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Newsletter

Daily Newsletter, Saturday, 4/21/2012

Table of Contents

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

Market Wrap

Volatility at Tops and Bottoms

by Jim Brown

Click here to email Jim Brown

A key sign of a top or bottom in the market is a sharp increase in volatility like we saw last week.

Market Statistics

You may remember the long rally in the first quarter where we went for streaks of days at a time without the Dow trading in a triple digit range much less close with a triple digit gain. Last week the Dow averaged a 147 point daily range and only one day traded in double digits and that was 87 points. The S&P averaged a 15 point daily range. Volatility has definitely returned but volume has not. Daily volume averaged 6.3 billion shares per day but that did increase on Thursday to 7.3 B and 6.6 B on Friday. There was no conviction to any of the market moves either positive or negative. That is also a sign of market tops. When volume does not increase on the dips or spikes it means many traders are content to sit on sidelines and watch until a new trend is established.

This is still a headline driven market and last week had plenty of headlines. Europe, economics and earnings continue to be the major drivers. Europe went through four days of gloom and doom over the pending 10-year bond auction in Spain on Thursday and then when it came the actual auction was a non-event. Bidding was robust and yields were manageable. This weekend the worry is over the French elections. President Nicolas Sarkozy is in a dead heat with socialist Francois Hollande. Some polls have Hollande ahead and he had said he would renegotiate the deal with the EU although his party has tried to walk those comments back. If Hollande did win there would be greater spending on social projects and less agreement with Germany on EU matters. The European markets are confused about direction since spending can be both positive and negative for equities. If Hollande is elected there would probably be less of an inclination towards further EU bailouts.

Also on Friday the IMF announced it had successfully raised another $430 billion to contribute to the European debt crisis. The IMF and EU are frantically trying to raise commitments to the crisis fund in case Spain and/or Italy spiral out of control and the troika has to step in with a monster bailout. The BRIC countries refused to contribute more money until they had a bigger say in how it was used. The IMF committee already has a plan in process to allow that but it requires ratification by the member countries and that could take another 12-18 months. Flush with this new cash the IMF warned the EU that member countries had to cut debt burdens significantly and make bold economic reforms to stabilize its financial systems in order to restore growth. Otherwise the debt problems will resurface in years to come. I doubt anyone was paying attention. When you are up to your neck in alligators it is hard to remember the initial objective was to drain the swamp.

In U.S. economics there were no major reports on Friday. The state employment report for March showed slower job growth than in February. This was a trend already seen in the nonfarm payrolls the prior Friday. Job gains were reported in 29 states for March. However, that was worse than the 42 states that reported gains in February. The biggest job declines were in Ohio -9,500, New Jersey -8,600 and Wisconsin -4,500. New York added +19,100, California +18,200 and Arizona +13,500. Nevada had the highest unemployment at 12%, Rhode Island 11.1%, California 11%. North Dakota had the lowest unemployment at 3% thanks to the Bakken oil field.

The disappointing job news from the states on Friday followed disappointing news on jobless claims on Thursday. Claims came in at 386,000 which sounds like a big increase only the prior week was revised up from 380,000 to 388,000 so this was actually a minor decrease. Since this number will probably be revised higher next week you never know what really happened until you look back from the future. The key point here is that the weekly jobless claims are getting farther away from 350,000 and closer to 400,000 every week. That 400K threshold is not going to be market friendly.

Jobless Claims

For whatever reason the layoffs appear to be accelerating along with a long list of disappointing economic numbers over the last couple weeks. The economic recovery appears to be slowing but you can't go on the day to day numbers you have to look at the month as a whole.

I went back and constructed a list of the major economic reports for April. We are only two thirds through the month but the recent trend has been negative. In the list below the numbers in green are an improvement over the prior report and those in yellow are a worsening since the prior report. In the case of the Monster Employment the numbers were the same but the index has gone up for five consecutive years in March. Not going up was actually negative. Same with industrial production at zero for the last two months. Production not increasing for two months was a negative for me. There is a lot more yellow on that graphic than green.

April Economic Reports

One specific report that was especially bad was the Philly Fed Manufacturing Survey on Thursday. The headline declined to 8.5 from a 12-month high in March at 12.5. New orders fell to the lowest level since September at 2.7. However, the employment component rose to 17.9 from 6.8 and that is a huge increase. Apparently manufacturers are expecting an improvement in conditions later this year.

The economic calendar for next week has several more regional manufacturing reports plus the first look at the Q1 GDP. The GDP is expected to have declined to 2.3% in Q1 from 2.95% in Q4. That report could be a market mover in either direction depending on what it says.

The biggest event for the week is of course the FOMC meeting on Tue/Wed and Bernanke's press conference on Wednesday afternoon. With the sudden worsening of employment numbers on all fronts the Fed is sure to say something in their statement about unemployment and their dual mandate. Bernanke will be grilled on the topic in his press conference. Because of recent comments from the various Fed presidents and FOMC members nobody in the mainstream economic press really expects a new QE3 program to be announced. There are a few outliers still expecting some new action but the odds are dwindling. However, with the next meeting not until June and that is when the Operation Twist expires you would expect the Fed to make some announcement about extending Twist at this meeting. They rarely wait until the day something ends to announce a change. Should they NOT say anything about extending Twist the market would probably react badly.

The FOMC will probably downgrade its economic statement and reiterate they are ready to take additional action if the economic situation deteriorates further. The Fed will want to act sooner rather than later to avoid taking action in the middle of a heated election cycle later this year. How Bernanke is going to orchestrate that is still a mystery to all.

Economic calendar

In the earnings department the news has been better than expected. Two weeks ago the estimate for S&P earnings growth for Q1 had declined to +0.1%. After only a week of actual earnings those estimates are approaching +3.2%. That is still not strong but it is far enough above negative territory that analysts are breathing easier again.

With 75 S&P companies reported the actual earnings growth is +3.7%. About 82% of reported companies have beaten earnings estimates and 74% beat revenue estimates. Revenues are up +3.4% with operating margins declining. While the results have been good so far they are not expected to last. The remaining 425 S&P companies are expected to post an earnings decline of -0.9%. If you exclude Apple that number falls to -2.3% for those 425 or +1.8% for all 500 companies.

Expectations had clearly fallen too low and analysts are playing catch up after the first 75 companies reported. The problem with the reporting cycle is that the grade A blue chips are the first to report. Intel, IBM, Microsoft, GE, JPM, etc. The farther we get into the cycle the lower the quality of the earnings being reported. The +3.7% earnings growth from those first 75 did not help their stocks in most cases. The majority of them declined after their reports.

Exceptions to that trend were Microsoft, GE, Honeywell, Ebay and Schlumberger. Microsoft (MSFT) rallied +5% on Friday and singlehandedly offset the impact of Apple's decline on the Nasdaq 100. Microsoft rallied +$1.41 (+4.54%) but was responsible for +12 NDX points. Apple declined -$14 (-2.4%) to knock 10 points off the NDX. Over 106 million MSFT shares traded on Friday.

Microsoft's earnings showed there was still life in the PC with sales of Windows 7 software surging. Windows 8 is in beta test and should offer touch screen capabilities for things other than tablets and smartphones. Microsoft reported earnings of 60-cents compared to estimates of 58-cents. Microsoft saw sales of Office rise +9% and Windows rose +4%. Server systems and tools rose +14%. Entertainment and services, including the Xbox, declined -16% but Microsoft said it was just a weak quarter for game sales. That has been repeated by all the other game manufacturers as well.

Microsoft Chart

GE reported earnings on Friday of 34-cents that was a penny above street estimates. Nobody really gets excited about GE's earnings but they do tune in for the guidance. CEO Immelt said orders for products and services related to infrastructure were up +20%. Revenue rose +4% to $35.2 billion. With that kind of scale it is hard to move the revenue needle in double digits. The transportation segment saw profits rise +48% and health care +10%. The only decline came in the home solutions segment. Orders for locomotives, aircraft engines and other industrial equipment rose by double digits. Immelt was borderline bullish on the outlook saying "We've got game right now!" GE shares rose a whopping 22-cents.

GE Chart

Honeywell (HON) told analysts last month to expect earnings in the 96-98 cent range. On Friday they posted earnings of $1.04 compared to 88-cents in the year ago quarter. Honeywell said they were not trying to lower the bar on estimates. They were just fortunate to be riding the crest of a major wave of orders. The company said in its forecasts they were assuming Europe would be in recession all year but they still raised their estimates again. HON raised the full year range to $4.35-$4.55 from $4.25-$4.50. They said the growth came without a major rebound in the housing market and the numbers would be even better if the housing sector took off. HON shares rose +2.4%.

Honeywell Chart

Oil service company Schlumberger (SLB) posted earnings of 98-cents and beat the street by a penny but it was the bullish tone that pushed their stock higher. Revenue rose +22% and the company said they expected the growth to continue. SLB expects the number of rigs working outside North America to rise by 10% this year and that is a big profit driver for the industry. UBS said rig utilization and deepwater activity should accelerate in 2013 and beyond.

Halliburton (HAL) also posted an upbeat earnings report and outlook earlier in the week. Both companies said despite a slowdown in gas well drilling there was really no slowdown in overall activity in North America. Oil wells require fewer pumps for fracturing but the number of wells is rapidly increasing. Currently there is a surplus of pumping horsepower but SLB does not expect it to last.

The combined outlooks from HAL and SLB paint a very promising picture for the U.S. energy sector. There is currently a rotation in progress from gas wells to oil wells but the slowdown from that equipment shift is temporary. Eventually gas will pick up again but that does not necessarily mean oil drilling will slow. Overall the number of total rigs will increase but it may take a couple years.

Companies like Chesapeake (CHK) are cutting back from 75 gas rigs to 25 but those 50 rigs are moving to liquids production instead. There are plenty of opportunities in the oil field to keep everyone busy.

Schlumberger Chart

Sandisk (SNDK) was one of the companies that did not rally on earnings. SNDK shares fell -11% after posting profits that fell by almost half from the year ago quarter. Adjusted earnings of 63 cents missed estimates of 67 cents and were well below the 92 cents in Q1-2011. Sandisk said weak demand and low selling prices were to blame and they expect that trend to continue through Q2. Altera (ALTR) missed estimates by a penny with 35 cents per share and shares fell -8%. Freescale (FSL) posted a loss of 4 cents and a penny better than expected but shares declined -12%. Lattice Semi (LSCC) posted earnings inline but shares fell -7%. It was not a fun day in the semiconductor sector.

Sandisk Chart

Semiconductor Index Chart

Riverbed Technology (RVBD) was crushed for a -26% loss after reporting earnings in line with estimates but revenues that were well below analyst estimates. The company said it expected revenue growth for 2012 to fall to 15% compared to the 17% to 20% it predicted last quarter.

Riverbed Chart

Tempur Pedic (TPX) saw its shares decline -20% on Friday. The company reported earnings of 86 cents that beat the street estimates of 84 cents but they guided lower for the full year. The company guided to $3.80-$3.95 and analysts were expecting $3.97. TPX shares had rallied +$35 since December and those profits were cut in half with a -$17.22 drop. Competitor Select Comfort (SCSS) declined -9% on the news.

Tempur Pedic Chart

Ethan Allen (ETH) fell -7% to $22 after raising their dividend by 9 cents but warning on Q1 results. The company said it expects to report profits of 13-14 cents compared to 7 cents in the year ago quarter. They also said by the end of this quarter they will have added new products to the line to replace 60% of existing products. This rejuvenation of the product line also added 4-5 cents in onetime costs and excluding those costs the Q1 earnings would be 17-19 cents. While those earnings should have been good news the CEO warned "we remain cautiously optimistic as macroeconomic conditions remain uncertain." That was enough to knock the stock to a five month low.

Ethan Allen Chart

Bank of America just can't seem to get any respect. After buying Countrywide Financial just before the financial collapse and then being forced by the Fed to buy Merrill Lynch they inherited tens of billions in problems plus two very strong businesses. Once they work through all the problems and the litigation ends BAC will be a dominant player in the financial system. However, the end is not yet in sight. When the Fed forced them to buy Merrill the bank did not disclose at the time that Merrill was losing $15.8 billion in that quarter. BAC has been sued for making the acquisition and paying too much. The millions of mortgages they acquired from Countrywide turned into a black hole of losses. Nothing seemed to go right and the bank has been struggling for four years now.

BAC posted Q1 profits that fell -68% to $643 million, but that included a $4.8 billion accounting charge related to the value of the bank's debt. The earnings beat estimates but the pain just keeps coming. Sell side analyst Mike Mayo downgraded the bank on Friday saying they need to take bolder actions including breaking up the company or selling more assets. He downgraded the bank to a sell from underperform. He warned again about the still unresolved mortgage liabilities, lost market share in mortgages while they try to stabilize and pending write downs in the credit card business. BAC actually reduced bad debt reserves in the Q1 earnings but Mayo believes there is trouble ahead. He said the bank needs to cut 30,000 more workers to accelerate earnings and reduce costs.

Other analysts downplayed Mayo's downgrade saying he has ulterior motives in promoting his book "Exile on Wall Street, One Analyst's Fight to Save Big Banks from Themselves." I agree with those analysts. I personally believe BAC is going to be a premier financial entity once they get past these mortgage problems and the lingering impact of the Merrill acquisition. I would not mind seeing the shares decline to $7.50 or lower because that would be a bargain entry for a long term hold. Once the problems are over BAC shares should easily return to pre recession levels because the business offering is significantly broader and the asset base is huge.

Bank of America Chart

The earnings calendar for next week is very active with more than 400 companies reporting. The ones below are just a sample. However, the entire week will revolve around Apple after the bell on Tuesday. They represent a significant portion of the S&P earnings with estimates for Q1 at $9.99 per share. A significant beat or miss will have a dramatic impact to the market and to the overall S&P-500 earnings for the quarter.

Caterpillar should say good things about the global economy on Wednesday and UPS will be the actual barometer on Thursday. The global economy runs on shipping and their performance and guidance will be critical.

Earnings Calendar

The volatility has increased based on the wide swings in the indexes but the VIX closed at a two week low. There are two reasons for this. One was expiration week. Option premiums used to calculate the VIX had declined to a minimum. The second reason the market volatility was related to specific stocks in the headlines rather than a broad sell off of all stocks. The big declines and gains were limited to the stocks in the news but many of those were Dow stocks so the implied impact on the market was magnified.

There is still an underlying bullishness for the market compared to just a couple weeks ago. The percentage of stocks over their 50-day moving average two weeks ago declined to less than 25% and the lowest level in 2012. That percentage has been rising over the last two weeks to 43.4% today. That is a far cry from the 85% in January and February but the short term trend is rising. As long as it keeps rising the market is going higher. Once that trend begins to decline again it should be a warning signal of a deeper correction ahead. Note on the chart below that the MACD is turning positive again after more than a month in decline.

NYSE Stocks Over 50-Day Average

The S&P closed fractionally under the 50-day average at 1379.50 on Friday but it is still clinging to that support. Over the last two weeks the S&P has tried to recover from the April 10th dip to 1,357 but it remains stuck under prior support turned resistance at 1,390. For two weeks that has been a solid top. Support has formed at 1,370 but that support has been dependent on major blue chip companies reporting better than expected earnings and lifting the indexes. Next week we have hundreds of earnings reports but the quality of those reports will begin to decline. In other words there will be a greater number of misses and lower guidance than we saw last week.

I believe we are at a crossroads with the FOMC announcement on Wednesday a pivotal event. Since the markets are not expecting any new Fed stimulus, any announcement could provoke significant short covering. Conversely since expectations are minimal any lack of an announcement may not be really bad. If the Fed says they are not going to do anything because the economy is recovering as expected then the end of QE could be ignored. Personally I would be surprised if the market did not react negatively but eventually that day will come when the Fed will tell the market the Band-Aids are coming off and it is time to get back into the game.

With the Fed needing to keep mortgage rates low for the rest of the year and Operation Twist ending in June I would be very surprised if they did not mention the program could be extended in the post meeting announcement. That should be the least we could expect.

The S&P has the overhang of resistance at 1,390, the FOMC meeting and a possible decline in the quality of earnings. For those reasons I will be surprised if the market rises above resistance this week. However, until the short term rebound fails the overall trend is still bullish. Once the S&P trades below 1,360 again market sentiment should change. There has been no correction of any consequence in nearly five months. We are due. A material correction could knock us back to the 200 day average at 1275.

S&P Chart - 180 Min

S&P Chart - Daily

The Dow rebound from 12,750 was textbook but it is struggling to move over resistance at 13,025. Friday's +65 point Dow gain was positive for sentiment on a day when the Nasdaq was in negative territory. The Dow managed to close just over 13,025 despite an afternoon sell off. The gains were due to positive results from Microsoft and Travelers, which held the Dow up.

The key short term indicators on the Dow would be the 13,130 high on Tuesday and the 12,900 low on Thursday. A move above or below those outside ranges could dictate direction. The Dow gravitated to the 13,000 level for option expiration but next week it will be free to move away from that obvious pin point.

A move below 12,900 would be a lower low and target a retest of 12,750. A move over 13,130 would he a higher high and target a retest of the highs at 13,275. With the Dow seen as "the market" those levels will be closely watched and a move past either should attract many likeminded buyers or sellers.

Dow Chart

Dow Chart - Daily

Apple has closed lower on eight of the last nine days. Friday's close at $572 was a six week low and -$81 below its high of $644 on April 10th. Apple reports earnings on Tuesday and they are expecting a blowout quarter. However, some manufacturing challenges have resulted in some parts shortages that could have slowed sales. Add to that the impact of multiple patent suits and Apple could fail to beat as significantly as traders are expecting.

Apple normally blows away earnings targets. That means a "simple" beat is not going to be enough to keep the wolves at bay. However, the Apple faithful are lining up to buy stock with both hands on any material dip. Barring unforeseen circumstances any dip should be short lived.

Apple Chart

Unfortunately Apple is a significant impact on the Nasdaq and that helped push the Nasdaq 100 to a 22 point loss for the week. Fortunately Microsoft and Ebay were big gainers or the damage would have been a lot greater.

The Nasdaq Composite closed right on support on Friday at 3,000. That is below the 50-day average by 12 points. The Nasdaq looks very likely to break below that support next week and eventually retest 2,900. Resistance is strong at 3,050.

Nasdaq Chart

Nasdaq Chart - Daily

The Nasdaq 100 big cap index closed right on the 50-day average after three weeks of declines. The unstoppable big cap rally since December has lost momentum and a break below the 50-day could trigger accelerated selling.

Nasdaq 100 Chart - Daily

The Russell 2000 actually performed rather well last week. It tested resistance at 810 multiple times and closed within striking distance. It is well below the 50-day but that break was two weeks ago and the selling has not gotten worse. If the Russell moves over 810 the broader market should take notice. It would be very positive for market sentiment. Recently the big caps have been in charge of market direction and until that trend fades the Russell is in neutral.

Russell 2000 Chart - Daily

This is a big week for headlines with hundreds of earnings reports, a dozen economic reports and the mother of all quarterly FOMC meetings. The uncertainty over Fed direction is going to calm any bullish sentiment until after the Wednesday press conference. We could see some bulls buy the market ahead of the announcement in expectations of a QE surprise but I suspect there will be more sellers setting up for a post FOMC decline than buyers expecting good news.

Cash is a position. I would be hesitant to place any major bets ahead of the FOMC event. The potential for a large bout of volatility post meeting is huge. We are also approaching the sell in May cycle and now that option expiration is behind us there is nothing to keep investors tied to the market. With volatility increasing and a large profit under their belts it is more likely those cycle traders begin moving to the sidelines.

The U.S. may be the dog with the least fleas but it is still a dog. The economic acceleration has slowed and jobs appear to be declining again as we head into the summer doldrums. The political campaigns are going to start ramping up their attacks and telling everyone how bad the other party's policies are going to be on the economy. Consumer sentiment has already begun to decline and could move lower. Gasoline prices have eased to $3.87 on average but remain over $4 in many areas. That is the threshold for slowing the consumer and slowing the economy. There are a lot of warning signs beginning to appear and summer is not normally kind to the market. Institutional investors understand all these signs and will act accordingly. This week should be pivotal for the markets.

Jim Brown

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


Index Wrap

Sideways Trend and Marking Time

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The S&P 500 and the Nasdaq Composite are drifting sideways below their 21-day moving averages and barely holding their 50-day averages. Nevertheless, the Dow and the Composite closed the above or at bellwether technical supports at 13000 and 3000 respectively.

The sideways move at this juncture keeps the major stock indexes below their former daily chart up trendlines but also is 'throwing off' the overbought extremes of late-March. On a weekly chart basis, all the major indexes have HELD at or above their up trendlines dating from their October lows.

It looks to me like one more decline to lower lows for the current move is possible but not inevitable. I envision another substantial rally ahead but how soon is hard to gauge. I discuss anticipated support and upside 'breakout' levels in my various individual index commentaries below.

The retreat in Nasdaq bellwether Apple Computer (AAPL) and in S&P/Dow star performer IBM, deflected from resistance implied by key trendlines, was important in seeing that the overall Market was likely to correct. I wrote about pivotal technical aspects involved with these two bellwether stocks in my most recent Trader's Corner column which also got out to you last weekend; see online by clicking HERE.

I've gotten into a new weekend routine of also writing my 'Trader's Corner' as a kind of companion piece to this Index Wrap, laying out whatever chart and indicator patterns look important in determining upcoming Market direction. Of course I do that in this Wrap also but the other column lets me go more into depth and details about which technical analysis tools and interpretations are looking relevant to trade entry, exit or standing aside.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 Index (SPX) remains below its December-March up trendline, which makes for a mixed chart. 1390-1400 is the key area that needs to be regained to put SPX back on a bullish track technically. Next resistance above 1400 is in the 1420-1422 area at SPX's prior recent highs. The pattern suggests potential for another decline to complete a down-up-down or 'a-b-c' type correction. That's the somewhat typical pattern for corrections.

Support is implied by the prior low in the 1357 area, with next support around 1340. In terms of the weekly chart (not shown), this past week's low at 1365 stopped right AT the October-December-April up trendline. SPX could continue sideways and mount another rally. It's possible this longer-term trendline will continue to act as support but I'm not maintaining bullish positions so am not banking on it. This is a great time to be out of the market and to watch how things unfold here.

I remain longer-term bullish but how long this current sideways to lower correction goes on is hard to say. The school of easy expectations that says after May is the time to be 'away' (end of upside potential) is unlikely to keep working as the dominant pattern year after year. The Market rarely is so consistent.

I'd like to see SPX get to an oversold extreme in terms of the Relative Strength Index (RSI) again. The second (or third) time may be the charm for the bulls to buy in again.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) index provides the same 'mixed' picture as SPX. The sideways to slightly higher rebound off recent lows in the 618 area looks like a pause in a correction that will 'complete' itself with another downswing. If instead there's another rally rather than a rout, watch the 632-633 area. If OEX climbs back above its 21-day average (633 currently) and maintains that pattern, it's bullish for another rally to 645-647, resistance implied by the previously broken daily chart up trendline. I'd repeat my take on OEX from last week in that a decline to 610-600 would probably complete a second down leg pattern and be a likely buying opportunity.

618 is support suggested by the current intersection of the weekly up trendline (not shown), matching the recent 618 low. OEX could dip to 610 and rebound after that without suggesting a bearish breakdown. 650 is a major resistance implied by the previously pierced very long-term up trendline dating from the March 2009 lows, the June-Sept 2010 lows, extending to this past July's bottom. This pattern suggests 650 as a major resistance.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) managed to close above a key technical support at 13000 which was mildly bullish. If INDU can extend its recent rally to above 13130 and maintain levels above the 21-day and 50-day averages, upside potential looks to be back up the 13260-13300 area and possibly next to the 13400-13500 zone.

Near support is suggested at 12850, up from 12715-12700 last week. 12600 looks like fairly major support where I'd be a buyer of Dow Index calls.

As to the 30 individual Dow stocks, I rate 11 as in mostly longer-term uptrends; i.e., AXP, HD, IBM, INTC, KFT, KO, MCD, MSFT, PFE, TRV, and WMT. If another 5-6 flip up, that's enough to mount another good-sized advance. Buy some tech toys at Walmart, along with a side of Coke and Burgers, pay with your AmEx card and follow with a Pfizer antacid to help the bulls out here.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) chart and technical picture is mixed here as the index has drifted sideways recently. COMP's faltering upside momentum is highlighted by it trading under its 21-day moving average for the past two weeks and with its weekly Close below the 50-day average.

One more downswing, such as into the 2950-2900 zone would complete a 'typical' correction pattern and suggest a potential buying opportunity in NDX calls.

Near support comes in around 2975, extending to 2950, with next support in the 2900 area. Repeating from last week; a prolonged move below 2900 suggests a downside momentum shift.

Near resistance is at 3050, then 3100, extending to 3120-3130.

COMP has yet to get 'fully' oversold in terms of the RSI and in terms of more of a build up in bearish sentiment and if it does that I anticipate that this will occur at or near a tradable bottom.

NASDAQ 100 (NDX); DAILY CHART:

The initial Nasdaq 100 (NDX) Index bearish action was breaking below its previous up trendline and included trading below its 21-day moving average. With Friday's Close at its intraday lows, much influenced by a sharp decline in Apple shares this past week, NDX looks like it may next pierce its 50-day moving average, which will be more widely noticed in the Market than the dip below its 21-day average.

I rate the likelihood of a further decline in NDX that will go to a new low for the current move as greater than another good-sized rally. In terms of NDX's weekly chart (not shown), its very bullish long-term uptrend isn't reversed even with a dip all the way back to 2400. Just saying! Let's stick with the chart at hand; support is 2660, extending to the 2600-2575 area. I'd be looking for a tradable rally if prices got down to 2575-2550.

Resistance is at 2740-2750, then in the 2800 area.

As with COMP, I'm anticipating a bottom may correspond with the Index getting to what I consider to be a 'fully' oversold RSI reading. This last occurred in late-November. NDX may be due. It's been a very prolonged and strong advance and these cycles don't last forever, especially in a recovering economy versus say a tech bubble. At 2800 NDX retraced fully half of its monster bear market decline of 2000-2002. 50% retracements are common and often represent stalling points or significant tops.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) has stalled like the underlying NDX of course. We do see with the tracking stock an additional volume clue in that On Balance Volume or OBV has been in a steady decline since the first top made at 2794. The daily volume trend has been 'confirming' price weakness. QQQ here is also poised to break under its 50-day average, which would be an added sign of declining momentum.

I've noted support in the 65.2 area, then at 64, extending to the prior 63.2 low.

Resistance is first seen around 67.1, then at 68.0, extending to 68.5.

I'm anticipating another down leg in QQQ. The Q's could fall all the way to 60 and still maintain its long-term uptrend. I'm not expecting that kind of sell off currently, but it provides an idea of the longer-term bullish trend picture.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) is mixed in its chart/technical pattern in that it has continued to trade below its 820 'breakdown' point, which is also where the 21 and 50-day averages intersect. This key dividing line (820) makes clear the level that needs to be regained in order to forecast further upside for the Russell.

Key support is in the area of the two lows seen in the 785-783 area. Below 780, I've highlighted support at 760. I should note also, based on RUT's weekly chart (not shown) that 750 appears as a key support also.

Above 820, resistance is apparent beginning around 840 and extending to the prior recent 848 (up) swing high. Major resistance then lies in the 868 area, at the May highs.

It's hard to tell here if RUT is building a rectangular type top or not. I'd say no based more on the Nasdaq, which has been the market that has been leading the small to mid-cap Russell 2000.



GOOD TRADING SUCCESS!


New Option Plays

Discount Stores & Men's Apparel

by James Brown

Click here to email James Brown

Editor's Note:

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

(bullish ideas) EL, AAP, CB, ROST, DKS, ABCO, GCO, HHC, ANDE, NKE, UNH, PNC, THI

(bearish ideas) IYF, DE, RGLD


NEW DIRECTIONAL CALL PLAYS

PriceSmart Inc. - PSMT - close: 79.97 change: +1.81

Stop Loss: 76.99
Target(s): 84.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
PSMT runs a shopping warehouse chain of discount stores. The company reported earnings in early April. PSMT missed bottom line estimate by two cents but beat on revenues. The stock rallied off its earnings news.

The daily chart has an inverse head-and-shoulders pattern that is forecasting an $88 target. PSMT has managed to climb to new all-time highs this past week. I am suggesting a trigger to buy calls at $80.75 with a stop loss at $76.99. Our exit target is $84.75. More conservative traders may want to consider a tighter stop loss. FYI: The Point & Figure chart for PSMT is bullish with a $95 target.

Trigger @ $80.75

- Suggested Positions -

buy the May $80 call (PSMT1219E80) current ask $3.10

Annotated Chart:

Entry on April xx at $ xx.xx
Earnings Date 07/05/12 (unconfirmed)
Average Daily Volume = 313 thousand
Listed on April 21, 2012


NEW DIRECTIONAL PUT PLAYS

Jos. A Bank Clothiers - JOSB - close: 47.97 change: -0.65

Stop Loss: 50.25
Target(s): 45.25
Current Option Gain/Loss: May50p: + 0.0% or May$45p: +0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
JOSB is a men's apparel chain. The stock had rallied to resistance near $55 in late March. Then JOSB reported earnings that missed both the top and bottom line estimates. The stock was crushed with a gap down toward $50. Management issued cautious comments going forward. Now after two weeks of chopping sideways JOSB is breaking down further.

I am suggesting small bearish positions at the open on Monday. We want to limit our position size because JOSB has an elevated amount of short interest. The most recent data listed short interest at 18.7% of the very small 27.5 million share float and this raises the risk for a short squeeze.

Our short-term target is $45.25. More aggressive traders may want to aim for the $42-41 area instead.

(small positions) - Suggested Positions -

buy the May $50 PUT (JOSB1219Q50) current ask $2.80

- or -

buy the May $45 PUT (JOSB1219Q45) current ask $0.60

Annotated Chart:

Entry on April xx at $ xx.xx
Earnings Date 05/30/12 (unconfirmed)
Average Daily Volume = 596 thousand
Listed on April 21, 2012



In Play Updates and Reviews

Stocks Close the Week Quietly

by James Brown

Click here to email James Brown

Editor's Note:

It was a bumpy week for stocks but the market closed on a quiet note. Our BWA trade was closed. DTG was stopped out.

Readers may want to consider taking profits early in our FDO and ORLY trades.

Current Portfolio:


CALL Play Updates

Cigna Corp. - CI - close: 48.02 change: +0.01

Stop Loss: 46.95
Target(s): 52.25
Current Option Gain/Loss: Unopened
Time Frame: up to the May 3rd earnings report.
New Positions: Yes, see below

Comments:
04/21 update: CI did not see much movement on Friday. Shares essentially closed unchanged. The stock has been consolidating sideways for two weeks now. You can see on the daily chart that this consolidation is narrowing and CI should see a breakout one way or the other soon.

I am suggesting a trigger to buy calls at $49.05. It is possible that the $50.00 level is overhead resistance so we want to keep our position size small. Plus, we want to exit prior to the May 3rd earnings report. FYI: The Point & Figure chart for CI is bullish with a $60 target.

Trigger @ $49.05 (small positions)

- Suggested Positions -

buy the May $50 call (CI1219E50)

04/19/12 adjust trigger to $49.05

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


Family Dollar Stores - FDO - close: 68.34 change: +0.85

Stop Loss: 64.75
Target(s): 69.25
Current Option Gain/Loss: +59.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
04/21 update: This stock was showing relative strength again on Friday. FDO hit another record high. Readers may want to seriously consider taking profits off the table right now. I am not suggesting new positions. We are moving our exit target down to $69.25 and moving our stop loss up to $64.75.

- Suggested Positions -

Long May $65 call (FDO1219E65) Entry $2.44

04/21/12 new stop loss @ 64.75, adjust exit target to $69.25
Readers may want to go ahead and take profits now (option @ $3.90, +59%)
04/18/12 new stop loss @ 63.75
04/18/12 triggered at $65.35

chart:

Entry on April 18 at $65.35
Earnings Date 06/27/12 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on April 16, 2012


O'Reilly Automotive - ORLY - close: 96.45 change: +0.46

Stop Loss: 91.95
Target(s): 98.50
Current Option Gain/Loss: (Apr90c: +76.0%) & May$90c: +82.2%
Time Frame: exit prior to April 25th earnings
New Positions: see below

Comments:
04/21 update: Friday proved to be a quiet day for ORLY. The trend remains higher but we're almost out of time. ORLY is due to report earnings on April 25th and we do not want to hold over the report. Readers may want to take profits now. Currently our exit target is $98.50 but we'll plan on exiting on Tuesday or Wednesday if shares don't hit our exit by then.

I am not suggesting new positions at current levels.

- Suggested Positions - Long May $90 call (ORLY1219E95) Entry $3.95

04/21/12 we want to exit prior to the April 25th earnings report
04/17/12 new stop loss @ 91.95
04/16/12 planned exit for Apr $90 call at the open.
option bid was $4.40 (+76.0%)
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


Sturm, Ruger & Co. - RGR - close: 53.44 change: +1.92

Stop Loss: 48.90
Target(s): 54.85
Current Option Gain/Loss: + 0.0%
Time Frame: exit prior to May 1st earnings announcement
New Positions: see below

Comments:
04/21 update: After Thursday's questionable trading session it was nice to see RGR showing relative strength on Friday with a +3.7% gain. This is a new all-time high for RGR. Our exit target is $54.85 but more aggressive traders may want to aim higher.

We do not want to hold over the May 1st earnings report.

- Suggested Positions -

Long May $55 call (RGR1219E55) current ask $1.85

04/19/12 triggered at $52.25

chart:

Entry on April 19 at $52.25
Earnings Date 05/01/12 (confirmed)
Average Daily Volume = 493 thousand
Listed on April 18, 2012


PUT Play Updates

EQT Corp. - EQT - close: 46.67 change: -0.32

Stop Loss: 48.25
Target(s): 42.00-40.00
Current Option Gain/Loss:(Apr$45P: -100%) & May45P: -40.6%
Time Frame: up to its April 26th earnings report
New Positions: see below

Comments:
04/21 update: EQT saw an intraday spike toward resistance near $48.00 and its 20-dma before reversing lower on Friday. This move looks like a new bearish entry point to buy puts.

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

- Suggested Positions -

Long May $45 PUT (EQT1219P45) Entry $1.60

04/19/12 planned exit for the April $45 puts, closed at $0.00 (-100%)
04/18/12 prepare to exit April $45 puts at the close tomorrow
04/16/12 triggered at $45.70

chart:

Entry on April 16 at $45.70
Earnings Date 04/26/12 (confirmed)
Average Daily Volume = 1.4 million
Listed on April 11, 2012


iShares Russell 2000 index - IWM - close: 80.21 change: +0.46

Stop Loss: 82.25
Target(s): 75.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
04/21 update: The intraday bounce in the IWM didn't get very far before starting to fade. The small cap ETF did close up on Friday. We are waiting for a breakdown from what looks like a bear-flag consolidation pattern.

Potential support at the simple 100-dma has risen to $78.79. I am raising our trigger to buy puts to $78.65. Our target is $75.50.

Trigger @ 78.65

- Suggested Positions -

buy the Jun $77 PUT (IWM1216R77)

04/21/12 adjust trigger to $78.65

chart:

Entry on April xx at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 53 million
Listed on April 19, 2012


Ryder System, Inc. - R - close: 49.20 change: +0.17

Stop Loss: 50.25
Target(s): 45.50
Current Option Gain/Loss:(Apr50p: -15.0%) & May$50p: + 5.5%
Time Frame: exit before April 24th earnings report
New Positions: see below

Comments:
04/21 update: Shares of Ryder saw a minor bounce on Friday. The trend is down and R has broken significant support but we're almost out of time. The company is due to report earnings on Tuesday morning (April 24th) and we do not want to hold over the report. This means we need to exit the remainder of any positions on Monday at the closing bell. Please note that I am lowering our stop loss to $50.25.

- Suggested Positions -

Long May $50 PUT (R1218Q50) Entry $1.80

04/21/12 prepare to exit on Monday at the closing bell
New stop loss @ 50.25
04/19/12 planned exit for the April $50 put. $0.85 (-15%)
04/18/12 prepare to exit the April $50 puts at the close tomorrow
04/17/12 opened the May $50 put position
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


SINA Corp. - SINA - close: 58.25 change: -0.75

Stop Loss: 62.75
Target(s): 51.00
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
04/21 update: SINA did see a brief spike above $60.00 on Friday morning but the rebound reversed and it proved to be a new lower high in the current trend of lower highs. I would still consider new positions now or you could wait for a new relative low under $57.65.

Earlier Comments:
SINA can be a volatile stock so we want to keep our position size small. Our exit target is $51.00 but we should expect some support in the $57.00-56.50 zone.

(small positions) - Suggested Positions -

Long May $55 PUT (SINA1219Q55) Entry $2.50

04/18/12 triggered at $59.40

chart:

Entry on April 18 at $59.40
Earnings Date 05/09/12 (unconfirmed)
Average Daily Volume = 4.8 million
Listed on April 17, 2012


CLOSED BEARISH PLAYS

BorgWarner - BWA - close: 80.59 change: -0.86

Stop Loss: 84.55
Target(s): 79.00
Current Option Gain/Loss: -100%
Time Frame: up to the April 26th earnings report
New Positions: see below

Comments:
04/21 update: The trend in BWA continues to look bearish. Unfortunately we ran out of time. Our April $80 puts have expired. We would have considered May puts but BWA is due to report earnings on April 26th and we do not want to hold over the announcement.

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

- Suggested (small) Positions -

Apr $80 PUT (BWA1221P80) Entry $1.25, exit $0.00 (-100%)

04/21/12 April puts have expired
04/19/12 prepare to exit tomorrow if under $80.00, setting a temporary exit target at $79.00
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


Dollar Thrifty Automotive - DTG - close: 79.11 change: +0.44

Stop Loss: 80.55
Target(s): 72.50
Current Option Gain/Loss: -51.4%
Time Frame: up to its early May earnings report
New Positions: see below

Comments:
04/21 update: The trading gods were in a fickle mood on Friday and shares of DTG saw an early morning spike above resistance before immediately reversing lower Our stop loss was hit at $80.55. The overall trend still looks bearish. I would be tempted to re-launch put positions here or on a drop below $78.00.

- Suggested Positions -

May $75 PUT (DTG1219Q75) Entry $1.75, exit $0.85* (-51.4%)

*exit is an estimate. option did not trade at time of our exit
04/20/12 stopped out at $80.55
04/17/12 new stop loss @ 80.55
04/17/12 DTG gapped open at $78.36

chart:

Entry on April 17 at $78.36
Earnings Date 05/03/12 (unconfirmed)
Average Daily Volume = 247 thousand
Listed on April 16, 2012