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Newsletter

Daily Newsletter, Saturday, 6/9/2012

Table of Contents

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

Market Wrap

Greece Again?

by Jim Brown

Click here to email Jim Brown

Greece is the number one headline for next week as the three-year crisis moves into another stage.

Market Statistics

I can't count the number of times Greece has been the focal point for the next day/week of trading. It is amazing because Greece only has an annual GDP of $303 billion or 0.4% of the global GDP of $69.7 trillion. According to the IMF it ranks 35th in the world. This tiny country has turned the economic and investing sectors upside down for nearly three years with its weekly chapter of woe.

Greece announced last week it's GDP shrank by -6.5% in Q1. That was compared to the prior revision at -6.2% and the Q4 GDP of -7.5%. Consumer spending fell -7.5% and capital investment -21.3%. Unemployment is 21.9% overall and 51% for those under 25.

Spain, 12th largest global economy at $1.5 trillion and fourth in the euro zone may have stolen the headlines last week and probably the headlines on Monday but then it is back to Greece for the new elections next Friday. If the anti-austerity party wins in Greece the odds are good the country will default and leave the euro zone. If the pro-austerity party wins and is able to form a coalition government they will probably default at some point in the future but not leave the euro.

It is the threat of leaving the euro that has turned Europe upside down. I am not going to repeat all the points here because I have covered those dozens of times in the past. For the U.S. a win by the pro austerity party is preferable. The election on Friday will be the topic all week once we get past the Spanish headlines on Monday.

Spain was expected to ask the euro zone this weekend for help with recapitalizing its banks. They will be the fourth country to officially ask for a bailout since the crisis began. Deputy finance ministers from the euro zone were expected to hold a conference call on Saturday to discuss a Spanish request for aid. No figure had been set. Later the 17 finance ministers from the euro zone will hold a separate call to discuss approving the request. The EU spokesman said Spain had not yet made a formal request but the euro zone was preparing for the eventuality.

The situation in Spain is deteriorating quickly. On Thursday Fitch Ratings cut their sovereign credit by three notches to BBB because of the country's exposure to bad loans from a collapsed real estate sector. Unemployment is 24.4% and rising.

The euro zone ministers realize an agreement on Spain needs to be reached immediately before the Greek elections. If the wrong party wins in Greece the euro zone could be thrown into a panic that could last for months. Spain needs resolution immediately.

The estimates for the size of the bailout needed range from 40 to 150 billion euros. (Fitch estimates 100 billion euros, S&P 80-112 B, JPM 150 B) The actual amount will be based on an audit in progress by two independent assessors. The first group will report their findings on June 21st and the second on July 31st. The bailout will likely come from the 440 billion euro European Financial Stability Facility or EFSF. Malcolm Barr, a JPM analyst, said a "bank rescue would only be a stepping stone for a broader package of support for Spain" because it would underscore the inability of the government to raise money.

Update: Late, late Friday night Spain said it may not ask for a bank bailout because Germany may impose conditions on the deal. Also, Moody's warned it was about to cut Spain's debt to BBB, following the same action in prior weeks by Egan Jones, S&P and Fitch. If Moody's does cut Spain as expected to BBB it will result in a 5% increase in repos on Spanish bonds. What this means is that banks that have pledged Spanish bonds as collateral for ECB loans will have to put up another 5% to further collateralize that debt. In other words the collateral will have gone down in value so the banks will have to put up additional collateral. These are the same banks currently in need of a bailout.

You may have heard that Spain successfully sold 2.1 billion euros of debt on Thursday. What you probably did not hear was that the major buyers were the Spanish banks currently in need of a bailout. Apparently Spain unloaded that two billion into the banks knowing full well they were going to ask for a bailout for those same banks on Saturday. That is an interesting financing tactic. That is like knowing you are not going to be able to make a payment on your credit card and going out on the day before its due and charging it up to the limit before your credit privileges are suspended.

Spain will join Greece, Ireland and Portugal in receiving financial aid from the EU. Cyprus is expected to be the next country to request aid. Cyprus will have to seek a bailout of its banking system after taking a huge loss on its Greek debt. Banks were forced to take a 76% write down on their investments when Greece forced a default on their bonds. The second largest bank, Cyprus Popular Bank, posted a $3.2 billion loss on its Greek debt. Cyprus is forced to ask the EU for help because it is unable to borrow from the international markets after two ratings agencies cut its rating to junk.

The decline in economic activity in Europe because of the debt crisis has spread to every nook, cranny and burger joint. McDonalds (MCD) reported lower than expected same store sales for May and warned that austerity in Europe was taking a toll on sales. Same store sales rose only +2.9% in Europe but analysts were expecting +4.7%.

McDonalds also said its sales in Asia, the Middle East and Africa declined -1.7% in May with particular weakness in Japan and China. Sales in China declined for the first time since November 2009. The company actually said this was not just a bad month but the start of a new trend. Dow component MCD shares declined -5% on the news making it the biggest drag on the Dow.

In U.S. economic news the trade deficit for April narrowed to $50.1 billion from $52.6 billion. The pace of imports declined -1.8% while exports declined -0.8%. The recession in Europe and slowdown in China are being felt in the U.S. and the internals in this report are going to be a drag on Q2 GDP when the next revision is reported.

Wholesale inventories rose by +0.6% in April compared to +0.3% in March. Rising wholesale inventories point to slower demand.

The two reports were for the April period and presented lagging data. They were both ignored by investors.

Goldman cut GDP estimates for Q2 to 1.8% primarily due to weaker than expected real export growth as a result of weakness in Europe. Deutsche Bank (DB) cut GDP estimates from 2.9% to 2.4% because of "unexpected weakness in recent federal government spending, which has been primarily due to significantly lower military outlays." Barclays cut their estimates to 2.0% for Q2.

The economic calendar for next week is actually highlighted by news out of China rather than U.S. economics. China has a tsunami of economic numbers being reported this weekend. Normally they would be watched only by the currency traders and the economic geeks responsible for reporting Asian news.

However, China unexpectedly cut interest rates on Thursday for the first time in nearly four years. It also cut prices for gasoline and diesel. The sudden rate cut only two days before the May economic data suggests the numbers could be ugly. Wholesale prices declined -1.4% and the second monthly decline suggesting consumer demand is crashing. Food prices fell unexpectedly with annualized gains of +6.4% compared to +7.0% in the prior month.

If China's economic numbers are worse than expected we could see an ugly market on Monday. China is the thermometer we use to determine the health of the global economy since they make the majority of consumer goods used around the world. If activity slowed dramatically analysts will be proclaiming a global recession on Monday.

Update: Late Friday night the WSJ reported a May CPI number for China at 3.0% compared to consensus of 3.2% and April at 3.4%. The PPI declined -1.4% compared to estimates of -1.1%. On Saturday China reported Industrial Production rose +9.6%. That was higher than the +9.3% in April but lower than estimates at +9.9%. They also reported Retail Sales rose a smaller than expected +13.8% compared to forecasts of +14.3%, April's +14.0% and +15.2% in March. Demand is definitely weakening.

Next week the reports out of the U.S. that are most important are the PPI and CPI but the recent trend has been a slowing of inflation so those headlines will also be ignored as long as they are in the range analysts expect. A sharper drop than expected would revive the deflation fears but we have a long way to go before that could be a problem. PPI is expected to decline -0.6% and CPI -0.2%.

Economic Calendar

Other overseas events include the OPEC meeting on Thursday. Several countries have already called for production cuts including Venezuela, Iran, Iraq and Algeria. This comes as OPEC production rose to 31.75 mbpd in May and 1.75 mbpd more than the official production quotas. The European recession and its impact on China and the U.S. has slowed demand while production is the highest it has been since 2008.

Saudi Arabia has already given notice it will continue pumping at a high rate in order to keep prices low ahead of the Iranian oil embargo scheduled to begin on July 1st. For Saudi Arabia this is a bloodless war against Iran. Keeping the price down and more importantly keeping the world supplied with oil during the embargo keeps the pressure on Iran to give up its nuclear ambitions and also force it to quit spreading civil unrest throughout the Middle East. If Iran has limited oil income it can't ship money off to fund protestors and terrorists in other countries.

However, there is a downside to this program. Saudi needs $98 oil (Brent) to fund its budget and the social programs that are keeping the Arab spring at bay in Saudi Arabia. At some point Saudi will have to decide between supporting prices or pressuring Iran. Iran needs oil prices at $85 to support its budget but that assumes full production and full sales. If their 2.6 mbpd of oil sales is cut back to 1.6 mbpd as expected that is a sizeable hit to revenue.

Saudi wants to keep the world markets well supplied because the EU embargo and U.S. sanctions both have escape clauses if prices were to rise too high as a result. Saudi has built up 80 million barrels of oil in storage around the world to keep any short term challenge in the Persian Gulf from impacting prices. Barton Biggs claims this economic war by Saudi Arabia has been in the in the master plan of the Saudi royal family for sometime while they waited for the correct time to implement it. Destroying the destabilizing Iranian influence in the Persian Gulf by reducing their oil income is a dream come true for Saudi Arabia.

The OPEC meeting is on Thursday and you can expect some heated tempers and I seriously doubt there will be any consensus opinion on cutting production since Saudi Arabia carries the equivalent of a veto.

The UAE is rushing to complete a 236-mile pipeline to the Indian Ocean that would allow them to export their production without shipping it through the Strait of Hormuz. The 48-inch pipeline has been completed and is in the testing phase. It has a capacity of 1.5 mbpd. Emirati officials have not announced a starting date but suggested it could be soon. The seven state federation is OPEC's third largest exporter of oil behind Saudi Arabia and Iran. Iran has repeatedly threatened to close the Strait of Hormuz where one third of the world's oil is shipped daily if Iran is attacked or their oil sales are cut off.

Crude oil prices are hovering right at support ahead of the OPEC meeting and Chinese economic reports. Oil posted a gain for the week to end a streak of five weekly losses.

WTI Crude Chart

Brent Crude Chart

The next event is the Iranian six nation meeting in Moscow on the 18th. The Iranian president has already said the meetings would fail because the demands on Iran are unreasonable. Those demands are for a halt in uranium enrichment and access to the Parchin military base where nuclear weapons research is thought to have been carried out. This is the last meeting before the embargo and sanctions are scheduled to begin so we will see how committed Iran is in keeping a rigid nuclear posture.

The Fed's FOMC meeting begins on the 19th and they are widely expected to make some sort of adjustment to their policy. This could be as small as extending Operation Twist or tweaking some other program. They are not expected to announce any QE programs. Bernanke said in his testimony on Thursday that the Fed stood ready to change the policy to increase stimulus if needed. Three other Fed heads indicated they were acceptable to further stimulus in their speeches last week. It is definitely a mixed crowd so hopes for additional stimulus are neutral.

Lastly, the Supreme Court could announce the decision on the Affordable Care Act as soon as Monday. They don't announce their dates in advance and all we know is it will be in June. There are rumors there will be an announcement on Monday with decisions on pending cases. The healthcare sector is going to be extremely volatile regardless of what decision the court makes. One analyst said hospitals could gain 50% if the law is invalidated. The president said he would press to pass changes to the law if it was struck down. Odds on getting a new law passed are basically zero before the election.

The FDIC closed down four small banks this weekend at a cost of $80.8 million. They were the Farmers and Traders State Bank in Illinois, Waccamaw Bank in North Carolina, Carolina Federal Savings in Charleston SC and First Capital Bank in Kingfisher OK. Waccamaw was the largest with 16 branches. Bank failures are down dramatically from the financial crisis levels. In 2009 there were 140 banks closed and 2010 saw 157 closed. In 2011 that dropped to 92 and after this weekend there have only been 28 in 2012.

In stock news Apple is set to hold its developer conference next week and release the new version of iOS 6. They are also expected to announce some new versions of the MacBook Air and MacBook Pro powered by Intel. A flood of new videos on YouTube purport to show the next version of the iPhone that is expected to be released late in Q3. The videos show a larger screen and an aluminum back. The volume of the leaked videos and the consistency of the various features being discussed suggests they could have some authenticity. Apple aficionados will have to wait for Sept/Oct for the official announcement. Apple shares are threatening to break over resistance at $580 and head back to two month highs at $600 if successful.

Apple Chart

Texas Instruments (TXN) will hold its mid-quarter update conference call on Monday after the close. This update can be market moving depending on the content. TXN will discuss market trends and its outlook for the future. The fate of the semiconductor sector will be reliant on this conference call. TXN shares need some positive news after declining for two months.

Texas Instruments Chart

The outlook for the Nasdaq (NDAQ) continues to dim. CNBC broke a story on Friday claiming UBS was preparing to sue the Nasdaq for $350 million for losses sustained in the Facebook IPO. Reportedly UBS tried to buy millions of shares of Facebook but could not get trade confirmations until the stock sank well below the IPO price. UBS then found itself stuck with millions of shares at the IPO price that they eventually sold under $30 per share. They claim the stock should have been halted when it became apparent there was a problem in the system. In a statement a UBS official suggested there could be many more firms like themselves that took huge trading losses because of the lack of timely execution confirmations. UBS was not an underwriter for the IPO.

Nasdaq has admitted there were delays and has raised its initial compensation fund from $13 million to $40 million. Up until Friday there was thought to be somewhere around $100-$150 million in losses by banks and brokers in the IPO process. The claim by UBS suggests there could be well over $500 million in losses if not more.

Nasdaq Chart

There was some bright news for Nasdaq on Friday. Even in the midst of the Facebook disaster there are still wins for the Nasdaq. NYSE listed Kraft (KFT) announced it was moving its listing to the Nasdaq on June 26th. The ticker will remain the same until the company splits into two companies later this year. Those surviving companies will also trade on the Nasdaq with the symbols KRFT (Kraft Foods Group) and MDLZ (Mondelez International). Kraft said they saved several hundred thousand dollars in listing fees.

Navistar (NAV) lost -$8 on Thursday after the truck company reported a Q2 loss of -$1.99 per share. Analysts were looking for a profit of 67 cents. The company lowered its full year forecast to a range of zero to $2 per share. In February they had predicted a profit of as much as $5.75 per share. They reduced that to $5.25 in March. Going from $5.75 to $0.00-$2.00 is a major revision. Navistar said it was having a tough time meeting tougher emission standards for one of its trucks. Shares of Navistar declined from $28.13 to $20.21 before rebounding sharply over the last two days to $28.36. The reason for the rebound was news from Carl Icahn that he raised his stake from 10.6% to 11.9% on the drop. He purchased an additional 883,200 shares at an average price of $24.44. This is one time where investors should be really glad Icahn was onboard. However, given the magnitude of the profit decline I would be using the $8 rebound to exit my position.

Navistar Chart

The gains last week came in two spurts. Monday was flat with a -12 point opening dip that was erased by the close for no gain. The total S&P gain from Tuesday's open through Friday's close was +45 points. That just happens to be the points gained in the two short squeezes. One occurred at Wednesday's open and another at Wednesday's close that carried over into the Thursday open. Those squeezes accounted for 45 points and the entire gain for the week.

This was not excited buying where investors said "stocks are cheap, I am going to load up today." It was simply a massive short squeeze after the worst week since November. The squeezes powered last week to the best weekly gain of the year.

This is extremely typical. You get a big oversold push to new lows after several weeks of declines and then a sharp rebound as those pressures are relieved. If the indexes had rebounded past resistance I would be more optimistic. Unfortunately the rebound stopped right at or below strong resistance in all cases.

Some analysts will have you believe the market was climbing a wall of worry. I believe it was a wall of short covering ahead of some high visibility events. Traders did not want to risk existing profits when European leaders were telegraphing a possible bailout of Spanish banks all week. The ECB meeting, Bernanke testimony, etc were potential events that could have wrecked profitable short positions. Bearish traders did the right thing and took profits and that pushed prices higher.

Other traders probably bought the optimism of a potential bank rescue, potential stimulus programs, etc and went along for the ride. The markets are rarely neutral. They are either overbought or oversold or in the process of getting to those levels. The rally last week relieved the oversold conditions and left the markets at that rare neutral position ahead of the weekend events. Bulls did not want to be long ahead of the China news and bears did not want to be short ahead of a potential Spanish bank bailout. Opposing forces met at resistance and called it a day.

S&P resistance is now 1325-1334 and we closed at 1325. This is the ideal location for a good news breakout and also ideal for shorts to jump back into the game if the weekend news was bad. The economic news from China over the weekend has been worse than expected. In theory this should mean a lower open on Monday but you have to wonder if having the 48 hours to mull it over if investors will actually be relieved it was not worse. I think the key point is that all the data points were declining and some have been declining for six months or more. You could say those who take an optimistic view of China are just rearranging the deck chairs while the ship sinks.

China is taking action to stimulate the economy with its rate cut last week and the relaxing of policy on loan growth. Unfortunately as we know from experience it takes months and multiple policy announcements to change economic direction.

I can't forecast the open on Monday. As of 5:PM on Saturday Spain has not yet asked for the bank bailout and they may wait until after the June 21st audit release. Estimates from all over Europe seem to be trying to top each other on how much a bailout will cost with multiple headlines at 100 billion euros and higher. Apparently Spain does not want to mention a number until the audit is complete. They could say 80 billion today and the audit says 125 billion on the 21st. That would put them in a more embarrassing position than they are today.

Update late Saturday night: The euro zone has agreed to loan Spain 100 billion euros to bailout the banks. The money will be put into a special fund Spain created specifically for the banks and not go into the general fund. The actual amount will include a "significant" safety margin but won't be decided until after the June 21st audit release. The finance ministers did not say where the money was coming from or how it will be paid. Reportedly the 2.5 hour conference call became heated several times before the agreement was reached. This should have a positive impact on the markets on Monday.

We just need to watch the 1225-1234 resistance range and go with the flow. If we move over that level for more than a few minutes then additional shorts will be forced to cover and that will push us into a new formation on the charts. If that resistance holds and we open lower then we could go into a holding pattern while we wait for Greece.

We remain hostage to the headlines and there is not much we can do. On the U.S. side the earnings outlook for Q2 is slowly declining. Warnings like McDonalds on Friday should cause investors to start planning for a weak earnings cycle. That could also depress markets in the weeks ahead.

S&P Chart - 25 Min

S&P Chart - 90 Min

S&P Chart - Daily

The Dow rebounded to resistance at 12,550-12,600 and that is where is closed. There was a +93 point gain on Friday but the close was still lower than the Thursday high thanks to the market drop on Thursday afternoon. You can't look at the closing headlines and make market decisions. You have to look at the bigger picture. For the Dow that was a close below the 12,600 resistance level. A breakout over that level would take us to a four week high so it needs to be watched carefully.

Dow Chart - 90 Min

Dow Chart - Daily

The Dow transports have not confirmed the rebound in the Dow industrials. The rebound to resistance at 7620-7630 should have been stronger given the persistent decline in the price of oil. The weakness in the economic outlook is weighing on the transports in the form of lower volume estimates.

Dow Transports Chart - Daily

The Nasdaq was boosted by the return of fan favorites to the top 20 list. Apple, Google, Priceline, etc posted gains with Apple moving back to strong resistance and on the verge of a breakout.

The Nasdaq closed at initial resistance at 2858 but well below Thursday's high at 2873. Tech stocks had a really good day on Wednesday but have been unable to move significantly above Wednesday's close at 2844. Sellers were waiting on Thursday's gap open.

I am encouraged by the Apple chart and their developer's conference next week. This normally provides a lift for the stock and any material gain in Apple at this point could trigger a sharp move higher and drag the Nasdaq along for the ride.

Nasdaq Winners

Nasdaq Chart - 90 Min

Nasdaq Chart - Daily

This weekend has seen a flood of headlines from Europe and Asia. I barely got five paragraphs written before the headlines changed. In the "you can't make this stuff up" category there was another revelation late Saturday that could dramatically power the markets on Monday. German news magazine Der Spiegel reported late Saturday that EU leaders are working on a comprehensive plan to rescue the euro that would include the issuance of joint euro bonds. This is a move that Germany has repeatedly rejected.

Reportedly European Union Commission President Jose Manuel Barroso, European Council President Herman Van Rompuy, Euro group head Jean-Claude Juncker and European Central Bank President Mario Draghi are working on plans for a "genuine fiscal union" in which individual member states would no longer be able to independently take on new borrowing. Governments would only be able to decide how to spend the money they raised in revenue. Any country that needed any additional funds would be required to ask the euro finance ministers. The ministers would then decide which financial needs at which level were justified and would then issue joint euro bonds to finance those needs.

This means collective liability for those debts. This is something Germany is strongly against but the plans being made at such a high level suggests Germany is ready to either give in to the greater good OR leave the euro in some fashion. There have been suggestions that Germany reissue its currency and basically have a dual currency system. Germany could have its strong mark but still utilize the euro. This would allow Germany to give up spending control to the other 16 nations. I think this is crazy because without Germany in the euro it would devalue dramatically. However, that would benefit the 16 remaining nations because their exports would be cheaper and trade would increase.

My brain is spinning with all the implications from the news this weekend and the only thing I can recommend for Monday is to watch the charts and go with the flow. A breakout here could have legs. That is especially true if the euro zone is going to implement real change rather than just plan to make a new plan. While I doubt such a genuine fiscal union would ever be ratified I am not European so the entire euro thing is a mystery to me anyway.

Art Cashin reminded everyone last week that two decades ago Margret Thatcher called the euro as "perhaps the greatest folly of the modern era." In her biography she said "Germany would be phobic about inflation, while the euro would prove fatal to the poorer countries because it would devastate their inefficient economies." Cleary that has come to pass. Thank you Art for the memories!

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

"Courage is not the absence of fear, but rather the judgment that something else is more important than fear."
Ambrose Redmoon


Index Wrap

My 'Favorite' Kind of Bottom

by Leigh Stevens

Click here to email Leigh Stevens
A favored bottom pattern I have is seen when index prices rebound after hitting my lower envelope lines, coupled with an oversold RSI extreme and where bullish sentiment is slow to come back (up). Add to that where the downside retracement is around 50% (OEX + NDX) to 61.8% (INDU). This was the second dip under the aforementioned lower envelope lines I'm using currently. It turned out that the brief dip below the 200-day moving average in the S&P 500 and Nasdaq Composite was only a harbinger of ONE more shot down; whereupon the 200-day average became a support sling-shot so to speak.

Panic bottoms (are there any other kind!) are always a bit hard to judge ahead of time, which I try to do, sometimes of course with greater success than others. Panics usually or often overshoot what you think they will rationally do. After many years of trading and analysis, I still never quite appreciate the extent the final panic and 'final' lows in the market. I never thought that the recent correction was the beginning of a bear market, but at the tail end of it, I had my doubts too.

Still and all, bottoms (at least WITHIN overall bull markets) are 'easier' to time than tops, which can be impossible. As I always say, sell offs tend to as few as a 1-time decision to dump stock; in the case of fund managers, they will tend to raise some cash by a small percent of overall portfolio value; alternatively and often they will lighten up on certain stock sectors and increase holdings in others.

In terms of my initial support-targets, it worked out fairly well. The S&P 100 (OEX) and Nasdaq 100 (NDX) gave up the least as could be anticipated with big cap favorites: At the 579 low, OEX hit my initial support target at 580 and did not have a single day Close below its 200-day average. NDX got to 2443 as an intraday low, versus my initial support-target of 2435.

The other indexes were scattered about in terms of meeting some key technical expectations for a bottom. I had an initial support-target of 1260 in SPX; it got to 1266 this past week. My initial support-target for INDU was 12000; it hit 12035. For COMP my initial support-target was 2700 and it reached 2726 at its recent low.

SPX and COMP each retraced 58% of the last big up leg. (OEX and NDX only 54%). As is frequently the case, the Dow 30 (INDU) performed quite 'technically' since it retraced an exact Fibonacci 61.8% of its late-November to early-May advance and hit an exact 30 (the start of an oversold extreme) in its 8-week Relative Strength Index (RSI).

One way that ALL the major indexes, including the Russell 2000 (RUT), suggested that they were back in an uptrend or at least made a significant bottom, was the fact of all closing the week back above their 21-day moving averages. Speaking of RUT, there was a 'minimum' chart objective implied by its prior Head and Shoulder's top down to 722; RUT made a low in the past week at 729. I'd say that RUT has 'fulfilled' a key downside objective. This (technical analysis) is not rocket science, only an 'art' and general expectations for key patterns.

It's also hard to predict how much chopping around the Market will do in terms of either 'testing' its recent bottom or not. I anticipate that a next dip will hold above the lows already in. The 200-day moving average should also be a general area of support. A sideways move would be a good thing for the bulls as it builds a support base.

On an unrelated subject, Jim Brown mentioned to me that Art Cashin has had quite positive things to say about OIN on CNBC recently. I was at PaineWebber (now UBS) for 7 years where Art always had a terrific morning piece for the Analyst/Trader types like me; actually I was the only Analyst trader hybrid 'type', the rest were EITHER traders OR analysts (or brokers). Whatever, we all loved Art's invariable ending; e.g., On this day in 1943 Congress authorized the withholding tax on payrolls (true for June 9th). To celebrate, become self-employed!

By the way, I haven't been around Art in many years and gave up CNBC for lent :-) years back, but I assume he's well into his 70's. The market savvy that Art shows goes to my theory that being older can be a definite plus in the Market, since by a certain age you've seen it all or mostly so.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) appears to have completed its correction as its popped back up above its 21-day moving average. The 2nd down leg peak to trough to date: 2.3 times its first 65 point decline. If the second down leg is greater than a fibonacci 1.62 of down leg one, the next (fibonacci) expectation for the second downswing is to be at least double the first. SPX retraced 58% of its late-November to early-April advance versus my expectation of about 50%; when it went further, my next expectation was a 62% retracement but only the Dow equaled that.

The pull back under the 200-day moving average was temporary only as was the dip to under my lower moving average envelope line. All these factors plus the 13-day RSI and may call to put ratio or sentiment indicator suggested this market was oversold. A bounce back was in the cards. The RSI in fact bottomed at a higher level than ITS prior low, suggesting bullish price/RSI divergence.

The backdrop was also one of belief. If you believed that stocks were going into a bear market, the aforementioned factors would not have necessarily 'signaled' a bottom. My expectation has been that we were seeing a more or less normal downside correction in a bull market. Only if the retracement was GREATER than 62% or a bit more, namely 66%, would it look differently.

I anticipate near support now at 13000, extending to around 1288 or the intersection of the 200-day moving average, with next lower support back at the prior recent 1266 intraday low.

I've pegged near resistance at the prior 1335 high, with next resistance in the 1360 area. There may be a period of 'base' building as SPX establishes support in the 1300 area, extending to around 1280 but over time I anticipate the market working higher. Given the lighter volumes of summer, there may be a period of backing and filling. Bullish to me also is that my CPRATIO 'sentiment' indicator has risen only moderately.

S&P 100 (OEX) INDEX; DAILY CHART

The big cap S&P 100 (OEX) has regained some bullish footing as it rebounded from the area of its 200-day moving average and Closed above its 21-day moving average. My 580 initial support-target for OEX was equaled at its 579 intraday low within 1 point. OEX (as well at big cap Nasdaq 100) at 54% came closest to retracing a fibonacci 50% of its last big up leg. The recovery after that level of retracement is bullish.

OEX's second down leg was also a bit more than double its first. If the index was going to stand its ground it was 'time' for it to do so to maintain a still-bullish expectation in terms of a second corrective down leg versus the first; assuming this wasn't the start of a major bear move. I didn't think this was where we were and have been thinking correction-only. More on relative 'wave' considerations for the two down legs in my next Trader's Corner tomorrow (Sunday).

There's resistance just overhead at the prior 607 high, with next anticipated resistance in the 620 area.

Near support is highlighted at 590, extending to the 200-day moving average at 583, which is also then quite close to support implied by the recent 579 low.

OEX may take some time to get back into a clear cut bullish trend but I think the worst downside is over.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) completed an exact Fibonacci 61.8% (I often round to 62) retracement of its late-November to early-April advance. There is often just ONE of the major stock indexes that will fulfill a Fibonacci retracement objective so exactly and its telling when one does so. Pullback retracements of 38, 50 and 62% (or a bit more, especially 66%) remain within the bounds of a correction-only versus a bearish round-turn 100% retracement or more, which would suggest a new bear market trend.

INDU nearly reached my initial support-target of 12000 at its intraday low of 12035. I was thinking we'd see the Dow retrace somewhere between 62 and 66%.

While the Dow fell well below its 200-day moving average, it was only a minor dip (again) below the lower moving average 'envelope' line which is another way of measuring an oversold condition. Of course being 'oversold' is NO guarantee that an index will come out of free fall but a number of Dow stocks got into support areas where there was fund buying interest; e.g., AA, BAC, CSCO, HD, IBM, KFT, KO, MCD, MMM, MRK, MSFT, PFE, TRV and XOM. HD hardly corrected actually from its prior strong uptrend and DIS, T, VZ and WMT remained strong through this recent correction.

Support is noted at 12400, then at 12300; finally, back near the prior 12035 intraday low. Near resistance and a bit of tough near-term overhang is at 12600, next in the 12700 area and then finally and especially, around 12800.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) has regained some bullish footing after its recent rebound which came after its second down leg covered approximately double the ground of its first decline (from 3134 to 2946). COMP's second down leg 'c', from 3085 to 2726, was 1.95 times greater than its first downswing. The fact that the two down legs had this type 2 to 1 relationship, as well as seeing COMP rebound quickly from its dip below its 200-day average (as well as FROM my lower 'oversold' envelope line) suggested at a minimum to exit short COMP stocks.

COMP, like SPX, at 58 percent, retraced between 50 and 62% of its last major advance. Retracements less than 2/3rds maintain the potential of a downside correction-only; versus something suggesting a slide into a bear marke. There should be a period of recovery ahead, although it also would be normal to see backing and filling. Bullish sentiment is not rebounding strongly among options traders; in a contrarian sense this is bullish.

Support is suggested at 2800, extending to around 2782 at the top of COMP's recent upside price gap. Support at the 200-day moving average should also be noted, extending to the recent 2726 intraday low.

Resistance can be initially anticipated at the line of recent highs at 2873-2882, with resistance extending to 2900 even; next resistance is suggested at 2946-2950.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) Index has probably completed its sizable downside correction that carried to around 2450. Last week I noted an initial support-target of 2435 and the intraday low was 2443. It was telling also that NDX held ABOVE its 200-day moving average and didn't again dip to below my lower 'oversold' moving average envelope line (at 4% under NDX's 21-day moving average). NDX (like the big-cap OEX) completed just over half/50% of its late-November to late-March advance. The strong rally after this much of a retracement suggests NDX's correction may be over.

A rebound in key Nasdaq bellwether AAPL (Apple Computer) from the $550 area was telling for the recovery rally in NDX. NDX's Close back above its 21-day moving average also suggests that the slide may be behind us. That said there's still resistance around 2570 to be overcome; next resistance is at 2630-2635 to 2650.

Near support is at 2500, extending to 2450. Once we see some 'base-building' type back and forth action I'll be more inclined to buy dips to and under 2500 support. 2500-2450 could be a 'sweet spot' to do some buying of calls but short-covering and bargain hunting buying may carry into next week. I thought NDX might fall to the low end of its broad weekly uptrend channel (not shown) at 2400; this major up trendline may still be tested later, but at a higher level. Stay tuned on that.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) has experienced the same rally as the underlying NDX index of course and on its 'typical' low volume. The volume pattern with the stock is that big volume comes out when key support(s) are broken; otherwise, not so much.

I've noted resistance this week at 63.0, then at 64. Near support looks like 61.25, then back in the 60 area. On the longer-term weekly chart (not shown here), I was anticipating major support closer to 59-58.9. I wouldn't be surprised to see some sideways movement but not much further upside. Lastly, we may see the Q's dip under 60 on a further instance for a final low. We're not in a strong seasonal time for big gains.

RUSSELL 2000 (RUT); DAILY CHART:

My 'minimum' downside target on the Russell 2000 (RUT) based on its Head and Shoulder's top pattern was to the 722 area. There's nothing that says this number 'should' have been reached or we can't trust the recent 729 low. I suggest now watching to see if RUT can overcome potentially TOUGH resistance in the 785 area. If it can't for a time, we may still see another downswing that carries below 730.

I have noted near support at 750. What bothers me as I say is the sizable supply overhang suggested by the triple top pattern that makes up the Head and Shoulder's formation.

It may be hard for the small to mid-cap Russell index to attract the kind of buying that will churn through resistance anytime soon. Resistance is at 775-778, then at the aforementioned 785 area.

RUT doesn't often fall to oversold RSI readings (see above) at or below 30 on a 13-day basis but it did on this last downswing and then the RSI made a higher low this past week on a lower price, setting up the same bullish price/RSI divergence seen with the other major indexes. This was likely a good 'signal' to exit RUT puts but whether the index has all that much upside from here is the question that remains.

GOOD TRADING SUCCESS!



NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS

CHART MARKINGS:

1. Technical support or areas of likely buying interest are highlighted with green up arrows.

2. Resistance or areas of likely selling interest are notated by the use of red down arrows.

I WRITE ABOUT:

3. Index price areas where I have a bullish bias or interest in buying index calls, selling puts or other bullish strategies.

4. Price levels where I favor buying index puts or adopting other bearish option strategies.

5. Bullish or Bearish trader sentiment. There's a bottom of the chart display of the CBOE daily call to put volume ratio line for equities-only options (CPRATIO) on the S&P 500 (SPX) and the Nasdaq Composite (COMP) daily charts. However, this indicator pertains to the market as a whole, not just SPX or COMP. I divide calls BY puts rather than the reverse (i.e., the more common put/call ratio). In my indicator a LOW reading tends to be bullish and a HIGH reading tends to be bearish, as with overbought/oversold indicators.

Any trading bias I have or suggestions I make are based on Index levels, not a specific option (month and strike price) with a suggested entry price for that option. My outlook most often focuses on the intermediate-term trend (next 2-3 or more weeks) rather than just the next several days relating to the short-term trend.

Having at least 3-4 weeks to expiration tends to be my guideline for trade entry choice. I attempt to pick only what I consider to be 'high-potential' trades, where a defined risk or trade-exit point would equal just 1/3 or LESS of an index price target; e.g., a favorable risk to reward ratio would be 1 to 3, 1:4, 1:5, etc.

I favor At The Money (ATM), In The Money (ITM) or only slightly Out of The Money (OTM) strike prices so that premium levels are not as cheap as would be the case with far out of the money options; this kind of analysis/risk to reward expectation helps in not overtrading an account such as by loading up on inexpensive calls or puts. Exit or stop points, as well as projected profitable index price targets, are based on my technical analysis of the underlying indexes.


New Option Plays

Discount Stores & Accessories

by James Brown

Click here to email James Brown

Editor's Note:

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

(bullish ideas) RKT, ALGT, SHW, SNI, UA, WFM, SAM, SXCI, ORLY, CYMI,


NEW DIRECTIONAL CALL PLAYS

Dollar Tree, Inc. - DLTR - close: 106.72 change: +1.89

Stop Loss: 103.45
Target(s): 112.50
Current Option Gain/Loss: Unopened
Time Frame: exit prior to the stock split
New Positions: Yes, see below

Company Description

Why We Like It:
Discount stores like DG, FDO and DLTR were all showing relative strength on Friday. DLTR looks the strongest with the breakout to new all-time highs past resistance in the $104-105 area. The stock has seen impressive gains over the last two years and management declared a 2-for-1 stock split in late May. The split will occur on Tuesday, June 26th.

I am suggesting we open bullish positions on Monday morning but *ONLY* if both DLTR and the S&P 500 index open positive. If those conditions are not met we will not open positions. If our trade does open then we want to exit prior to the stock split.

We will tentatively set an exit target at $112.50 with a stop loss at $103.45.

Do not enter position unless DLTR and the S&P 500 are both positive at the open

- Suggested Positions -

buy the Jul $110 call (DLTR1221G110) current ask $2.20

Annotated Chart:

Entry on June xx at $ xx.xx
Earnings Date 08/16/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on June 09, 2012


Fossil, Inc. - FOSL - close: 76.15 change: +1.80

Stop Loss: 72.65
Target(s): 84.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
FOSL makes and markets a number of accessories and watches. The company reported earnings back in early May and the stock was crushed when management warned with lowered guidance. Now FOSL has spent four weeks building a base near support at $70.00. The early June dips under $70 look like a bear trap pattern. Now FOSL is on the rebound.

Technically a 38.2% Fibonacci retracement of the decline would put FOSL at $96. We are aiming for $84.50 while more aggressive traders could aim for the $89-90 zone. However, please note that we want to open small bullish positions on Monday but *ONLY* if both FOSL and the S&P 500 index open positive. If not, then don't enter positions yet.

FOSL can be a volatile stock so we want to keep our position size small. We'll start with a stop loss under Friday's low at $72.65.

Do not enter position unless FOSL and the S&P 500 are both positive at the open

- Suggested Positions -

buy the Jul $80 call (FOSL1221G80) current ask $3.00

Annotated Chart:

Annotated Chart:

Entry on June xx at $ xx.xx
Earnings Date 08/07/12 (unconfirmed)
Average Daily Volume = 1.45 million
Listed on June 09, 2012



In Play Updates and Reviews

The Rebound Resumes on Friday

by James Brown

Click here to email James Brown

Editor's Note:

The stock market's oversold bounce off its June lows continued on Friday.

We have updated a couple of stop losses and removed NVS from the newsletter.

Current Portfolio:


CALL Play Updates

Costco Wholesale - COST - close: 88.74 change: +0.61

Stop Loss: 87.25
Target(s): 91.50
Current Option Gain/Loss: +32.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/09 update: COST continued to rally on Friday but shares failed to close above the late April highs. We are going to try and reduce our risk by raising the stop loss to $87.25. More aggressive traders will want to keep their stop loss underneath the simple 10-dma, currently at $86.68.

- Suggested Positions -

Long Jul $90 call (COST1221G90) Entry $1.10

06/09/12 new stop loss @ 87.25
06/06/12 new stop loss @ 86.25
06/06/12 triggered at $87.25

chart:

Entry on June 06 at $87.25
Earnings Date 10/03/12 (unconfirmed)
Average Daily Volume = 2.6 million
Listed on June 04, 2012


Monster Beverage - MNST - close: 76.10 change: +1.60

Stop Loss: 73.25
Target(s): 79.50
Current Option Gain/Loss: + 29.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/09 update: MNST has finally closed above resistance near $75.00. Shares outperformed on Friday with a strong +2.1% gain. We are going to try and reduce our risk by raising the stop loss to $73.25. More aggressive traders will want to keep their stop under the simple 20-dma for now (it's currently at $71.90).

- Suggested Positions -

Long Jul $80 call (MNST1221G80) Entry $1.70

06/09/12 new stop loss @ 73.25
06/06/12 new stop loss @ 70.75
06/06/12 triggered at $74.25

chart:

Entry on June 06 at $74.25
Earnings Date 08/02/12 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on June 04, 2012


Ross Stores Inc. - ROST - close: 64.50 change: +1.58

Stop Loss: 62.45
Target(s): 68.50
Current Option Gain/Loss: - 4.7%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
06/09 update: After disappointing on Thursday shares of ROST were back to showing strength again on Friday with a big +2.5% gain. This is a new all-time closing high and shares look poised to hit a new record intraday high soon. If ROST and the S&P 500 both open positive on Monday I would use this move as a new bullish entry point.

- Suggested Positions -

Long Jul $65 call (ROST1221G65) Entry $2.10

06/07/12 triggered on gap higher at $64.47

chart:

Entry on June 07 at $64.47
Earnings Date 08/16/12 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on June 06, 2012


PUT Play Updates

Baxter Intl. - BAX - close: 50.62 change: +0.14

Stop Loss: 51.51
Target(s): 48.00
Current Option Gain/Loss: Jun$50p: -60.6% & Jul50p: -24.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/09 update: BAX is still hovering in the $51-50 zone and remains in a bearish trend with short-term overhead resistance at the 10-dma. More conservative trades may want to adjust their stops closer to the $51.00 level.

- Suggested Positions -

Long Jun $50 PUT (BAX1216R50) Entry $0.66

- or -

Long Jul $50 PUT (BAX1221S50) Entry $1.55

06/02/12 new stop loss @ 51.51
05/31/12 triggered at $50.95

chart:

Entry on May 31 at $50.95
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 2.4 million
Listed on May 29, 2012


Coach Inc. - COH - close: 64.00 change: +1.93

Stop Loss: 64.05
Target(s): 58.50
Current Option Gain/Loss: -31.8%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
06/09 update: Some of the retail names were showing relative strength on Friday and COH helped lead the pack with a +3.1% rally. Shares rose right to the $64.00 level and almost hit our stop loss at $64.05. If the market opens positive on Monday we could see COH actually gap higher above our stop and close this trade. I am not suggesting new positions at this time.

- Suggested Positions -

Long Jul $60 PUT (COH1221S60) Entry $2.20

06/07/12 triggered at $62.25

chart:

Entry on June 07 at $62.25
Earnings Date 07/31/12 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on June 06, 2012


NASDAQ OMX Group - NDAQ - close: 22.12 change: +0.01

Stop Loss: 22.55
Target(s): 20.15
Current Option Gain/Loss: -35.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/09 update: The Facebook IPO nightmare for the NASDAQ will not go away. Now UBS is planning to sue NDAQ for up to $350 million in trading losses due to faulty and delayed quotes and filled orders. Yet in spite of this bad news shares of NDAQ really didn't move much on Friday. Shares are hovering near $22.00. On a short-term basis NDAQ actually looks poised to bounce higher and thus more conservative traders may want to abandon ship now and exit early.

I am not suggesting new positions.

(SMALL Positions) - Suggested Positions -

Long July $21 PUT (NDAQ1221S21) Entry $0.85

chart:

Entry on June 06 at $21.95
Earnings Date 07/25/12 (unconfirmed)
Average Daily Volume = 3.8 million
Listed on June 05, 2012


Netflix, Inc. - NFLX - close: 65.64 change: +1.00

Stop Loss: 67.25
Target(s): 60.25
Current Option Gain/Loss: -15.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/09 update: NFLX managed a bounce on Friday and recouped almost all of Thursday's declines. Yet the trend is still bearish. The stock spent most of Friday in the $65-66 zone so we can use a new drop under $65.00 as a new entry point to buy puts.

Earlier Comments:
I am suggesting we keep our position size small because NFLX can be volatile at times and being short the stock is a popular position with short interest at 20% of the 54 million share float. Our first target is $60.25. More aggressive traders could aim a lot lower. The Point & Figure chart is suggesting a $48 target although I suspect the $50 level could be significant support.

(Small positions) - Suggested Positions -

Long Jul $60 PUT (NFLX1221S60) Entry $3.57

chart:

Entry on June 08 at $64.37
Earnings Date 07/23/12 (unconfirmed)
Average Daily Volume = 4.9 million
Listed on June 07, 2012


Oil States Intl. - OIS - close: 66.22 change: -0.53

Stop Loss: 68.55
Target(s): 61.50
Current Option Gain/Loss: -33.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/09 update: OIS saw an early spike down to $65 before paring its losses on Friday. I don't see any changes from my Thursday night comments. The oversold bounce from its June lows has stalled at resistance. OIS looks poised to resume its bearish trend of lower highs and lower lows. I would still consider new put positions here.

- Suggested Positions -

Long Jul $60 PUT (OIS1221S60) Entry $2.25

chart:

Entry on June 08 at $66.04
Earnings Date 07/30/12 (unconfirmed)
Average Daily Volume = 720 thousand
Listed on June 07, 2012


CLOSED BEARISH PLAYS

Novartis AG - NVS - close: 52.47 change: +0.29

Stop Loss: 52.25
Target(s): 48.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/09 update: NVS is not cooperating. The long-term trend, most easily seen on the weekly chart, still looks very bearish. Yet there has been no follow through lower. NVS has spent the last three weeks churning sideways. The stock is either building a bottom or it's just a temporary speed bump before it resumes the trend lower. On a short-term basis NVS looks poised to rally and break out of its $51.25-52.75 trading range. If that happens then shares might rally toward their 200-dma again.

Our plan was to buy puts at $51.00 but the trade has not been triggered yet. That's unlikely to happen any time soon so I am removing NVS from the play list.

Trigger @ 51.00

Trade did not open.

06/09/12 removed from the play list.

chart:

Entry on June xx at $ xx.xx
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 1.75 million
Listed on June 05, 2012