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Daily Newsletter, Saturday, 4/7/2012

Table of Contents

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

Market Wrap

Inflection Point

by Jim Brown

Click here to email Jim Brown

Nonfarm payrolls plunged unexpectedly on Friday causing S&P futures to drop -20 points.

Market Statistics

Nonfarm payrolls for March came in at +120,000 and much lower than the +205,000 consensus estimate. That was the lowest job gain since October's +112,000. Recent revisions have been strongly higher but that was not the case in March. The February gains were revised higher by +13,000 but January was revised lower by -9,000 for a trivial net change.

If those numbers were the entire story the market would not have been so disappointed. However, the corresponding Household Survey, which posted a gain of +428,000 jobs in February saw an actual LOSS of -31,000 jobs in March. This is not a sign the economic recovery is accelerating but suggests it has stalled. Has the market reached an inflection point on the economy?

If the number of employed persons actually declined by -31,000 in the Household Survey why did the unemployment rate go down? The unemployment rate declined from 8.3% to 8.2% solely because another 164,000 people gave up looking for work and left the work force.

Analysts claimed the fourth warmest winter on record accelerated hiring into January and February and played havoc with the seasonal adjustments making employment seem higher in the early months and leaving March with a weak number. If analysts are so sure this is what happened then why didn't they report this before the payroll number? Why were the various estimates over 200,000, several over 250,000 and one at 290,000? I think some of them need to find a new line of work.

However, in their defense the employment components of the various regional reports plus the national ISM showed employment improving. That suggests there could be some noise in the BLS data but since the Nonfarm Survey and the Household Survey, each with significant differences in the survey method, that does not seem to be the case.

When the payroll numbers were announced the S&P futures fell more than -20 points to 1372 and rebounded only slightly to close at 1375. If this sentiment holds over the weekend we could see the major averages open below initial support on Monday. The Dow futures dipped to 12,831 and the Nasdaq futures -40 points to 2720 before very minor rebounds.

Nonfarm Payroll Chart

The bright side of the payroll numbers is that the Fed is not likely to tighten its easy money policy at the April meeting. I think the payroll report increases the chances for the continuation of Operation Twist and should April payrolls also come in weak the odds for QE3 would rocket significantly. The Fed has been careful to qualify all of its statements of late with concerns about a jobs slump. It looks like they got it right.

Not all Fed Presidents are economic lightweights. NY Fed President William Dudley, March 19th. "While these developments are certainly encouraging, it is far too soon to conclude that we are out of the woods. To begin with, the economic data looked brighter at this point in 2010 and again in 2011, only to fade as we got into the second and third quarters of those years." He went on to say that warm weather increased construction and temporarily increased hiring and we should not expect it to continue.

Bernanke also warned the prior week with "the better jobs numbers seem somewhat out of sync with the overall pace of economic expansion." The chairman went on to suggest that achieving further declines in the unemployment rate is likely to require a more rapid pace of economic growth going forward. This stance by Bernanke ahead of a decline in jobs suggests further policy stimulation in the near future.

The odds of a cooperative Fed could ease the damage at Monday's open. However, our payroll numbers are sure to depress the European and Asian markets so we may be in reaction mode to their declines.

In a note Goldman Sachs posted on Friday they said another easing action at the April meeting seemed unlikely but an easing at the June meeting seemed almost certain. They expect an extension of Operation Twist to the tune of $200 billion.

Bill Gross penned another article on Thursday saying the stock market has Bernanke in a box and QE3 is still on the way. The markets declined sharply when QE1 and QE2 ended and they are likely to do that when Twist ends. Until the recovery is firmly rooted, Bernanke is trapped in a permanent cycle of QE to keep the market wealth effect in place.

All the various futures contracts imploded on the payroll news but it was a thin market. With the equity markets closed for the holiday the only securities available to trade were the futures. Investors trying to protect their long positions for the open on Monday were forced to short futures. Volume in the S&P futures was 1.54 million contracts and 160,000 came in the 30 minutes following the payroll report with trading halting at 9:AM.

I always say when the market wants to go down it will find an excuse. Last week we saw a weak market looking for a real excuse to either rally or take profits. This could be that excuse that starts the ball rolling downhill.

S&P Futures Chart

A couple of numbers not widely reported in discussing payrolls are worth a mention. In the last year the adult civilian population rose by 3,604,000. However, the labor force only rose by 1,315,000. Those not in the labor force rose by 2,289,000. Nearly twice as many people joined the "not in the labor force" group than those joining the labor force.

Those "not in the labor force" hit a new record high of 87,897,000. The number of people dropping out of the labor force is accelerating at an unbelievable rate. Were it not for those who "dropped out" over the last year the unemployment rate today would be 11%. There are 142,034,000 people employed and 12,673,000 officially unemployed according to the BLS. There are 7,672,000 people working part time because they can't find a full time job.

The U6 unemployment is 14.5%. That includes people looking for a job, those with part time jobs because they can't find full time work, those that dropped off the rolls because their unemployment ran out and discouraged workers who have quit looking. That U6 number includes 22,432,000 workers. The U6 rate was created by the Clinton administration to try and get Greenspan to keep rates lower longer because of the total number of unemployed. Who knew it might be used again against Bernanke in 2012?

Gallup has a daily poll on jobs and unemployment that is not seasonally adjusted and without B/D adjustments. The BLS numbers always have big estimates of "seasonal factors" in their numbers plus the Birth/Death adjustment for businesses thought to have been created in that month. For March that birth/death estimate accounted for +90,000 of the +120,000 jobs reported. Gallup publishes their data constantly and as of last week they show the unemployment rate in the U.S. to be 10.0%. They show the U6 under/unemployment rate to be 18%. Are you listening Ben?

Gallup Underemployment Chart

Unemployment for 16-19 year olds is 25%. For those without high school graduation it is 12.6%, college graduates 4.2% and those over 55 at 6.2%. Married white couples 5.3%, Asian couples 6.2%, never married whites 10.5% and never married Asians 9.2%.

It takes 150,000 new jobs per month just to keep up with new workers, graduates and immigrants, entering the work force. Over the last 25 months the average monthly job gain has been 143,000. In theory the unemployment rate should have risen. Instead it has fallen from 9.8% to 8.2% over that period. Mathematically this does not compute until you remove those "discouraged workers" from the labor force computations. That means their unemployment ran out and they are no longer counted as belonging to the labor force.

Between January 2008 and February 2010 there were 8.8 million jobs lost. Since that February low 3.6 million have been recovered or 41%. The real labor force has grown by 4.6 million over the same period. Not enough jobs have been created to even account for old workers much less new ones. That is a very poor percentage indicating a relatively weak recovery. In the chart below the red line is the current recovery in jobs compared to all the prior recession recoveries since 1948.

Chart of all Prior Recoveries (Source: Federal Reserve)

There were two other economic reports on Friday to round out the calendar. The Monster Employment Index came in at 143 and flat with February. Online job advertisements did not increase or decrease. However, the index normally rises in March so a failure to do so is actually negative. The index has risen in March for each of the last nine years.

In March jobs in agriculture declined -4.6%, professional and technical services -4.3% and management -3.5%. Job openings rose in hotel and food services +6.5%, mining +4.2% and transportation services +4%. Analysts were again quick to claim that warmer weather pulled hiring into January and February that would normally have occurred in March.

The California Manufacturing Survey for Q2 rose from 58.9 to 60.3. That is the highest level since Q2-2011 and managers reported improvements in all components. New orders rose from 57.2 to 64.2 and employment rose from 52.9 to 55.2. Production increased sharply from 61.0 to 68.9.

The economic calendar for next week will focus on the Fed Beige Book and the price inflation reports at the producer and consumer level. Other than the Beige Book the rest of the economics should not be market movers. With a FOMC meeting on the 24th the Beige Book, which reports economic conditions in each of the Fed regions, will be another piece of the puzzle in determining what action the Fed might take at that meeting.

Bernanke speaks on Monday night in Stone Mountain Georgia on Fostering Financial Stability and you can bet there will be a reference to jobs and the Fed.

Economic Calendar

The big news for next week is the start of the Q1 earnings cycle. Alcoa kicks it off on Tuesday but the big dogs will be Google on Thursday and JPM/WFC on Friday. Google is always a highly volatile event with large price swings after the release. In January Google dropped -$55 the day after their earnings. The drop from $639 to eventually hit $564 several days later has been erased with Google closing on Friday back at $632. Google is always good for a big post earnings gap. The only challenge is picking the right direction ahead of time.

Google chart

JP Morgan (JPM) earnings will be interesting because of the letter Jamie Dimon wrote to regulators last week. The 30 page letter complained about favored investment and trading strategies that would be illegal once the various new regulations go into effect later this year. Dimon said the bank would be profitable and profits would increase but his hostile tone and complaints about banning lucrative strategies caused a sharp drop in the price of JPM shares. Given the rally in those shares since November I am not surprised to see some profit taking ahead of earnings once resistance was hit at $46.50.

JPM Chart

Wells Fargo (WFC) also reports on Friday and the stock price is holding right at strong resistance of $34.50. Both JPM and WFC were parties to a $26 billion mortgage settlement on Friday. We will hear a lot about this all week. The banks involved were BAC, C, JPM, WFC and Ally Financial, formerly GMAC. The banks will begin to compensate homeowners who may have been impacted by the so-called robo-signing scandal. Under the settlement the banks will commit $17 billion toward modifying mortgages for delinquent borrowers. That will include principal reductions of as much as $100,000 for roughly one million homeowners who are underwater and behind on payments.

Another $3.7 billion will go towards refinancing mortgages for borrowers who are current on payments. That will help some 750,000 borrowers take advantage of the historic low rates. There is also $5 billion in fines to states and the federal government.

Just getting the settlement in place will help all those banks and we should have some update on costs when JPM and WFC report earnings on Friday.

Wells Fargo Chart

Yahoo (YHOO) is holding an all staff meeting on Tuesday to discuss the planned reorganization and new management structure. Last week they announced the planned layoff of 2,000 employees or 13% of the company. On Friday Blake Irving, Chief Product Officer, announced he was leaving. The first of what could be a flurry of managers fleeing a sinking ship. Yahoo shares have been trading in a lackluster manner despite the changes being telegraphed every day. It appears investors have given up trading on Yahoo news.

Yahoo Chart

With the market closed on Friday there was a serious lack of stock news. Actually other than the payroll news there was no news at all. Everything that happens on Monday will be related to that payroll report.

Oil prices rose on Thursday to $103.31 for WTI and $123.31 for Brent. That WTI number will likely drop sharply on Monday because a slowing jobs environment will be equated with slowing demand for oil and gasoline. Eventually cooler heads will prevail because a Fed reaction to the payroll number will weaken the dollar and reflate oil prices.

WTI Crude Chart

Brent Crude Chart

Gasoline prices continue to rise because gas prices are dependent on Brent crude not WTI crude. Gasoline prices in the U.S. rose to $3.94 on Friday and regardless of what happens on Monday they should continue rising. The Iranian oil embargo is gaining speed and may end up more successful than initially expected and cut Iranian sales by 1.5 mbpd. The rising price of gasoline could have impacted hiring to some extent because business owners remember vividly the impact of high gas prices in 2008.

Gasoline prices normally rise between February and Memorial Day. Since 2000 the average increase has been +27%. This year gasoline has only risen +14%, or +48 cents since Feb 1st. Refiners are required by the Clean Air Act to make gasoline for summer use that burns cleaner to reduce smog clouds. That clean burning gasoline costs an extra 10-15 cents per gallon to produce. Since oil used to make most U.S. gasoline has averaged $120 per barrel this year the odds of gas prices moving over $4 in the weeks ahead are very good.

JP Morgan pointed out that since the gasoline prices began to rise there has been an impact on retail spending. Diane Swonk pointed out that up to 50% of prescriptions are not being picked up. Prescriptions for those on fixed income are being cut in half. That means consumers are only asking for half the initial quantity in order to lower the cost and manage cash flow.

Gold prices rebounded slightly on Thursday ahead of the payroll report but gold futures did not trade on Friday. If the economy is seen as weakening then gold prices should rise. If the Fed moves back into the easing column then gold prices should rise. We are still waiting to see if the chart pattern completes that reverse head and shoulders or if support fails and we move to a new low.

Gold Chart

The chart below is the percentage of stocks on the NYSE that are trading over their 50-day average. Since the beginning of March the percentage has been declining dramatically yet the major indexes have been testing new highs. Those indexes were benefitting from the mega-caps like Apple and IBM. The rest of the market has been sliding away while the big caps were being used as safe deposit boxes by fund managers. That may begin to unravel next week.

NYSE 50-Day average percentage.

The S&P futures at 1375 after the payroll report suggests the S&P could open significantly lower. The S&P could even open lower if China's economic numbers to be reported on Monday are not market friendly. Higher Chinese inflation will prevent them from lowering rates to avoid a hard landing.

If the S&P falls through 1375 at the open on Monday and dip buyers don't show up in volume then 1340 is the next material support. We are clearly heading for a serious change in market sentiment if that happens.

S&P Chart

The Dow chart has been in a rising wedge for months and a close under 12,900 on Monday would complete the pattern and project a lower trend for some period of time. However, I feel the support at 12,750 is going to be a factor. As long as that support holds you could make a case for further gains. Unfortunately with the Q1 earnings cycle kicking off next week and not expected to show any material earnings growth the pressure will be on the bulls to keep the rally going. The bears are likely to have an easier task with the three Es of economy, earnings and Europe weighing on the market as we head into the sell in May cycle.

Dow Chart

Dow Futures Chart

The Nasdaq 100 futures fell to strong support at 2725 and without any further headlines on Monday that would be a reasonably strong initial support level. However, a break of that support could give up another -100 points before encountering decent support.

The Nasdaq Composite could decline to 3,000 at Monday's open but that would not put it in jeopardy. It would take a close under 2850 to really bring out the bears. That is not likely to happen over the next several days. Fund managers would have to completely abandon the big caps in order to produce that kind of decline and I think many will be reluctant to simply cash out everything until later in April.

Nasdaq 100 Futures

Nasdaq 100 Chart

Nasdaq Composite Chart

The Russell fell out of its recent range but remains well above critical March lows. The Russell futures declined -15 points to close at 799. The Russell index has strong support at 785 and the March lows.

The Russell next week will be a critical sentiment indicator. If that 785 level appears to be in jeopardy then turn out the lights the party may be over.

Russell Futures Chart

Russell 2000 Chart

Spain rose again as a potential trouble spot last week as deficits soared along with interest rates on Spanish bonds but that should not be a surprise to readers. We have known for weeks that Spain would be the next trouble spot. Stay tuned for more volatility over Spain.

Greece pro bailout parties are reportedly recovering lost ground ahead of the April elections. The parties lost support when they agreed to the bailouts but now that time has passed some of that support is returning. However, 92 members of the Greek parliament have offered amendments to dilute the previously passed austerity budget that was required to get the bailout. The Greek Prime Minister has vowed to defeat them all. It is immaterial. Greek is going to default. It is only a matter of time. The next challenge for Greece will come after those April elections if the winner decides to dump the bailout agreements as some have promised.

An Iranian parliamentarian, Gholamreza Mesbahi Moghadam, made headlines over the weekend when he said Iran already has the technological capability and scientific knowledge to develop a nuclear weapon. He said Iran could easily produce the highly enriched uranium and build a nuclear weapon but Iran had elected not to go that route. The IAEA has already agreed that Iran could quickly enrich its 20% uranium to bomb grade at 90% with little difficulty. Moghadam may have been trying to convince foreign powers of Iran's peaceful intent but instead he probably heightened the suspense in Israel. Iran is scheduled to meet in six party talks next week in Turkey. The last talks were canceled after two days when they could not agree on what to talk about. Iran refused to talk about anything nuclear despite that being the reason for the talks. This time may be different thanks to the growing oil embargo. The five permanent members of the UN Security Council plus Germany make up the six parties other than Iran at the meeting. This could be a headline producer with Israel eager to strike soon while they have a window of good spring weather.

With the start of earnings next week we could see an ugly trend develop of weaker results and lowered guidance. After last week's earnings and warnings the official Q1 earnings estimate for the S&P 500 has gone negative. The S&P 500 companies are now expected to post a decline in earnings for Q1 of -0.1%. After eight quarters of double digit earnings growth we saw a decline to +6% in Q4. Thanks to a weaker Europe and higher oil prices we are likely to post the first quarter of negative earnings since the recession. Earnings revisions are dropping fast. Just two months ago the estimate was for +3% earnings growth.

In theory investors are not freaking out because the comparisons from the +19% growth in Q1-2011 are so strong. Not exceeding those earnings is not necessarily bad news. It should mean that earnings are still strong, just not growing. That idea will be tested with the guidance. If guidance is decent then the market may shake off the weak results. If guidance is poor and suggesting another declining quarter in Q2 then investors may decide to run for cover. Today Q2 earnings are expected to rise by +7% and another +5% in Q3, +16% in Q4, +14% Q1-2013 and +13% in Q2-2013. I would be extremely surprised if those double digit estimates come to pass but that is another story for another day. Those are based on Europe's economy stabilizing and returning to growth by the end of 2012.

The earnings scheduled for next week are not likely to give us much insight into the future. AA, GOOG, JPM and WFC are notable companies but not likely to give us much broad market direction. The following week is where the rubber meets the road as dozens of big names report. Let's hope that road is not a mess of skid marks at the end of the week.

Monday's market is likely to be chaotic. Futures are showing a big decline at the open and investors will have China's economic numbers to digest as well. We could see a monster buy the dip rebound or we could fall straight through to next level support. Because the market was closed on Friday and investors have had all weekend to ponder the circumstances anything is possible. The NYSE 50-day average chart I showed earlier suggests quite a few investors were already looking for the exit. The payroll report may have shown them the door.

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Index Wrap

Slipping

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The Dow has slipped below its dominant up trendline, with the S&P looking likely to follow. Nasdaq could hold up better as long as there's such continued strength in Apple (AAPL).

I wrote last week about charting techniques that suggest technical resistance in the area of recent highs in both the big cap S&P 100 (OEX) and the Nasdaq 100 Index (NDX). This area of resistance is highlighted again in two weekly charts; i.e., OEX and the Nasdaq 100 (NDX).

Just as a stock or stock index return to a prior high will often encounter selling pressure (i.e., 'resistance') a prior up trendline, once penetrated, often acts as later resistance. Selling pressures are common when prices return to a key prior broken up trendline, with OEX as a recent example.

The COMBINATION of this occurrence (a return to the prior trendline) along with the extreme seen in the Relative Strength Index or RSI is potent as a pattern pointing to at least a SLOWING of upside momentum.

The weekly chart seen below of the big cap Nasdaq 100 (NDX) is updated to this past week and the red down arrow now shows 2 weeks with highs AT what I take (until 'proven' otherwise) as a strong resistance trendline. In my next chart, resistance is seen to lie at the top end of a broad uptrend price channel; highs of the past two weeks turned lower from this line.

Trendlines tend to 'work' great in terms of predicting coming market moves much of the time (e.g., prices rebounded from a support up trendline, time to buy); however, there's also the occasional instances of a move that jumps the uptrend channel and prices break out above the top end of a former price channel.

The 2800 level is also proving significant since 2800 represents a 50% Fibonacci retracement of the March 2000 to October 2002 bear market decline; from 4816 at the peak to a low of 795! A retracement of one-half of a major prior decline is a potent area for an index or stock to pause in its advance if not start a significant correction.

In terms of NDX's 13-week RSI it continues in the high or 'overbought' zone. In a very strong uptrend, there's a common pattern of a small pullback that pulls down high/overbought RSI readings, only to be followed by another rally that again takes this indicator to an overbought extreme before a more SIZABLE correction occurs.

What the two weekly charts suggest is that the big cap S&P and Nasdaq indexes are in an area of some technical resistance. A substantial pullback or correction can easily happen. On the other hand, with Q1 earnings ahead, recent disappointing job numbers may take a back seat and stock prices stay buoyant awhile longer as traders await earnings. A May peak often is what starts a weaker summer period.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 Index (SPX) remains within its uptrend channel through this past week, but if the Dow is 'leading' here, SPX will also dip below the highlighted up trendline. Dropping to a less steep advance is part of the ebb and flow of most rising trends. An intermediate uptrend is considered in reversal only if prices pierce the prior Closing downswing low.

Just based on the charts, SPX could stage a rally in the area of recent lows, an area of potential support suggested by its up trendline. If instead, we see a Close below this trendline, the likelihood of more sustained weakness grows substantially on a second day close below the trendline.

I've highlighted resistance at 1420; then around 1460. Support could be found at the trendline (around 1395) but more likely is support around 1375; then at 1340. A couple of closes below 1340 suggests an intermediate downside reversal.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart remains bullish but further weakness will carry OEX to below its up trendline of recent months, indicating the slowing of its advance. Given the jobs numbers it seems likely we'll see at least an early day decline below OEX's up trendline. The key will the Close and then the next day's Close.

Near resistance is in the 645 area, with major resistance around 665-667.

Near support can be assumed at the up trendline at 635 but I'm not counting on support there like more likely buying interest in the 620 area, with support extending to 610.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) which was struggling to hold its up trendline, slipped below it indicating slowing upside momentum. The key line of technical support remains 13000. With earnings watch season ahead with the typical bearish AND bullish surprises, a concerted move to take INDU below 13000 seems less likely.

A Close in the Dow below 13000 would be bearish if more than a 1-2 day affair. Next lower INDU support then looks like 12800, extending to 12735 at the prior intraday low

Dow stocks in still strong rally trends have fallen to 8 (AXP, HD, IBM, INTC, KFT, KO, MCD and PFE), with none of this group stalled at prior tops and the like. The big bull movers are down from the week before when I counted 10-11 Dow stocks as in solid uptrends.

If INDU 'bases' in the 13000 area, there's potential back up to resistance around 13260-13300. I haven't noted a higher resistance but 13600 would be a rally possibly too far.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) remains within its bullish uptrend channel but not by much. Resistance/selling pressure continued this past week on rallies above 3100, especially to around 3130. I assume major resistance begins closer to 3250-3300.

I don't anticipate COMP's up trendline containing the next sell off, so support in the 3050 area doesn't look so solid; but it's the bears to prove by dragging COMP lower. Next support 3000, not so important technically but psychologically. 2900 is the must hold level for the bulls. Below 2900 we have to recognize a downside momentum shift.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) Index continues within its bullish uptrend channel. Its recent minor dip was from the high end of the channel the index has been in to the low end. If 2740 trendline support gives way, 2700 is next support. 2575 is the key lower support; if NDX pierces this prior low, technically the intermediate trend flips to down.

NDX/tech bellwether AAPL which had a minor downside reversal the prior week ran up to new highs in a very strong week just ended for the stock. Hard to imagine NDX having much of a set back as long as Apple is still surging. I show resistance for AAPL in the $650 area.

Near resistance in the Nas 100 remains 2790-2800. A next leg up above 2800 should encounter technical resistance at the upper trendline, which currently intersects around 2870.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) chart remains bullish as long as QQQ holds the low end of its uptrend channel, suggesting potential trendline support at 66.9. Below the current up trendline, next support looks like 65. I'm not expecting it but a move below 63.2 takes out the prior low and flips the intermediate trend to down; assuming no rebound within a day.

Resistance above 68 has stymied the bulls. I've highlighted resistance at 68.3, then up in the 70 area at the top end of the long-standing uptrend channel for QQQ.

Daily trading volume continues to taper off. The On Balance Volume (OBV) line pointed lower last week as I wrote then, and some weakness developed this past holiday-shortened week. I can envision a decline to 65 easier than see a decisive upside penetration of 68.3 resistance and a move toward 70.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) chart has turned bearish in terms of its faltering upside momentum; seen on the chart of course as RUT falling below its up trendline. Generally, the Index appears to have built and is building a significant top by its extended sideways move.

Near resistance is 840-845, then 880, extending to 900.

Support is at 800 and then RUT doesn't have far to go to its last downswing low at 785. Below 785, significant technical support begins in the 740 area.



GOOD TRADING SUCCESS!


New Option Plays

Fertilizer and Weight Loss

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

The Mosaic Co. - MOS - close: 52.96 change: -0.88

Stop Loss: 55.25
Target(s): 47.50
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
MOS is a specialty chemical company but it's probably best known for being in the phosphate-fertilizer industry. The company recently reported earnings in late March and missed estimates by 10 cents. This helped kick start the current reversal lower. Two trading days ago MOS broke down under support near $55.00 and its 100-dma.

There is potential support at $50.00 but I suspect we could see MOS fall into the $47.50-45.00 zone. I am suggesting small bearish put positions at the open on Monday with an exit target at $47.50. FYI: The Point & Figure chart for MOS is bearish with a $46 target.

NOTE: The stock market, and MOS, are likely to gap open lower on Monday. The options will gap higher in response.

open small positions on Monday morning

- Suggested Positions -

buy the April $50 PUT (MOS1221P50) current ask $0.29

Annotated Chart:

Entry on April xx at $ xx.xx
Earnings Date 03/28/12 missed by 10 cents
Average Daily Volume = 5.2 million
Listed on April 07, 2012


Weight Watchers Intl. - WTW - close: 76.16 change: -0.15

Stop Loss: 79.25
Target(s): 70.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
It looks like shares of WTW have topped out and reversed near resistance a couple of weeks ago. An oversold bounce on Tuesday failed at $80.00. Now shares are back under technical support at the 50-dma. There doesn't appear to be any support until the $70.00 level (or the 100-dma).

I am suggesting we open small bearish positions at the open on Monday and target a drop to $70.50. We'll use a stop loss at $79.25. I want to warn you that WTW could be prone to short squeezes with short interest at 18.5% of the small 35 million-share float but I'm not expecting one with the market poised to drop on Monday.

NOTE: The stock market, and WTW, are likely to gap open lower on Monday. The options will gap higher in response.

open small positions on Monday morning

- Suggested Positions -

buy the Apr $75 PUT (WTW1221P75) current ask $1.75

Annotated Chart:

Entry on April xx at $ xx.xx
Earnings Date 05/03/12 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on April 07, 2012



In Play Updates and Reviews

Monday Could Be Ugly

by James Brown

Click here to email James Brown

Editor's Note:

The stock market was closed on Friday but the futures market was open and the S&P futures plunged on the less than expected jobs data.

We'll have to wait and see if investor sentiment changes before Monday morning but at the moment it looks like stocks are poised to gap down or spike down at the open on Monday.

We could see several of our bullish plays get stopped out.

Current Portfolio:


CALL Play Updates

Allergan Inc. - AGN - close: 94.82 change: -0.45

Stop Loss: 92.25
Target(s): 99.50
Current Option Gain/Loss: Apr92.5c: -19.7% & Apr95c: -37.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
04/07 update: AGN delivered another quiet session on Thursday. Shares actually spent most of the week in a relatively narrow range. There is short-term support near $94.00 and near $92.50ish but if the market plunges on Monday I would expect AGN to hit our stop loss at $92.25. I am not suggesting new positions at this time.

FYI: The Point & Figure chart for AGN is bullish with a $110 target.

- Suggested Positions -

Long Apr $92.50 call (AGN1221D92.5) Entry $3.55

- or -

Long Apr $95 call (AGN1221D95) Entry $1.85

03/27/12 AGN hit our breakout trigger at $95.25
03/22/12 adjusted entry point strategy to include a buy-the-dip trigger at $90.50 and a breakout trigger at $95.25.
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 27 at $95.25
Earnings Date 05/03/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on March 13, 2012


Affiliated Managers Group - AMG - close: 113.18 change: -0.10

Stop Loss: 111.45
Target(s): 119.50
Current Option Gain/Loss: Unopened
Time Frame: up to the late April earnings report.
New Positions: Yes, see below

Comments:
04/07 update: AMG also produced a calm performance on Thursday. Nimble traders might want to consider buying a dip near its 40-dma near $109.25 with a tight stop loss. The newsletter is suggesting that readers wait for a breakout higher with a trigger to buy calls at $115.50. Our target is $119.50. FYI: The Point & Figure chart for AMG is bullish with a $134 target.

Trigger @ 115.50

- Suggested Positions -

buy the Apr $115 call (AMG1221D115)

- or -

buy the May $120 call (AMG1219E120)

chart:

Entry on April xx at $ xx.xx
Earnings Date 04/24/12 (unconfirmed)
Average Daily Volume = 310 thousand
Listed on April 03, 2012


Check Point Software - CHKP - close: 63.08 change: +0.01

Stop Loss: 61.40
Target(s): 68.50
Current Option Gain/Loss: Apr62.5c: -12.9% & May65c: +16.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
04/07 update: CHKP saw a little bit of volatility on Thursday morning and then fell asleep the rest of the session to close almost unchanged. Odds are really good we will see CHKP test short-term support near $62.00 soon. If the market really declines on Monday we'll see CHKP hit our stop loss at $61.40. I am not suggesting new positions at this time.

FYI: The Point & Figure chart for CHKP is bullish with an $88 target.

- Suggested Positions -

Long Apr $62.50 call (CHKP1221D62.5) Entry $1.55

- or -

Long May $65 call (CHKP1219E65) Entry $1.20

03/31/12 new stop loss @ 61.40
03/23/12 CHKP hit our entry trigger @ 62.25

chart:

Entry on March 23 at $62.25
Earnings Date 04/17/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on March 22, 2012


Cognizant Technology - CTSH - close: 77.29 change: +1.01

Stop Loss: 74.75
Target(s): 82.00
Current Option Gain/Loss: Apr77.5c: -31.4% & May$80c: -15.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
04/07 update: CTSH bucked the trend and showed some relative strength on Thursday with a +1.3% gain. Shares are trading just under resistance in the $77.50-78.00 zone. At this point I'd wait for a new rise past $78.00 before considering new positions. More conservative traders may want to inch up their stop loss but I am expecting CTSH to dip toward support near $75.00 on Monday.

FYI: The Point & Figure chart for CTSH is bullish with a $97 target.

- Suggested Positions -

Long Apr $77.50 call (CTSH1221D77.5) Entry $1.75

- or -

Long May $80 call (CTSH1219E80) Entry $1.95

03/26/12 CTSH hit our entry trigger at $77.55

chart:

Entry on March 26 at $77.55
Earnings Date 05/04/12 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on March 21, 2012


Quest Diagnostics Inc. - DGX - close: 61.17 change: +0.09

Stop Loss: 59.45
Target(s): 66.50
Current Option Gain/Loss: Apr60c: -26.9% & May65c: -28.5%
Time Frame: exit prior to earnings on April 18th
New Positions: see below

Comments:
04/07 update: DGX hovered near the $61.00 level on Thursday. If the market spikes lower on Monday I would expect shares to test the $60.00 level. I am not suggesting new positions at this time. Please note that we will plan to exit prior to the April 18th earnings report.

Earlier Comments:
I do want to point out that the 2006 high near $64.70 could be overhead resistance but we are aiming for $66.50. FYI: The Point & Figure chart for DGX is bullish with an $85 target.

- Suggested Positions -

Long Apr $60 call (DGX1221D60) Entry $2.60

- or -

Long May $65 call (DGX1219E65) Entry $0.70

04/07/12 plan to exit prior to the April 18th earnings report
04/02/12 triggered at $61.55

chart:

Entry on April 02 at $61.55
Earnings Date 04/18/12 (unconfirmed)
Average Daily Volume = 821 thousand
Listed on March 29, 2012


Dollar Tree, Inc. - DLTR - close: 94.56 change: -1.19

Stop Loss: 92.25
Target(s): 98.50
Current Option Gain/Loss: Apr$95c: +15.1% & May95C: +16.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
04/07 update: Overall the trend of March same-store retail sales for most of the major brands reporting on Thursday was positive. This gave the retail sector a boost except for the individual names that missed. DLTR rallied +1.6% and tagged a new record high intraday at $96.64. Cautious traders may want to raise their stops toward the $93.50 area. However, I am concerned that market weakness on Monday could actually produce a spike down toward the $92-90 zone. We have a stop loss at $92.25. I am not suggesting new positions at this time.

We are targeting $98.50. More aggressive traders could target the $100 level. FYI: The Point & Figure chart for DLTR is bullish with a $122 target.

- Suggested Positions -

Long Apr $95 call (DLTR1221D95) Entry $1.65

- or -

Long May $95 call (DLTR1219E95) Entry $3.00

03/21/12 DLTR hit our entry trigger at $94.55

chart:

Entry on March 21 at $94.55
Earnings Date 05/17/12 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on March 20, 2012


J.B.Hunt Transport - JBHT - close: 55.72 change: -0.01

Stop Loss: 53.75
Target(s): 59.50
Current Option Gain/Loss: Apr55c: +14.8% & May$55c: + 7.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
04/07 update: The Dow Jones Transportation average managed to post a minor gain on Thursday. JBHT outperformed its peers with a +0.3% gain and the stock hit another new record high.

The stock should have some very short-term support at $55.00, at $54.00 and at its 50-dma. Of course a drop to the 50-dma would stop us out.

FYI: The Point & Figure chart for JBHT is bullish with a $69 target.

- Suggested Positions -

Long Apr $55 call (JBHT1221D55) Entry $1.35

- or -

Long May $55 call (JBHT1219E55) Entry $2.00

chart:

Entry on March xx at $ xx.xx
Earnings Date 04/12/12 (unconfirmed)
Average Daily Volume = 729 thousand
Listed on March 28, 2012


iShares Biotech ETF - IBB - close: 123.76 change: +0.35

Stop Loss: 121.75
Target(s): 129.75
Current Option Gain/Loss: Apr125c: -48.6% & May125c: -31.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
04/07 update: The IBB managed a minor bounce on Thursday. I would expect a dip toward support near $120.00 and its 50-dma on Monday and that means we will probably see our trade stopped out since our stop is at $121.75. More aggressive traders could move their stop loss under the $120.00 mark as a bet the IBB will hold that level.

- Suggested Positions -

Long Apr $125 call (IBB1221D125) Entry $1.85

- or -

Long May $125 call (IBB1219E125) Entry $3.20

04/07/12 odds are this trade will get stopped out on Monday
04/03/12 triggered at $125.25

chart:

Entry on April 03 at $125.25
Earnings Date --/--/--
Average Daily Volume = 403 thousand
Listed on April 02, 2012


NetEase.com - NTES - close: 57.86 change: +0.98

Stop Loss: 54.45
Target(s): 64.00
Current Option Gain/Loss: Apr55c: +17.5% & Apr60c: - 7.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
04/07 update: Traders bought the dip on Thursday morning and NTES rallied +1.7%. However, if the U.S. market spikes down on Monday I would not be surprised to see NTES dip toward the $55.00 level. I am not suggesting new positions at this time.

Earlier Comments:
Our multi-week target is $64.00. FYI: The Point & Figure chart for NTES is bullish with a $68 target.

- Suggested (Small) Positions -

Long Apr $55 call (NTES1221D55) Entry $2.80

- or -

Long Apr $60 call (NTES1221D60) Entry $0.70

03/26/12 sold half at the open.
exit bid on Apr. $55 call @ $0.00 (+67.8%)
exit bid on Apr. $60 call @ $1.95 (+178.5%)
03/24/12 new stop loss @ 54.45.
03/24/12 Prepare to sell half of our positions on Monday to lock in a gain.
Apr $55 call bid currently @ $5.20 (+85.7%)
Apr $60 call bid currently @ $1.95 (+178.5%)
03/22/12 readers may want to go ahead and take profits now
Apr $55 call (+50%), Apr $60 call (+100%)

chart:

Entry on March 20 at $56.11
Earnings Date 05/16/12 (unconfirmed)
Average Daily Volume = 584 thousand
Listed on March 19, 2012


O'Reilly Automotive - ORLY - close: 92.65 change: -0.21

Stop Loss: 89.45
Target(s): 98.50
Current Option Gain/Loss: Apr90c: +20.0% & May$90c: +13.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
04/07 update: Trading in ORLY was relatively calm on Thursday. If the market dips as we expect on Monday we could see ORLY fall toward support near $90.00. I would use a bounce near the $90.00 level as a new bullish entry point.

We are targeting a move to $98.50 but more conservative traders may want to take profits near $95.00 instead. FYI: The Point & Figure chart for ORLY is bullish with a $103 target.

- Suggested Positions -

Long Apr $90 call (ORLY1221D90) Entry $2.50

- or -

Long May $90 call (ORLY1219E95) Entry $3.95

04/03/12 new stop loss @ 89.45
03/26/12 triggered at $91.25

chart:

Entry on March 26 at $91.25
Earnings Date 04/25/12 (unconfirmed)
Average Daily Volume = 887 thousand
Listed on March 24, 2012


PNC Financial Services - PNC - close: 64.70 change: -0.02

Stop Loss: 62.75
Target(s): 69.50
Current Option Gain/Loss: Unopened
Time Frame: up to its April 18th earnings report
New Positions: Yes, see below

Comments:
04/07 update: PNC looks like it's slowly rolling over. If the market drops on Monday I would not be surprised to see PNC dip toward the $62.00 level or its 50-dma. Currently I am suggesting a trigger to buy calls at $65.25 with a stop loss at $62.75. Our target is $69.50. However, we will plan to exit prior to the April 18th earnings report. FYI: The Point & Figure chart for PNC is bullish with a $79 target.

Trigger @ 65.25

- Suggested Positions -

buy the May $65 call (PNC1219E65)

chart:

Entry on April xx at $ xx.xx
Earnings Date 04/18/12 (confirmed)
Average Daily Volume = 3.7 million
Listed on March 31, 2012


Regeneron Pharma. - REGN - close: 123.44 change: +1.39

Stop Loss: 119.75
Target(s): 127.50
Current Option Gain/Loss: - 1.6%
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Comments:
04/07 update: REGN was showing strength on Thursday likely due to news out that the FDA will put the drug Zaltrap on the fast-track review system. REGN is working with Sanofi on Zaltrap as a treatment for colorectal cancer.

Our trade to buy calls was triggered at $122.50. On a short-term basis REGN should have support near $120.00. Unfortunately if the market spikes down hard on Monday we could see REGN hit our stop loss. More aggressive traders may want to widen their stops.

- Suggested Positions -

Long Apr $125 call (REGN1221D125) entry $3.05

04/05/12 triggered at $122.50

chart:

Entry on April 05 at $122.50
Earnings Date 05/01/12 (unconfirmed)
Average Daily Volume = 774 thousand
Listed on April 04, 2012


Tractor Supply - TSCO - close: 93.35 change: +0.72

Stop Loss: 89.80
Target(s): 98.00
Current Option Gain/Loss: Aprl95c: - 3.5% & May95c: - 3.2%
Time Frame: up to the mid April earnings report
New Positions: see below

Comments:
04/07 update: Traders bought the dip in TSCO on Thursday morning near $92.00. The stock rallied to a new record high. Unfortunately shares will likely drop and retest support near $90.00 if the market plunges on Monday due to Friday's jobs data.

Our trade was opened on Thursday at our $93.25 trigger. Readers may want to wait for a bounce off the $90 area before considering new positions.

- Suggested Positions -

Long Apr $95 call (TSCO1221D95) Entry $1.40

- or -

Long May $95 call (TSCO1219E95) Entry $3.05

04/05/12 triggered at $93.25

chart:

Entry on April 05 at $93.25
Earnings Date 04/18/12 (unconfirmed)
Average Daily Volume = 578 thousand
Listed on April 03, 2012


Ulta Salon, Cosmetics - ULTA - close: 95.04 change: +0.11

Stop Loss: 89.95
Target(s): 98.50
Current Option Gain/Loss: + 3.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
04/07 update: ULTA is still drifting higher with a bullish trend of higher lows but the stock has been stuck trying to get through resistance near $95.00. I would expect a drop toward the $92-90 zone on Monday if the market plunges due to the jobs data from Friday. I am not suggesting new positions at this time.

Earlier Comments:
FYI: The Point & Figure chart for ULTA is bullish with a $110 target.

- Suggested Positions -

Long Apr $95 call (ULTA1221D95) Entry $1.65

04/03/12 adjusted target to $98.50
03/28/12 new stop loss @ 89.95
03/26/12 new stop loss @ 89.45
03/24/12 adjusted exit target to $97.50
03/21/12 ULTA hit our trigger at $91.25

chart:

Entry on March 21 at $91.25
Earnings Date 06/07/12 (unconfirmed)
Average Daily Volume = 759 thousand
Listed on March 20, 2012


VMware, Inc. - VMW - close: 113.75 change: +0.78

Stop Loss: 107.25
Target(s): 117.50
Current Option Gain/Loss: Unopened
Time Frame: exit prior to the April 18th earnings report
New Positions: Yes, see below

Comments:
04/07 update: VMW dipped toward its simple 10-dma and bounced on Thursday. The intraday low was $111.77 so our trade is still not open yet. Trigger was $111.50. Shares actually look poised to move higher from here. However, if the market plunges on the Friday jobs data we could see VMW test the bottom of its rising channel. The 20-dma is at $108.76. I am suggesting we move our trigger to buy calls down to $109.25 and we'll move our stop loss to $107.25.

We want to keep our position size small to limit our risk. Plus we want to exit prior to the April 18th earnings report.

Buy-the-dip Trigger @ 109.25

- Suggested Positions -

buy the Apr $115 call (VMW1221D115)

04/07/12 not open yet. Adjust buy-the-dip trigger down to $109.25 with a stop loss at $107.25.
04/02/12 not open yet. VMW did not hit our entry point requirement. We're adjusting our entry strategy to use a buy-the-dip trigger at $111.50

chart:

Entry on March xx at $ xx.xx
Earnings Date 04/17/12 (unconfirmed)
Average Daily Volume = 1.2 million
Listed on March 31, 2012


PUT Play Updates

Apache Corp. - APA - close: 95.87 change: -1.67

Stop Loss: 100.25
Target(s): 92.00
Current Option Gain/Loss: Apr95.5p: +25.0% & May95p: +15.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
04/07 update: APA continues to sink and shares closed under its simple 150-dma on Thursday. The intraday low was $95.69. I am eliminating the early target to take profits at $95.25. We'll use only one exit target at $92.00. I am also adjusting our stop loss down to $100.25.

- Suggested Positions -

Long Apr $97.50 PUT (APA1221P97.5) Entry $2.40

- or -

Long May $95 PUT (APA1219Q95) Entry $2.90

04/07/12 reduced exit targets to just one at $92.00
04/07/12 new stop loss @ 100.25

chart:

Entry on March 29 at $98.32
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 2.7 million
Listed on March 28, 2012


iShares Russell 2000 ETF - IWM - close: 81.94 change: -1.33

Stop Loss: 87.51
Target(s): 78.50
Current Option Gain/Loss: +15.3%
Time Frame: several weeks
New Positions: see below

Comments:
04/07 update: Small caps underperformed the major indices again. This time the IWM has closed under technical support at its 50-dma and the trend line of higher lows. That doesn't bode well if you're bullish. The next level of support is the $80.00 mark. Our target to take profits is at $78.50. I am not suggesting new positions at this time.

- Suggested Positions -

Long Jun $82 PUT (IWM1216R82) Entry $3.12

03/28/12 triggered at $83.45

chart:

Entry on March 28 at $83.45
Earnings Date --/--/--
Average Daily Volume = 54.8 million
Listed on March 27, 2012


OpenTable, Inc. - OPEN - close: 40.56 change: -0.06

Stop Loss: 42.55
Target(s): 33.00
Current Option Gain/Loss: Apr40p -38.6% & May35p: -17.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
04/07 update: It was a quiet session for OPEN on Thursday. Shares faded from their late morning highs. I remain cautious with the stock above the $40.00 level. Wednesday's low was $39.06. Readers may want to launch new positions if OPEN hits $39.00.

Earlier Comments:
Remember, this is a higher-risk trade. Short interest on OPEN is already at 51% of the small 18.3 million share float. The stock could be prone to short squeezes. Plus, there was some speculation last week that OPEN could be a buy-out target for someone looking for exposure to the online restaurant reservation market. Rumors that OPEN could be a takeover target could always spark a short squeeze.

Our target is $33.00 although readers may want to exit near possible support at the $35.00 level instead. FYI: The Point & Figure chart for OPEN is bearish with a $35 target.

(small positions) - Suggested Positions -

Long Apr $40 put (OPEN1221P40) Entry $2.20

- or -

Long May $35 PUT (OPEN1219Q35) Entry $1.70

04/02/12 triggered at $39.65

chart:

Entry on April 02 at $39.65
Earnings Date 05/01/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on March 24, 2012