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Daily Newsletter, Saturday, 5/19/2012

Table of Contents

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

Market Wrap

Facebook Fizzle

by Jim Brown

Click here to email Jim Brown

Facebook gave back all its opening gains and would have gone negative if not for underwriter support.

Market Statistics

I am so glad the Facebook IPO is over. The constant hype despite the extreme valuations had grown to the point where every news headline was related to Facebook. The stock opened on Friday at $42 and then declined almost immediately to the offer price at $38. Massive intervention by the underwriting syndicate prevented it from going negative and eventually some new buyers came to the market. The stock rebounded to $42 again before collapsing at 2:PM to trade at $38 for the rest of the day. Tens of millions of shares were traded in the last 30 min in the $38.00 to $38.05 range. JP Morgan and Morgan Stanley stepped in as buyers to prevent the shares from falling below $38 but it was a monster fight.

There were 82 million shares traded in the first 30 second of trading. Volume continued to be very heavy as the price declined but almost immediately there were problems at Nasdaq. Trade allocations and confirmations were delayed for several hours. Most investors did not know how many shares they had in their account until after 2:PM when Nasdaq said the messaging problems had been fixed. However, major brokers including Fidelity said confirmations for millions of shares had still not been delivered by the market close. Many Etrade customers did not learn until after the close that they had not received any IPO shares.

Had the systems been functioning normally the volume would have been significantly greater than the 581 million shares traded. Investors who were allocated shares in the IPO but had no confirmation could not sell them into the market. They were forced to watch the price decline without knowing "IF" they had any shares or how many shares they owned.

Despite the confusion, which would have allowed even more selling had it not been present, the volume was the largest for any U.S. IPO ever surpassing GM's record. The underwriters, all 33 of them, were able to keep the price at or above $38 but only after a major intervention. Underwriters want to have an IPO finish positive on the first day as evidence it was priced correctly and eagerly anticipated by the investing public.

Before the IPO we were hearing the shares were oversubscribed by 10:1 or even 30:1. Facebook raised the anticipated price twice and raised the number of shares being offered. Apparently the hype was just that, hype. Every person and institution that requested shares got those shares. In a normal IPO if a person asks for 1,000 shares he might get 300. An institution might ask for 300,000 and get 100,000. Because of this allocation lottery everyone always asks for more than they want. For instance the individual may ask for 3,000 shares and hope to get 1,000. The institution may ask for 600,000 and hope to get 300,000. Because of the hype this was probably rampant for Facebook. Investors that received allocation confirmations before the open found they got all the shares they requested. That means the majority of those investors/institutions needed to sell shares ASAP.

In the chart below you can see where the underwriters supported the price at 11:45 and again in the 30 min before the close. They were successful in preventing any trades below $38 even by a penny. They had to absorb significant volume to keep the price over $38. In the level 2 image below at 11:53 there were huge bids outstanding at $38. Compared to the relatively small share amounts at the ask. There was no way FB shares were going under $38.

Later in the afternoon the volume was not especially heavy but it was in the tens of millions of shares. For a space of about 15 min the price was dead flat at $38.

Facebook Chart

Facebook Order Depth

Bid/Ask (Image source @bourbon_meyer)

Underwriters can support prices in a variety of ways. They can physically buy the shares at no higher than the offering price. This can become expensive in an IPO of this size. They can also short the shares at the open by over allocating shares to their clients. Say they were given 50 million shares to allocate to their clients. They are also allowed a "greenshoe" option which in this case was 15%. That means they had an extra 7.5 million shares to hand out in the case of excess demand. That gives them 57.5 million shares. If they believe the IPO is going to be in trouble they can over allocate that extra 7.5 million shares and give their clients more shares than the underwriter was allocated. In this example let's say they distribute 57.5 million shares to their clients even though 50 million was the official allocation. That means they are short 7.5 million at $38. As the price in the open market declines back to $38 they can maintain a buy at $38 to cover that 7.5 million share short. Multiply this by all 11 underwriting managers and they had 63 million shares short to cover at the issue price if needed. Morgan Stanley was the official "stabilization agent" for the IPO. If the price never returned to the $38 level then those over allotment shares would be left in the market.

Friday was only the first step in the Facebook share saga. They have three lockup dates at 90, 150 and 180 days. They issued roughly 440 million shares on Friday but that number will increase by 172 million shares in 90 days and then more than double by 180 days. By year end there will be 1.8 billion Facebook shares available to trade. August 20th is the first lockup to expire with 172 million additional shares coming to market.

The odds of Facebook trading significantly below their offer price are very close to 100%. Facebook priced at 100 times 2013 earnings compared to Apple at 13 times 2012 earnings. Facebook will have 1.8 billion shares at year end compared to Apple at 935 million. Do the math. Facebook closed the day with a market cap of $105 billion and 3,200 employees. Hewlett Packard has a market cap of $42 billion and 325,000 employees.

For comparison other recent tech IPOs included Linkedin (LNKD) had a +109% spike on its first day. Groupon (GRN) rose +31%. The much hyped Facebook turned in a face-flop with a zero gain. The Facebook disaster caused investors to dump other social networking stocks. Zynga fell -13.4% to $7.14 after being halted for trading twice due to excessive price swings. Linkedin (LNKD) fell -5.7% and Groupon (GRPN) -6.7%.

Pivotal Research started coverage of Facebook with a "Sell" rating with a price target of $30.

More than 1,000 Facebook employees became millionaires on Friday. Some early employees and investors owned the shares at as little as $1.50 each. That could make employee retention a little difficult over the next several months. Zuckerberg ended the day worth $19.25 billion. Not bad for 8 years of work.

There was not a lot of news other than Facebook on Friday. There were no economic reports to move the market. Next week is going to be very slow in terms of economics. There are a couple housing sales reports and a couple regional manufacturing reports but nothing really market moving.

Economic Calendar

The Dow completed its 12th daily decline out of the last 13 days. That is the worst streak of losses since 1974. Pushing the global markets lower is the continuing flow of bad news from Europe. Greece dissolved its parliament in order to allow the new elections on June 17th. The elections are being seen as a vote on staying in the euro or committing economic suicide by defaulting on the bailout agreements and going back to the drachma. On Friday Germany's Merkel supposedly suggested adding a euro question to the June 17th ballot so citizens could decide if they wanted to stay in the euro with austerity or abandon the euro and face the chaotic consequences. However, late in the day her office said the rumor was incorrect.

Greece was downgraded again by Fitch from B- to CCC and the lowest rating for a country that is not in default. Fitch warned of a "probable" exit from the euro if the June elections produce an anti austerity government as expected. Fitch said a euro exit and forced redenomination of euro debts into drachmas would be considered a default. The parties winning the most votes in the May election said Greece should tear up the bailout agreements because the eurozone could not afford to kick Greece out of the union as it would trigger the entire currency union's collapse. A new anti austerity government will believe it is playing with a stacked deck and demand serious concessions from the eurozone but Germany is likely to balk at further concessions and let Greece commit economic suicide by voluntarily leaving.

Moody's downgraded 16 Spanish banks late Thursday citing concerns over the economic crisis. Moody's said numbers released last week showed bad loans at an 18-year high and said it was not confident Spain could continue to recapitalize its banks indefinitely. If Spain needed its own bailout the EU, ECB and IMF would be hard pressed to come up with sufficient funding. Germany countered on Friday saying it saw no reason why Spain could not continue to bailout its own banks without seeking outside aid. Ireland had the same problem in 2010 and required a bailout when it could not continue to fund its banks due to excessive bad loans. Moody's downgraded Italian banks earlier in the week. There is a serious run to withdraw bank deposits in Italy, Spain and Greece. The Financial Times said $1.5 billion flowed out of Greek banks on Monday/Tuesday alone.

This continued downward spiral by the weak European countries pushed the global markets into seriously oversold levels. In theory the oversold markets are due for a rebound soon but the clock is working against us. With the June 17th Greek election still four weeks away and the outcome likely to be an exit from the euro, most investors are looking for a safe haven. Nobody really knows what a Greek exit would do to the global financial system but there will be an impact. Economically most of the damage will be inside Greece but financially it will be widespread as euro denominated debts are forcibly denominated into drachmas. Banks and businesses will fail while thousands of others outside Greece will take major losses. The great Greek unknown will linger as a cloud over the market for the next month.

That cloud has even bigger storms behind it in Italy and Spain and investors worry that once Greece leaves the euro they will eventually follow suit. Most analysts believe this won't happen but investors hate uncertainty. It is the not knowing that causes the biggest problems.

Late Friday Spain was forced to revise its 2011 deficit estimate up to 8.9% of GDP from 8.5% in the last release. The initial target was 6%. Spain said despite the upward revision it was sticking with its 2012 deficit target of 5.3%. Fitch warned that despite the affirmation there was still a risk those 2012 targets would be missed.

The G8 meeting at Camp David this weekend is expected to focus on the Greek problem and the ramifications to other countries. President Obama is expected to partner with the new French socialist president Hollande in attempting to push through expanded stimulus through social programs aimed at generating economic growth in Europe. The G8 leaders will probably be drawing up contingency plans for a Greek exit from the euro. Even if they don't actually expect it they can't allow themselves to be unprepared.

The worries over the deteriorating conditions in Europe pushed the interest rate on the U.S. ten-year note to 1.702% and a new record low. U.S. treasuries are being seen as a safe haven once again despite our own rapidly deteriorating financial situation. We are still the dog with the least fleas.

Ten Year Note Interest Rate Chart - Monthly

Gold prices rebounded $70 since Wednesday's low of $1526 to close at $1591 on Friday. The power behind the move is the newfound expectations for the FOMC to add further stimulus to the market when they meet in June. The worsening European situation was mentioned in the FOMC minutes last week as a potential reason for additional stimulus. Add in the three-week decline in the stock market and what appears to be slowing U.S. economics and analysts suddenly found themselves expecting new stimulus. The Philly Fed Manufacturing Survey on Thursday declined sharply to -5.8 in May from 8.5 in April. Expectations were for a rise to +10.0.

Philly Fed Manufacturing Chart

I think this stimulus expectation is misplaced today but the June meeting on the 19th is two days after the Greek election so the outcome there could influence Fed members currently on the stimulus fence to join the party once again. This prospect and the oversold conditions in gold caused a strong bout of short covering.

Gold had fallen sharply on the rising dollar and selling by hedge funds. The CFTC reported on Friday that investors had dumped $2 billion in gold futures since May 1st. Net longs fell by $2.2 billion to $12.2 billion for the week ended May 15th. Net long contracts fell from 92,498 to 78,619. This was the smallest net long position in gold since December 2008 and the financial crisis forced liquidation in commodities to cover losses in equities. Gold prices on the June contract fell -$82 for the week ended May 15th before rebounding sharply late in the week.

Gold Chart

Also weighing on the market was the decline in the financial sector. Not only was Europe weighing on financials but the JP Morgan trade disaster was also a factor. JPM has lost $30 billion in market cap since it announced the $2 billion loss. Now that trading loss is up to $3 billion and it could go as high as $5 billion. This is prompting Congress to call for more rules for banks that are deemed too big to fail. Jamie Dimon has agreed to testify before Congress about the trade. The division inside JPM responsible for the loss was managing a portfolio of $326 billion in bonds and derivatives. JPM has a reported $71 trillion in derivatives on its books.

The decline in the S&P Financial Sector was -$127 billion in market cap last week. Eventually this cliff dive by JPM shares will end. The stock is already trading below tangible book and I think the bargain hunters will appear in quantity as it nears $30.

The financial sector lost more than -7% for the week.

Financial Sector ETF

JP Morgan Chart

With the Facebook IPO out of the way we may see traders return to the market. Clearly a lot of that $18 billion that was sucked out of the broader market in hopes of capitalizing on a big Facebook win will return next week. Most retail traders and probably a lot of institutions that received an IPO allocation have either already sold their shares or will do so once FB trades under $38. New money will take their place but the point here is that the retail trader will have their cash back and it could move back into tech stocks.

The Volatility Index closed at a six month high at 25.10 and this was an expiration Friday when the VIX is normally tame because of low premiums for puts. However, the market is imploding so put prices were still elevated.

Volatility Index Chart

Note the massive volatility spike back in August. That was the debt limit increase spike where S&P lowered the credit rating on the USA. For the long term thinkers out there we have an even bigger event coming in January. It is being called the "Fiscal Cliff." Bloomberg expects the impact of these events to cut -4% from the 2013 GDP. For those unaware that cliff includes:

Expiration of Bush tax cuts.
Payroll tax cut holiday from 6.2% to 4.2% expires.
Doctors get a 27% pay cut for Medicare patients.
Alternative Minimum Tax spikes for middle class workers.
Dividend Tax rises from 15% to 45%.
$1.2 billion in automatic spending cuts kicks in.
The $16.4 trillion debt limit will have to be raised to $18 trillion.
Four of the 20+ taxes for Obama Care begin.
Full list (PDF)

Just getting past the current market decline does not mean it will be clear sailing into year end. Worries over all those events above will weigh on any future rebound.

After three weeks of declines everyone is looking for a bottom. After months of vertical gains the concept of three weeks of declines is foreign to most traders. The S&P closed right on the 300-day average on Friday and just above the 200-day. (The 300-day is an interesting average. Some stocks completely ignore it while others treat it like an electric fence. Add it to your chart program and then look how well some stocks pay attention. Indexes are not normally reactive to it, only stocks.)

The S&P has declined -8.4% from the May 1st high of 1415 and -8.9% from the April 2nd high close at 1422. The index is approaching correction territory at -10%.

The AAII bullish and bearish percentages are very close to levels where reversals usually occur. The bullish percentage at 23.58% is actually below the levels seen during the market implosion in August 2011. The bearish percentage at 45.97% is nearing the level seen in August 2011 at 49.85%. That was a two year high.

AAII Bullish Sentiment

AAII Bearish Sentiment

What is so strange here is that it only took three weeks for a major change in sentiment and the S&P has only declined -8.4%. Are we just getting more risk adverse as we age or is it that traders are starting to understand the complex market relationships with Europe and the potential for a really ugly second half?

Regardless of the reason for the decline it has impacted all the various indicators. For instance the McClellan Oscillator has fallen to 110.33 and level that normally is reserved for major market events where a bottom is formed.

McClellan Oscillator Chart

In a Bloomberg survey of top strategists from major investment banks they found that recommendations to buy stocks as an asset class had fallen to levels not seen since the bottom of the 2009 crash.

Bloomberg Analyst Chart

Stocks have suddenly fallen out of favor and there are NO SIGNS of a pending bottom. However, volume has picked up dramatically. That is especially true of declining volume. We have gone from 5-6 billion total shares per day three weeks ago to 8.5 billion for the last two days. Declining volume averaged 6.4 billion shares per day and that was equal to total volume per day just a couple weeks ago. Daily up volume has only averaged 1.6 billion shares for all of last week.

Granted option expiration had something to do with that as well as 570 million FB shares on Friday but volume has definitely increased. Option volume has also increased and it is significantly weighted to puts. The CBOE Put/Call Ratio rose to 0.99 on Friday. Historically that represents extreme bearishness due to the volume of puts to calls in the market. That 0.99 level is very close to the extreme levels reached in August 2011 over 1.05. Also note the MACD at the bottom of the chart. It has also risen to extremes.

Put Call Ratio Chart

While we know the bearishness has reached the point of being extreme there has not been a pivotal day in the decline. That is a day where the A/D volume is 10:1 to the downside. Some call it a capitulation day. While bearishness increased significantly over the last three days there was no sign of capitulation. There were still people nibbling at the intraday dips. Nobody appears ready to chuck it all and throw in the towel.

Larry McMillan was pondering the same question on Friday and he said the odds of a powerful short term rebound were growing but he sees it as an opportunity to get short at a higher level. At this point I agree with him. The short term bearishness has reached the point where an unexpected news event could create a monster short squeeze. However, the longer term problems with Europe and economics should force the markets lower in the weeks ahead.

Bernanke could make an appearance at any time and say something about a potential QE3 program and the shorts would be crushed. He does not have to wait for the June FOMC meeting. He has shown in the past that he can telegraph his intentions and move the market. The ECB is also likely to print more money possibly with LTRO-III. They need to slow the downward spiral even more than the Fed does. Coming the week after the G8 meeting would be perfect timing for an announcement of some sort and possibly a coordinated announcement.

The S&P could continue to the 200-day support at 1275 next week or it could rebound at any point. With the Dow down 12 of the last 13 days the rebound spring is coiled pretty tight. Nothing prevents it from being wound tighter but we have to be nearing an explosive rebound.

There are analysts talking about a dip to 1250 or even 1200 so be prepared for a continued decline even if we get a short term bounce.

S&P Chart - Daily

S&P Chart - Daily

The Dow is not normally reactive to the moving averages because of its thin 30 stock construction. That being said there is a convergence ahead of several different support points including the 200-day average. While I think the Dow will be controlled by Europe and economics we could see a rebound or at least a pause at the 200-day as traders search for something to pin their hopes on.

Dow Chart - Daily

Dow Chart - Daily

There is a scene in the Twilight Zone movie where a character asks a pending casualty, "Do you want to see something really scary?" He could have been referring to the Nasdaq chart from last week. The Nasdaq lost -155 points or -5.28% in a single week and there next support level could still be several percent lower. However, the Nasdaq has lost 306 points or -9.919% since the May 1st high at 3085. In theory only a couple more points will qualify as a 10% correction and the selling pressure will ease. Unfortunately I have found out from three decades of market watching that market theory seldom corresponds with market reality. If it was that easy nobody would every buy any stock after the first 2-3% decline and everyone would wait for the bell to ring a -10.1% and then go long.

There is no sign of a bottom in the Nasdaq and the Facebook flop could sour the tech sector next week as well. The opposite view I suggested earlier is that sellers of Facebook now have cash to reinvest and that could be directed towards techs. Those investors now holding cash they had hoped to see double in the Facebook IPO may be disillusioned and seeing the market in freefall they may want to lick their wounds before rushing to catch the next falling knife.

The Nasdaq is about to test the 200-day average at 2740 and that could become support. However, market sentiment has turned so negative that any support may prove brief until the sellers run out of stock.

Apple (AAPL) did halt its decline on the 100-day average on Thursday and actually closed positive on Friday but still on that supporting average. A break below that $528 level could see another 30 points disappear very quickly as technical sell stops are triggered.

Apple Chart

Nasdaq Chart - Daily

The Russell 2000 chart may be a window into our future. The Russell has broken below all the major averages and the 785 level that were support since January. The break below the 200-day suggests the big cap indexes may soon follow suit. The head and shoulders on the Russell completed and that formation now targets 725. In times of market stress most support levels are exceeded as the decline overshoots the technical targets. For that reason I am expecting to see a retest of 700-715 in the weeks ahead.

I don't expect to see that occur in a straight line. There is a short squeeze or two in our future but I think any rebound will fail unless there is a surprise announcement by the Fed and ECB.

Russell 2000 Chart - Daily

The Total Stock Market Index has shown in the past to be reactive to the 200-day average. That is currently 13,370 and about 145 points below our current level. The TSM is not impacted by large moves in individual stocks and is therefore an accurate picture of market sentiment. That sentiment is ugly today.

Dow Total Stock market Index Chart - Daily

If we go one step further and chart the NYSE Composite we see that index has already fallen below the same relative support levels the other indexes are just now approaching. The NYSE has a lot of energy stocks plus ADRs for foreign stocks. The energy sector has been decimated with the decline of oil prices to $92 and natural gas prices briefly falling below $2. The ADRs have been crushed by double digit declines in the indexes of other countries. China, India, Brazil, Spain, Italy, and others are all down significantly on the European crisis.

The NYSE may be a better indicator of world markets but the U.S. economy is relatively stronger than the rest of the world at present. The NYSE may be the worst case and hopefully the S&P and Nasdaq don't go to these extremes.

NYSE Composite Index Chart - Daily

The Dow Transports lost -5% for the week despite plunging oil prices. The transports should have reacted positively to the prospects for lower fuel prices but worries over lower shipment volumes and slowing economies weighed heavily on the carriers.

Dow Transport Chart

The charts paint a vivid picture of a market in the process of a serious collapse. The -10% correction thresholds could be hit as early as Monday but there is not yet anything in the headlines to energize buyers. There has been little bargain hunting on the dips and money flows out of equity funds and back into bonds is accelerating rapidly.

This picture suggests there are lower lows ahead but as we all know the market direction can change just as easily as changing the channel on TV. No market move is guaranteed and no move lasts forever. The Dow down 12 of the last 13 days is a streak begging to be ended. Something will cause a short squeeze soon but as long as the Greek cloud hangs over the market the long term outlook is negative.

Enter passively, exit aggressively!

Jim Brown

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Index Wrap

As Stocks Fall Off a Cliff, Fear Climbs Sharply

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

Last week I suggested there's no reversal to a bear market suggested on a longer-term basis but enough panic was in the air this past week to feel like one. Fear factor VIX (CBOE Volatility Index) rose sharply. I made last weekend that the sell off was looking like a 'normal' bull market correction but this past week was all selling all the time. I see this panic as near to running its course. If so it suggests taking put profits. Going the other way and buying calls is risky too, maybe not so much that there won't a bounce, but any rally may be limited given the fear and loathing that's out there about euro-land.

Last week I suggested some 'likely' support levels (e.g., 1340, then 1320) in the S&P 500, but even 1300 gave way by week's end. As happens from time to time, the market has gone from an extremely bullish outlook to extremely bearish. Extreme to extreme, the never ending story of stocks.

This second down leg in the major indexes is now a bit more than a Fibonacci 1.6 times the first downswing. In the process the S&P is quite oversold on a daily chart basis as is Nasdaq. The (Nas) Composite is now also nearing an oversold extreme on a weekly chart time frame.

Those who bought puts even as prices fell off a cliff have profited, which is not a common occurrence in buying puts, EXCEPT in panic situations. I don't do well in crazy time predictions for a possible further downside. There are however strongly increasing odds of a rebound sooner rather than later.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart continues bearish; more so now with the waterfall type decline of this past week. I was looking for support in the 1340 area and this gave way, then at 1320. NOT! Even 1300 didn't hold up as a possible 'major' support. I suggested probing the long side around 1320 would warrant an exit point or stop just below 1300. I'm shying away from further crystal ball predictions on a next bottom!

I have been saying for awhile it's sometimes if not OFTEN the case with a SECOND down leg that it's more than the first. More by 'at least' a Fibonacci 1.6 times and SPX has now gone a bit more than that. The decline has also carried well under my lower 'envelope' line set at 3 percent under the 21-day average. No magic number in this but such oversold extremes don't last more than a few days typically.

I've estimated next support at 1280, extending to 1270. I'm looking for a near-term rebound either from the recent close or from the 1280-1270 zone. Near resistance is now at prior support at 1320; next resistance 1340. Needless to say that SPX is now 'fully' oversold both in terms of the Relative Strength Index (RSI) AND by my bullish/bearish sentiment indicator. Bears beware of a bullish rebound with a day or a few.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) index chart is bearish but with its second down leg having fulfilled some 'minimum' downside objectives. See above S&P 500 comments also.

I thought that OEX wouldn't get pushed under 610 for long, but that's now highlighted on my chart as near resistance. 600 as an 'obvious' support got pierced also. I thought that 600 was a potential objective but not so quickly as this past week already!

Those taking a flyer on calls around 600 would have exited at 595 by my lights. Taking put profits was good in my estimation. I don't suggest trying to stay in until everyone is short already, given the risk of a short-covering rally.

OEX may have touched some support at 590 already but if there's just more free fall ahead, its next lower support looks like 580-584.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) has a bearish chart and it got more bearish with the waterfall type decline of the past 5 trading sessions. This type action usually suggests that at least an interim bottom isn't far off. I use IBM as the current best S&P/Dow bellwether and it looks to have some support in the 195 area which it touched on Friday.

The well-defined double top in INDU was the tip off for a significant lid on the Average but that wouldn't necessarily suggest a rout from there. Still, there were a lot of instances where the Dow couldn't get through the 13300 area. If they can't take em up, they can take em down with a vengeance.

There are now just a handful of INDU stocks that don't have a continuing pattern of weakness or a pattern of breaking down of the prior uptrend. DIS, KFT, T, VZ and WMT still are holding up but that's not a powerhouse picture of leaders.

Potential support looks like 12300, extending to 12200. I thought last week that support was near at hand but the sell off has gotten extreme enough to project potential for an interim low. Near resistance is at the last 'break-down' point at 12600, with next resistance at 12800.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

I noted that prior (island) top patterns in the Nasdaq indices but didn't see downside below 2900 but COMP fell off a cliff.

Where to from here? I've sworn off crystal ball predictions but have estimated support at 2750, then at 2700. COMP in this zone would have more potential for at least a dead cat bounce than another big further decline. I also thought that the low-2800 area would hold up as support too. Grain of salt on my downside expectations! My best COMP and NDX 'predicator' has been Nasdaq Apple (AAPL) and I've been projecting a pullback to the $500 area and AAPL is getting close to that target; Friday Close: 530.

Near resistance: at 2850 and a prior potential support; next resistance is 2900 and this may be a strong lid on any rallies ahead.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) Index is in the second downleg of an a-b-c (down-up-down) correction pattern; one where the second decline has now carried to 'at least' (a Fibonacci) 1.6 times the first down leg. This doesn't of course mean that NDX is going to now magically be lifted from recent lows, but does suggest that one key downside chart expectation has been met. Moreover, as you can see from the COMP chart above, Nasdaq is now at a 'fully' oversold extreme given such low bullish sentiment.

Apple Computer (AAPL) is an even more key bellwether for big cap NDX. AAPL is now close to my initial pullback objective to $500 given its Friday finish at 530.

Near support or a next downside target is to the 2450 area, then to 2400. Near resistance now looks like 2550, extending to 2600.

NDX is about as oversold (judging by the 13-day RSI) as it tends to get at significant turning points. The Index can of course slide further but I suggest not getting complacent in puts. If NDX just levels out here and volatility decreases, you may not exit with the profit you hoped for. Still, I like 'worrying' about profits rather than being on the wrong side of the market!

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) is bearish for saying bearish given the recent acceleration in its decline.

Near support or a next potential downside target looks like 60, extending to 59.3. If QQQ touches 60 I'm anticipating evaluating buying the stock, with a 59.0 sell stop. The key unknown is whether a potential move to 60 would be a knife-like plunge through this level or where buying interest starts showing up. I don't suggest trying to 'catch a falling knife' but rather assessing bottoming action if or when it comes in.

Near resistance looks like 63, then 64, at two prior 'support' levels. Support, once broken, 'becoming' subsequent resistance.

Daily trading volume has jumped again on this latest sell off and it looks like more bullish 'long-term' holders of the stock have lost their conviction. Good time for a bottom perhaps on further weakness or from recent lows, although I thought buying interest might show up around 63 and here is QQQ under 61.0 on Friday.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) chart plunged after falling under the 'neckline' of a Head & Shoulder's Top pattern which is outlined below. Of all the major indexes save the Dow, RUT had the most clear cut advance warning of a top based on its chart pattern. As I've noted on the chart, the H&S top has a 'measuring' implication for a rule of thumb 'minimum' downside objective to around 723.

I didn't highlight support or resistance points but they look like a next potential support at 735, extending to 726. Near resistance, based mostly on the RUT hourly chart (not shown here) looks like 760, then 777-780.

Like the other indices, RUT is quite oversold which suggest the potential for a rally. Let's say the probability of a rebound grows or just a leveling off of prices.



GOOD TRADING SUCCESS!


New Option Plays

Nearing The Spring Lows

by James Brown

Click here to email James Brown

Editor's Note:

We are cautious on the market right now. The trend is clearly down but stocks are oversold and due for a bounce. When the bounce shows up it will probably be a sharp rally higher but will likely turn out to be a new entry point for bearish positions.

We would rather wait for the oversold bounce before loading up on new trades.


NEW DIRECTIONAL PUT PLAYS

L-3 Communications - LLL - close: 67.58 change: -0.30

Stop Loss: 68.75
Target(s): 62.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
LLL is essentially a defense contractor. The big spike higher in late April was a reaction to the company's bullish earnings news. They beat estimates on both the top and bottom line. Plus management raised guidance. Yet after the spike traders started selling and the stock has followed the market lower these last three weeks.

Now LLL is breaking down under its simple 200-dma and is in danger of breaking down under its March and April lows. The weekly chart shows a longer-term bearish trend of lower highs and lower lows.

I am suggesting a trigger to buy puts at $66.75 with a stop at $68.75. We will target $62.75. More aggressive traders could aim closer to the $60 area.

Trigger @ 66.75

- Suggested Positions -

buy the Jul $65 PUT (LLL1221S65) current ask $1.85

Annotated Chart:

Weekly Chart:

Entry on May xx at $ xx.xx
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 856 thousand
Listed on May 19, 2012



In Play Updates and Reviews

BIDU Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:

Shares of Baidu.com (BIDU) hit our bearish exit target on Friday. We also closed our HUM trade to lock in a profit. VZ was triggered and I have removed AMGN and MJN as candidates.

The stock market is looking oversold here and due for a bounce. Readers will want to seriously consider taking profits now on our bearish put positions.

Current Portfolio:


CALL Play Updates

Verizon Communication - VZ - close: 41.53 change: +0.16

Stop Loss: 39.95
Target(s): 45.75
Current Option Gain/Loss: Jun$42c: - 3.3% & Jul$43c: -21.2%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/19 update: Our new trade on VZ has been opened. The stock gapped open higher at $41.61. Our trigger was $41.55 so the play was opened immediately. Shares rallied to $42 before paring its gains. The relative strength is encouraging. More conservative traders could wait for a dip near $41.00 or the 10-dma before launching new positions.

More conservative traders may want to use a stop closer to $40.50 instead. Keep in mind that VZ does not move super fast so we'll need to show some patience.

- Suggested Positions -

Long Jun $42 call (VZ1216F42) Entry $0.60

- or -

Long Jul $43 call (VZ1221G43) Entry $0.66

05/18/12 triggered on gap higher at $41.61 (trigger was 41.55)

chart:

Entry on May 18 at $41.61
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 13.8 million
Listed on May 17, 2012


PUT Play Updates

Fiserv, Inc. - FISV - close: 64.61 change: -0.72

Stop Loss: 67.25
Target(s): 63.50
Current Option Gain/Loss:(May$70p: +12.5%) & Jun65P: +105.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/19 update: The correction in FISV seems to be gaining a little momentum. Shares broke down and closed under the $65.00 level on Friday. I am lowering our stop loss to $67.25.

Our exit target is $63.50 but more conservative traders may want to take profits now (currently +105%). Aggressive trades could aim for the $61-60 zone instead.

- Suggested Positions -

- previously closed position -
May $70 put (FISV1219Q70) Entry $3.02 exit $3.40 (+12.5%)

- or -

Long Jun $65 put (FISV1216R65) Entry $0.90

05/19/12 new stop loss @ 67.25
05/17/12 new stop loss @ 68.25
05/15/12 closed May $70 puts at the open: bid @ 3.40 (+12.5%)
05/14/12 prepare to exit the May $70 puts at the open tomorrow
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: 63.34 change: -0.38

Stop Loss: 66.05
Target(s): 61.50
Current Option Gain/Loss: +66.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/19 update: Another day, another decline for GD. Shares are looking oversold here. Readers may want to take profits now. When the market bounces we could see GD rally back toward the $65-66 zone. I am inching our stop loss down to $66.05.

- Suggested Positions -

Long Jun $65 PUT (GD1216R65) Entry $1.50

05/19/12 new stop loss @ 66.05
05/17/12 new stop loss @ 66.55
05/15/12 triggered @ 65.75

chart:

Entry on May 15 at $65.75
Earnings Date 07/25/12 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on May 09, 2012


Informatica - INFA - close: 41.57 change: -0.70

Stop Loss: 45.25
Target(s): 40.25
Current Option Gain/Loss: +70.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/19 update: INFA inched lower on Friday and closed down -1.6% to set a new three-month low. Our exit target is $40.25 but more conservative traders may want to exit early now to lock in a gain. If the market does see an oversold bounce we could easily see INFA bounce back toward the $44 or $45 levels.

- Suggested Positions -

Long Jun $45 PUT (INFA1216R45) Entry $2.40

05/19/12 readers may want to take profits now
05/16/12 new stop loss @ 45.25
05/14/12 triggered at $44.50

chart:

Entry on May 14 at $44.50
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on May 10, 2012


iShares Russell 2000 ETF - IWM - close: 74.69 change: -0.71

Stop Loss: 78.75
Target(s): 72.00-70.00 zone
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
05/19 update: Thus far the IWM is moving the direction we expected. It's just moving lower a lot faster than expected. I don't want to chase it here even though Friday was bearish with a close under technical support at the simple 200-dma. I strongly suspect the market is going to see an oversold bounce soon and that's when we will want to buy puts.

We will tentatively put a trigger to buy puts at $76.75 with a stop loss at $78.75.

Trigger: buy puts on a bounce at $76.75, stop 78.75

- Suggested Positions -

buy the Jul $75 PUT (IWM1221S75)
05/19/12 adjusted strategy: buy puts on a bounce at $76.75, stop 78.75
05/17/12 temporarily wait on buying puts. We will re-evaluate tomorrow.

chart:

Entry on May xx at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 53 million
Listed on May 12, 2012


Siemens AG - SI - close: 83.56 change: +0.54

Stop Loss: 87.75
Target(s): 80.25
Current Option Gain/Loss: +18.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/19 update: European stocks just had their worst week of the year. Thus I am surprised that SI managed an oversold bounce on Friday of +0.6%. The trend is down but shares remain oversold. Look for short-term resistance at the simple 10-dma near $85.80. I am not suggesting new positions at this time. FYI: The Point & Figure chart for SI is bearish with a $74 target.

- Suggested (SMALL) Positions -

Long Jun $80 PUT (SI1216R80) Entry $1.35

05/16/12 SI gapped open higher at $84.94

chart:

Entry on May 16 at $84.94
Earnings Date --/--/--
Average Daily Volume = 832 thousand
Listed on May 15, 2012


Tiffany & Co. - TIF - close: 60.64 change: +0.57

Stop Loss: 63.55
Target(s): 59.00
Current Option Gain/Loss: +11.5%
Time Frame: exit prior to the May 24th earnings report
New Positions: see below

Comments:
05/19 update: TIF managed an oversold bounce off of round-number support at the $60.00 level on Friday. We only have three days left for this trade since we're planning to exit prior to the earnings on May 24th.

I am not suggesting new positions. Please not our new stop loss at $63.55.

- Suggested Positions -

Long Jun $60 put (TIF1216R60) Entry $2.35

05/19/12 new stop loss @ 63.55, only 3 days left
05/17/12 TIF is testing $60 readers may want to take profits now
05/16/12 new stop loss @ 64.25
05/14/12 TIF gapped down at $61.67, under our trigger.

chart:

Entry on May 14 at $61.67
Earnings Date 05/24/12 (confirmed)
Average Daily Volume = 1.5 million
Listed on May 12, 2012


CLOSED BULLISH PLAYS

Amgen Inc. - AMGN - close: 69.15 change: -1.39

Stop Loss: 69.40
Target(s): 74.90
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
05/19 update: The market's sell-off is accelerating and AMGN is breaking down from its recent trading range. It's possible that shares might bounce off their 50-dma but it's not worth taking a chance here. I'd rather remove AMGN now. We can choose to add it back later if the stock improves. Shares never hit our trigger to buy calls.

Trigger @ $71.50 (small positions)

Trade never opened.

05/19/12 removed from the newsletter
05/17/12 adjusted trigger to $71.50.

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


Mead Johson Nutrition - MJN - close: 81.00 change: -1.53

Stop Loss: 82.25
Target(s): 89.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
05/19 update: We have a similar situation with MJN. The plan was to buy calls on a breakout higher. The stock is dropping instead thanks to the market's widespread decline. Friday saw a breakdown below the 50-dma. I am removing MJN from the newsletter. Our trade did not open.

Trigger @ 85.05

Trade did not open.

05/19/12 removed MJN from the newsletter.

chart:

Entry on May xx at $ xx.xx
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on May 16, 2012


CLOSED BEARISH PLAYS

Baidu, Inc. - BIDU - close: 115.37 change: -2.03

Stop Loss: 125.50
Target(s): 115.50
Current Option Gain/Loss:(May125P: +128.5%) & Jun120P: +181.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/19 update: Target achieved.

It was a volatile day for BIDU. Shares rallied past $121 on Friday morning but reversed and eventually closed down another -1.7%. Our exit target was hit at $115.50.

- Suggested Positions -

- previously closed position-
May $125 put (BIDU1219Q125) Entry $2.10, exit $4.80 (+128.5%)

- or -

(closed on Friday, May 18th, 2012)
Jun $120 put (BIDU1216R120) Entry $2.95, exit $8.30 (+181.1%)

05/18/12 exit target hit at $115.50
05/17/12 new stop loss @ 125.50, adjust exit to $115.50
05/14/12 planned exit to sell our May $125 puts at the open this morning.
They opened with a bid at $4.80 (+128.5%)
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


Humana Inc. - HUM - close: 74.53 change: -1.15

Stop Loss: 80.25
Target(s): 71.50
Current Option Gain/Loss: Jun80p: +66.6% Jun75P: +73.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/19 update: Hmm... it looks like I may have been a little bit early with our exit. On Thursday I suggested we exit our HUM positions at the open on Friday since I was expecting a potential oversold bounce off the $75.00 level. Instead HUM has continued to sink and lost another -1.5%. Our trade is closed and HUM remains short-term oversold here.

- Suggested Positions -

Jun $80 put (HUM1216R80) Entry $3.00 exit $5.00 (+66.6%)

- or -

Jun $75 put (HUM1216R75) Entry $1.15 exit $2.00 (+73.9%)

05/18/12 scheduled exit at the open
05/17/12 Prepare to exit positions at the open tomorrow
05/16/12 new stop loss @ 80.25

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