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Daily Newsletter, Saturday, 5/26/2012

Table of Contents

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

Market Wrap

Hostage to Headlines

by Jim Brown

Click here to email Jim Brown

The markets remain hostage to headlines from Europe and there is no end in sight.

Market Statistics

Continued negative headlines from Europe are pressuring the global markets and this is not likely to change for several more weeks if not months. Greece has been the daily headline but that is not the only problem in Europe.

Spanish bank Bankia was rumored at Friday's open to be planning to ask the government for an additional 15 billion euros to cover capital requirements on real estate and non-property loans. The bank's parent was nationalized about a month ago because of capital problems. Late in the day the bank actually asked for 19 billion euros ($24 billion) in support. The government already contributed 4.5 billion euros in 2010 when the Bankia Group was formed from a merger of seven savings banks. The bank posted a loss in 2011 of 2.98 billion euros.

The losses in Bankia are producing worries of similar losses in other Spanish banks and an accelerating decline resulting in other nationalizations. Investors are worried the Spanish government cannot afford to continue to pour tens of billions into the banking system in an effort to overcome the declining fundamentals. Economic Minister Luis De Guindos told banks on May 11th to come up with another 30 billion euros in capital and that was on top of a demand for 54 billion euros in February.

Spain is entering a double dip recession that will worsen problems for banks. The worst is the real estate crash that has devalued property by as much as 50% in some areas. Banks holding mortgages on those properties are in deep trouble. S&P lowered the ratings on Bankia and four other banks and warned the rising reserve requirements in the wake of the rising loan defaults would lead to further downgrades.

Spanish regional entities like Catalonia have more than 36 billion euros of debt maturing this year and no way to raise it in the private markets. The yields on Spanish debt are nearing 7% and the regional authorities can no longer sell debt in the international markets.

One analyst said "Greece is the fuse and Spain is the bomb." Spain's debt to GDP is 145%. As Greece accelerates towards its probable exit from the euro the fate of the other debtor nations including Spain, Italy, Portugal and Ireland hangs in the balance.

Spanish unemployment is 24.1% but under age 25 it is over 50%. Greek unemployment is 21.7%, Portugal 15.3%, Ireland 14.5%, France 10%, Italy 9.8% and Germany 5.6%.

Belgium's foreign minister warned on Friday that central banks and corporations are making a grave error if they do not make plans now for a Greek exit from the euro zone. Greece only accounts for 2% of the EU economy but it represents a severe contagion threat if it decides to leave the euro. The Euro Working Group told member states last week to begin making plans for a disorderly Greek exit.

French banks have significant risk to a Greek exit. Credit Agricole, BNP Paribas and SocGen have stepped up planning for the consequences of a return of the Greek Drachma. French banks have 47.9 billion euros of Greek debt, Germany 18.6, UK 11.5 and Portugal 8.7 billion. Peter Bofinger, one of the five key advisors to the German government, said Europe should renegotiate the bailout settlement with Greece as the initial terms assumed overly optimistic growth. "It is important for both sides because if you have an uncontrolled exit by Greece, it could lead to a 'Lehman moment' for Europe."

It appears the anti-bailout parties in Greece have got it right. They believe they can void the agreement and renegotiate for much better terms because the alternative of a disorderly exit is too terrible for the rest of the euro to consider. Unfortunately once they do that we will see Portugal and Ireland asking for the same deal on their bailouts. If you carry this concept a little farther we see Spain and Italy demanding support in the hundreds of billions of euros because they are too big to fail and too big to exit without bankrupting the entire euro zone. The stronger countries like Germany are in a world of trouble because they will be asked to pay the majority of the bailout bill and they have no way to avoid it. Germany may be the economic brain behind the euro body but the heart, liver and lungs have cancer and need surgery and chemo. Germany does not want to pay for all the operations but they also can't afford to deny the treatment because the unchecked cancer in any of those organs would eventually kill the entire euro body.

The cost of a Greek exit to the rest of the euro zone is estimated to be between 1-2 trillion euros from bank failures, debt defaults, business bankruptcies, etc.

This euro problem is not going away and definitely not going away before the June 17th Greek election. A new poll published Friday gave the anti-bailout Syriza party more than 30% support, widening its lead over the center-right New Democracy party from 2% to 4%. A different poll showed that more than 75% of the people don't want to leave the euro because of the financial hardship it will involve. Will they vote that way on June 17th? Nobody knows. That would require them voting for a party other than Syriza. Talk is cheap but once they enter that voting booth they have to vote for financial stabilization and austerity or exiting the euro and financial suicide. Until the result is known the world's markets will remain hostage to the headlines.

Back on this side of the pond the only material economic headline was a sharp move higher in Consumer Sentiment. The headline number for May rose to 79.3 from 76.4 in April. Consensus was for a gain to 77.8. This was a huge surprise and the highest reading since October 2007. The nearly +3 point jump was larger than the combined gain from the prior three months. Sentiment has now risen for nine consecutive months.

Surprisingly the current conditions component showed the biggest jump from 82.9 to 87.2 while the expectations component rose from 72.3 to 74.3. Present conditions are now at the highest since January 2008 and expectations at the highest since July 2007.

This sudden spurt in sentiment is amazing given the deteriorating conditions in Europe and a three week slide in the stock market. Gas prices falling to $3.71 per gallon and mortgage rates falling to a new low appear to have offset the slowdown in new jobs. Either the 2013 fiscal cliff has not yet made an impression on consumers or they just assume lawmakers will legislate it away. There is a serious disconnect between the average consumer and the financial problems the country will face in the years ahead. Don't worry, be happy!

Consumer Sentiment Chart

The shortened economic calendar for next week is full of high profile events and it could be a pivotal week for the markets. This is employment week with the ADP and Challenger reports on Thursday and Nonfarm Payrolls on Friday. The GDP is also Thursday and the consensus is a revision to +2.3% growth for Q1 but the whisper numbers are as low as +1.8%. That would be a challenge for the market.

The Chicago ISM, formerly PMI, is Thursday followed by the national ISM Manufacturing on Friday. Both of these reports could be a problem if they show material declines.

The big report for the week will be the Nonfarm Payrolls on Friday. Consensus estimates are for a gain of +175,000 jobs, up from 115,000 in April. You may remember March and April were well below expectations and a dramatic slowdown from the strong January and February numbers. If May shows a rebound or at least a strengthening then the market should be ok. If by chance there is another weak month in the 115,000 range I think the investors will express their worries over the rest of the year by exiting stocks.

Economic Calendar

We have seen some serious declines in the regional activity reports for May. The Philly Fed fell from 8.5 to -5.8. The Richmond Fed fell from 14.0 to 4.0 but the Kansas Fed rose from 3 to 9 so the conditions are not the same in all regions. This makes forecasting the national ISM for next week a tossup and that is the same with the payroll reports. Some of the regional Fed reports showed a significant improvement in the employment components. However, the weekly jobless claims are still averaging over 378,000 for the last seven weeks. That has eased to 371,000 over the last three weeks but the difference is minimal. With the heavy calendar of material reports we will remain hostage to the headlines even if Europe's news was to fade.

In stock news the Facebook IPO refuses to go peacefully into the history books. Suits are being filed daily and news is beginning to surface that explains just how big the problem at Nasdaq was at the open. It was chaos that lasted for hours and market makers could not get information on pricing or trades. Basically everyone was flying blind until after 2:PM when some normalcy returned. The major market making firms have reported losses of more than $150 million due to the technical problems at the Nasdaq. The exchange said it had reserved only $13 million for compensation on broken trades. The actual damage when the smoke clears could be 100 times that. UBS lost around $30 million. Knight Capital lost as much as $35 million. Citigroup more than $20 million. A market maker is a firm that must buy and sell a specific stock and maintain a publicly quoted price. Since the Nasdaq was not supplying prices in real time and trades were being executed as much as two hours away from when they were entered the market makers were stuck with the spread on the incorrect prices.

There will be severe repercussions to the Nasdaq for these errors. There are dozens of suits and inquiries from nearly every U.S. regulator, House and Senate committees plus the state of Massachusetts. There are multiple class action suits against the underwriters, Nasdaq and Facebook itself.

Trading in shares of Facebook has calmed with only 37 million exchanged on Friday. Shares closed at $31.90 after a spike at the close but they immediately declined to $31.34 in afterhours.

For those wishing to play Facebook options you will get your chance when they list on Tuesday. Beware! The volatility is going to be extremely high and premiums will be very expensive. I will be looking at the puts because analyst price targets are dropping like a rock with some as low as $9. There are still analysts with targets over the IPO price of $38 but they are being very quiet. The price targets range from $9 to $49. One analyst said the IPO was a disaster because it was over-hyped, over-priced, over-supplied and over owned. With a large number of banks, institutional investors and hedge funds already invested and known to be selling into the IPO there was little desire by other funds to contribute to their exit by picking up a bunch of shares. That is the equivalent of buying the top to buy shares that dozens of other hedge funds are dumping.

JP Morgan and Goldman Sachs were co-underwriters on the IPO and we found out on Friday they had actually loaned the shares to hedge fund clients to short into the IPO. Morgan Stanley did not loan shares. Shares cost 40% to borrow on Tuesday but that fell to 6% on Thursday as more shares became available. It was the 40th most expensive stock to borrow on Tuesday but not even in the top 500 on Wednesday.

At Friday's $31 close the stock still has a PE of 69. There are stories from institutional investors of Mark Zuckerberg failing to appear as promised at two road shows and hiding in the bathroom for 15 min at another when it was time for him to appear. Needless to say he is not inspiring investor confidence today.

Corsair Components, a computer memory manufacturer and Tria Beauty, a laser-hair removal and cosmetics firm, have both delayed their IPO as a result of the Facebook disaster. Expect more to follow.

Facebook Chart

Chesapeake Energy (CHK) rallied for the week on news they were putting more assets up for sale and some large investors were increasing their stakes in the company. Carl Icahn announced he had accumulated 50 million shares worth 7.56% of the company and worth $785 million. You may remember Icahn exited his CHK stake about a year ago. He had persuaded CEO Aubrey McClendon to sell off the Fayetteville Shale assets for about $5 billion. After that the promises the board made to Icahn "proved hollow" in Icahn's words and he exited his position. Shares have declined about 60% since then.

Of all the investors you want to be taking a new stake in your company it probably would not be activist investor Carl Icahn. He immediately sent a letter to the Chesapeake board saying he plans to force the breakup of the board and the installation of new directors nominated by him and some other leading shareholders. After McClendon was forced to liquidate the majority of his shares in a margin call his remaining stake is about one tenth the size of Icahn's today. I foresee a very rocky marriage ahead and an ugly divorce.

Icahn's letter to the board called them to task for not holding management (McClendon) accountable. He criticized them for allowing McClendon to cause multiple events over the past several years that were highly embarrassing to Chesapeake. At the same time they allowed the company to create a $16 billion operating cash shortfall for 2012. Icahn said he met with McClendon recently and suggested direct shareholder representation on the board. McClendon said he would consider it but the next day the board sent Icahn a letter refusing to even consider the request. The board recently said it was going to split the Chairman and CEO roles and appoint a new Chairman. Icahn said this is like having the fox chose another fox to guard the henhouse. Excerpt from Icahn letter, "We cannot stand idly by and allow this to happen. Therefore, if you continue to arbitrarily refuse the request we have made for shareholder representation, we, as activists, will immediately take whatever 'actions' we feel are necessary to protect the value of this company." That is not exactly the letter McClendon wanted to receive.

CHK announced it was putting more land up for sale in an effort to reduce that $16 billion funding shortfall. They put up 504,000 acres of oil and gas leases in the DJ Basin in Colorado and Wyoming. This is roughly 3% of their total holdings of 15 million acres. McClendon has said in February that wells in the DJ Basin had been "spotty." CHK expects to get $2 billion from that asset. Good luck with that. The acres were valued at $4,750 each in January 2011 when CNOOC of China bought a 33% stake. However, because of the spotty results Synergy Resources just paid $300 an acre in the same field in March. They are also trying to sell 1.5 million acres of leases in the Permian Basin. They are also looking for a partner for two million acres in the Mississippi Lime area of Oklahoma and Kansas.

Analysts are divided over the prospects for CHK to rise on the Icahn news or eventually decline since a proxy fight is only going to open the company up to more ridicule. After a month of gains in gas prices they fell -3.7% on Friday on a report saying at over $2.50 per mcf for gas, coal was a cheaper alternative for electrical generation. Plus gas injections into storage have been rising in recent weeks. More than 77 Bcf was added to storage last week.

Chesapeake Chart

Talbots (TLB) fell -39% on Friday after an exclusivity agreement with potential buyer Sycamore Partners expired without a deal. The deadline had been extended twice. Talbots said it remained open to the prior price of $3.05 per share but would actively explore other options. Sycamore owns 9.9% of Talbots and agreed to an exclusivity agreement in early May when it raised its offer by a nickel to $3.05. The street believes the company has already talked to multiple prospective buyers and nobody came through. Adjusted earnings last quarter were 9 cents compared to estimates for a loss of 2 cents but analysts believe the fundamentals are not good. They have closed 90 stores since March 2011 and they are on track to close a total of 110. They currently have 540 locations.

Talbot Chart

The CME (CME) announced a 4:1 stock split in an effort to attract new investors. With CME shares currently trading at $262 a 4:1 split will reduce the price to about $53. That puts it within reach of a lot more investors. However, concerns over lackluster trading volume across all exchanges has pressured prices of shares like the CME. They recently said volume was down -10% YTD. CME shares have also been under pressure since the MF Global disaster and worries over liability in that mess. CME was an auditor of MF Global and there is still $1.6 billion of client funds missing. At the CME shareholder meeting on Wednesday investors complained about the falling stock price and asked about a split.

CME Chart

In related news the CBOE won another court battle against the ISE in the long running feud over the S&P-500 index options. The Illinois Appellate Court affirmed an earlier injunction forbidding the ISE from listing S&P-500 options, which are licensed exclusively to the CBOE by McGraw Hill and the CME Group Index Services unit. The ruling also applies to the Dow Jones index options. The dispute started six years ago when the ISE tried to get approval to list the options on its electronic exchange. When it could not get approval from McGraw and the CBOE it tried to list them without any approval and the CBOE won an injunction preventing it. The S&P options are the CBOE's most lucrative product. ISE argued it was unfair since options on stocks can be freely listed on any exchange. The ISE has since been bought by Eurex, a Frankfurt based futures exchange. An ISE spokesman had no comment on future plans to continue the fight.

Google (GOOG) closed at a four-month low on Friday at $591 and $3 under the 200-day average. I mentioned this last week that a close under that level could lead to a bigger decline. The company has been holding over that level for the last two months and there was no specific news I could find pushing the stock lower on Friday. Google is very close to announcing a new Android tablet of its own. The 7 inch tablet has been seen in Google's offices and will probably be announced at the developer conference on June 25th. Next week is going to be key for Google if it remains under the 200-day average. That could prompt some funds to unload their positions. The 200-day is a key long/short indicator for many managed funds.

Google Chart

VeriFone (PAY) fell -15% on Friday after the company said it expects to report adjusted profits of 68-70 cents per share. They expect revenue between $495-$500 million. Analysts were expecting 70-cents and $502 million. The company backed full year guidance but warned the strength in the dollar had hurt profits. Some analysts suggested VeriFone was using the euro weakness, dollar strength as an excuse and the stock was punished.

VeriFone Chart

Research in Motion (RIMM) is expected to announce layoffs of between 2,000 to 6,000 as early as next week. RIMM currently has a workforce of around 16,500. This suggests RIMM has given up on growing its business and is accepting its role as a minor smartphone supplier.

RIMM Chart

The continued problems in Europe pushed the euro to another new two year low at 1.24 and the dollar index to two year high. Commodities are normally weak when the dollar rises but gold bucked the trend with a +15 point gain to $1573.

Dollar Index Chart

Crude prices were flat at $91 despite a breakdown in the talks between the six nations and Iran. The Iranian diplomat called the talks a "complete failure." A person from the six nations said the meeting was extended an additional day just to try and craft a post meeting statement that was acceptable to Iran. The final statement described "very intense" discussions but noted "significant differences remain."

An Iranian negotiator said the goodwill created since the first meeting in April has been jeopardized by "approaches that were really destructive" referring to a unanimous vote by the Senate on Monday to tighten the sanctions even further.

Iran struggled to put the talks in a positive light because all the demands of the six nations were far across the "red lines" Iran has vowed not to cross. They refuse to give up uranium enrichment. They refuse to allow inspections of military bases where testing is suspected.

During the talks Iran went back to its old strategy of misdirection and distraction. As part of the agreement they wanted conditions on non involvement in the unrest in Syria and Bahrain. They even wanted to add in restrictions on narcotics.

The final draft of the original meeting statement threw the lead Iranian diplomat, Saeed Jalili, into a fit of rage. It was "furiously responded to by Jalili [who said] if you read this statement [publicly], we are going to state the whole story was a failure, a fiasco." After a huddle the six nations agreed to an extra day of talks to construct a statement that was acceptable to Iran. It is important for Iran to save face in the region. They don't want to be seen as backing down to the six nations.

Basically Iran wanted an end to sanctions before they would agree to any nuclear concessions. They wanted language that would prevent the sanctions from being restarted on "some future pretext" like Iran not following through with its promises. The six nations demanded Iran halt all enrichment until they had proven to the world they had no secret programs to develop nuclear weapons. With 9,000 operating centrifuges that would be a tall order. Iran would have to shut down the highly secret underground facility at Fordow. There was NO agreement on anything except to have another meeting in Moscow next month.

It did not help that UN inspectors reported they had located traces of uranium enriched to MORE than 20%. The IAEA report cited a May 9th letter from Iranian officials saying the uranium they found that was enriched to 27% was an "accident" that could have occurred due to actions "beyond the operators control." A scientist at the Washington based Institute for Science and International Security (ISIS) said the new configuration at Fordo was meant to "overshoot 20 percent" at the start. Inspectors said finding the traces at 27% suggests there were enrichments even higher that were a result of the completed process. ISIS also said Iran now had enough enriched uranium to make five nuclear warheads once it was improved to 90%.

The IAEA head failed to secure an inspection agreement as promised last weekend when discussions broke down. The IAEA said satellite surveillance of the Parchin site is currently showing high traffic of construction vehicles and rivers of liquid pouring from the buildings. They suspect Iran is trying to scrub and sanitize the buildings to eliminate all traces of radioactive materials prior to agreeing to inspections.

Despite the "positive statement" that took an additional day of meetings to craft the outlook here is not good. The IAEA has enough data from observations, surveillance and insider information that Iran is not going to be able to prove they are not doing weapons research. They are not going to give up on enrichment and the July 1st EU oil embargo is going to happen. This effort to show the six nations and Iran "making progress" is a sham in hopes of eventually achieving some progress and to keep oil prices lower as we move closer to July 1st.

The six nations have the hammer with the increasingly difficult sanctions and Iran is going to have to either come clean and abandon its nuclear ambitions or go bankrupt from slowing oil sales. Civil strife is rising along with food prices as a result of the existing sanctions and the July 1st deadline will only make it worse. Oil prices should begin moving higher as we move closer to the embargo.

Crude Oil Chart

Gold Chart

The Dow has only been positive four days in May. If this continues through month end it will be the first time ever it has failed to post a minimum of five days of gains in a month. Thanks to the big rebound on Wednesday all the indexes did finish with gains for the week. The Dow was down -191 points at the Wednesday lows but rebounded to close down only -6.66 points. That rebound rescued the markets and kept them in positive territory for the week.

The S&P tested support at 1295 twice. Once the prior Friday and again on Wednesday. Fortunately both times it held. The first time it was helped by the three weeks of selling that created severely oversold conditions that were ripe for a short squeeze. The second rebound on Wednesday came on strong sales of new homes and expectations for some solution in Europe with the EU summit in progress. There was no solution and the markets declined at the open on Thursday. In the afternoon shorts covered again and volume died as we headed into the holiday Friday.

With the heavy duty economics next week and the likelihood of more negativity from Europe the 1295 level could be tested again. However, I looked at a lot of stock charts this weekend and quite a few appeared to be forming a potential bottom. Until an actual rebound occurs that pattern is just a pause in the decline but there were some encouraging signs.

The S&P has resistance at 1325 and until we move back over that level I am still bearish. There are just too many global problems to assume the market will rally. The U.S. may be the dog with the least fleas and the safe haven for any European cash but eventually that trend will be offset by the European weakness impacting our markets.

After we get past the payroll reports next week the next big challenge is the June 17th Greek election. Following that will be the June 19th FOMC meeting. If the anti-bailout party wins in Greece I would expect the Fed, ECB, IMF and BOE to announce some program to support bank deposits in Europe. I have no clue how that would happen but if Greece appears headed for the door they will have to support the banks to prevent a total meltdown in Europe. This possibility is going to weigh on the markets until June 17th.

There was no follow through on either the initial Monday rebound or the intraday dip on Wednesday. Now that we are officially in summer the volume will continue to decline. Only 4.7 billion shares were traded on Friday and it will slow in the weeks ahead.

S&P Chart

The Dow chart is similar to the S&P only it clearly shows that solid resistance formed at 12,530 and it held twice after the initial Monday/Tuesday short squeeze. The Dow came very close to making a lower low at the close on Friday. The Dow would have to break above 12,575 to confirm a move higher. A drop below 12,300 would be seriously negative for sentiment.

Dow Chart - 15 Min

Dow Chart - Daily

The Nasdaq rebounded sharply from support at 2775 but there was no follow through. It has now formed a bearish pennant formation with a breakdown due any day now. The pennant is a consolidation/continuation pattern that almost always completes with a continued move in the initial direction. In this case the continuation would be a bearish breakdown.

Current support is 2775 followed by the 200 day average at 2750. A break of those levels should setup a test of 2600.

Bearish Pennant

Nasdaq Chart - 30 Min

Nasdaq Chart - Daily

While there are some stocks showing some minor bullish indications I feel the overall market is going to be weighed down in the short term by concerns in Europe. Once the Greek election on June 17th is completed there will be more direction for Europe only because the uncertainty will be reduced. That does not mean the situation will be better because even if a pro-bailout party wins it will be a tough road that may eventually lead to further defaults.

What could change this entire scenario is the implementation of some sort of bank guarantee system like the FDIC for the euro zone. This does not exist now. That system would slow down capital flight out of the problem countries and remove some of the worries about failing banking systems. If that announcement occurs in the weeks ahead we could see a strong short covering rally in Europe and the global markets. I am not holding my breath. It will not likely happen unless the wrong party wins in Greece and they begin heading for the euro exit.

Do you play chess? If you do you know you have to think many moves ahead and consider multiple alternative scenarios in order to out play your opponent. In the stock market investors need to think many days, weeks or months ahead to be properly positioned. Investors today need to be thinking about the possibilities surrounding Greece, Europe's response, the FOMC, the election, Supreme Court rulings on Obamacare, the fiscal cliff, China's economic slowdown, U.S. debt ceiling hike in September, etc. There is a tremendous wall of worry ahead of us that may force our markets lower by the end of 2012. Noted investor Marc Faber, the Gloom, Doom and Boom Report, believes there is a 100% chance of a global recession by year end. He said there is a zero percent chance it can be avoided.

The Congressional Budget Office (CBO) believes the fiscal cliff scenario would knock -4.0 percentage points off U.S. GDP in 2013. Since estimates for 2013 GDP have already fallen to +1.8% to 2.0% growth that suggests the U.S. would be in recession at -2%. However, regardless of who wins the election the odds of any version of Congress allowing all the fiscal cliff problems to all come due at the same time is about zero. Surely rational thinking will prevail and some of the events will be postponed or extended. If not the wall of worry may collapse on us.

I believe this tsunami of major events headed our way this fall is going to pressure our markets later this summer. Maybe not next week but just as sure as winter follows summer there will be a market shift ahead. It could be subtle as each problem comes to a head but the avalanche of problems due to hit in the fall could overcome even the most optimistic investors. For this reason I expect cautious money to begin moving away from equities towards the safety of bonds as the summer progresses. There will still be peaks and valleys in the equity market but volume should slow even more than normal over the summer.

Think like a chess player and study the potential scenarios ahead as I report on them each week. Decide how they will impact your long term investments. If your time horizon is 3-4 weeks then nothing will change for you. If you have long term investments, IRAs, etc then decide how a global recession would impact your positions and take action if we see it approaching. Don't look back a year from now and say "I sure wish I had done ..." Be proactive this summer not reactive.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

"Procrastination is still procrastination even if you schedule it for tomorrow."


Index Wrap

At Or Near a Bottom

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

After retracing 50% of their late-Nov to late-March advances in the S&P 500 and the Nasdaq, the Market may be at or near a bottom. There's also potential for another shot down ahead of a tradable bottom such as to around 2700 in COMP and 1260 in SPX.

Certain objectives or expectations for the length of the second downswing were met but possible bear flag patterns in the S&P and Nasdaq charts and a Head & Shoulder's type top in the Russell 2000 give some pause also. The market got fully oversold on a daily chart basis and is getting fairly so on weekly charts.

Last week I saw buying calls as risky due to a likely weak initial rally. When I saw how quickly bullish sentiment rebounded, I assumed even more that this would be a rolling bottom if that and not a 'V' type bottom with a straight shot down then an immediate sizable rally to follow.

Bottom line, I don't think EARLY bulls will fare so well as prices chop around some more due to slowing Europe AND now China. I don't think the slow-growing US economy can pull up the world but it can pull up stocks here further. Right now fear and loathing related to foreign menaces rule and I don't downplay the risks of our recovery being nipped in the bud.

Unlike the larger SPX index (and the Nas Composite and Nas 100), the big cap S&P 100 hasn't given back quite as much ground in terms of its retracement of the last big advance (late-Nov to late-March/early-April), which has been 45% so far, compared to a 50% retracement in the S&P 500/SPX and a bit over 50% in COMP. A number of the big cap OEX stocks haven't given up much ground from their highs or are still in strong uptrends (i.e., WMT). Unlike the price averaged Dow 30, OEX is strictly capitalization weighted so OEX member stocks like AAPL, AMZN, AXP, BA, BRK.B (Berkshire Hathaway), DIS, EBAY, GOOG, HD, IBM, KO, PFE, KFT, PFE, T, VZ, XOM and WMT haven't had the steeper declines seen with some in the S&P 500 and 400. If you want a slightly less risky bet on some upside ahead, better to be the S&P 100 calls in the case of another shot down before a recovery rally has a chance to gain traction.

Based on the chart patterns to date, what we've been seeing is a fairly 'normal' correction in an overall (longer-term) bull market. It's not a rip roaring bull and the Transportation stocks didn't 'confirm' blue chip Dow strength to 13300 (correctly) but I try not to confuse trading opportunities with a hope to make X percent on investment holdings in 2012.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

1300 has held up so far as support in the S&P 500 (SPX). Sometimes the obvious in the Market is not obviously wrong. Moreover, the decline to below the 3% envelope line didn't last beyond a few days so far, a pattern common to index bottoms, although the SPX percent value 'extremes' vary in the 3-4% range.

I pointed out last time that the SECOND down leg is often more than the first (decline) by some Fibonacci factor; e.g., the second decline dropping 1.5-1.6 times more than the first downswing. This is a common pattern to corrections after a prolonged run up. It doesn't mean that the second decline won't go even beyond a Fibonacci 1.6 times the first but 1.6 is historically common in the indexes within a cresting bull market.

I've highlighted support at 1300, extending to 1280, but if the recent upward sloping rebound is a 'bear flag', another shot down could carry to 1260. I wouldn't be surprised if the buying in the 1300 area was on the early side or premature.

Near resistances look like prior support levels at 1340 and 1360. A close above the 21-day moving average would suggest possible further upside follow through, with the caveat that subsequent follow through is key; a single such Close above the pivotal 21-day average could be a fake out upside move.

The 13-day Relative Strength Index (RSI) as seen above and below hit a 'fully' oversold extreme. On an 8-week basis (not shown here) the recent RSI low in SPX and OEX was just over 30; low, not quite as 'extreme' on a longer-term chart basis.

My sentiment indicator seen above bottomed in an almost 'classic' leading-indicator manner, just BEFORE there was a rebound and ahead of prices establishing some support.

S&P 100 (OEX) INDEX; DAILY CHART

I wrote last week that "the S&P 100 (OEX) index chart is bearish but with its second down leg having fulfilled some 'minimum' downside objectives." Minimum objective refers to the 590 level and the 590 intraday low wasn't touched again on two different dips this past week. Still, I'm not ruling out another retest of 590 and the potential for a further shot down to the 584-580 support. On a risk to reward basis, buying the dip in OEX to below 600 wasn't a bad move. As I noted above in my initial 'bottom line' comments, unlike the larger SPX index, the big cap S&P 100 hasn't given back quite as much ground in terms of its retracement of the last big advance (late-Nov to late-March/early-April), which has been 45% so far, compared to a 50% retracement in the S&P 500/SPX and a bit more than this in the Nas Composite. A number of the big cap OEX stocks haven't given up much ground or are still in strong uptrends (i.e., WMT). Unlike the price averaged Dow 30, OEX is capitalization weighted so OEX member stocks like AAPL, AMZN, AXP, BA, BRK.B (Berkshire Hathaway), DIS, EBAY, GOOG, HD, IBM, KO, PFE, KFT, PFE, T, VZ, XOM and WMT are holding up and haven't had the steeper declines seen with some in the S&P 500 and 400. If you want to have a bit less downside risk, better to be the S&P 100 calls if you buy a further dip or have bet on a rebound.

I would especially buy a further sell off that carried to the low-580 area, risking 5-7 points under 580. A further decline would fulfill an expected move below a bear flag formation such as what may have formed in OEX. If there's going to be a further move below recent lows, odds favor early in the week. Otherwise, further backing and filling looks like a bottoming process.

OEX support is at 590-591, with next lower support estimated in the 584-580 price zone.

Resistance is seen at 605 in OEX, extending to the 609-610 area. 614 is the current level of the 21-day moving average. A Close above the 21-day would suggest the possibility of some further upside but the following day after any such move should be watched for upside follow through or the LACK of it.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) which has a still-bearish chart on a short to intermediate-term basis seems to be stabilizing above 12400. However, the idea that INDU has reached a support and area of solid buying interest is early. It still remains for the Dow to make a move above near resistance at 12500-12560.

There remains the possibility that INDU will fall to the 12000 area. I've highlighted support at and near the low-12300 area and next lower anticipated support at 12200.

Dow stocks holding up fairly well (or still even in rally phases) include AXP, BA, DIS, HD, IBM, KO, PFE, KFT, T, VZ, and WMT, which gets close to half (of the 30 stocks) with rebound potential. One more shot down and I'd buy Dow Index calls with the index at or near 1200. I'm being conservative; INDU could already be at or close to a bottom. I'm always looking for that final move, followed by waning momentum suggesting going the other way, assuming price action shows signs of a reversal.

Layers of resistance/selling pressure are anticipated at 12600, 12700, and then 12800.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

I've left the note from last week on the Nasdaq Composite daily chart below as to the completion of a common second down leg in COMP that is 1.6 times the point decline of the first decline.

The foregoing comment isn't to say that the longer second downswing necessarily COMPLETES the correction but it has the chops for it or the right symmetry in its pattern so to speak. At a minimum it suggests that put holders in NDX and key bellwether stocks (e.g., Apple) may have gained most of the profit that they could hope for. And of course if prices trend sideways more than anything (and volatility falls), put premiums will decline.

Near resistance is at 2860, with what is probably tougher resistance at 2900-2925. A couple of Closes above the 21-day Average is needed to suggest that the correction has run its course and lows for the recent decline might be in place.

Support is seen at recent lows around 2775, with fairly strong support around 2700, which is somewhat of my worst case downside scenario at the moment. A move to 2700 would fulfill an expected downside IF the recent consolidation is a flag pattern, which is simply a pause on the way to still lower levels. If so, there's a 'measuring' implication to around 2700 to possibly finish this decline assuming it's not over with already; a possibility given the move already to the lower envelope line.

The 13-day Relative Strength Index (RSI) as seen above and below hit a 'fully' oversold extreme. On an 8-week basis (not shown here) the recent RSI low in COMP and NDX was just over 30; low, not quite as 'extreme' on a longer-term chart basis.

My sentiment indicator seen above bottomed in an almost 'classic' leading indicator manner, just BEFORE there was a rebound once the Index found some support.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) Index also has the pattern of possible completion of an 'a-b-c' or down-up-down 3 part segment that's common for bearish pullbacks, especially after a long advance. NDX may still have a further shot down and one that would 'set up' further bearishness which in turn often precedes a tradable bottom.

I don't anticipate a big further decline and stocks transitioning to a bear market. There are still a lot of strong NDX big cap companies that haven't tipped into noticeable bear market patterns; see my 'bottom line' comments at top or in the OEX section. The S&P 100 has a good number of Nasdaq listed stocks which are just correcting(only) as well as NYSE listed companies.

One more decline, especially if it carried as far as to the 2400 area, should set up a buying opportunity having a favorable risk to reward (e.g., risking to 2350, with a target back up to 2600-2630). Meanwhile, I've noted close by NDX support in the 2475 area, extending to 2450, with fairly major support at 2400.

Resistance is at the high end of the recent trading range, in the 2555 area, with resistance then extending to 2600-2630.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) is bearish on a short to intermediate term basis, mirroring of course the underlying NDX index. If there's an extension of the recent decline to the 60 or lower, such as to around 59, I'm anticipating wanting to buy the stock. I tend to favor buying or shorting the stock on an unleveraged basis and not have a particular expiration time frame to also factor in as with puts and calls.

Near support is highlighted in the 60.7 area, extending to 60. 59 is also a support and my current 'maximum' anticipated downside and a likely short-lived dip at that. I believe buyers will come on any dips below 60.

Near resistance at 63, extending then to 64.0

Daily trading volume shot up on Thursday and fell way off on Friday ahead of our Memorial Day holiday. Not many wanted to hold much over the long weekend with stocks trading in Europe on Monday but not here. As said already, I think good buying interest will surface on any dips below 60, although there might not be much jump in volume. QQQ tends to see volume spikes mostly on sharp declines, particularly when well-defined support levels give way; or to below key moving averages such as when QQQ plunged below its 50-day average. These points then give you a good idea of expected resistance on a climb back up.

RUSSELL 2000 (RUT); DAILY CHART:

I've kept the extensive outline of the Russell 2000 (RUT) Head and Shoulder's top pattern. I've kept the notations that suggest that a 'minimum' downside objective would be fulfilled around 722 as a reminder that at least ONE of the major index charts suggests a further decline and not just immediately below current levels.

Near support is suggested at recent lows around 746 and I've estimated a next lower support around 734. A move to 722 would fulfill a measured objective that is seen with the H&S pattern and where a buying opportunity may set up. The 'measuring' implication is to take the distance from the top of the 'head' to the 'neckline' and if that's broken (after a 'right shoulder' top), subtract the first measurement FROM the neckline.

Upside resistance is seen at 770, then up in the 780-783 area. A couple of Closes above 783-785 would suggest that the index had regained a bullish pattern. I'm not expecting this anytime soon as RUT's top looks formidable; meaning, it's a broad top with 3 rally failures over a number of weeks.

Like the other indices, RUT is also quite oversold which suggest the potential for a rally OR the likelihood of at least a leveling off of prices.



GOOD TRADING SUCCESS!


New Option Plays

Software & Engines

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

SolarWinds, Inc. - SWI - close: 47.68 change: -0.04

Stop Loss: 45.75
Target(s): 52.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
SWI is in the application software industry. Shares have been consolidating sideways the last few weeks as it digests the late April surge higher. Now SWI looks poised to run higher again.

If both SWI and the S&P 500 index open positive on Monday morning, then we'll open positions at the open. Otherwise, we'll use a trigger at $48.55 to buy calls. We'll try and limit our risk with a stop at $45.75. We do need to keep a wary eye on the $50.00 level, which could be round-number resistance but I am setting our exit target at $52.50.

*see entry details above*

- Suggested Positions -

buy the Jun $50 call (SWI1216F50) current ask $1.20

- or -

buy the Jul $50 call (SWI1221G50) current ask $2.50

Annotated Chart:

Entry on May xx at $ xx.xx
Earnings Date 08/02/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on May 26, 2012


NEW DIRECTIONAL PUT PLAYS

Cummins Inc. - CMI - close: 98.95 change: -1.31

Stop Loss: 102.55
Target(s): 92.50
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of this engine maker are in a bearish trend. The stock's oversold bounce just failed at technical resistance at the simple 200-dma. This failed rally looks like an entry point to buy puts.

I am suggesting positions at the open on Monday morning with a stop loss at $102.55. Our target is $92.50.

- Suggested Positions -

buy the Jun $95 PUT (CMI1216R95) current ask $2.00

Annotated Chart:

Entry on May xx at $ xx.xx
Earnings Date 07/31/12 (unconfirmed)
Average Daily Volume = 2.7 million
Listed on May 26, 2012



In Play Updates and Reviews

Triggered Trades and Early Exits

by James Brown

Click here to email James Brown

Editor's Note:

We saw two trades get triggered on Friday (BBBY, HAIN). Plus, we're planning an early exit for a few trades (VZ, FISV, SI).

Current Portfolio:


CALL Play Updates

Bed Bath & Beyond Inc. - BBBY - close: 72.40 change: -0.07

Stop Loss: 69.75
Target(s): 79.00
Current Option Gain/Loss: Jun75c: -18.4% & Jul75c: - 8.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/26 update: BBBY spiked higher on Friday and briefly traded above $73.00. Our trigger to buy calls was hit at $72.75. Our trade is open. Yet the stock's inability to close above resistance is a bit worrisome. I would not launch new positions again until BBBY traded above $73.10.

Our multi-week target is $79.00. FYI: The Point & Figure chart for BBBY is bullish with an $83 target.

Trigger @ 72.75

- Suggested Positions -

Long JUN $75 call (BBBY1216F75) Entry @ $1.03

- or -

Long JUL $75 call (BBBY1221G75) Entry $2.72

05/25/12 triggered at @72.75

chart:

Entry on May 25 at $72.75
Earnings Date 06/20/12 (unconfirmed)
Average Daily Volume = 2.6 million
Listed on May 24, 2012


Cymer Inc. - CYMI - close: 53.30 change: -0.08

Stop Loss: 49.95
Target(s): 57.00
Current Option Gain/Loss: Jun55c: -11.1% & Aug55c: - 5.0%
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Comments:
05/26 update: CYMI has been quietly churning sideways for three days in a row. The consolidation narrowed on Friday. The stock looks poised to break higher but it's not guaranteed. Nimble traders could buy dips near $52.00 while more cautious traders may want to wait for a new relative high over $53.70.

Our multi-week target is $57.00. FYI: The Point & Figure chart for CYMI is bullish with a long-term $80 target.

- Suggested Positions -

Long Jun $55 call (CYMI1216F55) Entry $0.90

- or -

Long Aug $55 call (CYMI1218H55) Entry $2.95

05/22/12 triggered at $52.60

chart:

Entry on May 22 at $52.60
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 476 thousand
Listed on May 21, 2012


Edwards Lifesciences - EW - close: 87.40 change: +0.07

Stop Loss: 83.75
Target(s): 89.50
Current Option Gain/Loss: Jun85c: +15.6% & Jun$90c: +21.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/26 update: EW rallied to $88.00 intraday but only ended the session with a minor gain. The afternoon slide lower pushed our option values lower as well. I am not suggesting new positions at current levels. Readers might want to already start adjusting their stop loss higher.

FYI: The Point & Figure chart for EW is bullish with a $126 target.

- Suggested Positions -

Long Jun $85 call (EW1216F85) Entry $3.20

- or -

Long Jun $90 call (EW1216F90) Entry $1.15

chart:

Entry on May 24 at $85.21
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on May 23, 2012


Sourcefire, Inc. - FIRE - close: 55.92 change: +0.98

Stop Loss: 52.75
Target(s): 59.35
Current Option Gain/Loss: Jun55c: +13.7% Jun60c: - 6.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/26 update: FIRE rallied back toward the $56.00 level on Friday with a +1.7% gain. The stock's outperformance is encouraging. I am not suggesting new positions at this time.

Earlier Comments:
FIRE could see some short covering. The most recent data listed short interest at 14% of the very small 28 million share float.

- Suggested Positions -

Long Jun $55 call (FIRE1216F55) Entry $2.90

- or -

Long Jun $60 call (FIRE1216F60) Entry $1.50

chart:

Entry on May 24 at $55.50
Earnings Date 08/01/12 (unconfirmed)
Average Daily Volume = 857 thousand
Listed on May 23, 2012


The Hain Celestial Group - HAIN - close: 55.95 change: +0.91

Stop Loss: 52.90
Target(s): 59.00
Current Option Gain/Loss: Jun55c: + 2.5% Jul60c: - 4.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/26 update: Bullish analyst comments on Friday helped push HAIN to a new intraday high and shares closed up +1.6%. The stock settled right under its prior high near $56.00. Shares actually gapped open higher at $55.37, which was above our entry trigger at $55.25. The play is open.

FYI: The Point & Figure chart for HAIN is bullish with a $59 target.

- Suggested Positions -

Long JUN $55 call (HAIN1216F55) Entry $2.00

- or -

Long JUL $60 call (HAIN1221G60) Entry $1.15*

*entry price is an estimate. looks like a possible bad tick at $5.00 on the morning of 05/25/12
05/25/12 trade opened on gap higher at $55.37, trigger was 55.25

chart:

Entry on May 25 at $55.37
Earnings Date 08/23/12 (unconfirmed)
Average Daily Volume = 742 thousand
Listed on May 24, 2012


Medivation, Inc. - MDVN - close: 87.38 change: -1.54

Stop Loss: 84.90
Target(s): 99.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
05/26 update: The rally in MDVN lost steam on Friday. Shares reversed course under resistance and underperformed with a -1.7% decline. The stock continues to trade with a bullish consolidation pattern. We are waiting for a breakout higher.

The option spreads are a little wide in MDVN so I am suggesting smaller positions to limit our risk. We will use a trigger at $90.25 to open positions with a stop loss at $84.90 to start. Our target is $99.00. FYI: The Point & Figure chart for MDVN is bullish with a $101 target.

Trigger @ 90.25 (small positions)

- Suggested Positions -

buy the JUN $95 call (MDVN1216F95)

- or -

buy the JUL $100 call (MDVN1221G100)

chart:

Entry on May xx at $ xx.xx
Earnings Date 08/09/12 (unconfirmed)
Average Daily Volume = 755 thousand
Listed on May 24, 2012


Verizon Communication - VZ - close: 41.45 change: +0.06

Stop Loss: 39.95
Target(s): 45.75
Current Option Gain/Loss: Jun$42c: -46.6% & Jul$43c: -54.5%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/26 update: We have run out of patience with shares of VZ. The stock is just not moving fast enough. I am suggesting an early exit on Monday morning at the open.

- Suggested Positions -

Long Jun $42 call (VZ1216F42) Entry $0.60

- or -

Long Jul $43 call (VZ1221G43) Entry $0.66

05/26/12 prepare to exit on Monday at the open.
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

ITT Educational Services - ESI - close: 57.90 change: +1.52

Stop Loss: 59.25
Target(s): 51.50
Current Option Gain/Loss: -16.8%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/26 update: I could not find any news to explain the big bounce in ESI. It's probably just an oversold bounce on the way down. However, just to be cautious here we are lowering our stop loss down to $59.25. More aggressive traders will want to keep their stop above $60.00 since the $60.00 level is the nearest resistance.

- Suggested Positions -

Long Jun $55 PUT (ESI1216R55) Entry $2.55

05/26/12 new stop loss @ 59.25
05/24/12 new stop loss @ 60.55

chart:

Entry on May 23 at $57.71
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 410 thousand
Listed on May 22, 2012


Fiserv, Inc. - FISV - close: 67.17 change: +0.21

Stop Loss: 68.55
Target(s): 63.50
Current Option Gain/Loss:(May$70p: +12.5%) & Jun65P: - 44.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/26 update: FISV continues to bounce and closed above its 20-dma on Friday. We are losing patience here. I am suggesting we exit positions at the open on Monday morning. More aggressive traders will want to keep the play open and keep their stop loss just above resistance at the $68.0 level or above the simple 50-dma 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

05/26/12 prepare to exit on Monday morning.
05/23/12 Raising our RISK - new stop loss @ 68.55, above the 50-dma
More conservative traders will want to exit now instead.
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: 63.58 change: +0.24

Stop Loss: 66.25
Target(s): 61.50
Current Option Gain/Loss: +36.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/26 update: GD displayed some volatility at the open on Friday with a surge toward $64.00 but the rally slowly faded. The stock pared its gains down to +0.3%. More conservative traders may want to adjust their stop loss closer to $65 or the 10-dma. I am not suggesting new positions.

- Suggested Positions -

Long Jun $65 PUT (GD1216R65) Entry $1.50

05/23/12 tweaking our stop to $66.25
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: 45.72 change: +0.52

Stop Loss: 45.25
Target(s): 40.25
Current Option Gain/Loss: +33.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/26 update: The trend for INFA still looks down especially after Thursday's failed rally under $44.00. More conservative traders may want to lower their stop closer to the $44 level.

- 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: 76.59 change: -0.05

Stop Loss: 77.35
Target(s): 72.00-70.00 zone
Current Option Gain/Loss: -12.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/26 update: If you look at the consolidation inside the IWM over the past week there is a bullish trend of higher lows. You might be able to interpret this as a growing bear-flag pattern. Or you could argue that the small cap ETF has found new support and is coiling for a bigger bounce.

I still see the $78.00 level as the key resistance line but we're going to try and reduce our risk by moving the stop loss down to $77.35. More aggressive traders will want to keep their stop above $78.00 instead.

- Suggested Positions -

Long Jul $75 PUT (IWM1221S75) Entry $3.20

05/26/12 new stop loss @ 77.35
05/22/12 triggered at $76.75
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 22 at $76.75
Earnings Date --/--/--
Average Daily Volume = 53 million
Listed on May 12, 2012


L-3 Communications - LLL - close: 67.19 change: -0.49

Stop Loss: 68.75
Target(s): 62.75
Current Option Gain/Loss: -18.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/26 update: LLL was showing weakness on Friday. The last few days traders were buying dips below the $67.50 level but buying interest ran out of steam on Friday. Shares look poised to break down further. You could launch positions now or wait for a new drop under $66.40 as an entry point for puts.

- Suggested Positions -

Long Jul $65 PUT (LLL1221S65) Entry $1.85

05/23/12 triggered at $66.75

chart:

Entry on May 23 at $66.75
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 856 thousand
Listed on May 19, 2012


Reliance Steel - RS - close: 48.00 change: -0.06

Stop Loss: 50.55
Target(s): 42.50
Current Option Gain/Loss: -24.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/26 update: Friday was a very quiet day for RS with shares drifting sideways in a narrow range. Last week's sideways consolidation almost looks like a bear-flag pattern. Readers can use a drop under $47.00 as a new bearish entry point.

FYI: The Point & Figure chart for RS is bearish with a $38 target.

- Suggested Positions -

Long JUN $48 PUT (RS1216R48) Entry $2.45

chart:

Entry on May 23 at $47.79
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 534 thousand
Listed on May 22, 2012


Siemens AG - SI - close: 85.51 change: +1.17

Stop Loss: 87.75
Target(s): 80.25
Current Option Gain/Loss: -51.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/26 update: There is not much reason for European stocks to be bouncing given the situation in Europe but SI rallied on Friday. This move higher was probably due to a German bank (DB) upgrading the stock. The trend is still down but SI could see a bigger bounce. We are going to go ahead and exit early at the open on Monday.

- Suggested (SMALL) Positions -

Long Jun $80 PUT (SI1216R80) Entry $1.35

05/26/12 upgraded by DB on Friday. We want to exit early on Monday morning
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