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Daily Newsletter, Saturday, 5/12/2012

Table of Contents

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

Market Wrap

$2 Billion Hiccup

by Jim Brown

Click here to email Jim Brown

Friday started off negative after JP Morgan confessed a $2 billion loss for a trade gone bad. After a brief rebound the indexes finished in the red once again.

Market Statistics

While we don't as yet know the specific details of the JP Morgan trades that have cost the company $2 billion through last week we do know what happened in a generic sense. JPM had a portfolio of $379 billion in bonds at the end of March. Only 30% of those were guaranteed by a government agency. That was down from 42% at the end of 2010. This compares to the $293 billion bond book at Bank of America that is 87% in agency guaranteed securities.

JP Morgan wanted to hedge this bond risk and the Chief Investment Office (CIO) attempted to hedge the risk by buying/selling credit default swaps. Those swaps would have allowed JPM to profit if the bond holdings went against them.

However, a trader in the Europe office leveraged up these swaps to the point where hedge funds and other institutions figured out what they were doing. Bloomberg did articles on these monster trades in March and April and Jamie Dimon blew it off then as a "tempest in a teapot." That article alerted even more hedge funds to the enormous positions and everyone started betting against the JPM hedges.

The bank did not realize it was in serious trouble because they had moved to a new software program for calculating the daily "value at risk" or VAR. In theory that is the amount of money a bank can lose on any day based on their positions. The new program did not accurately value the CDS positions. When they saw they were losing money in excess of the VAR estimates they went back to the old program and suddenly the VAR doubled. This set off alarm bells at the highest levels of JPM and they immediately began to try and close the positions. However, since the hedge fund community had caught on and were betting against JPM they began taking huge losses in closing the CDS positions. At one point they had to quit trading because the market deck was stacked against them so heavily.

The CDS market is extremely thin and with JPM trying to exit billions in positions all at once the bids went significantly against them. In fact JPM is still exposed. Dimon said it could take a couple of quarters to completely unwind the positions. That means there is not enough liquidity to close the swaps at a reasonable price. JPM will have to hold the remaining positions until they can find willing buyers and that could take some time. Dimon said the $2 billion loss was a starting point.

However, despite the magnitude of the trades and the loss the bank is in no trouble. Even with the loss they will still post a profit in Q2 and for the full year. They expect to produce revenue of more than $90 billion in 2012 and earnings before share buybacks of more than $15 billion. Losing $2 billion is a blow but relatively speaking the bank is still very profitable.

The biggest blow came to the rock star status of Jamie Dimon. He was widely regarded as the best CEO in the megabank world but having to admit this kind of problem is a serious black eye. He admitted the hedge was "complex, flawed, poorly executed, poorly reviewed and poorly monitored". He said the trade was structured wrong and managed terribly. In an interview he gave late Friday for Sunday's Meet the Press he said "We were sloppy, we were stupid and we know we exercised bad judgment." He said "we should have paid more attention to the news reports."

The trader responsible for constructing the "synthetic credit portfolio" was Bruno Iksil otherwise known as "the London Whale" and as "Voldemort" the villain in the Harry potter series. At one time he said he could walk on water, referring to his skill at constructing elaborate portfolios producing large profits. He had attracted market attention in early April with "epic" sized market moving trades in the CDS market. The face value of the position was in excess of $100 billion. The size and quantity of these trades had garnered some serious attention in the community and in the press. A Bloomberg reporter and former trader who covered hedge funds for 14 years, Stephanie Ruhle, began writing about the mysterious whale trades back in early April.

Stephanie Ruhle

It was clear JPM shares were going to take a serious hit on Friday after the confession late Thursday night. With JPM a Dow component this was a direct influence on the Dow. JPM shares declined -9.3% to close near the lows of the day. This knocked 29 points off the Dow.

Once this news blows over and the trade liability ends we know JPM will come back strong. That may be months from now but you can bet Dimon will put controls in place to make sure this type of event does not happen again. JPM shares hit a low of $28 last year and closed at $37 on Friday. If we get a drop back to that $28 range I would be a buyer for a long term hold.

JPM Chart

The S&P futures were severely negative on Thursday night based on the cockroach theory. If JPM had trading problems then the other major banks probably had them as well. By Friday morning this theory had been discounted and the bad news was pretty much a JPM only story. The Dow opened negative about -75 points. It quickly rebounded +139 to test resistance at 12,920 from the prior four days and then the sellers took over and it was a long slow slide into the close. The JPM news did not accelerate the decline for the week but merely confirmed it.

Dow Chart - 15 Min

The economic news helped to relieve some of the gloom and doom at the open. The Consumer Sentiment for May rebounded sharply to 77.8 and a four year high! The April number was 76.4 and expectations were for a small decline to 76.0. This surprise gain stretched the streak of consecutive monthly gains to nine months.

The present conditions component spiked sharply from 82.9 to 87.3 to provide all the momentum to the headline number. The future expectations component declined to 71.7 from 72.3. The recent decline in gasoline prices from $3.92 to $3.73 was credited with the majority of the improvement. Back in April all the news headlines were predicting $4 gasoline and once that daily price hike stalled and started moving lower it was a relief to consumers.

The stabilization in the labor market may also have helped. The Nonfarm Payrolls for April remained level with March and did not continue their steep decline. The jobless claims have also returned to prior 2012 levels and the three weeks of spikes to 390,000 have ended. Claims returned to 367,000 last week.

However, the decline in the stock market could weigh on the next sentiment release. The declines have been minimal at about -4% but the streaks of losing days will cause sentiment to decline.

Consumer Sentiment Chart

Jobless Claims Chart

The Producer Price Index (PPI) declined -0.2% for April as inflation pressures eased. The year over year rate declined for the seventh consecutive month to +1.9%. Prices for finished goods fell -1.4% and the biggest drop since October thanks to the falling gasoline prices.

The core rate, excluding food and energy, saw prices rise +0.2% and slightly less than the +0.3% rate in March. Prices for products made with crude oil fell by -4.4%. Commodities declined and that helped push many of the prices lower. Cotton prices fell to a five year low after India ended an export ban. Copper prices are also declining because of slower manufacturing in China.

The economic calendar for next week is highlighted by the FOMC minutes on Wednesday and the Philly Fed Manufacturing Survey on Thursday. The FOMC minutes are going to be the key event for the week. We already know there is dissension within the Fed but the minutes will give us a clue as to how heated the discussions were and to some extent what options were discussed.

The Facebook IPO is tentatively scheduled for Friday. However, late Friday CNBC said it could be delayed because the SEC has not yet approved the latest filing. Rumors are claiming it is oversubscribed by a factor of 10. However, Bloomberg said institutional investors are shying away from it because they are skeptical about the company's prospects since ad revenue has not kept pace with user growth. Facebook amended its S-1 form on Wednesday to show the number of ads per daily average user is falling. Q1 revenue declined -6% from Q4. Bloomberg cited "people with knowledge of the matter" saying the institutional demand was much weaker than expected. Retail investors still appear to be excited but they will each buy far fewer shares than institutions would normally.

An investor poll found that 79% of investors, analysts and traders who subscribe to Bloomberg thought the $96 billion valuation was too high.

Several top name investors and analysts have said Zuckerberg's decision to wear his trademark hoodie to the road show events was a mark of immaturity. As a hedge fund manager contemplating investing millions of dollars in a company they would like to feel confident the management is professional and competent. Zuckerberg controls 57% of the voting shares.

Quite a few analysts expect a huge pop on the open and then a quick fade. Almost nobody in the analyst community is recommending buying the shares in the open market. The consensus appears to be "if you can get them in the IPO then sell them at the open."

I am worried about the amount of cash the IPO will take out of the market. The official price range is $28 to $35 but they could easily raise that to $40 based on the excessive retail demand. Just using a $40 price and the 185 million shares Facebook is selling, assuming an overallotment, and the 157 million shares being sold by existing shareholders you get roughly $14 billion. That means investors will have to sell billions of dollars in shares of other companies in order to have the cash available in their account when the IPO prices. That suggests there could be an underlying cash drain in the market early in the week.

The number I will be interested in is the number of shares traded on the first day. With 342 million shares available to trade on the first day I would not be surprised to see one billion shares trade as the churning begins.

Economic Calendar

In stock news embattled energy company Chesapeake (CHK) announced after the close it had received an emergency bridge loan from Goldman Sachs and Jefferies Group of $3 billion. The short term loan will be used to repay part of its existing $4 billion revolving credit facility. CHK has been in a cash squeeze as gas prices plummeted and the company was forced to curtail production. The company said earlier in the day it may have to delay asset sales in order to preserve cash flow to remain within its banking covenants. Selling producing assets reduces reserves and cash flows and impacts your balance sheet. That also reduces the amount of collateral held by secured creditors.

Chesapeake has been under fire because of news events surrounding its high profile CEO Aubrey McClendon. The new loan will allow CHK breathing room while it tries to sell up to $14 billion in assets in 2012. The company needs to sell assets to raise cash because of its high debt load and falling revenue. The new debt facility matures in 2017 and carries an interest rate of 8.5%. The rate is high but the loan is "unsecured."

Fitch Ratings estimates CHK was facing a funding gap as high as $10 billion in 2012. Between now and the end of 2013 CHK is facing required capex spending of as much as $23 billion. In most cases CHK has to drill wells on new leases in order to hold them with production. That means they have to drill wells that are currently unprofitable in order to preserve the leases until gas prices rise again.

Shares of CHK plunged to a new multiyear low.

CHK Chart

The dollar rallied for its ninth day and closed at a two month high as the worries in Europe increased. Greece failed to form a coalition government for the third time as each of the three major parties exhausted their three days each in an attempt to head off new elections. There is only one more event that could avoid those elections and that is a meeting with the country's president. The socialist party leader, Evangelos Wenizelos, the third party leader to fail the coalition effort, said he would hand the mantle back to the president on Saturday. The president will bring all party leaders together for one last attempt to find common ground before the mandated elections, which would occur in June.

While the parties could not form a coalition they did seem united in not wanting to follow through on the bailout terms. Austerity was voted down and now the people will have to find a way to vote in a coalition that will follow their wishes.

Greece leaving the euro currency was a topic in nearly every piece of analysis I read this weekend. This seems to be a done deal even though the public is going to be crushed when it happens. Banks are going to fail. Businesses are going to fail. Savings will be cut in half. In the beginning it will be ugly but a year from now the results for Greece will probably be better conditions. With ultra cheap money their products will be cheap and tourism will probably double or triple.

In Spain the banks have been given 15 days to raise 30 billion euros in new capital or be nationalized. This is on top of a 54 billion euro plan ordered in December. They have to raise loan loss reserves from 7% to 30% on real estate loans. They have 15 days to either come up with the cash or present plans on how they will raise it or be forced to take government loans in the form of convertible bonds with an interest rate of 10%.

Unfortunately there is an estimated 180 billion euros of toxic real estate loans on the books of Spanish banks. Nonperforming loans are in excess of 20%, some claim it is more than 25%. The banks will require an additional 200-250 billion euros in new capital to reach the level required by the EU later this year. Basically the Spanish government is going to have to create new debt amounting to roughly 25% of its GDP before the end of 2012 in order to keep the banks afloat. Those same banks borrowed roughly 332 billion euros from the ECB in the one trillion euro handout six months ago. I would bet against that money being paid back to the ECB when the three years are up.

On Friday Art Cashin reiterated the problem with bank runs in Europe. Citizens who don't want to end up with drachmas or lira in their account some morning in the near future will be withdrawing euros in cash to stash under their mattress. This has already been underway for the last several months but with Spain talking nationalism it is sure to accelerate. The faster the withdrawals the quicker the banks will fail.

On Saturday more than 100,000 demonstrators gathered across Spain to protest the austerity program. They are demanding repeal of the current austerity programs.

Spain's Puerta del Sol Plaza

Ireland will vote on austerity on May 31st and analysts are worried they will vote against the current leaders after Greece voted their leaders out. Austerity is not fun but most citizens don't understand the alternatives. Ireland is widely expected to default on its debt but elect to remain in the euro.

European economics are worsening along with the political outlooks. There were even people talking on Friday about Germany pulling out of the euro because of the coming QE programs by the ECB in order to rescue the debtor nations, which is rapidly becoming all of them. If Germany withdrew the rest of the euro would collapse.

Over the weekend there was an article in the main German paper that appeared to acknowledge the need for further QE by the ECB. Germany had been strongly against debasing the currency through multiple QE programs like the LTRO because they have suffered through unbelievable inflation in the 1920s. Paper money was so worthless it was cheaper to burn for heat instead of using it to buy firewood. They actually had one trillion mark notes. The one below is a 20 billion Mark note.

German 20 Billion Mark Note

Burning German Notes for Heat

If Germany is now relenting on additional ECB QE then it will probably take the form of new LTRO programs. Banks can buy sovereign debt like Spain's at 5%, use it as collateral in LTRO offerings to borrow more money at 1% interest and then buy more sovereign debt to use as collateral in the next LTRO, etc, etc. In this way the sovereign yields are kept artificially low while the banks pocket a fat 4% spread on what will end up being trillions in quantitative easing. The entire house of cards will eventually collapse when the countries default on their debt but that "can" will have been kicked three years down the road by the LTRO. There is no solution to this problem. Spain will likely default followed by Italy and then France. French debt to GDP is over 140% when guarantees to the EU bailout programs are included. Downgrades to their credit rating could come any day now that Hollande has been elected.

The problem is the common euro currency but no common government or common budget. The individual countries can't print their own euros so they are forced to live on a budget only they have been exceeding that budget by taking on excess debt when they have no hopes of ever paying it back. There is no easy solution and the Greek domino is only the first one to fall.

The growing problems in Europe have pushed the euro to a four month low while the dollar broke out to a two month high. Because of the scenario laid out above the euro is going to continue lower in the long run and that supports the dollar. This dollar strength along with economic weakness in Europe and China has pushed commodities to multi week lows.

Euro Chart

Dollar Index Chart

Gold prices broke below $1600 and below next level support at $1581. It would appear a test of $1550 is guaranteed because I don't see any dollar weakness in the near future.

Gold bulls are still predicting $2000 by year end. Eric Sprott, Citigroup and Morgan Stanley are in that camp. Goldman is predicting $1840 by year end. They base this on the economic cliff facing the U.S. in January. There are $1.2 billion in mandatory spending cuts. There are more than a dozen tax increases plus another $1.3 trillion budget deficit. Regardless of whom wins the election the next 60 days after the November ballot will be very hectic and outgoing lawmakers don't have the best record for governing responsibly.

Gold Chart

Crude oil continues to fall in lock step with the dollar's gains. Helping push it lower is the turmoil in Europe and the calming words coming out of Saudi Arabia. Iran has started to increase its bluster over the scheduled May 23rd meeting but Saudi is repeating to anyone who will listen that they have 2.5 mbpd of spare capacity and more than 80 million barrels in storage. Whether either claim is valid we may never know but the repeated claim and the rising dollar has pushed WTI down to just over $95.

Crude Oil Chart

The S&P declined to 1343 on Wednesday and the support of the 100-day average at 1353. Both levels need to hold if there is going to be any hope of a return to a bullish trend. That 1340 support dates back to February and a break below that level is going to set off alarm bells at every trading desk in the country. The combination of a break of 1340 and the 100-day average is double trouble.

The banks are supposed to be major contributors to S&P earnings in the second half of the year. If the JPM problem forces new regulations or a cutback on current operations at the major banks then those earnings could be in jeopardy.

Similarly if oil prices decline below $95 the earnings in the energy sector will decline and that was also a major component of the S&P earnings for the rest of the year. Once analysts start cutting estimates on entire sectors the outlook could quickly dim.

We have had a decent bout of profit taking but it only equates to about 4% on the S&P. That is barely a thunderstorm for the markets. However, after watching the entire month of April in a consolidation pattern with a month end rebound that failed, we could be looking at a change in investor sentiment.

Fortunately that 1340 support level is very clear on the chart so there will be no ambiguity about when to go short. If 1340 breaks it could be a quick ride to -10% at 1275 and the 200-day average.

S&P-500 Chart - Daily

The Dow chart has the same clear cut chart pattern with the 100-day average and strong support at 12,750 just ahead. A break of both would target the 200-day average at 12,180.

JP Morgan knocked about 29 points off the Dow on Friday but the Dow finished -99 points off its highs. The rebound failed about as quickly as it started but it was a summer Friday. Volume was light at 6.4 billion shares and declining volume was 2:1 over advancing. New 52-week lows at 186 outnumbered new highs at 146.

We have returned to the "sell the close" pattern. Morning rebounds are sold in the afternoon as longs run to the safety of cash rather than face the overnight darkness.

Until this pattern changes and we start seeing rallies into the close you can bet there are lower lows ahead. This is a sign of a lack of conviction by the longs.

Target a break under 12,750 to be flat or short.

Dow Chart

The Dow Transports have declined for two weeks despite falling oil prices for the last nine days. In theory this should have been positive for the transports but the weakening economics proved to be a bigger drag. The transports have strong support at 5050 and the 300-day average. For some reason that average has a strong influence on the transports. As long as the transports are declining the Dow Industrials are not going to mount a big rally.

Dow Transports Chart

The Nasdaq Composite is also teetering on the brink with the 100-day average at 2910 just slightly over psychological support at 2900. Google, Apple, Priceline and other large tech stocks are still trending lower.

Apple is weak after analysts predicted the carrier subsidies for the iPhone were going to be cut. When only one or two carriers had the iPhone they were forced to pay huge subsidies to offset the $649 cost of the phone. Now that basically all carriers have the phone and acceptance of the phone itself is worldwide there is no reason to pay such large upfront fees. If a user is upgrading from one iPhone to another they don't need to be subsidized. They want the iPhone. AT&T is currently paying about $265 per phone to Apple and then recovering that money with the two year contract to the user. If AT&T and others decided to cut that subsidy to $200 per phone the number of sales might drop slightly given the number of other touch screen smartphones available now. AT&T and Verizon beat estimates for Q1 because the number of iPhones they sold were lower than estimates and that means less money put out for subsidy payments. The carriers are dealing from a position of strength in the quarters ahead and while Apple will continue to make great products and sell a lot of phones the newness has worn off the iPhone and profits may begin to slow. Of course that has been the claim for several quarters and it has not happened yet.

Cracks are beginning to form in several of the big cap tech stocks. Google has patent problems and institutional investors seem concerned the company may be devoting too much money in non core areas like the self driving car, solar energy and the race to space. Priceline declined nearly $100 over the last two weeks on earnings problems. Oracle declined -10% over the last eight days. Cisco is down -10%. The last week was not kind to big cap techs.

Eventually this negativity will end but it may not be this week. The 2900 support level will be critical. If investors are content to buy that dip then maybe the tide will turn. However, a break there could quickly target 2735.

Nasdaq Chart

The small cap Russell 2000 could be ready to lead us lower. The Russell did not rebound as high as the other indexes in late April and the Russell has already broken below the 100-day average. A break below 785 is going to target 750 and the 200-day average.

The Russell chart looks like a textbook head and shoulders formation. A break below the neckline at 785 should produce significant technical selling.

Russell 2000 Chart

On Saturday China cut the reserve requirement ratio (RRR) for banks by 50 basis points. That action freed up 400 billion yuan ($63.5 billion) for lending in an effort to reduce the risk of a further economic slowdown. It is effective as of May 18th. This is the third RRR cut in the last six months. Data out of China on Friday showed the economy continuing to weaken rather than recovering. Industrial production rose at 9.3% and the lowest rate since April 2009. April retail sales rose only +14.1% compared to estimates of 15.1% and a reading of 15.2% in March. The RRR cut was expected after the bad economic numbers on Friday. However, it should still be market positive for Monday at least in Asia.

I am neutral on the market for next week. A -4% decline to date is just moderate profit taking and the indexes are at decent support levels. We could see a minor rebound but I think the cash drain from the FaceBook IPO will offset any dip buying. Until current support fails this is just a garden variety pullback. Once that support fails (12,750, 2900, 1340, 785) traders will start factoring in a bigger -10% correction act accordingly.

The FOMC minutes is the biggest hurdle for the week but should support break before Wednesday afternoon they will likely be ignored.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

"Socialism is great - until you run out of other people's money."
Margret Thatcher


Index Wrap

It's Not a Bear Market

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

While, as I wrote last week, topping out action suggested the market wouldn't see new highs anytime soon, this doesn't warrant becoming growling bears. I assess that we're seeing a correction only WITHIN a longer-term uptrend.

Bullish sentiment fell to levels this past week last seen when the S&P 500 (SPX) hit 1100 last August; or, back in June last year, when SPX fell to around 1250. (Supporting the idea what the market will go lower after May.)

Options traders in the aggregate tend to buy puts after the market is already falling or has fallen sharply, NOT for example when its up at a line of prior highs such as the Dow was week before last. I'm not saying that the 'herd' is always wrong, just most of the time! Especially when they don't buy those same puts when the risk to reward equation is much better.

If you want put 'insurance' against a big fall in stock values, better to do it when you can stop out or exit for a small loss. Declines are MUCH more likely in circumstances where the price pattern shows an index or stock hitting resistances, especially after a prior huge advance. I'm talking about not just instances when there's a possible top formation of one type or another, but also when the major indexes are at or above levels representing a 'typical' overbought extreme.

The market started finding support after INDU got down to support in the 12800 area. If you wonder why, you can peruse the 30 Dow weekly charts. 9 INDU stocks continue on a bullish track; almost 1/3rd of the Average. With the exception of some recent selling pressure in HD and PFE (profit taking or minor topping action?), the 9 are AXP, DIS, HD, KFT, KO, PFE, T, TRV, VZ.

As to how low we can go from here, I would note that the Nasdaq Composite (COMP) has already retraced (at 2900) a Fibonacci 38% of its run up from its December 2011 low up to its March high. COMP of course could have more of a retracement than this, such as 50% (to 2822), but in a strong market, like the tech-heavy COMP, retracements of as much as one-half of a big prior advance isn't all that common. You may recall me making several mentions of the fact that the Nas 100 (NDX) reversed lower (to date) after retracing exactly 50% of the massive 2000-2002 bear market decline.

As to the question of how low can we go, my crystal ball isn't exactly clear on this question. I have support levels noted with each index below and I'm not anticipating a break of the second highlighted (lower) 'support' levels. Prices may well chop around for awhile as the market continue to throw off its longer-term overbought condition; e.g., as seen on weekly index charts using the 8 or 13-week Relative Strength Index (RSI) indicator.

Segueing into the topic of oversold readings, we're seeing that already with the 13-day RSI in the major indexes. The daily chart RSI readings are about as low as seen over several instances in the past year; the recent RSI low is a 5th one.

If I was going to adopt an aggressive bullish stance, I'd be looking to do it soon, especially on further weakness. A more cautious approach suggests not trying to buy index calls (for example) on what may be only an initial rebound, since a stronger rally may follow and it's often safer to buy a secondary low. There's definitely the risk that this first cluster of lows is not a 'final' low for this overall correction. And, to keep buyers away, there's this new mantra of sell in May and go away, which is kind of stupid to take to heart, since as soon as EVERYONE believes it, it won't 'work' any more.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart is bearish on a short to intermediate-term basis. The last intraday top at 1415 was under the prior peak. No (downside) reversal was indicated however until SPX, for the second time, pierced its 21-day moving average. If you were also keeping tabs on SPX's hourly chart (not shown here), a Head & Shoulder's top formed as part of the 1415 high. A next top was lower than 1415, making for 2 lower secondary tops sandwiching the middle peak. It's a good idea to follow the hourly and weekly charts in addition to the dailies.

I've noted near support in the 1340 area, and that includes the prior 1343 intraday low. I've highlighted a next potential lower support at 1320. 1320 represents a Fibonacci 38% retracement of up leg from the early-Dec 2011 low to SPX's early-Apr high. This particular retracement is the initial one I look to as a possible stopping point for a correction. The second down leg has carried as far as the first decline, whereas it's sometimes if not often the case that a second downswing is longer than the first. Could happen, doesn't 'have' to'. Stay tuned.

Even if SPX goes on to make a lower low, there's potential for a rebound before that. The low reading on the RSI and similar low on my call to put (CPRATIO) sentiment indicator suggests being cautious about overstaying in puts. The indicators are one thing. There's also the fact that SPX has resisted getting pushed to support at 1340. I'm also cautious about jumping in on the long side here until I see more but its tempting given an 'obvious' place for a stop/exit just below 1340. If 1320 is seen, that's also interesting for calls, with a stop just below 1300.

Near resistance is seen at 1365, then around 1380. Two days of closes above the 21 and 50-day averages would suggest substantial buying was coming in again.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) index chart is bearish short to intermediate term. The second decline has now carried as far as the first. Some symmetry there but the second sell off often carries farther than the first. A rebound to the 627-630 resistance wouldn't be surprising but I don't rate the chances of a bullish break out above 630 as high, at least not yet.

I wrote last week that "I don't see OEX being pushed under 610-609 near-term, at least not for long." And, that "Longer-term we could see 600 retested..." Taking another look at that, I'd also note that 600 (599 to be precise) represents a fibonacci 38% retracement of the late-Nov to April advance. 600 seems like a 'natural' eventual objective. If so, a question is how many are going to sell OEX at 600, when it seems like such a natural or obvious place to be buying it, if only to cover shorts.

Immediately ahead, another dip to 612-610 looks like a buy and 630 a place to sell. At 600 the buy side looks compelling because of good potential for at least a bounce or more and with 595 as a (hopefully) 'limited risk' exit/stop out point.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) has a bearish chart as the last high in the 13295 area makes for well-defined line of resistance. I'd call the pattern a double versus a 'triple' top or a complex double top since the left hand top is a cluster that occurred in a similar time frame, followed by a significant decline. The second top after the prior low forms a second top.

Some time (space) separating two tops is what's associated with a double top. I make a point out of this as double tops are potent formations that are worth shorting most of the time. The indicated risk point (stop out point) is just a bit over the prior high; e.g., at 1335 (Dow 13350) in Dow index puts. (I messed up this number last week in the e-mail but corrected it in the web version.)

I wrote last week that "Bearish sentiment should start to build again if INDU closes below 13000 for an extended time." This is seen big time in the SPX and COMP charts which display my (CPRATIO) 'sentiment' indicator. I also noted that key lower support below 13000 came in around 12800 and that's held up well so far, with much owed to continued bullish action in AXP, DIS, HD, KFT, KO, PFE, T, TRV and VZ. (The HD and PFE weekly charts are showing some selling coming in recently and they've retreated from their recent highs but no reversals are seen.)

Pivotal resistance is seen at 13000 at what was key support (support, once penetrated, 'becoming' subsequent resistance), extending to 13050. A move above the key 21 and 50-day moving averages would be bullish if more than a 1-2 day affair.

Support is suggested in the 12750-12710 area, with next support coming in around 12600. 12530 could represent fairly major support as implied by this level representing a Fibonacci 38% retracement of the advance from the late-Nov/early-Dec lows up to the early-Apr top.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

We've seen to date two somewhat complex 'top' patterns in the Nasdaq indices involving chart (price) gaps, namely what's called in technical analysis parlance an island top pattern. The top variety (there's an island 'bottom' formation also) occurs after a prolonged rally. There's a final upside price gap, then a cluster of highs at or above the price gap. This is then followed by a downside gap, leaving the isolated 'island' top and is a type of exhaustion pattern; i.e., an advance gets 'overextended' and volatile and a significant correction follows. I didn't highlight the two island type tops but I think you can see them below easily enough.

I wrote last week about looking for "...a retest of 2900 support... and "for the 13-day RSI to finally also get to a 'fully' oversold reading again." With both predictions borne out, where to from here? I don't have a lower projection than 2900 near-term but of course this (2900) support may get retested and even pierced; support extends to 2870. 2900 represented a Fibonacci 38% retracement of the Dec 2011 to April 2012 advance. 2822 would be a 50% retracement of COMP's last up leg and is my lowest downside expectation currently; and more for later on rather than anything I anticipate near-term.

Key resistance comes in at 3000, extending to 3020. I'd be surprised to see a rebound carry to above 3000. I wouldn't overstay in Nasdaq related puts. Bellwether Apple (AAPL) could eventually retreat to around 500 (Friday Close: 566) and if this happened I don't envision COMP holding the 2900 area.

The 'oversold' extremes seen in both the 13-day Relative Strength Index (RSI) AND my (CPRATIO) 'sentiment' indicator seen above suggest that at least a short-term bottom could be at hand or is near. These two indicators plus the fact of the 38% retracement discussed above for COMP suggest at a minimum to take put profits; take the money and run as the further downside is probably less near-term anyway, than the rebound potential that exists; e.g., for a rebound to key resistance in the 3000 area.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) Index has completed a second a-b-c (down-up-down) corrective pattern which could mark the end of the decline. Or NOT, assuming the second down leg is of the extended variety where the second downswing 'extends' to more than the first decline, which isn't uncommon.

As I note above with the Nas Composite, Apple Computer (AAPL) is an even more key bellwether for the big cap NDX. I see potential for AAPL to pull back to the $500 area but maybe not soon; whenever, more downside for NDX below 2600 is suggested by such a move for Apple as an ancillary 'indicator' so to speak.

In terms of the RSI oversold extreme seen below and the equally 'oversold' extreme (of a different type) implied by my sentiment model seen above with the COMP chart suggests that further NDX downside of any magnitude is probably limited.

Near support comes in at 2600, extending to recent intraday lows at 2587; next support is at 2575, a prior key low. Near resistance is at the top of the recent downside chart gap at 2680, which also represents resistance implied by the 21-day moving average; next resistance is at 2700. NDX may bounce back and forth between 2600-2590 to 2680-2700 over the next 1-2 weeks before there's any prolonged move out of this range.

The Facebook IPO may well provide general buying interest in NDX in the coming week. I'm unsure when Facebook becomes part of NDX but it will of course; as surely as Mark Zuckerberg will exercise his option to purchase 60 million shares at 6 cents each. Not a bad deal with the stock expecting to start trading somewhere between 28 and $35! Let's see... well, you can do the math but it's a lot of zeros!!

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) is bearish in its pattern, but looks to have technical support in the 63.5 area, extending to 62.7. Near resistance is at 65 even, then in the 66 area.

Daily trading volume has tapered way off and may mean that the sellers hit with extreme 'fear and loathing' have left the building and taken away the potential for further major selling pressure.

The near-term price range (next 1-2 weeks) I can envision for QQQ is 63 on the downside and 66 on the upside.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) chart which is bearish could also have formed a 'complex' Head & Shoulder's Top with a 'neckline' in the 784 area. A decisive downside penetration of 784 on a Closing basis, would suggest potential for a sizable further down leg. Absent that and an ability to hold above 778-785 support on an intraday basis, negates 'activation' of an eventual downside target (implied the H&S neckline penetration) to the 720 area.

If Nasdaq is at or near a bottom, RUT will follow and the 780 area will prove to be at least a near-term bottom. In terms of potential support implied by key retracements, at 778 RUT would complete a 38% retracement of its early-Nov to April run up. A 50% retracement of the prior RUT advance would be to 757.

Key near resistance still looks like 805 at the top of a downside price gap and the current intersection of the 21-day average; next resistance then extends to 815 and the 50-day moving average with further resistance coming in around 820.



GOOD TRADING SUCCESS!


New Option Plays

Chemicals, Construction, and Jewelry

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Ashland Inc. - ASH - close: 67.31 chagne: +1.01

Stop Loss: 64.49
Target(s): 74.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
ASH is a specialty chemical company. The stock has been consolidating sideways the last couple of weeks while still maintaining a bullish trend of higher lows in spite of the market's recent weakness. This relative strength looks ready to blossom into a new bullish breakout higher.

I am suggesting a trigger to launch positions at $67.75. We'll use a stop $64.49, just under its May low. I am expecting possible round-number resistance at $70.00 but our multi-week target is $74.00. FYI: The Point & Figure chart for ASH is bullish with an $84 target.

Trigger @ 67.75

- Suggested Positions -

buy the Jun $70 call (ASH1216F70) current ask $1.10

Annotated Chart:

Entry on May xx at $ xx.xx
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 763 thousand
Listed on May 12, 2012


NEW DIRECTIONAL PUT PLAYS

Fluor Corp. - FLR - close: 53.89 change: -0.71

Stop Loss: 56.35
Target(s): 50.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
FLR is a heavy construction company that just reported earnings a few days ago. You can see the spike higher on May 4th when FLR beat earnings estimates by four cents. Yet that news was not enough to reverse the bearish trend of lower highs and lower lows. The earnings rally reversed at technical resistance at the 50-dma. Now FLR has broken down under support near $56 and its 200-dma and 150-dma. The recent oversold bounce just two days ago failed at this level near $56.00.

I am suggesting we launch bearish put positions at the open on Monday morning. We'll use a stop loss at $56.35, just above Thursday's high. It's possible that FLR might see some support at a trend of higher lows (on the chart as a dotted line) near $52 but we are setting our exit target at $50.25.

- Suggested Positions -

buy the Jun $52.50 PUT (FLR1216R52.5) current ask $1.75

Annotated Chart:

Entry on May xx at $ xx.xx
Earnings Date 05/03/12
Average Daily Volume = 1.8 million
Listed on May 12, 2012


Tiffany & Co. - TIF - close: 63.04 change: -0.59

Stop Loss: 65.25
Target(s): 59.00
Current Option Gain/Loss: Unopened
Time Frame: exit prior to the May 24th earnings report
New Positions: Yes, see below

Company Description

Why We Like It:
This is going to be a short-term trade. TIF, a high-end jewelry store, has broken down under support. Now after three days of consolidating sideways the stock looks poised to continue lower again. I am suggesting a trigger to buy puts at $62.75, which would be a new relative low and we'll exit at $59.00. More aggressive traders could definitely aim lower but we do not want to hold over the May 24th earnings report.

Trigger @ 62.75

- Suggested Positions -

buy the Jun $60 put (TIF1216R60) current ask $1.74

Annotated Chart:

Entry on May xx at $ xx.xx
Earnings Date 05/24/12 (confirmed)
Average Daily Volume = 1.5 million
Listed on May 12, 2012



In Play Updates and Reviews

Prepare to Exit May Options Soon

by James Brown

Click here to email James Brown

Editor's Note:

May options expire soon. We are planning to close a few positions on Monday. Please see the individual updates below for details.

Current Portfolio:


CALL Play Updates

Amgen Inc. - AMGN - close: 70.78 change: +0.69

Stop Loss: 68.95
Target(s): 74.90
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
05/12 update: AMGN was showing some relative strength on Friday with a +0.9% gain. Shares also managed to breakout above its simple 10-dma and its short-term trend of lower highs. This move is bullish and looks like a new entry point to buy calls yet the intraday high was only $71.13. We have a trigger to buy calls at $71.25. Our target is $74.90. More aggressive traders could aim higher.

Trigger @ $71.25 (small positions)

- Suggested Positions -

buy the Jun $70 call (AMGN1216F70)

chart:

Entry on May xx at $ xx.xx
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 3.9 million
Listed on May 08, 2012


Airgas Inc. - ARG - close: 92.08 change: -0.41

Stop Loss: 89.65
Target(s): 97.50
Current Option Gain/Loss: May92.5c: -39.1% & Jun95c: -34.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/12 update: After hitting new highs on Thursday there wasn't any follow through on Friday. ARG quickly drifted lower toward its simple 10-dma. The larger trend is still up. I would still consider new positions here but nimble traders may want to wait and buy calls on a dip near the 20-dma near $91.00. Our multi-week target is $97.50. FYI: The Point & Figure chart for ARG is bullish with a $119 target.

NOTE: We want to keep our position size small. You could argue that ARG is forming a wedge pattern, which could be considered bearish.

(small positions) - Suggested Positions -

Long May $92.50 call (ARG1219E92.5) Entry $1.15

- or -

Long Jun $95.00 call (ARG1216F95) Entry $1.45

05/10/12 triggered @ 92.50

chart:

Entry on May 10 at $92.50
Earnings Date 05/03/12
Average Daily Volume = 476 thousand
Listed on May 05, 2012


United Natural Foods - UNFI - close: 51.07 change: +0.47

Stop Loss: 48.25
Target(s): 54.50
Current Option Gain/Loss: +15.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/12 update: UNFI displayed relative strength on Friday with a +0.9% gain. The stock closed at a new record high. Readers might want to consider raising their stop loss closer to the 20-dma (currently near 49.25). If both UNFI and the S&P 500 open positive on Monday we can use this as a new bullish entry point (although you'll probably want to buy June calls since Mays expire soon).

FYI: The Point & Figure chart for UNFI is bullish with a long-term $82 target.

- Suggested Positions -

Long May $50 call (UNFI1219E50) Entry $0.95

chart:

Entry on May 03 at $49.90
Earnings Date 05/31/12 (unconfirmed)
Average Daily Volume = 250 thousand
Listed on May 02, 2012


PUT Play Updates

Baidu, Inc. - BIDU - close: 122.23 change: -1.43

Stop Loss: 130.25
Target(s): 115.00
Current Option Gain/Loss: May125P: +92.8% & Jun120P: +62.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/12 update: News out late Thursday night that BIDU is planning to launch a new smartphone running its Baidu Cloud operating system did not have a positive impact on the stock Friday morning. Shares spiked down at the open, managed to bounce back intraday, and then roll over again.

This remains an aggressive, higher-risk trade. I am lowering our stop loss down to $130.25. I am not suggesting new positions at this time. FYI: The Point & Figure chart for BIDU is bearish with a $106 target.

NOTE: We have five days left on our May puts. The current bid on our May $125 puts is at $4.05 (+92.8%). I am suggesting we exit our May puts at the open on Monday. More aggressive traders could risk holding on for a few more days before they expire.

- Suggested Positions -

Long May $125 put (BIDU1219Q125) Entry $2.10

- or -

Long Jun $120 put (BIDU1216R120) Entry $2.95

05/12/12 new stop loss @ 130.25
Prepare to exit May $125 puts at the open on Monday, current bid $4.05
05/08/12 BIDU gapped open lower at $127.01

chart:

Entry on May 08 at $127.01
Earnings Date 07/25/12 (unconfirmed)
Average Daily Volume = 5.0 million
Listed on May 07, 2012


Rockwell Collins - COL - close: 51.99 change: -0.27

Stop Loss: 54.25
Target(s): 51.50
Current Option Gain/Loss: May $55p: +124.0% & Jun$55p: +72.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/12 update: COL is still sinking and shares hit new relative lows on Friday. Our exit target is at $51.50 but I am suggesting we go ahead and exit our May $55 puts at the open on Monday morning. We will lower our stop loss down to $54.25 for the June puts. I am not suggesting new positions at this time.

- Suggested Positions -

Long May $55 PUT (COL1219Q55) Entry $1.25

- or -

Long Jun $55 PUT (COL1216R55) Entry $1.85

05/12/12 new stop loss @ 54.25
prepare to exit May $55 puts at open on Monday, current bid $2.80
05/05/12 new stop loss @ 55.25
05/03/12 triggered at $54.75

chart:

Entry on May 03 at $54.75
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on April 25, 2012


Fiserv, Inc. - FISV - close: 66.56 change: +0.09

Stop Loss: 70.05
Target(s): 63.50
Current Option Gain/Loss: May$70p: + 5.9% & Jun65P: + 5.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/12 update: FISV is still trying to bounce after testing its 100-dma on Wednesday. The stock hit $67.33 intraday on Friday. I have been suggesting that shares should find resistance near $68.00 so the bounce may not be over yet. I would use a bounce into the $67.75-68.25 area as a new bearish entry point to buy puts (but I'd only buy Junes at this point, May options expire soon).

- Suggested Positions -

Long May $70 put (FISV1219Q70) Entry $3.02

- or -

Long Jun $65 put (FISV1216R65) Entry $0.90

05/07/12 triggered on gap down at $67.26 (our trigger was 67.40)

chart:

Entry on May 07 at $67.26
Earnings Date 05/01/12
Average Daily Volume = 693 thousand
Listed on May 05, 2012


General Dynamic - GD - close: 66.53 change: -0.01

Stop Loss: 68.25
Target(s): 61.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
05/12 update: GD just reaffirmed its bearish trend of lower highs. The stock bounced on Friday but the rebound reversed at technical resistance at the simple 10-dma. Shares are sitting near support at $66 and its 200-dma. I am suggesting we buy puts if GD trades at $65.75 or lower. More conservative traders may want to wait for a drop under $65.00 instead. Our target is $61.50. FYI: The Point & Figure chart for GD is bearish with a $60 target.

Trigger @ 65.75

- Suggested Positions -

buy the Jun $65 PUT (GD1216R65)

chart:

Entry on May xx at $ xx.xx
Earnings Date 07/25/12 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on May 09, 2012


Helmerich & Payne Inc. - HP - close: 45.94 change: -0.37

Stop Loss: 50.55
Target(s): 45.25
Current Option Gain/Loss: May50p: +60.0% & Jun45p: +58.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/12 update: HP bounced off its Friday morning lows but the rebound failed by midday and HP closed off -0.8%. Our target is $45.25. However, more conservative traders may want to take profits now, especially if you are holding the May options, which expire in five days.

I am not suggesting new positions at this time.

- Suggested Positions -

Long May $50 PUT (HP1219Q50) Entry $2.50

- or -

Long Jun $45 PUT (HP1216R45) Entry $1.20

05/12/12 readers may want to take profits now, especially if you're holding the May options, which expire soon.
05/10/12 there has been no follow through on the bounce.
05/08/12 warning! HP has produced a big intraday bounce. This might be a short-term bullish reversal.
05/05/12 new stop loss @ 50.55
05/04/12 HP gapped down at $48.57

chart:

Entry on May 04 at $48.57
Earnings Date 07/27/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on May 03, 2012


Humana Inc. - HUM - close: 78.32 change: -1.08

Stop Loss: 82.25
Target(s): 71.50
Current Option Gain/Loss: Jun80p: +16.6% Jun75P: +17.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/12 update: Healthcare stocks were underperforming as a group on Friday and HUM was underperforming its peers with a -1.3% drop to new relative lows. I would still consider new position snow at current levels. Our exit target is $71.50 but do not be surprised if HUM finds some support and bounces in the $76-75 area. FYI: The Point & Figure chart for HUM is bearish with a $69 target.

- Suggested Positions -

Long Jun $80 put (HUM1216R80) Entry $3.00

- or -

Long Jun $75 put (HUM1216R75) Entry $1.15

chart:

Entry on May 10 at $79.56
Earnings Date 07/30/12 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on May 09, 2012


Informatica - INFA - close: 45.26 change: -0.13

Stop Loss: 46.25
Target(s): 40.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
05/12 update: The intraday bounce in INFA on Friday has failed and shares were rolling over into the weekend. The stock looks poised to breakdown under recent lows.

I am suggesting a trigger to buy puts at $44.50. Our target is $40.25. We'll use a stop loss at 46.25. FYI: The Point & Figure chart for INFA is bearish with a $39 target.

Trigger @ 44.50

- Suggested Positions -

buy the Jun $45 PUT (INFA1216R45)

chart:

Entry on May xx at $ xx.xx
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on May 10, 2012


Jos. A Bank Clothiers - JOSB - close: 46.64 change: -0.37

Stop Loss: 49.25
Target(s): 45.25
Current Option Gain/Loss: May50p: + 6.6% or May$45p: -61.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/12 update: JOSB is hovering between support near $46.00 and short-term technical resistance at its 10-dma. The current trend is down but we're running out of time. May options expire soon. More conservative traders may want to just abandon ship right now. I am not suggesting new positions and we will lower our stop loss down to $48.15.

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

05/12/12 new stop loss @ 48.15
05/05/12 new stop loss @ 49.25

chart:

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