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Daily Newsletter, Saturday, 4/28/2012

Table of Contents

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

Market Wrap

Earnings Power

by Jim Brown

Click here to email Jim Brown

Better than expected earnings overcame weak economics and Spanish downgrades to power the markets to a three week high.

Market Statistics

The market climbed a wall of worry last week with strong help from several high profile earnings reports. Apple, Ebay and Amazon were instrumental in pushing the Nasdaq over resistance at 3060. The much better than expected Q1 earnings overcame weak economics, a passive Fed and downgrades to Spain to close the week with a strong three day gain on the Nasdaq.

On Friday we got the first look at the Q1 GDP and it was lower than analysts expected. The initial Q1 reading showed growth declining to +2.2% from the 2.95% growth in Q4. Analysts had recently upgraded their estimates to 2.3% to 2.5% growth. Apparently they overshot on the revisions.

The slowing growth came mainly from declining investments in inventory and lower fixed investments. Offsetting the declining investments was a smaller than expected decline in government spending. Final sales jumped to 1.6% in Q1 from 1.1% in Q4.

The PCE price index showed a sharp spike in inflation to 2.4% and double the rate in Q4. The core rate, excluding food and energy, declined sharply to 0.4% from 1.7%. High fuel prices in Q1 were clearly moving into the distribution channel.

The savings rate fell to 3.9% from 4.5%. That is the result of higher spending levels and it is the lowest rate since 2007.

In theory the warmer weather in Q1 should have increased economic activity. That is what the analysts claims was the reason for the stronger payroll gains in January and February. That is also a factor in why analysts had upgraded their forecasts. The missed forecasts will require analysts to rethink the Q1/Q2 economic cycle and we could see downward revisions in GDP targets for the next two quarters. Currently the estimates for Q2 are +2.3%, Q3 +2.7% and Q4 +2.9%.

Helping to support estimates is an auto sector selling cars at the annual rate of 15.4 million units, a rebounding housing sector and strong consumer sales. Higher gasoline prices could weigh on all of those growth centers.

GDP Chart

The final revision of the Michigan Consumer Sentiment Survey rose slightly to 76.4 and notching a slight +0.2 gain for the month. The preliminary reading of 75.7 was a -0.5 decline. The final revision brought the index back to a gain and stretched the streak of positive gains to eight months. The inflation expectations component declined to 3.2% from 3.9% thanks to the decline in gasoline prices.

The headline gain was supported by a rise in the expectations component to 72.3 from 69.8 while the present conditions component declined to 82.9 from 86.0.

The sudden uptick in jobless claims could be weighing on that present conditions component.

Consumer Sentiment Chart

The weekly jobless claims came in at 388,000 and the prior week's 386,000 reading was revised higher to 389,000. That makes three weeks of claims at a pace of 388,000 and a significant uptick from 360s we saw earlier in the year. I keep expecting one of these reports to hit 400,000 again and that four handle would be seriously market negative.

There is no way to blame the weather on the jobless claims. These numbers are the result of companies laying off employees and there is no other explanation. However, if you look at the chart below for the same period in 2011 there was also a sharp rise in claims in April. Maybe this is a seasonal trend and not a change in the underlying economy. Maybe that is also grasping at straws. Time will tell.

Jobless Claims

We will know if the increased jobless claims had any real impact on overall employment when the payroll numbers are released next week. The cycle starts on Wednesday with the ADP Employment report, Challenger Employment on Thursday and Nonfarm Payrolls on Friday. The current estimate for the nonfarm report is a gain of +165,000 jobs. That would be an increase from the +120,000 in March but a continued decline from +246,000 average pace for the three months ending in February.

Nonfarm Payrolls Chart

Also making waves next week will be the four ISM reports. The national manufacturing ISM will be on Tuesday and it is expected to decline as is the ISM Services on Thursday. Anything other than very minor declines in these reports would be market negative.

Economic Calendar

Coming the following Sunday is the runoff in the French elections. Socialist Hollande is now expected to beat the conservative incumbent Nicolas Sarkozy and dramatically change the balance of power in the EU. Hollande is calling for the hiring of an additional 210,000 government workers, keep the retirement age at 60 and continue all the current welfare and entitlement programs. He plans to tax the rich with incomes over one million euros at 75% and those over 150,000 euros in income at 45% to force the rich to pay their "fair" share. Also he wants to limit executive pay to 20 times the average manufacturing wage or about $500,000. That would drive businesses out of France and force higher unemployment. There is an interesting article on Forbes about the comparison between Hollande and Obama. Read it here

With Spain and Italy heading back into the headlines and probably headed into bailout territory in the months ahead the change in the French leadership will make those twin problems even more difficult to deal with. They will come back to haunt the market. You can count on it.

S&P cut Spain's credit rating two notches last week and the country faces an even bigger problem in the months ahead on fears of further downgrades. Unemployment is 24% and retail sales declined for the 21st consecutive month as the recession forces consumers to cut back on spending. The country has already fallen back into recession and can't meet the deficit targets agreed to with the EU. The government has already bailed out many of the banks but the deepening recession is pushing even more to the edge of collapse. S&P cited the increasing risk of loan defaults at Spanish banks and called on the EU to take action. The Spanish economic minister said job growth and economic recovery is still two years off. The country is expecting GDP of only +0.2% in 2013 and +1.4% in 2014. More than 365,000 people lost their jobs in Q1 and that number is accelerating. Youth unemployment, age 25 and below, is over 50%. The credit downgrade will make it even harder for Spain to sell debt. This situation can only get worse and it will eventually lead to more bailouts.

Italy successfully sold debt at 5.84% right after the Spain downgrade but you can expect those yields to rise as the two debtors each sabotage the fate of the other as future economic news worsens. Italy still needs to sell an additional 257 billion euros of debt in 2012, possibly more if rates continue to climb higher, tax receipts continue to decline and more Italians end up on welfare and unemployment.

The markets ignored the news from France, Spain and Italy thanks to the better than expected earnings reports. Three weeks ago Q1 earnings expectations were teetering on the brink of going negative for the quarter. After three weeks of earnings and more than 177 S&P companies reported the overall earnings growth is +6.9%. As of the prior Friday a whopping 82% had beaten street estimates. That number has declined to 65% by Friday's close. Typically 62% beat estimates. The average earnings surprise is 12.1% but if you exclude Apple that falls to 7.5%. However, 42% of those companies already reported warned about lower earnings in future quarters. That is very high. However, 32% of companies raised guidance. Earnings estimates for Q2/Q3 are being lowered daily as a result of the repeated warnings. Only three sectors have seen estimates rise. Those are consumer discretionary, tech and financials. All other sectors are seeing estimates decline.

The main reason was the slowdown in Europe. More than half the companies in the S&P 500 generate a substantial portion of their earnings in Europe. Starbucks, Proctor & Gamble, Caterpillar and many more warned the slowdown in Europe was impacting sales. This is not likely to change in the near future. Europe is not plunging into a full blown recession but overall growth is very weak to nonexistent. Governments are dissolving, citizens are rioting in the streets and the ballot boxes in objection to austerity. Europe is facing a long period of weakness and that is bad for the U.S. and China.

That is why I am so shocked about the current earnings rally. With so many companies warning and the European outlook so weak you would think investors would be dumping stocks rather than loading up.

One of the reasons for the gains is the positively ugly earnings estimates going into this earnings cycle. Analysts had focused too intently on the global problems. Like me, they thought the European weakness would depress earnings. They did not count on the strong consumer spending in the U.S. in Q1. Analysts can claim it was the warm weather that allowed the U.S. to get a head start on spring but that still qualifies as grasping at straws.

For whatever reason the earnings estimates were grim. Shorts were loading up for the anticipated disaster that never appeared. It did appear for some stocks like Deckers (DECK) down -25% today, but for the companies that counted the news was good.

Everybody knows the Apple story from earlier in the week. They blew away estimates of $10.04 with earnings of $12.30. Sales in Asia were exploding to offset weakness in Europe. The earnings were so strong that when they lowered estimates for Q2 everybody gave them a pass. Shares rebounded from $560 to $618 at Wednesday's open then closed lower for the rest of the week to end at $603.

Apple Chart

Amazon (AMZN) closed at $196 on Thursday and sprinted higher to close at $227 on Friday for a 16% gain. Amazon posted a 35% drop in net income but a +34% jump in sales. Earnings came in at 28-cents per share compared to analyst estimates for 6-cents. Sales of media products rose by +19% to $4.7 billion. Electronics sales were up +43%. Cloud services grew by 61%. Clearly the Kindle sales plan is working. They sell the devices at a loss but make a huge profit on every downloaded book. Amazon does not release sales numbers on the Kindles but they did say their top ten products were mostly digital downloads. This pushed gross margins up by 120 basis points to 24% according to Macquarie analyst Ben Schachter. That is the biggest margin gain in ten years. The Kindle Fire is not just a tablet. It is a personal point of sale terminal for Amazon products. Every Kindle Fire owner has to buy additional items from Amazon. The company said its sales of online movies, games and music was exploding. Amazon guided for Q2 to a slightly lower revenue range than analysts were expecting and said it could lose money in the quarter as it continued building 11 new distribution centers. Amazon added 9,500 employees in the quarter.

It is too bad Amazon has a PE of 170 or there would be a lot more people buying the stock as a growth story. However, I would be seriously tempted to short AMZN at this level. This was a major short squeeze and once this squeeze ends it could see a decent decline as owners from the $180 level take profits. Amazon guided analysts to a loss of as much as $260 million in Q2. Their upper range was a profit of $40 million. Analysts were expecting a profit of $97 million. Why would Amazon predict such a wide range unless they were planning on using it? I suspect the $40 million profit high range was simply a tease to distract from the huge loss potential.

Amazon Chart

Expedia (EXPE) reported adjusted earnings of 26-cents that beat the street estimates of 15-cents. Revenue rose by 12% due to a +24% surge in hotel room bookings. That accounts for 18% of their revenue despite a decline in the average nightly rate. Booking at Hotels.com rose by 37%. Airline ticketing revenues fell -17% due to lower prices for tickets even though they sold more seats. Shares rallied +23% on the news.

Expedia Chart

Priceline (PCLN) shares rallied +$28 on the Expedia news.

Priceline Chart

Deckers (DECK) reported earnings of 20 cents that missed the street estimates of 25 cents. That was also a 60% haircut from the 49 cents it earned in the year ago quarter. Deckers said the warmer winter significantly reduced sales of UGG boots. Plus, the 40% rise in the price of sheepskin increased operating costs and impacted profits. The company also warned on full year 2012 earnings. Revenue did rise +20.2% to $246.3 million thanks to early demand for the spring collection. On the bright side Deckers has no debt and it had $228 million in cash. Shares of DECK declined -25% on the news.

Deckers Chart

Starbucks (SBUX) reported earnings that rose +19% and raised guidance but the stock was pounded for -5% loss. Weakness in Europe was their Achilles Heel. Analysts were expecting a 2.2% rise in same store sales in Europe but Starbucks reported a -1% decline in European sales. Globally sales rose +7% and thanks to Europe that was below the 8.2% analysts expected.

The CFO said Europe has taken a turn for the worse over the last couple of months. However, he said that was transitory and the company was taking steps there to rebuild the business similar to what Starbucks did to revive the U.S. during the financial crisis.

Starbucks said growth in China was exploding with same store sales up +18% and revenue up +32%. That is the seventh straight quarter of revenue growth over 20%. In the Americas sales rose only 8.1%. The CFO said they were not seeing the fall off in sales in China as reported by McDonalds and Yum Brands. They plan on accelerating store openings in Asia to 400 in 2012 with half in China.

The company also reported coffee prices reduced operating income by $63.5 million and cut 200 basis points off operating margin, which was flat at 13.5%. Starbucks raised coffee prices at some of its 17,200 stores to keep pace with rising costs. Starbucks hedges its coffee prices and they expected costs to decline in the second half of the year. The company raised revenue growth guidance to the "low teens" from an earlier target of 10%. They raised earnings guidance to $181-$1.84 from $1.78-$1.82. They expect to open 1,000 net new stores in 2012 and expand sales of packaged coffee. They are going to accelerate the delivery of the Verismo coffee machine in China. Currently Starbucks has a 19% share of the k-cup market and they expect to increase that share as well. Howard Schultz was also bragging about how well the Evolution Juice brand is going to do and expectations for it to quickly become a billion dollar brand. The first store was opened in Bellevue Washington in March.

I am a believer in the Starbucks brand. You can't always anticipate things like the collapse of Europe but you can manage it and I believe they will succeed. SBUX shares declined ahead of earnings from the $62 April high but still gave back another $3 to close at $57.45 on Friday. I believe this is a bump in the road and a buying opportunity. Long term support is in the lower $50s.

Starbucks Chart

The earnings calendar for next week is missing all the big tech names that can move the market. However, Pfizer, Mastercard, Visa, AIG, Time Warner and Kraft will get plenty of attention. GMCR is not a tech but as a Nasdaq stock it could be influential. It has fallen out of favor recently but still has a following.

The quality of earnings should begin to decline as the companies reporting decrease in size.

Earnings Calendar

The FOMC statement on Wednesday did not mention any new monetary stimulus program but Bernanke held out hope for the market when he said again the Fed remains ready to take additional steps if economic conditions worsen. It was only one sentence in a day filled with doublespeak and innuendo but the market clung to it like a life preserver in a stormy sea.

The dollar index closed at a two month low on Friday and even with the Bernanke comments that seems like a contradiction. The euro is in trouble again with governments dissolving, leaders being evicted, too big to fail countries failing, etc. However, the dollar is weakening against a basket of currencies and that is helping commodities.

Crude oil rallied to close just below resistance at $105 and gold closed at a two week high at $1664. Two days do not make a trend but I am not going to complain.

Dollar Index Chart

WTI Crude Oil Chart

The S&P 500 rallied to resistance at 1390 on Thursday then held there for three hours until breaking out at 1:PM. Immediate short covering began just like I warned in the Tuesday night newsletter. That level was a solid resistance target and the breakout was strong. However, the volume was not. At 6.4 billion shares it was mediocre. Friday's volume at 5.9 billion was worse but as we move closer to summer the volume on Friday's is going to decline significantly.

I think Friday's rally of +3 points on the S&P was purely Amazon and Expedia. The 1400 level was broken at 10:30 and it took the rest of the day to add +3 points.

The S&P chart shows a textbook rebound from 1360 and a strong three day rally. In reality it was an Apple spike on Wednesday that gapped to 1390 at the open and then closed at 1390. No further progress other than the opening gap was ever achieved. Thursday and Friday built on that short squeeze once it was clear it was not going to be instantly erased.

Resistance now is about 1420 followed by 1428 and the May 2011 highs. Personally I doubt the staying power in this rally. Apple declined steadily from its opening highs on Wednesday. Once the Amazon short squeeze ends I suspect it will also relinquish some gains. I just don't see any set of earnings reports next week that might keep the tech rally alive.

However, this market climbed an amazing wall of worry last week with numerous detours. If investors are betting on a Bernanke put they may be misled. Before Bernanke invokes QE3 the economics would have to get a lot worse and that would be market negative. If investors are betting on continued positive earnings surprises they could be mistaken there as well. Remember we went from an 82% beat rate to 65% in the space of a week. We could see that rate continue to decline as the quality of the reporting companies weakens.

Sell in May? There were several commentaries out last week suggesting that strategy does not work in election years. The idea was an incumbent party promising a chicken in every pot and a car in every driveway if reelected. The improving sentiment is supposed to be reflected in the market. I am not sure that is going to work this year.

We have to focus on the rally from the December lows and the possibility for traders to take those profits off the table. Unfortunately if you look at the chart the entire month of April was a bout of solid profit taking and consolidation so the Q1 rally pressures have already been equalized.

That means all things being equal there is just as good a chance of the market moving higher than lower. Are all things equal? Europe is making daily headlines, China is slumping and the combination is causing an abnormal amount of lowered earnings guidance. Iran could be attacked at any moment. Gasoline prices are moving back towards $4 and the U.S. economy is weakening. If the nonfarm payrolls next Friday are disappointing again it could be an ugly summer.

We have to look at the market for what it was last week. It was driven higher by massive gains in a very few stocks. That is not an ideal situation but major rallies can be started by unexpected short squeezes. We have to either play the cards we are dealt or fold the hand. You will never get rich betting against the trend.

The S&P is in breakout mode with 17 points to go before testing some major resistance. That 1420 level would be the key for me. A failure there would be a double top and a possible setup for a decline into the summer doldrums. Don't forget the high in 2011 occurred on May 2nd after a profit taking dip in both March and April.

S&P Chart

The Dow is still running on the strength of IBM and McDonalds. They made up for the -2.43 loss in Proctor & Gamble on Friday. The +23 point gain was lackluster and suggested the nearer the Dow moves to solid resistance at 13,300 the fewer stocks are going to participate.

The 13,300 level is a road sign with flashing lights. It is flashing "proceed at your own risk" the road ahead is not charted. If we are fortunate enough to punch through that level the bears would have to relent and there would be massive short covering that could trigger a new leg higher.

I don't want to bet against it but I would lighten up on profitable positions when that level is reached. It never hurts to take a partial profit just in case the bridge to 14,000 collapses with us on it.

Dow Chart - Daily

The Nasdaq powered through resistance at 3060 thanks to monster gains in AAPL, EBAY, AMZN, EXPE and PCLN. Which stock is going to provide the lift next week? Those short squeezes will likely fade and become a drag on the index. Tech stocks have been reporting good earnings thanks to a select few but once the generals are gone there may not be enough troops to provide a continued rally.

The most likely scenario would be a drop back into the consolidation range and another battle with support at 3000.

Nasdaq Chart

The Russell is actually slightly bullish thanks to the short covering. The Russell is closing in on strong resistance at 832 and a breakout there would be bullish. It will also be a strong possibility we could see a failure there and the beginning of a right shoulder in a H&S pattern. If the RUT can break past 832 I would expect the 847 high to fail as well. That is how critical the 832 level is this week.

Russell 2000 Chart

Payroll Week

While the ISM reports are key to the economic picture the market will be focused on the Nonfarm Payrolls on Friday. The rising jobless claims are suggesting there is trouble ahead but the regional manufacturing reports have all seen strong employment components. This payroll report could go either way. With consensus estimates at 169,000 and some outlier estimates at 75,000 to 250,000 there could be either a big beat or a big miss and either way will be a market mover.

The ADP report on Wednesday is like a peek inside the nonfarm report. That will be the last chance for analysts to clean up their estimates before Friday. One reporter was calling for 275,000 on the nonfarm payrolls right up until the actual announcement last month. That kind of error makes an analyst much more conservative going forward. If the 169,000 estimate today is a reflection of "conservative" views then a lower number is going to be a shock.

I believe the weekly jobless claims are an indicator. They have risen by an average of 20,000 claims per week but in the overall scheme of things that equates to 80,000 lost jobs out of a workforce of 154 million workers.

I have no forecast for the payroll numbers. I am neutral and will plan to be an observer rather than a bettor when they are announced.

Jim Brown

Send Jim an email

"To the man who only has a hammer, everything he encounters begins to look like a nail."
Abraham Maslow


Index Wrap

A Strong Rebound

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The Nasdaq Composite (COMP) had two days where it sharply broke below 3000 support but the subsequent rebound was impressive. The S&P indexes made double bottom lows which was impressive but SPX now may be challenged to move above 1400 at least near-term. The Dow held its weekly up trendline and moved smartly above the pivotal 13000 level, led by 10 of the 30 stocks in particular.

There are a couple of charts, one daily and one weekly of specialized interest that I'll feature here; all other daily charts are below per usual.

I wrote last week that it was possible that this past week would take the major indexes to new lows for the move and complete the common down-up-down or 'a-b-c' corrective pattern and that was how it unfolded. In the case of the S&P 500 (SPX) and the S&P 100 (OEX) bullish double bottom lows formed, which suggested taking a bullish trading stance. SPX should be watched closely ahead as there's come technical resistance suggested just above the pivotal 1400 level and the index is overbought now on a short-term basis.

First up is my SPX daily chart with the a-b-c (down-up-down) pattern highlighted below. The formation of a second low at the bottom of the 'c' down leg equal to the bottom of the 'a' downswing strongly suggested this as a place to cover puts and the like and to adopt or maintain bullish strategies.

The Dow 30 (INDU) pivotal low was found at the intersection of the current weekly chart up trendline as seen in my next chart. Now the question is of course whether the major stock indexes pierce their prior highs or not. I'm not ruling this in or out but it may be a struggle.

Nominal new highs, followed by a rally failure should be watched for. Of course INDU is now very close to its prior recent highs around 13280. If projected resistance for the Dow in the 13500 area is exceeded (see the daily chart below), on projection on the weekly chart here suggests potential resistance at the prior major up trendline coming in around 13800. As we go forward, that same 'resistance' trendline will intersect closer to 14000. Those big round numbers are often key benchmark levels.

In the Nasdaq indexes, the Composite (COMP) and the big cap 100 (NDX), more unusual island bottoms formed this past week as you'll see on those charts further on.

The strong move back up above the 21 and 50-day moving averages was also a bullish technical event seen on all the charts.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

Last week I suggested that the S&P 500 Index (SPX) needed to regain the 1400 area to put SPX back on a bullish track technically. SPX did close the week above this pivotal level and next up is a key test in the 1420-1422 area, at SPX's prior recent highs. On an hourly chart basis (not shown), the index is hitting some resistance and is overbought on a short-term basis. A minor pullback here shouldn't be any big deal, as long as SPX continues to hold above its key 21 and 50-day moving averages, as noted below as initial support.

The S&P made a double bottom low, which is bullish. Yet to come now is how it does at its prior recent highs. Resistance above 1420-1422 comes in around 1436-1440. I calculate major resistance up in the 1475-1480 area currently.

I'm anticipating at least a retest of prior highs and the index can probably go on higher from there, but there may be a minor pullback first. As it turned out, the one 'fully' oversold RSI reading was all she wrote. This has been common in all the major indexes. As long as this bullish trend continues, chances to buy calls at what turns out to be a 'bargain' level are few and far between. This contrary to my thought last time that SPX might get oversold again in RSI terms; instead, the RSI bottomed at higher high, which makes for a bullish RSI/price divergence.

Bullish sentiment shot up mid week, has moderated since but is gradually trending higher again. When my sentiment indicator rises to an upper extreme again, it will likely be time to get cautious again as happened last time this occurred.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) index also formed an exact double bottom low, providing a low risk trade in calls, given that an exit strategy would be appropriately placed just a few points under the prior low. Upside potential could be assumed at that point to be several times the few points 'risked' in an exit plan.

I wrote last week that a decline to 610-600 would likely 'complete' an a-b-c (down-up-down) correction but of course the double bottom low in fact completed that pattern AT the prior low. I'm used to seeing a LOWER low on a second down leg as was in fact seen with the Nasdaq. A double bottom low is always something that should be assumed as an alternative possibility.

Key resistance is still the same: 647-650, extending to 653-655 at the previously broken up trendline, which is true on both a daily AND weekly chart basis.

Key nearby support is in the 630 area. A pullback to this area wouldn't be any big deal as long as OEX Closes above its 21 and 50-day averages. Below that is more problematic for the bulls, especially if this continued into a second day.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) was led higher and back above the pivotal and well-watched 13000 level and the 21 and 50-day averages by very bullish action in AXP, BA, HD (continuing it's relentless rise), IBM, KFT, KO, PFE, T, TRV and VZ; a mixed bag of 2 consumer 'defensives', 1 consumer cyclical, 1 bellwether (and old line) tech, 2 telecommunications, 1 aerospace, 2 financials and 1 drug stock. The common denominator: earnings! If in real estate the key is 'location, location, location', it's 'earnings, earnings, earnings' in stocks.

Support in the 12850 area was suggested by a rebound from the weekly chart up trendline as seen in my initial 'bottom line' commentary above. Near support is gain at 13000.

Near resistance is suggested by the prior high just under 13300. I've noted a next resistance and a key one, as in the 13530 area, at the current intersection of the previously broken up trendline. Absent some renewed worries, real and imagined from the Eurozone (or, perhaps China or Iran), I anticipate higher levels in the Dow. There's nothing technically flashing a warning here.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

Weakness over the prior two weeks and inability of the Nasdaq Composite (COMP) to trade back above the pivotal 21-day moving average led not surprisingly to further weakness with the gap down opening and trade on Monday-Tuesday. The subsequent Wednesday gap UP opening left a 2-day 'island' formation that has the appearance of a classic island bottom. This pattern is highlighted on the Nas 100 (NDX) chart, one further on from COMP.

I wrote last week that "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." Indeed the completion of a common 'a-b-c' (a down, up, then another downswing) correction, where the second down leg carries further than the first is a 'textbook' corrective pattern.

Near support is again 3000, with further support at 2950. Near resistance is suggested by a line of prior highs around 3120, with resistance then extending to the 3150 area.

I thought that COMP would also again get to an oversold low in terms of the 13-day Relative Strength Index; it wasn't quite to the extreme area I consider 'fully' oversold but the lowest reading this past week equaled the prior (RSI) lows.

Judging by the 'basing' action that went on for two weeks, then the island bottom, I'm anticipating at least a re-test of the prior highs and probably at least a nominal new high. Short-term, on an hourly chart (not shown) basis COMP is overbought which suggests a possible minor dip early in the coming week. If COMP continued to trade above or mostly above the pivotal 21 and 50-day moving averages, the Composite will likely move higher.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) Index, which had been bearish in its pattern, appears to have completed an a-b-c downside correction and forming an 'island bottom' as highlighted on the NDX daily chart below.

Last week I wrote that "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." This seemed more 'obvious' than a brilliant observation on my part but the decline led to a call buying opportunity at support in the low-2600 area. I thought NDX could dip to 2600-2575 but the tip off for a possible bottom was Tuesday lows 'holding' Monday's bottom.

Near support looks like 2720, at the 21-day moving average and next at 2660, extending to the 2630 area.

Resistance is the same as noted last week, around 2750; with next resistance in the 2795-2800 area. Fairly major resistance then comes in around 2850 as NDX would be back at its previously broken up trendline.

I anticipate NDX working higher and at least re-testing prior highs. I think that the index could rally to around 2840-2850. Eventually, but maybe not until after the summer doldrums, NDX could get to, or near, 3000. That's likely a ways off if at all but is a longer-term objective. The rally to 2800 is quite an extensive move (off the late-2002 lows), as NDX has now retraced fully half/50% of the huge 2000-2002 bear market decline.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) has regained its bullish footing per my comments on the underlying NDX index above. I noted support last week at 65.2, extending to 64. Near support is up to 66 now, at the 50-day moving average, with lower support suggested around 64.5.

Resistance is now up to 68, from 67.1 last week, with next resistance in the area of prior highs at 68.5. More major resistance can be expected if there's a further rally to 69.5-70.

Daily trading volume declined on the recent rally, about par for the Q's as the NDX tracking stock tends to see big volume on declines and lesser volume on rallies, just the opposite pattern relative to company stocks. What I look for instead is a steady rise in the On Balance Volume (OBV) line on rallies.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) completed an apparent double bottom and this bullish pattern was 'confirmed' so to speak with its gap higher opening mid-week and the breakout move above the 50-day moving average.

Support is at 800, then down at the prior lows around 785.

Resistance is the same this, first at 840 and extending to the prior recent 848 (up) swing high.

I wrote last time that RUT was probably not building an apparent 'rectangle top' based more on the Nasdaq pattern, which continues to lead the small to mid-cap Russell 2000. RUT should follow Nasdaq higher, or not, depending on the next move in tech stocks.



GOOD TRADING SUCCESS!


New Option Plays

Business Services & Internet

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) TDW, PX, ROP, IHS, BCR, DDS, ROST, PETM, DSW, WLL, LTD, BYI, DG, CLB, GCO, GPI


NEW DIRECTIONAL CALL PLAYS

Alliance Data Sys. - ADS - close: 130.34 change: +0.53

Stop Loss: 126.75
Target(s): 137.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
ADS reported earnings a couple of weeks ago on the 19th. They beat estimates by 19 cents but guided lower for the second quarter. The market did not penalize them for the lowered guidance. Shares are now hitting new highs as traders buy the dips. That might be due to the high short interest as bears try and cover. The most recent data listed short interest at 18% of the small 48.7 million share float.

The high on Friday was $130.66. I am suggesting a trigger to buy calls at $130.75 with a stop loss at $126.75, just under the 20-dma. Our target is $137.50.

Trigger @ $130.75

- Suggested Positions -

buy the May $130 call (ADS1219E130) current ask $2.55

- or -

buy the Jun $135 call (ADS1216F135) current ask $1.80

Annotated Chart:

Entry on April xx at $ xx.xx
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 700 thousand
Listed on April 28, 2012


NetEase, Inc. - NTES - close: 60.00 change: -0.42

Stop Loss: 57.95
Target(s): 64.75
Current Option Gain/Loss: Unopened
Time Frame: exit prior to the mid May earnings report
New Positions: Yes, see below

Company Description

Why We Like It:
NTES is a Chinese Internet stock. Shares have spent a few weeks trying to get past resistance near $60.00. At the same time the stock is channeling higher. Nimble traders could try buying a dip near the 20 or 30-dma with a tight stop loss. I am suggesting we use a trigger to buy calls on a rise at $60.75 instead. We'll use a stop loss at $57.95 to start. Our exit target is $64.75. We do not want to hold over the mid May earnings report. FYI: The Point & Figure chart for NTES is bullish with a $68 target.

Trigger @ $60.75

- Suggested Positions -

buy the May $60 call (NTES1219E60) current ask $2.40

- or -

buy the May $65 call (NTES1219E65) current ask $0.70

Annotated Chart:

Entry on April xx at $ xx.xx
Earnings Date 05/16/12 (unconfirmed)
Average Daily Volume = 588 thousand
Listed on April 28, 2012



In Play Updates and Reviews

FDO Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:

Shares of Family Dollar Stores (FDO) hit our exit target on Friday. Elsewhere we had planned to exit our IWM trade at the open.

Current Portfolio:


CALL Play Updates

Capital One Financial - COF - close: 56.06 change: +1.22

Stop Loss: 53.45
Target(s): 59.00
Current Option Gain/Loss: May55c: +35.0% & Jun57.5c: +30.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
04/28 update: COF was starting to show some relative strength on Friday with a +2.2% gain. The stock is now convincingly above resistance near $55 and its 20-dma. I would use Friday's move as a new entry point or you could wait for a new dip into the $55.50-55.00 zone as your entry point. FYI: The Point & Figure chart for COF is bullish with a $62 target.

- Suggested Positions -

Long May $55 call (COF1219E55) Entry $1.40

- or -

Long Jun $57.50 call (COF1216F57.5) Entry $1.07

04/26/12 triggered at $55.25

chart:

Entry on April 26 at $55.25
Earnings Date 07/11/12 (unconfirmed)
Average Daily Volume = 4.8 million
Listed on April 25, 2012


3M Co. - MMM - close: 89.36 change: +0.04

Stop Loss: 88.45
Target(s): 94.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
04/28 update: MMM's performance on Friday was disappointing. The stock churned sideways and closed virtually unchanged on the day. There is no change from my Thursday comments.

I am suggesting a trigger to buy calls at $90.25 with a stop at $88.45. Our multi-week target is $94.50.

Trigger @ 90.25

- Suggested Positions -

buy the May $90 call (MMM1219E90)

- or -

buy the Jun $90 call (MMM1216F90)

chart:

Entry on April xx at $ xx.xx
Earnings Date 07/24/12 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on April 26, 2012


PriceSmart Inc. - PSMT - close: 83.12 change: +3.72

Stop Loss: 77.65
Target(s): 84.75
Current Option Gain/Loss: +21.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
04/28 update: Friday was a big day for PSMT. Shares rallied past $80.00 again and rallied past its prior higher from a few days ago. The stock ended Friday's session up +4.6%. Our exit target is $84.75 but more aggressive traders may want to aim higher. Please note that I am raising our stop loss to $77.65, which is just under Thursday's low.

Earlier Comments:
The daily chart has an inverse head-and-shoulders pattern that is forecasting an $88 target. 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.

- Suggested Positions -

Long May $80 call (PSMT1219E80) Entry $3.30

04/28/12 new stop loss @ 77.65
04/24/12 PSMT is underperforming with a -4.3% reversal lower.
04/23/12 triggered at $80.75

chart:

Entry on April 23 at $80.75
Earnings Date 07/05/12 (unconfirmed)
Average Daily Volume = 313 thousand
Listed on April 21, 2012


PUT Play Updates

Rockwell Collins - COL - close: 56.27 change: +0.64

Stop Loss: 56.15
Target(s): 51.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
04/28 update: The market's bullishness this past week has helped power a bounce in shares of COL. Currently we are waiting for a breakdown to new relative lows. I am suggesting we buy puts if COL hits $54.75 or lower. However, if COL continues to bounce we'll probably drop it soon as a bearish candidate.

Trigger @ 54.75

- Suggested Positions -

buy the May $55 PUT (COL1219Q55)

- or -

buy the Jun $55 PUT (COL1216R55)

chart:

Entry on April xx at $ xx.xx
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on April 25, 2012


Jos. A Bank Clothiers - JOSB - close: 48.31 change: +0.69

Stop Loss: 50.25
Target(s): 45.25
Current Option Gain/Loss: May50p: -26.6% or May$45p: -53.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
04/28 update: The market's widespread bounce on Friday finally helped push JOSB above short-term resistance near $48.00 yet the bounce stalled near prior support and new resistance in the $48.80 area. JOSB's larger trend is still bearish and the rebound should roll over here.

I am leaving our stop loss at $50.25 tonight but more conservative traders may want to lower theirs toward the 20-dma near $49.40 or closer to the $49.00 level instead.

Earlier Comments:
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)

Long May $50 PUT (JOSB1219Q50) Entry $3.00

- or -

Long May $45 PUT (JOSB1219Q45) Entry $0.65

chart:

Entry on April 23 at $47.50
Earnings Date 05/30/12 (unconfirmed)
Average Daily Volume = 596 thousand
Listed on April 21, 2012


Joy Global, Inc. - JOY - close: 71.60 change: -0.63

Stop Loss: 72.25
Target(s): 65.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
04/28 update: Good news! There was no follow through on Thursday's bullish reversal candlestick. Instead JOY's rally attempt on Friday morning quickly ran out of steam and the stock underperformed with a -0.8% decline. We're still waiting for a breakdown under support near $70.00.

I am suggesting we launch small bearish positions if shares hit $69.75. We'll try and limit our risk with a stop loss at $72.25 but I have to warn you that JOY can be a volatile stock. Adding to the volatility has been the occasional rumor that JOY might be a takeover target.

If triggered at $69.75 we will target a drop to $65.25. More aggressive traders could aim for the $62-60 zone.

Trigger @ 69.75 (small positions)

- Suggested Positions -

buy the May $70 PUT (JOY1219Q70)

chart:

Entry on April xx at $ xx.xx
Earnings Date 05/31/12 (unconfirmed)
Average Daily Volume = 2.4 million
Listed on April 25, 2012


SINA Corp. - SINA - close: 59.22 change: +0.20

Stop Loss: 61.15
Target(s): 51.00
Current Option Gain/Loss: -27.2%
Time Frame: exit prior to the mid May earnings report
New Positions: see below

Comments:
04/28 update: SINA failed to breakout past resistance at the $60.00 level. Shares did see an intraday move to $60.04 but the stock failed to close over this resistance. I will note that it did close above its simple 10-dma. More conservative traders may want to lower their stop loss closer to the $60.00 area. I am not suggesting new positions at this time.

Remember, we want to exit prior to the mid-May earnings report (that's still not confirmed yet).

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

04/26/12 new stop loss @ 61.15
04/25/12 new stop loss @ 61.65
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 BULLISH PLAYS

Family Dollar Stores - FDO - close: 69.05 change: +1.73

Stop Loss: 64.75
Target(s): 69.25
Current Option Gain/Loss: +82.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
04/28 update: Target achieved.

FDO displayed relative strength on Friday with a +2.5% gain. The stock was higher intraday with a rise to $69.50. Our exit target was $69.25.

- Suggested Positions -

May $65 call (FDO1219E65) Entry $2.44 exit $4.45 (+82.3%)

04/26/12 target hit at $69.25
04/24/12 FDO hit some profit taking. Cautious traders may want to exit early now.
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


CLOSED BEARISH PLAYS

iShares Russell 2000 index - IWM - close: 82.38 change: +0.64

Stop Loss: 82.25
Target(s): 75.50
Current Option Gain/Loss: -55.2%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
04/28 update: As expected the market opened higher on Friday. On Thursday night we decided to exit our IWM positions at the open on Friday. Unfortunately Monday's breakdown from the bear-flag consolidation pattern proved to be a bear-trap instead! Stocks have been up every day since then. Now the IWM is back above resistance near its 50-dma and the $82 level.

The IWM opened at $81.98 on Friday.

- Suggested Positions -

Jun $77 PUT (IWM1216R77) Entry $2.50 exit $1.12 (-55.2%)

04/27/12 planned exit at the open on Friday
04/26/12 prepare to exit tomorrow at the open
04/23/12 triggered at $78.65
04/21/12 adjust trigger to $78.65

chart:

Entry on April 23 at $78.65
Earnings Date --/--/--
Average Daily Volume = 53 million
Listed on April 19, 2012