeks ahead. Since January 3rd S&P has downgraded estimates for nine of the ten sectors with technology the only sector currently expected to post a gain. Tech earnings are expected to increase by +2.6%. That is not exactly a rousing victory. The earnings estimates for the telecommunications sector have declined -15.3% and there has been a drop of -13.9% for the materials sector. Six sectors are expected to post a decline in earnings. Those are energy, materials, health care, financials, telecommunications and utilities.

S&P Earnings Estimate Revision Chart

Earnings growth estimates for the entire S&P for all of 2012 has declined to +6% with a rise of +13.5% in 2013. S&P expects U.S. GDP for all of 2012 at +2.1% and rising only to +2.3% in 2013. They claim problems that could derail their less than optimistic forecasts were:

A meltdown in Europe's debt situation. (Portugal, Spain, etc)
A spike in oil prices.
A geopolitical event.
Mounting tensions in the Middle East.
Gridlock in Washington leading to another ratings downgrade.

So what are the odds of any of those events coming to pass? I would say it was about 100% on several. That does not bode well for future quarters and we are not even out of Q1 yet.

How is the market going to react when nearly every company starts posting a decline in earnings if S&P is correct? I would bet it won't be new highs. However, we saw the market shake off the flood of earnings misses and guidance warnings for Q4. It is always possible the market overlooks Q1 as well but I am not holding my breath. Guidance for Q2 could be a serious challenge.

That brings me back to the quarter end scenario. Fund managers are not dummies. At least most are not dummies. They know earnings are going to be terrible. Do they still throw money into stocks to window dress for quarter end? Since funds live and die by their quarterly statements I don't think they have any choice. However, there are probably quite a few who have been invested for the last three months and they could go to cash now, sell the rally and guarantee their year end bonuses.

The retail investors are not nearly as educated and informed. They are finally coming back into the market thanks to the new highs working as an advertisement for equity investing. They don't realize earnings are going to be terrible. You can't pick up a newspaper every Saturday and really understand what is going on in the financial world. You get headlines designed to sell newspapers and rarely hardball warnings on the state of the market.

Using a line from the movie Cool Hand Luke, "What we have here is a failure to communicate." Retail traders rushing in to buy a market top is a time honored tradition. For years they have been sitting in the safety of fixed income investments and afraid of equities. Now that the markets are setting new highs they are afraid they are missing the boat and they are starting to abandon those fixed income funds. If earnings were going to be in double digits again I would say the switch to equities was timely and appropriate. Unfortunately they are going to make the switch at exactly the wrong time.

I believe we are setting up for a monster "Sell in May" event. We will get deep into April and the majority of the S&P will have posted a decline in earnings and probably a decline in guidance and the money flow will reverse and the summer doldrums begin.

Those last twenty paragraphs of analysis and $3 will buy you a bad cup of coffee at Starbucks. That is just my thoughts based on the earnings analysis of S&P and nearly 20 years of studying the market every day. Nothing is easy. Nothing is ever guaranteed. The market exists to make fools of as many analysts as possible every day. I would nominate myself as head fool but a couple of other guys have been using that title for about ten years now.

In theory the market should continue inching higher for the next couple of weeks as the move out of fixed income gains momentum and fund managers window dress the end of the quarter. The next chapter would be a bit of choppy trading as the first couple weeks of earnings are released then a decline into the summer doldrums. Theory never seems to work for me in practice. Maybe this time it will be different.

The rush out of bonds stalled on Friday but that was probably due to the desire for safety over the weekend just in case Israel and Iran started shooting. If nothing happens over the weekend the bond outflows should resume.

Ten Year Yield Chart

Thirty Year Yield Chart

The market is rising on a lot of positive news or at least negative news that failed to live up to expectations. We worried for months over a hard landing in China. Many believe that hard landing has arrived with estimates for +7.5% growth in 2012 but the damage has been minimal. (China's Hard Landing)

Greece caused severe market dislocation for the last year and they have now moved out of the headlines and into history without a disorderly default at least for the time being. Instead of being the "Lehman event" in Europe the result was far less destructive.

The fears of a double dip recession in the U.S. in the fall failed to appear despite a significant soft spot. The economics and sentiment declined sharply to bottom in late summer but stopped well short of a new recession. Look at the Consumer Sentiment chart reprinted below. The sentiment for August was only 55.7 and only .04 away from the 28-year low in 2008. That drop in sentiment and economics was sharp but the bounce was equally as strong.

Consumer Sentiment

The markets shook off the Japan earthquake and the Thailand floods, the civil war in Libya and unrest in Egypt, Yemen, Nigeria, Sudan, etc. The ongoing Syrian disaster today has been regulated to the inside pages with barely a mention in the network newscasts. The markets have climbed a serious wall of worry to get this far so maybe they will shake off what could be a negative earnings quarter and move higher. Stranger things have happened in the past.

In stock news the banking sector continued to outperform post stress test. Amazingly banks that failed the test were doing very well. SunTrust (STI) gained +8.8% for the week. Citi gained +7.1%. Banks that passed also did well with Bank of America gaining +21.4%, JPM +8.5% and WFC +7.1%. Even Goldman Sachs added +3% despite the ugly NYT article by outgoing employee Greg Smith. (Why I am Leaving Goldman)

I would bet that most of those stress test banks are being chased by funds eager to show winners on their quarterly statements. Banks were consistently overlooked in January and February but they have gone from sinners to winners over the last week.

KBW Bank Index Chart

Apple (AAPL) began delivering the new iPad on Friday. Lines were long but not as long as in the past because of the online preorders. Apple shares hit $600 on Thursday and came to a dead stop. Analysts are tripping all over each other to put ever higher price targets on the stock but the new iPad is now old news. How much longer will this rally last? I know there is every justification in the world for Apple at this price with a PE of 15 and massively growing sales and profits. One analyst expects their cash hoard to grow to $150 billion by the end of Q2. I have heard repeatedly that dividend funds are buying the stock in expectations for a monster dividend. Unless Apple decides to use that cash to buy IBM ($239 billion market cap) or Microsoft ($274B) they are going to have to make a major distribution soon. That would require a special dividend or a massive stock repurchase.

I think investors are tiring of the wait. The dead stop at $600.01 was clear evidence there were a lot of sell stops waiting. The intraday volatility over the last three days has increased and a break under $580 could begin a sharp decline. A return to the prior week's $520 level would be a buying opportunity for some. The stock has gone parabolic and eventually this rocket ship is going to run out of fuel. A return to the 200-day average would be a -$200 point drop.

Apple Chart

Apple Chart - Daily

India doubled its tax on gold and platinum from 2% to 4% in an effort to slow down imports. The tax on silver was not changed. India is the world's biggest bullion buyer and the rising rate of imports increased its current account deficit. India imported 969 metric tons in 2011 as gold prices rose for the 11th consecutive year. Gold futures in India rose by 32% in 2011 and much higher than the 10% in the global markets. Gold imports into India rose by 50% over the last three quarters. The tax on gold jewelry also doubled to 3%. Demand for gold in India is expected to slow slightly as a result of the tax but one analyst said it would be brief. "When you are buying gold for a long term investment to hedge against inflation the additional 2% tax is nothing." That is an increase of only $33 on a $1650 ounce of gold. Gold has declined over the last two weeks on the stronger dollar.

Gold Chart

The VIX dipped to a low of 13.66 just prior to the close. That level has not been seen since 2007. The sharp intraday dip is related to the options expiration and the impact on option prices. Volatility is so low at present that buying options outright are a bargain rather than doing spreads. To illustrate, a $60 April put on Wal-Mart is 52-cents with the price of WMT shares at $60.84. A 52-cent option 88-cents out of the money is a pretty cheap bet on a stock's direction. That is especially true given the price of gasoline and the odds Wal-Mart sales are going to suffer.

VIX Chart - Weekly

The S&P squeezed out a +1.57 point gain on Friday to stretch its string of weekly gains to six. The index closed over 1400 for the second day and the gain was never in doubt. Expiration of options and futures helped pin the index to 1400 level all day. Support is now well back at 1340 but there are no signs of a retreat.

Volume was strong on Friday thanks to the quadruple witching and some minor rebalancing of the indexes. Volume exceeded 7.0 billion shares for each of the last four days with 8.0 billion on Friday. Internals were evenly distributed with advancers and decliners almost dead even. The minimal 1.5 point gain was a result of the low volatility.

On the S&P the next resistance level is 1426 and the closing high from May 2008 just before the big recession drop began. Real support is 1340.

S&P Chart

The Dow has broken out to multiyear highs and set a new closing high for three consecutive days before resting on Friday. UTX was the laggard at -1.41 followed by MMM, PG and WMT to drag the Dow down.

Bank of America was the hero with a +6% gain but unfortunately a $9 stock has no material impact on the price weighted index. IBM is the largest weighting at $200 followed by CVX and CAT.

Support is well back at 12,750 and resistance is the October 2007 high close at 14,093.

Dow Chart - Daily

Resistance on the Nasdaq Composite is about 3,075 and then it jumps to 3,500 and the October 2000 highs. I seriously doubt that decade old highs will have any impact on the Nasdaq. The bigger impact will be just one more round number at 3,500.

The Nasdaq is going to be controlled by Apple so we should really just show an Apple chart in place of the Nasdaq 100 chart. When the spike in Apple finally collapses it will take the entire market with it. The S&P is up +11.65% for the year and Apple alone is responsible for 2%.

Nasdaq Chart

The Russell 2000 small cap index continues to be the fly in the market soup. The Russell refuses to break resistance at 830 and it has been rock solid for over a month. This contradicts the "fund managers chasing performance" claims because fund manager sentiment appears to be lacking conviction. They may be throwing money at the big caps but the Russell is only getting pocket change.

Don't back up the truck to go long until the Russell breaks out on strong volume.

Russell 2000 Chart

Conventional wisdom seems to think the rally will continue through month end and possibly into early April. The stall in Apple shares is giving me second thoughts about that concept. I believe Apple will control our fate. Once the profit taking begins in Apple the rest of the market will follow. With the iPad news now old the levitating power of the Apple faithful may begin to fade.

Wait for the Russell to confirm any further market gains before drinking the Kool-Aid and loading up on longs.

Jim Brown

Send Jim an email

"If you fail to plan, you plan to fail."
Old Saying


Index Wrap

Breakout Above Resistances; Bank Index Up 7%

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

This past week's run up didn't owe as much to tech stocks, although IBM and AAPL had substantial gains. Rather, we saw an S&P led rally given the strength in the banks and some others with sizable financial arms; e.g., BAC, JPM, AXP and GE in terms of Dow stocks. The S&P Bank sector Index (BIX) was up a whooping 7% for the week.

All the major indexes got back into their prior uptrend channels by making it above some big key numbers; namely, 1400 in SPX, 13000-13050 in the Dow and 3000 in COMP.

As I pointed out last week, the Nasdaq Composite Index (COMP) and the Russell 2000 (RUT) had recent (3/6) correction lows AT their bullish up trendline which suggested a possible low for all. Bullish price action in those 2 indexes weren't quite enough to keep me near-term bullish as I thought their might be another pullback toward or to early-March lows. I was interpreting this based on the common pattern of a second downswing in many 'normal' bull market corrections. WRONG! And, as we know, this Market is not exactly normal. Instead, the market shot up this past week in another strong bull advance.

A key technical 'element' in how I analyze the market was missing coming into last week; namely, trader sentiment wasn't all that bullish. It got to more of an 'overbought' bullish 'extreme' by the end of the week and my call to put ratio indicator may rise some more. However, given the overbought conditions of all the major indexes, I'm not going to chase any rallies in terms of buying into them. There could be an early-week correction, not down by a lot, then another rebound into the end of the week. Typically, there are 2-3 weeks of high bullish expectations (high bullish 'sentiment') before the market will have a deeper correction; like the one I was anticipating could develop when I wrote last weekend.

Last week I couldn't measure any clear cut chart resistance but after this latest advance, calculations I've done suggest near-term resistance around 1430 in SPX, 642 in OEX, 13300 in INDU, 3080 in the Composite, and 2765 in NDX (I should mention potential resistance in AAPL around 640-642) and; well, RUT is stalled yet again at a key line of prior highs at 833. IF the Russell 2000 is again an early-warning bellwether index for the rest of the market, its price action will be something to keep an eye on.

Bottom line, the trend is up strongly and don't bet against it but if you're not positioned on the bullish side already, let the other players fight it out for remaining gains. This rally is getting 'old' in the scheme of things. In a strong first Quarter, there's usually a correction by mid-March to early-April, ahead of another rally into mid to late-May typically.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

Contrary to my expectations a week ago that the S&P 500 (SPX) might have started an intermediate correction (e.g., 2-3 weeks), the market took off again rising (as it often does) concurrent with still-low to moderate bullish expectations among traders. The investment 'public' haven't made net increases in equities relative to fixed-income; at least beyond 401k type investments. Everyone is so leery of a deepening European recession and skyrocketing gas prices that stocks have seemed quite risky to most. But as they say, the market climbs a 'wall of worry'.

Instead of any further weakness, near resistance at 1375 got taken out on the way to SPX's climb to above 1400. The last weekly close above 1400 was the end of May, 2008 and that was just a slight rebound on the Index's way DOWN from the 1550 area.

In terms of the relatively narrow but steep uptrend channel that SPX has been in since late-December as highlighted on my SPX chart, potential resistance comes in at 1430, extending to 1450. One projection of possible resistance coming via short-term (1430) and long-term charts (1450).

Near, and key, support for SPX is at 1400, then around 1370. I can't say that two days below the 21-day moving average suggests deeper weakness to come but another sinking spell below this key trading average wouldn't get me buying calls.

It's your party at this point for those riding this trend higher. I'd like to buy a good sized dip if scares come up. Wait until someone noteworthy questions earnings growth projections for Apple in terms of justifying its current P/E!

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart is bullish and the Index has again climbed into the track it was on before this recent dip in terms of its uptrend channel. I don't know what further bullish news can keep pushing OEX higher at the same steep rate of price expansion. This last dip is visual evidence that at some point stocks mostly only rise so long at as fast a pace as the big-cap S&P 100 has been in since the November bottom.

If this recent rally again has 'legs', prices will next rise toward the middle to upper end of OEX's uptrend channel with the upper 'resistance' end of the channel intersecting around 656.

Support is evident in the 620 area, although trendline support is above this, at 635-636 currently. I also have noted very near resistance at 642. An easy move above 640-642 suggest potential for a further next spurt higher.

OEX, like the other major indexes, is overbought on an hourly, daily and weekly chart basis.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) chart continues to be in a strongly bullish pattern, especially with this last sharp rebound above 13000. My up trendline has been re-drawn for the Average to connect the last two daily lows to the November low.

Trendline support is seen at 12930; next support at the prior 12735 intraday low.

**UPDATE: A later look (3/18) at the Dow daily chart suggests a different interpretation than my initial one which went out as part of the 3/17 Option Investor e-mail. I initially wrote: "One measurement of potential resistance suggests that the Dow is in that area already, around 13300; however, there's room to roam given INDU moving above 13300." A revised daily chart is inserted than the one originally seen in the 3/17/12 OI market letter. I've come to a different interpretation for the chart. A rising wedge pattern is still seen, but more clearly traced out with better 'definition' to the upper trendline.

With the below re-drawn chart, the pattern now suggests that INDU has broken out ABOVE the upper resistance trendline, 'negating' the rising bearish wedge pattern. Given the concept of resistance once penetrated 'becoming' support on subsequent pullbacks, this chart pegs INDU support for the 13140 area, which would represent a pullback to the prior resistance trendline.

My key number in terms of potential resistance based on weekly chart (not shown here)analysis comes at 13500-13540.

In terms of the worrisome to Dow Theorists fact that the Dow Transports (TRAN) have NOT followed the Industrials (INDU) to a similar new closing weekly high above 5563; TRAN closed this past week at 5351, so it still has a ways to go if its to 'confirm' the continuation of the bull market. However, TRAN also had a strong gain this past week.

JPM, BAC plus GE and AXP led the Dow higher; helped by continued or renewed strength in HD, IBM, INTC, and MSFT. Now there's 8 stocks to watch for clues to the next move!

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) chart stayed bullish in the broadest Technical sense in that its last pullback low rebounded from right where the bulls would want it to, at the intersection of its well-defined up trendline.

I see some possible resistance coming in next in the 3080 area, but then not until 3150 above that. 3000 will be considered 'the' support to watch, but more important technically is where the up trendline suggests support and that current intersection is at 2950; support then should extend to 2900. A close under 2900 would be a minor game changer and bearish chart wise.

The current advance is getting 'old' in terms of length of time without more than a shallow pullback. Moreover, the RSI is not confirming this latest move to a new high, while still up in its 'typical' overbought zone. That knowledge in this kind of market doesn't suggest making a bearish play (respect the trend!) but does suggest bulls be careful to protect profits due to the increased probability that enough of a correction will develop to at least push the RSI back to its 'midrange' 50-55 area.

NASDAQ 100 (NDX); DAILY CHART:

As I wrote last week regarding the Nasdaq 100 (NDX), the Index piercing its line of prior highs at 2645-2650 was key to a next move to 2700-2730. A somewhat unusual week as we're not used to seeing the S&P soaring and the big-cap Nasdaq 100 well, just 'following' along. Still, a strong weekly gain again for NDX and its key bellwether, Apple Computer(AAPL).

As suggested by the upper end of the uptrend channel that NDX has been in for many weeks, a potential key technical resistance for NDX comes in around 2765 at the intersection of the upper trend channel; with AAPL, pivotal technical resistance looks like 640-642 currently. If in NDX calls, you're probably keeping a close eye on AAPL and you should.

I didn't highlight very near support at the up trendline, what with the Index being back in its uptrend channel. Near support at the regained up trendline (unnoted below) is at 2680. Technical support is next assumed for the 2650 area, extending to 2630. A close or two below 2600 suggests further downside potential to the low-2500 area.

I noted on the NDX daily chart here that a move to 2800 would be a technical milestone of a 50% retracement of the monster decline in NDX from its March 2000 top to the bear market low of October 2002. A recovery of half of the prior decline could mark a pause in the multimonth advance.

The Nasdaq 100 tracking stock (QQQ) has of course also climbed back into its steep uptrend channel, which keeps the chart in the same bullish rate of ascent as in prior weeks. Still, the recent sell off suggests that this rally is getting stocks to levels that are considered fairly priced and the advance is going to level off at some point. Especially so, in a contrary opinion sense, if bullishness keeps rising the way it did this past week.

Key resistance is at 68-68.1, at the upper trend channel boundary. Intersection of QQQ prices with this upper trendline would suggest that 1.) further price gains will follow that upper trendline higher or 2.) will mark a juncture where QQQ levels off and trends sideways to lower after that.

Near support is a 66.0; with next support in the area of the 21-day moving average, currently at 64.6. 63-63.2 or the area where support developed at the early-March low is a key lower support.

Volume has been decent on the most recent run up. It almost makes me suspicious since the QQQ tracking stock doesn't always follow the bullish volume tendency for regular (company) stocks of volume going UP as prices rise. Seems that this may be another sign of increasing bullish sentiment.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) reversed and rallied from its up trendline, which was bullish action. More bearish is seen by RUT continuing to top out at its now well-defined line of resistance at 833; a real stopper for the past few weeks.

Assuming a decisive upside penetration of the 833 line of resistance, there's potential again for RUT to again reach the upper end of its uptrend channel, where resistance could come into play around 877. I see more potential for another drift toward support than an upside breakout type move.

Key near support is at 800, at the current intersection of the aforementioned up trendline. Next technical support looks like 750.

RUT has the most pronounced bearish price/RSI 'divergence' of any of the major indexes. The first time that RUT was hitting those 833 highs, the RSI was much higher than this most recent instance; suggesting, DECLINING relative strength. Stay tuned on how this plays out ahead! RUT would be my least favorite index calls to be holding here.



GOOD TRADING SUCCESS!


New Option Plays

Oil Services & Industrial Goods

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) IJR, XLE, CLR, DVN, WSO, CHTR, BCR, PXD, CLB, CKH, PX, BXP, APD, ROK, BRK.B, GD, WCC, NOC, DVA, and ALV.

While we are seeing a lot of bullish candidates the rally in tech stocks is looking pretty extended. We are very tempted to buy a June put on the QQQ in an effort to capture a correction in the NASDAQ-100. At the same time we are facing the prospect of the market extending its gains as money managers window dress their portfolio in time for the quarter end (March 31st). I'm going to pass on the QQQ put idea tonight but it's an idea we may revisit between now and the end of March.


NEW DIRECTIONAL CALL PLAYS

Lufkin Industries - LUFK - close: 79.93 change: +1.57

Stop Loss: 76.99
Target(s): 84.85
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
LUFK is an oil services stock. After a -$10 correction from $85 to $75 the stock is on the mend. Shares are now testing resistance near $80.00. I am suggesting we use a trigger to buy calls at $80.75 with a stop loss at $76.99, which is just under the 50-dma. Our target is $84.85. More aggressive trades could aim higher. The Point & Figure chart for LUFK is bullish with a $97 target.

Trigger @ $80.75

- Suggested Positions -

buy the Apr $85 call (LUFK1221D85) current ask $2.00

Annotated Chart:

Entry on March xx at $ xx.xx
Earnings Date 04/19/12 (unconfirmed)
Average Daily Volume = 494 thousand
Listed on March 17, 2012


NEW DIRECTIONAL PUT PLAYS

Polypore Intl. Inc. - PPO - close: 36.40 change: -0.99

Stop Loss: 38.65
Target(s): 31.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
PPO is clearly not participating in the market's rally. Shares have been hit by various concerns regarding its battery business. Investors are selling into strength and PPO has a bearish pattern of lower lows and lower highs. It just completed a new lower high this week near $38.50.

I am suggesting small bearish positions at the open on Monday with a stop loss at $38.65. Why small positions? We want to limit our risk because being bearish on PPO is a popular trade. The most recent data listed short interest at 34% of the 46.3 million-share float. It is this short interest that produces these brief little short squeezes higher that keep failing (at least they are failing so far). Our target is $31.00 or the dotted trend line of lower lows (see chart below). FYI: The Point & Figure chart for PPO is bearish with a $16 target.

- Suggested Positions -

buy the Apr $35 PUT (PPO1221P35) current ask $1.80

Annotated Chart:

Entry on March xx at $ xx.xx
Earnings Date 05/03/12 (unconfirmed)
Average Daily Volume = 2.4 million
Listed on March 17, 2012



In Play Updates and Reviews

AXP & COF Hit Our Bullish Targets

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market saw its rally pause on Friday but that didn't stop a couple of financial call plays (AXP & COF) from hitting our exit targets.

We have removed FDX and TSCO from the newsletter. Neither trade was opened. Our GTLS trade was triggered. I am suggesting an early exit in the EW trade.

Current Portfolio:


CALL Play Updates

Allergan Inc. - AGN - close: 93.00 change: -1.18

Stop Loss: 89.75
Target(s): 98.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
03/17 update: After four days of gains and up six out of the last seven sessions, shares of AGN hit some profit taking on Friday. The -1.2% decline looks like a very short-term bearish reversal. That's okay since we are planning to buy the dip anyway. Currently the plan is to buy calls on a dip at $92.25. More conservative traders may want to wait for a dip into the $91-90 zone instead or better yet wait and buy a bounce.

We will start with a stop at $89.75. Our multi-week target is $98.00. FYI: The Point & Figure chart for AGN is bullish with a $110 target.

New buy-the-dip trigger @ 92.25

- Suggested Positions -

buy the Apr $92.50 call (AGN1221D92.5)

- or -

buy the Apr $95 call (AGN1221D95)

03/15/12 not open yet. New buy-the-dip trigger @ 92.25
03/14/12 not open yet. try again.

chart:

Entry on March xx at $ xx.xx
Earnings Date 05/03/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on March 13, 2012


Airgas Inc. - ARG - close: 84.84 change: -0.11

Stop Loss: 81.75
Target(s): 87.00
Current Option Gain/Loss: (Mar82.5c: +45%) & Apr$85c: + 8.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/17 update: Friday was a lackluster session for stocks. ARG initially rallied past $85.00 but settled with a very minor loss. If the market were to see a pullback I'd look for ARG to test its 10-dma near $83.00. I am not suggesting new positions at this time.

- Suggested Positions -

March position is closed.
Mar $82.50 call (ARG1217C82.5) Entry $1.00, exit $1.45 (+45%)

- or -

Long Apr $85.00 call (ARG1221D85) Entry $1.25

03/14/12 April $85 call play opened
Exited March $82.50 calls at the close (bid $1.45, +45%)
03/13/12 new stop loss @ 81.75
Buy April calls (see 2nd position) if ARG hits $84.05
Plan to sell our March calls at the closing bell tomorrow.
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


Clean Harbors, Inc. - CLH - close: 68.95 change: -0.01

Stop Loss: 66.75
Target(s): 71.50
Current Option Gain/Loss: + 3.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/17 update: CLH has spent the last six days churning sideways under resistance near the $70.00 level. That consolidation has narrowed the last two and a half days. I am concerned with CLH's inability to break higher while the major indices continue to climb. More conservative traders may want to exit early now. 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

03/13/12 new stop loss @ 66.75
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


Chart Industries - GTLS - close: 74.40 change: +0.79

Stop Loss: 69.75
Target(s): 79.75
Current Option Gain/Loss: - 8.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/17 update: Our new trade on GTLS has been triggered. The stock hit our entry point to buy calls at $74.25. Shares managed to hit a new record high at $75.00 before paring its gains.

Earlier Comments:
Our exit target is $79.75. More aggressive traders could aim higher. The Point & Figure chart for GTLS is bullish with an $82 target.

- Suggested Positions -

Long Apr $75 call (GTLS1221D75) Entry $3.50

03/16/12 triggered at $74.25

chart:

Entry on March 16 at $74.25
Earnings Date 05/03/12 (unconfirmed)
Average Daily Volume = 712 thousand
Listed on March 15, 2012


Herbalife Ltd. - HLF - close: 70.58 change: -0.17

Stop Loss: 67.75
Target(s): 74.75
Current Option Gain/Loss: - 9.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/17 update: The major indices drifted sideways on Friday and HLF was content to drift along round-number support at the $70.00 level. As broken resistance the $70 mark should be support but I'd expect HLF to dip toward $68.00 if the market did see a pullback.

Earlier Comments:
Our quick target is $74.75. More aggressive traders may want to aim higher. FYI: The Point & Figure chart for HLF is bullish with a long-term $103 target.

- Suggested Positions -

Long Apr $70 call (HLF1221D70) Entry $3.10

chart:

Entry on March 15 at $70.50
Earnings Date 05/02/12 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on March 14, 2012


IPG Photonics Corp. - IPGP - close: 55.47 change: -0.38

Stop Loss: 52.49
Target(s): 60.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
03/17 update: IPGP is hovering under the $56.00 level. We are waiting for a breakout. The plan is to buy calls if IPGP can hit $56.25 or higher. Shares could see a bit of a short squeeze. The most recent data listed short interest at 16.5% of the small 37.1 million share float.

Trigger @ $56.25

- Suggested Positions -

buy the Apr $60 call (IPGP1221D60)

chart:

Entry on March xx at $ xx.xx
Earnings Date 05/03/12 (unconfirmed)
Average Daily Volume = 763 thousand
Listed on March 15, 2012


Whole Foods Market - WFM - close: 85.15 change: -0.34

Stop Loss: 81.75
Target(s): 87.50
Current Option Gain/Loss: +15.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/17 update: Positive analyst comments and a new higher price target on Friday was not enough to lift shares of WFM. The market's major indices drifted sideways and WFM was content to consolidate sideways as well. WFM has spent most of the last three days in the $84.50-86.00 zone. If the market happens to see a pullback then WFM might find support near $84.00 and then in the $82.50-82.00 zone. I am not suggesting new positions at this time.

Currently our exit target is $87.50. More aggressive traders may want to aim for the $89.50-90.00 zone instead.

- Suggested Positions -

Long Apr $85 call (WFM1221D85) Entry $1.88

03/13/12 new stop loss @ 81.75

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

AMERIGROUP Corp. - AGP - close: 65.47 change: +0.21

Stop Loss: 67.25
Target(s): 61.00
Current Option Gain/Loss: (Mar$65P: -82.1%) & Apr$60P: -37.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/17 update: AGP's performance on Friday looked a lot like Wednesday and Thursday with a short spike higher at the open that fails near resistance at the $66.00 level. The overall posture for AGP looks bearish. The stock has formed a long-term bearish double top pattern with the peaks in July 2011 and February this year. Shares continue to trade under their 10-dma and their 50-dma. Yet I am not suggesting new positions at this time. A drop to a new relative low under $64.0 might change my mind on new put plays. Please note that I am lowering our stop loss down to $67.25.

- Suggested Positions -

March position is closed.
Mar $65 PUT (AGP1217o65) entry $1.40, exit $0.25 (-82.1%)

- or -

Long Apr $60 PUT (AGP1221p60) entry $1.20

03/17/12 new stop loss @ 67.25
03/14/12 planned exit for the Mar.$65 put, bid @ 0.25 (-82.1%)
03/13/12 new stop loss at $68.05
prepare to exit the March $65 puts at the open tomorrow,
we will keep the April $60 puts active.
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


Centene Corp. - CNC - close: 45.46 change: -0.83

Stop Loss: 46.25
Target(s): 40.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
03/17 update: There was no follow through on CNC's bounce on Thursday. The stock reversed with a -1.8% decline on Friday. Now shares are nearing support at $45.00 again.

I am suggesting a trigger to open bearish put positions at $44.75. This will require CNC to trade under its 50-dma and potential support at the $45.00 mark. If triggered we'll use a stop loss at $46.25. Our target is $40.50.

Trigger to buy PUTS @ $44.75

- Suggested Positions -

buy the Apr $45 PUT (CNC1221P45)

chart:

Entry on March xx at $ xx.xx
Earnings Date 04/24/12 (unconfirmed)
Average Daily Volume = 529 thousand
Listed on March 12, 2012


Joy Global, Inc. - JOY - close: 78.57 change: -0.07

Stop Loss: 81.65
Target(s): 72.50
Current Option Gain/Loss: -41.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/17 update: Hmm... it's a little hard to explain the outperformance in JOY on Friday (+2.1%). Gold and silver were up fractionally. Copper was down. The GDX gold miner ETF was down. JOY saw a bounce back toward the $80 level and its 10-dma. Today's move does put us on the defensive. If shares rally back toward their midweek highs then we will get stopped out at $81.65. I am not suggesting new positions at this time.

Earlier Comments:
Our target is $72.50. More aggressive traders could aim lower. The Point & Figure chart for JOY is bearish with a $70 target.

- Suggested Positions -

Long Apr $75 PUT (JOY1221P75) Entry $2.52

03/15/12 trade opened on JOY's gap down at $77.38, which is under our trigger to buy puts at $77.75.

chart:

Entry on March 15 at $77.38
Earnings Date 06/04/12 (unconfirmed)
Average Daily Volume = 2.8 million
Listed on March 12, 2012


CLOSED BULLISH PLAYS

American Express Co - AXP - close: 56.55 change: -0.17

Stop Loss: 53.40
Target(s): 57.00
Current Option Gain/Loss: +91.6%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/17 update: Target exceeded.

Shares of AXP gapped open higher at $57.31 on Friday morning. This is above our exit target at $57.00 so the trade was closed immediately.

Earlier Comments:
The plan was to keep our position size small.

- Suggested Positions - (Small Positions)

Apr 52.50 call (AXP1221D52.5) Entry $2.40 exit $4.60 (+ 91.6%)

03/16/12 target exceeded. AXP gapped above our exit target.
03/15/12 new stop loss @ 53.40
03/14/12 new stop loss @ 52.40, adjust exit to $57.00
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


Capital One Financial - COF - close: 54.50 change: +0.87

Stop Loss: 49.75
Target(s): 54.75
Current Option Gain/Loss:(Mar$50c: +83.8%) & Apr$50c: +117.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/17 update: Target achieved.

COF continued to rally on Friday. The stock outperformed the major indices and most of the financials with a +1.6% gain. Shares hit round-number resistance at $55.00 intraday. Our exit target was tagged at $54.75.

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

(small positions)

- Suggested Positions -

March position is closed.
Mar $50 call (COF1217C50) entry $1.30, exit $2.39 (+83.8%)

- or -

Apr $50 call (COF1221D50) entry $2.30 exit $5.00 (+117.3%)

03/16/12 target hit at $54.75
03/15/12 new stop loss @ 49.75
03/14/12 new stop loss @ 48.60
03/14/12 as planned, closed Mar $50 call, bid @ $2.39 (+83.8%)
03/13/12 prepare to exit March calls at the close tomorrow
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


FedEx Corp. - FDX - close: 94.34 change: -0.27

Stop Loss: 89.75
Target(s): 96.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/17 update: The new trend for FDX appears to be up, especially given the breakout past short-term resistance near $92.50. Nimble traders may want to still try and buy calls on a dip. However, we are running out of time. FDX is due to report earnings on March 22nd. We do not want to hold over the earnings report. I am dropping FDX as a candidate and we will make room for another trade instead.


03/17/12 removed from the newsletter with earnings coming up.
Our trade never opened.
03/15/12 not open yet. new buy-the-dip trigger @ 92.75
03/14/12 not open yet. try again.

chart:

Entry on March xx at $ xx.xx
Earnings Date 03/22/12 (unconfirmed)
Average Daily Volume = 2.1 million
Listed on March 13, 2012


Tractor Supply Co. - TSCO - close: 85.81 change: -1.47

Stop Loss: 85.75
Target(s): 94.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/17 update: TSCO is not cooperating. We've been worried about its lack of performance the last few days. Shares underperformed the market on Friday. The $85.00 level should be short-term support but my enthusiasm for this trade has cooled. Readers may want to keep an eye on TSCO for a breakout past the $88.50 area. We are removing TSCO as a trade.

Our trade did not open.

03/17/12 removed TSCO from the newsletter
03/14/12 adjust trigger to $88.75
03/13/12 if triggered at $88.50, only use small positions, move stop loss to $85.75

chart:

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


CLOSED BEARISH PLAYS

Edwards Lifesciences - EW - close: 71.42 change: +1.41

Stop Loss: 72.25
Target(s): 63.00
Current Option Gain/Loss: -69.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/17 update: EW outperformed the market on Friday with a +2.0% gain. I couldn't find any news to account for the relative strength. This convincing break past the $70.00 level is not a good sign for the bears. While it's possible that the $72.00 level and its 100-dma will hold as overhead resistance I am suggesting we go ahead and exit early now.

- Suggested (Small) Positions -

Apr $65 PUT (EW1221p65) Entry $1.65, exit $0.50 (-69.6%)

03/17/12 EW is showing relative strength. We want to exit early

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