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Daily Newsletter, Saturday, 4/14/2012

Table of Contents

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

Market Wrap

Trend Change?

by Jim Brown

Click here to email Jim Brown

The three Es of Europe, Economics and Earnings combined to produce a trend change in the U.S. markets.

Market Statistics

There was no clear culprit in the hunt for an excuse on Friday so market commentators blamed everything in sight. Ten year bond yields in Spain edged up to 5.977% and continue to suggests Spain is approaching a cliff where the ECB, EU, IMF will have to take action to prevent a death spiral into Greek like conditions. Worry over the Spanish bond auction next Thursday sent European markets lower. On Friday the French CAC-40 lost -2.5%, Germany's DAX -2.4%, FTSE 100 lost -1% and Spain's IBEX fell -3.6% to end a week of steep declines.

Helping to accelerate the negativity on Spain was news that Spanish banks borrowed 316 billion euros from the ECB in March. That was 50% more than in February. The current worry is not that Spain is about to default on sovereign debt but that Spain's banks are in serious trouble and the banking system could be in for some negative surprises. Banco Santander (STD) fell another -5% on Friday to a new three year low and very close to the 2009 recession low. The ECB tried to stabilize European banks over the last six months with more than one trillion euros of LTRO offerings. (QE) Those funds supplied a short bounce early in the quarter but that impact has evaporated.

Banco Santander Chart

Spain is in serious trouble. Unemployment is 23% with youth unemployment over 50%. The government banned cash transactions over 2500 euros starting on Friday. Anyone who has made a large cash transaction over the prior three months must report it. Spaniards with bank accounts outside the country must inform the government of their accounts. Large cash transactions at banks will now be flagged. The U.S. has had rules like this for decades but the EU has not. For Spain to change the banking rules it sends a warning signal to everyone else in an EU country. Change is coming quickly. The Spanish government believes by controlling cash transactions and tracking money to offshore accounts they can bring back more than 8 billion euros in taxes on those money transfers. Spain's efforts to suddenly enforce currency controls will cause a ripple effect across the EU. Spanish banks have been seeing large outflows of cash as the economic situation worsened. The run on the banks is similar to the one on Greek banks over the last two years. The end result for Spain is going to be the same. They are too big to fail and too big to save but the EU, ECB and IMF are sure to try and it will cause market problems worse than we saw with Greece.

JP Morgan (JPM) reported earnings that beat the street but the stock was hammered for a loss after announcing a huge litigation reserve of $2.5 billion. The litigation reserve reduced earnings by 39-cents but CEO Jamie Dimon said he believes this is the last significant addition to reserves "after a thorough review." They took another 14-cent charge on debt valuation adjustments. Adding to earnings was a 28-cent benefit from reduced loss reserves on mortgages and credit card loans. Credit quality is improving and those that were going to default have probably already done so over the last two years. Credit card charge offs declined to 4.37% compared to 6.81% in Q1-2011. They also received a 17-cent benefit from a settlement in the Washington Mutual bankruptcy. Gross earnings were $1.31 per share or $5.4 billion for the quarter. Estimates were for earnings of $1.18. JPM shares declined -3.6% on the news.

JPM Chart

Wells Fargo (WFC) also beat the street with earnings of $4.02 billion or 75-cents. Estimates were for 73-cents. WFC also soared past the revenue estimate of $20.4 billion with $21.6 billion. Wells Fargo now does about one third of all mortgage originations. Wells overtook Bank of America after BAC scaled back on mortgages in light of the problems they inherited from the Countrywide acquisition. However, loan growth grew by only +2% year over year and was down -0.4% from Q4. Stifel Nicolaus analyst Christopher Mutascio said the lack of loan growth was "concerning" but thought mortgage lending would help fill the void until corporate lending recovered. Wells said they had set aside more money for commissions and bonuses to cover their 264,900 employees, down -5,300 from year ago levels but up +700 from Q4. I can't conceive of having to make that payroll every two weeks. That is truly mind boggling. Wells also said they increased their litigation reserve but did not give a specific number. Shares were up +23% for the year and gave back -3.5% on Friday.

WFC Chart

The increased litigation reserves for JPM and WFC increased the worry over the Citigroup and Bank of America earnings next week. BAC has far more litigation problems than JPM so there is a worry their reserve allocation will also rise sharply. The worries over larger earnings problems from some of the less well run banks helped push the Bank Index down -3%. There was a major bank rally early in March and those gains are being slowly erased.

KBW Bank Index Chart

Google (GOOG) also added to the earnings gloom after beating estimates but trashing stockholders. Google shares rallied from the $651 close on Thursday to $671 in afterhours trading but then collapsed to close at $623 in afterhours on Friday. That was a decline of nearly $50 in response to the stock split announcement.

Google surprised investors with a strange 2:1 stock split proposal. Everyone who currently owns a share of Google will receive one new share for every share they own. The catch in the plan is that the new shares will be Class C shares with no voting rights. The current GOOG shares will retain their voting rights but will now be half their price. Essentially the board, actually Brin, Page and Schmidt who combined currently own 66% of the voting shares, has moved to remove votes from current and existing shareholders. The California State Teachers Retirement System, which owns $400 million in Google shares, was upset about the power grab and plans on "engaging" the company over the proposal. This will have to be approved by shareholders but with the top three executives having 66% of the voting shares there is no way it won't pass. Google said all future share issuances to employees or "other" purposes (read acquisitions) would be Class C shares.

Historically when a company has more than one class of stock with different voting rights the class without rights trades at a discount to the voting shares. Assuming Google was $600 on the day of the split you would end up with two shares at $300 each. Immediately the non-voting shares would begin to decline as investors sold those shares and purchased voting shares to replace them. This story is far from over from a company with an initial mission statement of "do no harm." Essentially Google's founders want to have a public company but private ownership. If you control all the voting shares you are no longer a CEO or Chairman. You are a dictator.

Google shares also declined on a -12% drop in the cost per click (CPC) and a shift to cheaper mobile advertising rates. That followed a -8% drop in rates in Q4. Despite the 12% decline in rates the revenue from ads increased by +39% thanks to more advertising platforms like mobile phones and tablets.

I suspect the decline in the stock price was related more to the negative connotations of the stock split than the drop in cost per click. The message boards were flooded with negativity over the move.

Google Chart

On the economic front there were only two reports. The Consumer Price Index declined from +0.4% in February to +0.3% in March. This was in line with consensus and basically a non-event as far as news. Energy prices rose again but the Core CPI, ex food and energy, was a tame +0.2%. Gasoline prices rose +1.7% in the covered period. Food prices are expected to decline as a result of the warmer weather and lengthened growing season. Natural gas prices are at ten year lows and that reduces the energy cost for electricity. With the worries over Spain and financial earnings this report was ignored.

CPI Chart

Consumer Sentiment for April declined slightly to 75.7 from 76.2 and that ended a streak of seven consecutive gains. The problems mentioned were the weaker jobs market and higher fuel prices. Surprisingly twelve month inflation expectations declined from 3.9% to 3.4%.

The current conditions component was responsible for the decline. Current conditions declined from 86.0 to 80.6 while expectations rose from 69.8 to 72.5. The payroll report and the uptick in jobless claims likely had an influence in the sentiment survey respondents.

Consumer Sentiment Chart

Jobless claims rose to 380,000 last week from 367,000 the prior week. This is the highest reading since early January. After a disappointing Nonfarm Payroll report the sudden increase in jobless claims is troubling. You can claim jobs were pulled into February by the warmer weather but then how do you describe the increase in layoffs as the weather improves even further. In theory there should be more jobs in April than February simply from the seasonal trends. This is a troubling change in trend and you can bet the Fed will be looking closely at next week's report ahead of their April 24th FOMC meeting.

Jobless Claims Chart

The economic calendar for next week is mostly housing details with the Philly Fed Survey on Thursday the most important economic report. The Spanish bond auction on Thursday could be a real bump in the road if it goes badly and given the trend in yields last week if it was left alone it would be ugly. For that reason alone I would expect the EU, ECB and/or IMF to intervene in some form to prevent a disaster.

If you were in a leadership position in one of those groups and you knew what was coming would you let Europe melt down again over Spanish interest rates? I would hope not. It is easy to "take the high road" and just let things happen and avoid the "moral hazard" of always coming to the rescue of errant countries but if that country is dragging down the rest of the EU then maybe a little immoral bond buying would be a good thing.

Economic Calendar

The real market news for next week will be the earnings. Most of the large cap techs report next week with the exception of Apple, which reports on the 24th. IBM, Intel, Microsoft, Ebay, SanDisk and Qualcomm will lead the list. With the Nasdaq 100 breaking its 14 week winning streak last week, thank you Google and Apple, the large cap tech earnings will draw a lot of attention.

Citigroup, Goldman Sachs, Bank America, US Bank and American Express will headline the financial sector earnings. Schwab and Etrade will give us a view into the trading activity of retail investors. Halliburton and Schlumberger will headline the oil services sector.

Earnings Calendar

Commodity prices fell again on the weak GDP from China. The country reported GDP of 8.1% for Q1. For any other country that would be blazing growth. For China's developing economy that was a three year low on a quarterly basis. Even during the recession China managed to post better than 9% growth on an annualized basis and they were screaming along at 14% before the recession. Clearly they can't continue to grow at those rates but even at 8% their economy would double again by 2020. Can you imagine China doubling by 2020? Unless they suddenly lose traction and self destruct that is where they are headed.

Analysts were all a twitter over the failure to hit 8.3% to 8.5% for Q1. Some whisper numbers were as high as 9%. Clearly some analysts need to get a fact check before putting their pencils to work.

China is far from destitute at 8.1% growth. For the month of March their retail sales rose +15.2% year over year. Industrial production rose +11.9% and fixed asset investments for the quarter rose +20.9%. However, much of their recent economic activity has been in infrastructure building. Housing starts in 2011 were over 15 million units. That is expected to drop to five million in 2012. While this will reduce economic activity it will help the dramatic drop in housing prices from millions of surplus homes on the market.

The Chinese consumer is actually starting to consume. The Chinese people have been very frugal in the past but they have been catapulted into the 21st century and they suddenly have money to spend and hundreds of thousands of retail stores in which to shop. The retail sales number I quoted above is amazing. If that continues China can move from an exporting nation to a consuming nation and that would be a major trend change.

Most analysts believe China will avoid a hard landing. Most believe Q1 will be the low point for 2012. China needs a GDP over 8% to maintain full employment or at least full enough to avoid civil unrest. For that reason analysts expect China to ramp up monetary policy to keep the GDP over 8% and probably over 9% by year end.

Therein lays the problem. Analysts are betting the farm on strong policy moves by the Chinese government and central bank. If those moves are not forthcoming soon those growth estimates are going to start falling faster than a North Korean rocket. That will weigh heavily on the U.S. and Europe.

China GDP Comparisons

Update Saturday afternoon: China announced today they were going to free up their yuan currency to trade in a larger band against the dollar. China wants the yuan to become a reserve currency like the dollar but in order to do that they have to let it float and that has been a criticism against China for years. The announcement said they are freeing the yuan to trade 1% over or under a midpoint every day, effective Monday. The previous trading range limit had been 0.5%. China said it wants to have a free floating yuan by 2015. The announcement was timed to coincide with the IMF meeting in Washington next week. This move could produce additional volatility in the dollar on Monday.

The weak GDP from China pushed copper prices to three month lows. China is the world's leading consumer of copper. Gold prices, in rally mode all week, gave up -$20 on the news. On the gold chart we are still waiting to see if that reverse head and shoulders pattern is going to complete.

Copper Chart

Gold Chart

Crude prices firmed mid week but then declined on the China news. This is the weekend Iran meets with the five members of the U.N. Security Council and Germany in Istanbul Turkey to discuss an end to uranium enrichment. Expectations were minimal. Iran said on Friday its hopes for a breakthrough in the talks had declined after the West warned Iran had to prove its credibility with major concessions. A source from Tehran said the Western comments "did not give us much hope." "So far the Iranian delegation finds the Western positions, as stated in the G8 meeting on Thursday, as disappointing and discouraging." Did they think it was going to be a tea party?

"In prior meetings Iran brought up political issues with no link to the nuclear issue and imposed unacceptable preconditions" according to a source within the P5+1 in Istanbul. "If Iran shows up with the same spirit of Istanbul 1, we are not going to get very far." US media claim the P5+1 wants Iran to halt enrichment of uranium to purities of more than 3.5%, dismantle its Fordo nuclear facility and send its enriched uranium stockpiles abroad. Reportedly the Fordo centrifuges could be reconfigured to enrich to weapons-grade levels of 90% with little effort. President Mahmoud Ahmadinejad insisted last week that Iran would not "retreat an iota from its undeniable right" to peaceful nuclear activities. On Friday President Obama told Iran, "It's your move." He said the U.S. was willing to give Iran economic incentives but only after the regime takes "concrete steps" toward halting its enrichment program. Iran has masterfully avoided direct confrontations for years by agreeing to talks and then stonewalling when it came to actions. They have perfected the "talk about nothing" concept.

If the talks this weekend actually showed some progress we could see crude oil prices decline further. There is a strong Iranian security premium in crude although the last three weeks of foreplay ahead of the talks has seen some of that premium decline as everyone tried to play nice ahead of the event. If Iran goes ahead with another version of bait and switch and refuses to discuss any serious topic or imposes unreasonable preconditions then the meetings will fail and oil prices will rise again. Israel will still be the elephant in the meeting room even though they won't be attending the talks. If Iran turns belligerent we could see Israel accelerate military readiness for an attack and that would definitely escalate prices.

Update Saturday afternoon: The EU envoy to the Saturday talks said they were "constructive" and they have agreed to meet again on May 23rd in Baghdad. Here is the key point. "All sides agreed to postpone talks about the details of Iran's nuclear program until a later date." Since this Saturday meeting was to discuss the nuclear program, exactly what did they discuss? This sounds like another round of delaying tactics by Iran. The only thing they agreed to was that the nuclear nonproliferation treaty must be upheld and Iran had a right to the peaceful use of nuclear energy. I believe the P5+1 nations were so afraid of the talks breaking down again and Israel or the U.S. attacking Iran that they wanted to show some progress even though nothing was really discussed. I will bet you the May 23rd meeting is either postponed, canceled or ends with "constructive" comments but no results once again.

I just saw a transcript of an interview with an Iranian official saying the "West must remove the sanctions before we (Iran) will agree to discuss changes in our nuclear program. The West must rebuild Iran's trust by removing the sanctions." Clearly no progress was made in the "constructive" talks. This is typical of the Iranian process. Ask for the world up front and then refuse to negotiate because the other side is not acting in good faith. Iranian TV is also reporting that Washington requested a private meeting with Iran and Iran rejected the request.

Another comment from the First Deputy Chairman of the Majlis Committee on National Security and Foreign Policy Hossein Ebrahimi, "The P5+1 should know that Iran is past the idea of suspension and closure and, whether they want it or not, the nuclear Iran can no more be denied." That is not exactly the comment from someone ready to play let's make a deal.

Don't forget Iran has been playing "Where's Waldo" with their nuclear program and the IAEA inspectors for a decade now. It is a constant shell game of block the visits then hide the evidence including in one instance bulldozing an entire complex of buildings after inspectors demanded a visit. After the site was leveled including removing the topsoil the inspectors were allowed to visit the site.

The "success" of Saturday's meeting is likely to pressure oil prices on Monday even though nothing of substance was discussed.

Oil Chart

The stock that never dies caught a cold last week. Apple shares hit a new high of $644 on Tuesday before profit taking took hold and shares declined -$40 to close at $604. The -3% decline on Friday came after a German court upheld a ban on Apple's use of "push" email for its mobile devices. The court confirmed an earlier ruling that Apple owes Motorola for using a patented technology that automatically informs customers about new messages on iPhones, iPods and iPads. Apple has to refrain from offering the "push" features in Germany and is liable for monetary damages still to be determined. Apple is involved in similar suits with Motorola in multiple countries and the German ruling could end up being a model for the other cases. Motorola is being acquired by Google and there is no friendship between Google and Apple. This suggests there will be a monster settlement by Apple to Motorola to cover worldwide use of its patents. Google/Motorola could play hardball and refuse to allow Apple to use those patents with an eye towards degrading the Apple products. I seriously doubt that will happen but it is always possible.

Apple Chart

The sharp declines by Apple, Google, Priceline and Amazon helped push the Nasdaq 100 to a -63 point, -2.3% loss for the week. That broke the 14 week string of gains on the big cap index. Apple is 22% of the S&P Technology Sector and 18% of the Nasdaq 100. A $40 decline by AAPL, GOOG and PCLN in the same week is pretty hard to overcome.

Nasdaq 100 Chart - 120 Min

Nasdaq 100 Chart - Daily

The Nasdaq Composite chart is still mildly bullish when viewed in isolation. When taken in context with the other indexes it looks more like an opportunity to get short before support fails. The huge number of tech earnings next week with most of the big caps reporting is going to test that support at 3000. A break there is sure to trigger stop losses and target 2900.

Nasdaq Composite Chart

Nasdaq Composite Chart - Daily

The Dow daily chart shows a clear break under not only the 30-day average but also the 50-day average. The Dow did rebound from support at 12,750 but failed again at exactly the 50-day average, which turned into resistance. The Dow also failed to return to the 13,000 level, which is now resistance as well. This support break and double resistance failure suggests we are going to see lower lows in the weeks ahead.

Dow Chart - 180 Min

Dow Chart - Daily

The S&P chart is stronger than the Dow chart. The Dow dipped to the support at the March low at 12,750 but the S&P remained well above the corresponding level at 1340. That is due to the broader composition of the S&P and the thin breadth of the Dow stocks. Problems in a single sector can move the Dow while the broader S&P remains steady.

However, the S&P did close under the 50-day average and the 30-day was a solid top on Thursday. Prior support at 1390 has turned into resistance and without a very quick recovery the path of least resistance is going to be down. S&P 1337-1340 is the next material support level at the March lows. Quite a few S&P components report earnings next week so direction will definitely be headline related.

S&P Chart

S&P Chart - Daily

The Russell 2000 fell to test support at the March lows of 785 and rebounded perfectly. However, prior support, now resistance at 810 held firm. Also, the 30-day average crossed over the 50-day suggesting the trend has changed and the next move is down. Since the average would take several days to reverse, this negative condition will be with us for a while. This is a technical short term sell signal.

Russell 2000 Chart - Daily

By using the Wilshire 5000, now called the Dow Jones Total Stock Market Index, we can eliminate all the inherent flaws in the smaller indexes. This is large caps, small caps, all sectors, etc. The Wilshire is holding over support at 14,250 and exactly where a bounce should occur. Should that support fail the target would be 13,250 and a -1,000 point decline.

Wilshire 5000 Total Stock Market Index Chart - Weekly

Next week is normally the best week in the third quarter. If you go back to 1950 the third week of April historically has the best gains of the entire quarter. Unfortunately the following six weeks are typically losers. This is option expiration week but after the wide swings last week I suspect there are few option positions still in force for April. Those seriously underwater and praying for a market move to return some lost premium are probably still there but I suspect the heavy volume option liquidation is behind us.

After Tuesday's 8.2 billion shares the last three days barely broke over 6.0 billion. The Wed/Thr short squeeze rebound ran out of steam and left us with more reasons to be cautious on Friday than optimistic. That is about the way I feel about next week. However, with earnings expectations in the +1% range on the S&P there will be plenty of opportunities to surprise to the upside. The only question will be whether the stocks react to the news. WFC and JPM both beat on earnings and then tanked. Google beat and tanked but I view that as a split problem. The good earnings news for most companies has been priced in over the last three months. We would have to see some monster surprises to push the entire market higher although some individual stocks may prove to be temporary winners. I say temporary because I am still expecting a strong sell in May cycle this year. Several weeks ago I predicted the week after option expiration to be the start of a correction cycle. I may have missed that by a couple weeks unless next week lives up to its historical norm of being the best week in Q2. One week does not make a trend but it can be a complete profit taking cycle. Was last week profit taking or the start of a trend change?

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Index Wrap

Bears Growling

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The S&P started slipping when the Dow fell under its up trendline week before last. Nasdaq followed last week when Apple (AAPL) failed to clear resistance I projected for the 650 area.

I'll start with the same charts I've featured in this section recently, that of the big cap S&P 100 (OEX) and big cap Nasdaq 100 (NDX) on a weekly chart basis.

The point to be made with OEX is that it's weekly highs were hitting a line of resistance implied by the previously broken up trendline. A week ago I was looking for a further retreat from this line and OEX delivered this past week.

The potential resistance implied by OEX hitting its prior up trendline as highlighted above was 'confirmed' so to speak by the pattern of S&P bellwether IBM, where the stock was hitting resistance in the 210 area, at the top end of its broad weekly uptrend channel (not shown).

Technical resistance measured in this same way, by looking at the top end of an obvious uptrend channel as seen in the OEX weekly chart below. The Index was hitting apparent resistance at the top end of its broad uptrend channel. The RSI extreme added to the view of an over-extended market. One other technical aspect: at 2800 NDX hit some 'natural' resistance of this level being a 50% retracement of the major decline NDX saw in the 2000-2002 bear market.

All that's recently happened in a sense is that the major indexes this past week simply retreated further from a 'classic' chart resistance area.

Given the rise in the VIX (Volatility) Index from a late-March low to around 20 this past week this week and the still-bearish chart pattern, I anticipate some further volatile price swings and some further decline.

I don't think the Market is done correcting but without complication TWO technical aspects should tell the story; 1.) can the Dow re-gain 13000 and 2.) will 3000 hold up as support in the Nasdaq Composite (COMP).

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

As anticipated the S&P 500 Index (SPX) fell below its up trendline, following the Dow from the week before in that pattern. SPX's Close below its up trendline was a type of chart 'confirmation' of more weakness to follow and not to get too 'sucked in' to rallies that followed. I doubt that the downside is over.

I am longer-term bullish but this last run up was over-due for a correction and they always come, eventually. The RSI has almost fully 'corrected' in its recent approach to oversold territory. One more shot down would complete the pattern I see here.

There's technical support in the 1350-1340 area. SPX could near 1300 again, but it's my most 'extreme' pullback objective.

The short to intermediate trend is down unless SPX can regain 1400. So, key resistance 1400, then in the area of prior recent highs around 1420.

S&P 100 (OEX) INDEX; DAILY CHART

The 'confirming' trigger for a bearish downside reversal with the S&P 100 (OEX) index was the break of its up trendline. The break of course occurred on Monday but the strongest Nasdaq stocks like AAPL held up into Tuesday in late week when they too were under selling pressure.

The chart pattern suggests another downswing coming off what looks like a bear flag. A fall to 610-600 would complete a second down leg pattern and be a buying opportunity in my opinion.

Don't believe this bull market is over. "Sell In May and Go Away" is getting too much play to happen quite the same way yet again this year. I mistrust, with good reason, any simplistic notion of an EASY way to make money in the Market. Buy Low and Sell High seems an easy rule. HOW to assess trends is the TRICKY part!

Resistance starts above 630 and extends to 636, 640 and 645. Support looks to come in around 610, a key area as the prior downswing low. 600 is my 'maximum' downside target at this snapshot moment. Earnings have become a renewed focus of course and that can moderate price swings. Prices most likely stabilize above 610.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) which had been leading the market for a while was the first to break under its up trendline and was the 'canary in the coal mine" this time. INDU now has slipped under its 50-day moving average, along with the other indexes this past week.

The 50-day average at 13000 is now a key 'bellwether' resistance along with what's suggested by the chart pattern; i.e., initial strong resistance at 13000, an eventual strong breakout above it, followed by another break below 13K. The pattern suggests that conquering 13000 may have to wait a couple of weeks; or months.

Key near support is 12715-12700, then at 12600. I'd be surprised to see INDU pushed below 12700 for any time, with 12700 as longer-term (weekly) trendline support. A weekly close below 12700, at INDU's longer-term up trendline, is bearish.

Resistance and a key one is 13000 both in terms of the chart (prior support 'becoming' subsequent resistance) and by the widely followed 50-day moving average. A move above 13000 that is sustained keeps INDU on a bullish track. Absent that the Average is in correction mode.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) fell out of its bullish uptrend channel with the decline to a lower trading range this past week. The index has so far only pulled back to support in the 3000 area. Ability for COMP to hold above 3000 keeps this most recent correction fairly mild and minor.

Key near support as noted already, 3000; next important support comes in at 2900. I'd repeat what I said last week that any prolonged move below 2900 suggests a downside momentum shift.

Near resistance is at 3070-3080, then 3100, extending to 3130.

Whenever a key trendline is pierced, it's important to do a chart check. My own suggests that there could be another down leg develop that carries COMP to around 2900. Any pullback to the 2900 area should bring in strong support/buying interest.

COMP almost got to its oversold zone early in the week as seen with the RSI above. It would also be fairly typical for another drop into more of a FULLY oversold reading.

My trader 'sentiment' (CPRATIO) indicator also seen above with the COMP daily chart is neutral, but its most recent extremes have all been on the 'overbought' side.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) Index recent bearish technical action has been breaking under its up trendline and to below its 21-day moving average. Unlike the S&P and Dow, key Nasdaq indices have not pierced their 50-day moving averages. Support in the 2650 area is implied by the important 50-day moving average AND is a natural area for chart support, at the Feb. highs. Look for good support there and on any further dips to around 2600.

Key near resistance is 2750, extending to 2790-2800. It would take a couple of closes back above the 21-day moving average to suggest to me that NDX was back on its prior bullish track. I'm looking for another rally but not quite yet.

Repeating a key watch is 2650 for support and 2750 for resistance for directional clues to the near-term trend, currently mixed. The downside looks like the path of least resistance currently.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) chart has taken on the same mixed technical pattern as with the underlying NDX index. On the QQQ chart a minor Head & Shoulder's Top pattern is more clearly seen; with a 'neckline' at 66. A decisive downside penetration of 66 would suggest downside potential to around 64. I anticipate a buying opportunity on dips to between 64 and 63.2, the area of the last intraday low.

Key near resistance comes in around 67.3, at the 21-day moving average. A couple of Closes above the 21-day moving average would suggest more upside potential than down; the reverse is true now: with QQQ under its 21-day average, I anticipate further downswings. Next key resistance is at 67.9-68, extending to 68.5.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) chart remains bearish in its pattern but there is the potential for a double bottom if 785 continues to hold up as support. I've noted resistance at the previously broken up trendline, currently intersecting in the 832 area; resistance is also implied by the 21-day moving average, at 823.

I noted last week that key support would be in the 785 area, at RUT's last downswing low and I'd point to this again as key near support; next support is seen at 760, extending to further support around 750-740.

I anticipate lower levels in RUT before completion of this current correction. After that the index should lag Nasdaq higher assuming another rally phase into May, after completion of the current correction.



GOOD TRADING SUCCESS!


New Option Plays

Industrials & Transports

by James Brown

Click here to email James Brown

Editor's Note:

Our short-term bias is bearish. If you're looking for bullish candidates then keep an eye on these stocks, which might be a buy on a breakout above resistance: AAP, SXCI, INTU



NEW DIRECTIONAL PUT PLAYS

Dow Jones Industrial ETF - DIA - close: 128.40 change: -1.32

Stop Loss: 130.65
Target(s): 125.00 and 122.00
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The market action over the past several days has taken a turn for the worse. The bull trend is broken, at least short-term, and stocks are poised for a deeper correction. The DIA broke support last Monday. The oversold bounce failed at resistance.

I am suggesting bearish put positions at the open on Monday morning. We will use a stop loss at $130.65. Please note that I am suggesting a short-term target at $125.00 and a longer-term, multi-week target at $122.00.

- Suggested Positions -

buy the May $127 PUT (DIA1219Q127) current ask $2.30

- or -

buy the May $124 PUT (DIA1219A124) current ask $1.42

Annotated Chart:

Entry on April xx at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 6.3 million
Listed on April 14, 2012


FedEx Corp. - FDX - close: 88.03 change: -1.81

Stop Loss: 90.55
Target(s): 85.05
Current Option Gain/Loss: + 0.0%
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The oversold bounce in FDX has reversed at resistance near $90.00 and its 10-dma. Shares already looked troubled with a bearish double top from the February and March peaks. There is potential support at $85.00 and its 200-dma near $84.60. I am suggesting we buy puts at the open on Monday and aim for $85.00. More aggressive traders could aim lower. FYI: The Point & Figure chart for FDX is bearish with a $78 target.

- Suggested Positions -

buy the May $85 PUT (FDX1219Q85) current ask $1.61

Annotated Chart:

Entry on April xx at $ xx.xx
Earnings Date 06/19/12 (unconfirmed)
Average Daily Volume = 2.5 million
Listed on April 14, 2012



In Play Updates and Reviews

Reversing Lower Into the Weekend

by James Brown

Click here to email James Brown

Editor's Note:

The midweek market bounce has reversed and stocks sold off into the weekend. On Friday we closed our AGN trade. Ryder was triggered. I have removed FCX.

Current Portfolio:


CALL Play Updates

Cigna Corp. - CI - close: 48.42 change: +0.84

Stop Loss: 46.95
Target(s): 52.25
Current Option Gain/Loss: Unopened
Time Frame: up to the early May earnings report.
New Positions: Yes, see below

Comments:
04/14 update: Our new CI trade is not open yet. The stock traded to an intraday high of $48.60 on Friday. I am suggesting a trigger at $48.75 as our entry. We'll start with a stop at $46.95. The $50.00 level is short-term resistance but we're aiming for $52.50. Aggressive traders could use the April calls, which expire in six trading days. I am suggesting the May calls. FYI: The Point & Figure chart for CI is bullish with a $60 target.

Trigger @ $48.75

- Suggested Positions -

buy the May $50 call (CI1219E50)

chart:

Entry on April xx at $ xx.xx
Earnings Date 05/03/12 (confirmed)
Average Daily Volume = 3.0 million
Listed on April 12, 2012


NetEase.com - NTES - close: 56.98 change: +0.06

Stop Loss: 54.90
Target(s): 64.00
Current Option Gain/Loss: Apr55c: -17.5% & Apr60c: - 78.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
04/14 update: We only have five days left for our April calls. More conservative traders may want to exit early now. I am not suggesting new positions at this time. We will raise our stop loss up to $54.90. Plan on exiting on the next rally into the $59-60 zone.

- Suggested (Small) Positions -

Long Apr $55 call (NTES1221D55) Entry $2.80

- or -

Long Apr $60 call (NTES1221D60) Entry $0.70

04/14/12 new stop loss @ 54.90
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: 94.35 change: +0.07

Stop Loss: 89.90
Target(s): 98.50
Current Option Gain/Loss: Apr90c: +76.0% & May$90c: +46.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
04/14 update: ORLY continues to show relative strength. The stock set a new all-time high on Friday. Unfortunately I wouldn't count on ORLY's strength to last. If the market accelerates lower it will be very tough for ORLY to keep posting gains.

We only have five trading days left for the April options. I am suggesting we go ahead and exit our April $90 calls at the open on Monday. We will inch our stop loss up to $89.90. More conservative traders may want to raise their stop closer to the 30-dma instead. I am not suggesting new positions at current levels.

- Suggested Positions -

Long Apr $90 call (ORLY1221D90) Entry $2.50

- or -

Long May $90 call (ORLY1219E95) Entry $3.95

04/14/12 plan to exit our April calls at the open on Monday
04/14/12 new stop loss @ 89.90
04/07/12 moved exit target to $98.50
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 (confirmed)
Average Daily Volume = 887 thousand
Listed on March 24, 2012


Ulta Salon, Cosmetics - ULTA - close: 94.93 change: +0.20

Stop Loss: 91.49
Target(s): 98.50
Current Option Gain/Loss: -27.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
04/14 update: ULTA is also showing some relative strength. The stock is hovering near the bottom of its bullish channel (see chart) and looks poised to breakout over resistance at $95.00. Of course there is no guarantee that ULTA will breakout higher, especially with the market poised to drop. Last week's low was $91.61. I am raising our stop loss to $91.49. Meanwhile nimble traders could use a rally past $95.50 as a new bullish entry point. Keep in mind that we will plan an exit in the next couple of days.

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


PUT Play Updates

Apache Corp. - APA - close: 93.65 change: -1.25

Stop Loss: 97.05
Target(s): 92.00
Current Option Gain/Loss: Apr95.5p:+ 79.1% & May95p: +51.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
04/14 update: Good news! There was no follow through on APA's oversold bounce from Thursday. Shares lost -1.3% on Friday. The simple 10-dma has fallen to $96.35. I am lowering our stop loss down to $97.05. More conservative traders may want to exit early now and lock in a gain. I am not suggesting new positions at this time.

Our exit target is $92.00. More aggressive traders could aim for the $90 area. Keep in mind we need to exit our April options soon.

- Suggested Positions -

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

- or -

Long May $95 PUT (APA1219Q95) Entry $2.90

04/14/12 new stop loss @ 97.05, prepare to exit April options soon
04/11/12 new stop loss @ 97.65, readers may want to take profits now with the options at +114.5% and +70.6%
04/10/12 new stop loss @ 98.50
04/09/12 new stop loss @ 99.00
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


BorgWarner - BWA - close: 81.80 change: -1.88

Stop Loss: 84.55
Target(s): 75.50
Current Option Gain/Loss: -48.0%
Time Frame: up to the April 26th earnings report
New Positions: see below

Comments:
04/14 update: Good news! There was no follow through on BWA's oversold bounce on Thursday. Shares hit a high of $83.93 and reversed under short-term technical resistance. The stock closed near its low for the day. Readers can use this reversal as a new bearish entry point to buy puts. You may want to buy May puts. We have to exit our April puts this week before they expire.

Earlier Comments:
We do want to keep our position size small. The most recent data listed short interest at 16% of the 107 million-share float. That does raise the risk of a short squeeze.

- Suggested (small) Positions -

Long Apr $80 PUT (BWA1221P80) Entry $1.25

04/14/12 Friday's reversal looks like a new entry point
04/10/12 triggered at $81.25

chart:

Entry on April 10 at $81.25
Earnings Date 04/26/12 (confirmed)
Average Daily Volume = 1.1 million
Listed on April 09, 2012


EQT Corp. - EQT - close: 46.18 change: -0.42

Stop Loss: 48.25
Target(s): 42.00-40.00
Current Option Gain/Loss: Unopened
Time Frame: up to its April 26th earnings report
New Positions: Yes, see below

Comments:
04/14 update: EQT is still hovering near support at the $46.00 level. We are waiting for a breakdown. Currently I am suggesting a trigger to buy puts at $45.70. Our target is the $42.00-40.00 zone. We'll use a stop at $48.25, just above today's high. FYI: The Point & Figure chart for EQT is bearish with a $36 target.

We want to exit prior to the April 26th earnings report.

Trigger @ 45.70

- Suggested Positions -

buy the Apr $45 PUT (EQT1221P45)

- or -

buy the May $45 PUT (EQT1219P45)

chart:

Entry on April xx at $ xx.xx
Earnings Date 04/26/12 (confirmed)
Average Daily Volume = 1.4 million
Listed on April 11, 2012


Ryder System, Inc. - R - close: 51.00 change: +0.60

Stop Loss: 52.05
Target(s): 45.50
Current Option Gain/Loss: -15.0%
Time Frame: exit before April option expiration
New Positions: see below

Comments:
04/14 update: Our Ryder trade has been triggered with Friday's breakdown to new lows. Shares hit our trigger at $49.75 late in the day. I would still consider new positions now at current levels but you will probably want to buy May puts instead. More conservative traders may want to use a tighter stop loss. Our target is $45.50. We do not want to hold over the late April earnings report.

Don't forget that April options expire in five trading days so we don't have much time.

- Suggested Positions -

Long Apr $50 PUT (R1221P50) Entry $1.00

04/13/12 triggered at $49.75

chart:

Entry on April 13 at $49.75
Earnings Date 04/24/12 (unconfirmed)
Average Daily Volume = 567 thousand
Listed on April 10, 2012


Timken Co. - TKR - close: 49.60 change: -0.60

Stop Loss: 51.55
Target(s): 45.50
Current Option Gain/Loss: -39.4%
Time Frame: up to its late April earnings report
New Positions: see below

Comments:
04/14 update: There was no follow through on TKR's big Thursday bounce. Shares have closed back under the $50.00 level, which is bearish. Friday's move looks like a new bearish entry point to buy puts but you may want to buy May puts since April puts expire in five trading days.

Earlier Comments:
Our target is $45.50 although we need to keep a careful eye on possible technical support at the 100-dma, exponential 200-dma, and the 300-dma all near the $46 area. Keep position size small.

- Suggested (small) Positions -

Long Apr $50 PUT (TKR1221P50) Entry $1.90

04/10/12 triggered at $48.90

chart:

Entry on April 10 at $48.90
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 846 thousand
Listed on April 09, 2012


Weight Watchers Intl. - WTW - close: 74.08 change: -0.15

Stop Loss: 77.25
Target(s): 70.50
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
04/14 update: WTW is not seeing a lot of movement either way. Thursday's intraday reversal failed at its 10-dma but there wasn't much follow through lower on Friday. I am adjusting our stop loss down to $77.25. I'm not suggesting new positions. We only have five days left on April options.

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

- Suggested (small) Positions -

Long Apr $75 PUT (WTW1221P75) Entry $2.05

04/14/12 new stop loss @ 77.25
04/10/12 new stop loss @ 78.25.
04/09/12 WTW gapped open lower at $73.99

chart:

Entry on April 09 at $73.99
Earnings Date 05/03/12 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on April 07, 2012


CLOSED BULLISH PLAYS

Allergan Inc. - AGN - close: 93.19 change: -0.12

Stop Loss: 92.25
Target(s): 99.50
Current Option Gain/Loss: Apr92.5c: -43.6% & Apr95c: -83.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
04/14 update: Positive comments from Jim Cramer on Thursday night helped AGN outperform the market on Friday with a +1.5% gain. The stock broke above short-term technical resistance but failed to close over the $95.00 level.

AGN had not been acting very healthy and our plan was to exit at the open on Friday morning.

- Suggested Positions -

Apr $92.50 call (AGN1221D92.5) Entry $3.55 exit $2.00 (-43.6%)

- or -

Apr $95 call (AGN1221D95) Entry $1.85 exit $0.30 (-83.7%)

04/13/12 planned exit on Friday morning
04/12/12 prepare to exit at the open tomorrow.
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


CLOSED BEARISH PLAYS

Freeport-McMoRan - FCX - close: 35.78 change: -0.53

Stop Loss: 38.25
Target(s): 31.50
Current Option Gain/Loss: Unopened
Time Frame: up to the April 18th earnings report
New Positions: see below

Comments:
04/14 update: There was no follow through on Thursday's short squeeze in FCX. The stock underperformed the broader market with a -2.5% drop on Friday. Aggressive traders could use a drop under $36.70 as a new entry point for puts. However, we do not want to hold over the April 18th earnings report. Since our trade isn't open yet I am dropping FCX as a candidate.

(note: the April 18th earnings date is not yet confirmed.)

Trigger @ $35.65 (small positions)

Our trade did not open.

04/14/12 trade did not open. removed ahead of earnings.

chart:

Entry on April xx at $ xx.xx
Earnings Date 04/18/12 (unconfirmed)
Average Daily Volume = 18.7 million
Listed on April 11, 2012