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Daily Newsletter, Wednesday, 6/20/2012

Table of Contents

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

Market Wrap

Fed's Response Leaves Market Wanting More

by Keene Little

Click here to email Keene Little
The results of the FOMC meeting were in line with what most expected -- only an extension of the Operation Twist program -- and now the market has to decide whether it's enough.

Market Stats

The market has been hoping for more monetary stimulus so that the money could be used to help keep the stock market from sinking. How sad that all we can do is hope for more stimulus money, knowing the global economy and high debt make the elevated stock market already over-inflated. Without more drug money just about everyone knows the market can't stand up on its own two feet.

So the Fed made a small move to help the market while hiding the fact that it really has nothing else to offer. Bernanke of course made an attempt to jawbone the market higher with promises of more stimulus if and when it is needed. He is desperately hoping it won't be needed. First of all he knows one too many programs and inflation could pop higher and he'll be scrambling to get it back under control. Once inflation pops out of the can it's very difficult to get back in.

The other reason Bernanke is hoping the market/economy won't need any more help is because he really doesn't have anything else to give. The normal monetary policy of the Fed is to reduce interest rates and make more money available to the banks for lending. This typically helps the construction industry and especially the housing market. But neither have gained much ground. Manufacturers have improved greatly over the past several years but with very little additions to employed staff (they've made huge improvements in productivity gains). This is a structural change, which is not likely to change until the economy improves.

As I've said many times before, the highly indebted consumer makes the Fed's monetary policies a non-starter. The Fed has been pushing on a string -- you can lead a horse to water but you can't make him drink. And the consumer is simply not drinking. Instead debt is being worked down (through payments or defaulting) and state and local governments are being forced to do the same thing. Therefore the Fed's policies are simply not working and any added stimulus is not likely to change that. But additional stimulus will risk letting the inflation genie out of the bottle and the Fed doesn't want to go there. Hence the jawboning without the additional stimulus.

The Fed did extend its Operation Twist program that was set to end this month. They've extended it to complete by the end of the year and intend on selling $267B in short-term securities and roll the money into longer-dated Treasury securities. But that doesn't really help the stock market. It's intended to help lower longer-term rates, such as mortgage rates and the 30-year bond yield did decline today. The bigger beneficiary of the program is the Federal government by locking in historically low long-term rates that will theoretically be cheaper to pay off over time through inflated dollars. The bigger problem is having a lot of debt in a deflationary environment. But the Fed is convinced they can fight off deflation (or are they?).

The next step for the Fed is another QE program but that's becoming less and less of an option as we move closer to the November elections. Also, because it could become highly inflationary it might not be an option the Fed will sincerely consider. Bernanke has made it clear that the Fed has made the monetary changes necessary to stoke the economy. Now it's up to the government to control its debt, which is a drag on the economy.

The Fed said that for the rest of this year they would not be reinvesting the proceeds from maturing Treasuries in its portfolio. This will ensure the Fed has more funds by the end of the year to help in some other accommodative programs if needed. But what this means for the market is that they will be pulling money out of the market. This is exactly the opposite of what the market wanted. So it threw a little hissy fit but was then lifted back up twice with some buy programs to prevent a selloff. What the market does for the rest of the week is going to be very telling.

Other than the Fed's accommodative monetary policies, which haven't worked, the other economic stimulus comes from the government (although one could make the argument that government spending is wasteful, especially since the money comes from the productive sector of the economy, that's another argument for another day). While the Fed can make more money available at a cheaper rate, the government can provide stimulus through make-work programs, investments in new technologies, etc. But here we are 12 years following the turn down in 2000 and in reality nothing has improved. And that's because we are in a fundamentally different kind of slowdown, one that will not be stopped by the Fed or government. They can slow it down but the correction will proceed and the huge debt overhang will be reduced.

The stock market has been reflecting hope and fear about this process and we're getting closer to the point of recognition where most will realize the Fed is out of bullets and the government is out of money. Once that recognition grabs hold, probably later this year, we'll see the stock market lose hope and grab hold of fear in a big way. Our job is to get in front of any big move and make some money from it. We can all wring our hands in despair and curl up into the fetal position and wait for the storm to pass or we can stand up, see what's happening and make the best of it -- turn lemons into lemonade.

And with that let's see what the charts are telling us. As always, it speaks in a different language and our job is to translate it into money-making opportunities. Last week I was showing projections for another leg up for a higher a-b-c bounce off the June 4th lows. The market obliged and we're now close to the upside targets for the bounce.

I'll start with the NDX charts tonight since it's the best one to show the potential for a new high before the bear gets his claws dug in deep in this market. Because the June 4th low for NDX was not a break below its October high it maintains the potential for a new high to complete a 5-wave move up from October. The other indexes have already overlapped their October highs (albeit only a little for SPX and not on a closing basis) and that violates an EW rule that says the 4th wave correction cannot overlap the 1st wave. So I've got labeled in light red and with the dashed line the potential for a rally into July to at least test the April high. In fact the 5th wave of the move up from October would equal the 1st wave at 2813.54 (vs. the April 3rd high at 2795.35).

Nasdaq-100, NDX, Weekly chart

If the June 4th low was the completion of the 1st wave down to start the new bear market leg down, the bounce off that low is only a correction of the decline and will lead to a stronger decline, which is depicted in bold red. This wave count calls for a resumption of the selling, possibly from right here.

The daily chart below shows the 3-wave bounce off the June 4th low and as such it fits as an a-b-c bounce correction of the 5-wave decline from April. This is what has me favoring the bearish path from here, not a new high in July. A drop below the high on June 7th, near 2570, would leave the bounce as a 3-wave correction and point lower, hence the key level to the downside at 2570.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2680
- bearish below 2570

The 3-wave bounce off the June 4th low is shown in more detail on the chart below. I apologize for the messiness of the chart but I'm trying to show the Fibs and channel lines that are in play here. Depending on whether I use the June 12th or June 14th low I get a slightly different wave count for the c-wave. Using the June 12th low for the start of the c-wave I think it needs one more new high to complete the pattern, with an upside target near 2650 (I'll be able to zero in on a tighter price target if we get the final 5th wave started on Thursday). Using the June 14th low for the start of the c-wave I can call today's high the completion of the rally. A drop below the up-channel, near 2600 Thursday morning, would be a bearish heads up and below 2570 would be good confirmation the top is in place.

Nasdaq-100, NDX, 60-min chart

SPX was able to punch through price-level resistance at 1335-1340 so the bulls want to see that hold as support on any pullback. A drop back below 1335 would be bearish, especially since it would confirm the bounce off the June 4th low as just an a-b-c correction to the April-June decline. That would indicate the 3rd wave down has begun and it will be stronger than the April-June decline (downside target will be about 1150 by August). If the rally can push at least a little higher on Thursday there is an upside target near 1369 where the a-b-c bounce will have two equal legs up.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1373
- bearish below 1335

As with the NDX 60-min chart the SPX 60-min chart below is messy but the channels and Fib projections are important here. Ideally the pattern calls for just one more high on Thursday (maybe Friday if it's a slow choppy move higher, perhaps in a small rising wedge pattern) and the 5th wave of the move up from June 12th would equal the 1st wave at 1366.68. Two equal legs for the a-b-c up from June 4th is at 1368.93 so we've got a target zone of 1367-1369 to watch for a possible reversal. Higher than 1370 could see a run up to 1379 and any higher than 1380 would be a bullish move. A break below 1345 would be a bearish heads up and then below 1335 would leave a failed inverse H&S pattern and failed patterns tend to fail hard, especially since this inverse H&S pattern has been widely reported.

S&P 500, SPX, 60-min chart

A high this week would coincide with the new moon that was yesterday (Tuesday) and as you look back over the past year you can see the new moon was associated with some important highs and lows. As a side note, you can see on the left side of the chart where the market was at the end of June (near 1340). Another year, another sideways move. Buy-and-holders got nothing for the past year but there were some very good trading opportunities, even if you simply exited when the market turned down and bought when it turned back up. Double that if you play the short side as well. Ready for the next year? My guess is we're going to be a lot lower one year from now than where we are currently.

S&P 500, SPX, MPTS daily chart

We've got the same pattern for the DOW and an a-b-c bounce off its June 4th low targets 12918. A price projection for the 5th wave of the move up from June 12th targets 12937 so that gives us a target zone to watch for a reversal. If the market drops Thursday and the DOW gets below 12650 it will confirm the high is already in place.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 13,060
- bearish below 12,650

Today the RUT was trapped between its 50% retracement, at 788.83, and its 50-dma, at 781.60. If it can make it a little higher on Thursday I have two projections close to 795 so watch for resistance and reversal there to short. Higher potential is to about 803 where it would retrace 62% of its March-June decline and hit its downtrend line from March. A drop below 774 would be trouble and below 760 would confirm the high is in place.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 803
- bearish below 760

Last week I pointed out what I call the 50/50 trade -- it's typically a very good reversal setup when price corrects and retraces 50% of its previous move and tags its 50-dma at the same time. This can be done on any timeframe and right now we're looking at the daily chart for BKX below. The 50% retracement of its March-June decline is at 45.77 and its 50-dma is at 45.61 (45.64 yesterday). Yesterday's high was 45.67 and today's was 45.82. Both days closed below its 50-dma. At the same location is the price projection at 45.58 for two equal legs for its a-b-c bounce off the June 4th low and at 45.67 is its broken 2009-2010 neckline. That's a lot of resistance in the 45.58-45.77 area and this is the kind of setup (to get short in this case) that I'll take every day of the year since you can keep your stop relatively close. I'd use a close above 45.80 for a stop (this market loves to do intraday spikes to grab stops and it's the closing price that's most important).

KBW Bank index, BKX, Daily chart

The TRAN's pattern is not clear enough to confidently place any EW count on it so I'm just watching the downtrend line from 2001 for now, currently near 5300. It has a high bounce off its June 4th low but so far it's just an a-b-c bounce like the others and two equal legs up would be at 5308.67. Based on these I'd say TRAN will be bullish above 5310 but it's a short at resistance if tagged and rolls over.

Transportation Index, TRAN, Daily chart

The dollar continues to chop its way lower and chop is the important word. Following a strong impulsive move up in May it's been in a corrective pullback since June 1st so the primary trend remains to the upside once the pullback completes. Its March 15th high at 81.16 and a 50% retracement of its May rally, also at 81.16, remains a good downside target and potential support to start another rally leg. A little lower it should find support at its 62% retracement, at 80.57, and the bottom of its pullback channel.

U.S. Dollar contract, DX, Daily chart

As the dollar has chopped lower gold has chopped higher since its May 16th low. Other than the possibility for a higher bounce to its downtrend line from 2011, near 1700, I don't see enough of a reason to want to be long gold. The choppy bounce pattern says look for a continuation lower, potentially right from here.

Gold continuous contract, GC, Daily chart

As shown on its 60-min chart below, today gold broke down from a parallel up-channel for price action since the pullback on June 11th, confirmed with a drop below 1607. It also dropped back below its February-June downtrend line and note where it bounced back up to this afternoon (on the FOMC announcement). Support-turned-resistance was the setup for a quick back test followed by a bearish kiss goodbye.

Gold continuous contract, GC, 60-min all-hours chart

Following oil's sharp drop in May it has been trading sideways. Impulsive decline, choppy consolidation -- this one should stay within its down-channel and drop lower. I show one more leg up for its consolidation but that's not required. A drop to its October 4th low (ahead of the stock market but the stock market should be right behind it), near 75, would make a good place to start a bigger bounce to correct the leg down from March.

Oil continuous contract, CL, Daily chart

Tomorrow morning we'll get the EU's PMI services number (4:00 AM EDT) and expectations are for a slight drop. We'll then get unemployment claims before the bell, with no significant changes from the previous week expected. Existing home sales, the Philly Fed and LEI numbers will be released at 10:00 AM. There's hope that the Philly Fed number will improve from last month's -5.8 but expectations are for it to still be in contraction territory.

Economic reports, summary and Key Trading Levels

The a-b-c bounce off the June 4th low is looking good and very close to completion, if it didn't complete at this afternoon's high. Ideally we'll see at least a minor push higher on Thursday but it should be a very good setup to get short. If you're in long plays I would use this afternoon's lows for your stop. If the bearish wave count is correct we're about to start a very strong selloff and long will be a painful place to be.

I can't rule out a run up to test the April highs so if you're looking to play the short side you'll need to use good risk management -- proper trade size, honor your stops, don't eat yellow snow, etc. We have a very good setup in front of us but there are no guarantees in the market -- all we can do is take the setups and then stop out when the market disagrees on the setup and runs us over. Once in a short play and the market drops then you can open the stop a little and give it room to breathe, especially since the next move down, if that's what's coming, is going to be a good one.

We'll know by this time next week whether or not the bears regained control so good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

If everything seems under control, you're just not going fast enough. - Mario Andretti


New Option Plays

Footwear & Retail

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Wal-Mart Stores Inc. - WMT - close: 68.52 change: +0.71

Stop Loss: 67.40
Target(s): 72.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The fallout over WMT's bribery scandal in Mexico was short lived. The stock has been showing plenty of relative strength over the last few weeks. Over the last few days WMT has been digesting its gains in a sideways consolidation.

It looks like that consolidation is ending with WMT breaking out to new multi-year highs today. Make no mistake, WMT looks overbought here but the trend is up and traders have been buying the dips. The 1999 high near $70.00 could be resistance. I wouldn't be surprised to see WMT run to $70 and pause or pull back toward $68 again. We are aiming higher and targeting $72.00. FYI: The Point & Figure chart for WMT is bullish with a long-term $91 target.

Use a trigger to buy calls at $68.65. We'll use a stop loss at $67.40

Trigger @ 68.65

- Suggested Positions -

buy the Jul $70 call (WMT1221G70) current ask $0.44

- or -

buy the Aug $70 call (WMT1218H70) current ask $0.91

Annotated Chart:

Entry on June xx at $ xx.xx
Earnings Date 08/16/12 (unconfirmed)
Average Daily Volume = 11.7 million
Listed on June 20, 2012


NEW DIRECTIONAL PUT PLAYS

Deckers Outdoor Corp. - DECK - close: 47.11 change: -0.90

Stop Loss: 50.05
Target(s): 42.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
DECK is a shoemaker. Unfortunately for shareholders the stock has been underperforming the market for months. The long-term trend has turned bearish with a pattern of lower highs and lower lows.

DECK's recent breakdown under key support at $50.00 is very bearish and could signal a drop toward the $40 area. I want to warn you that traders should consider this an aggressive trade because so many investors are already short this stock. The most recent data listed short interest at 26% of the small 36.7 million share float. That does raise the risk of a short squeeze, although DECK hasn't seen a squeeze in a while.

I am suggesting small bearish positions at the open tomorrow. We will start with a stop loss at $50.05. Our target is $42.00. FYI: The Point & Figure chart for DECK is bearish with a $34 target.

- Suggested Positions -

buy the Jul $45 PUT (DECK1221S45) current ask $1.40

- or -

buy the Aug $45 PUT (DECK1218T45) current ask $2.95

Annotated Chart:

Entry on June xx at $ xx.xx
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 1.45 million
Listed on June 20, 2012



In Play Updates and Reviews

Whole Foods at Another New High

by James Brown

Click here to email James Brown

Editor's Note:

Whole Foods Market, Inc. continues to perform well and tagged another new high. It wasn't a great day for APC.

Current Portfolio:


CALL Play Updates

Anadarko Petroleum - APC - close: 64.21 change: -1.59

Stop Loss: 63.40
Target(s): 69.75
Current Option Gain/Loss: -36.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/20/12 update: It was not a good day for some of the oil stocks. Crude oil prices hit a new 2012 low today. Shares of APC erased about two days of gains with today's -2.4% pull back. The stock stalled near $64 and its 10-dma and 30-dma, both acting as short-term support.

If there is any follow through lower tomorrow APC will likely hit our stop loss at $63.40. Readers may want to wait for a new rally past $65.00 or even $66.00 before initiating new call positions.

- Suggested Positions -

Long Jul $67.50 call (APC1221G67.5) Entry $1.75*

*option entry price is an estimate. looks like there was a bad tick at $5.00 this morning (06/19/12)
06/19/12 triggered @ 65.55

Entry on June 19 at $65.55
Earnings Date 07/23/12 (unconfirmed)
Average Daily Volume = 5.2 million
Listed on June 16, 2012


Citrix Systems - CTXS - close: 80.89 change: -0.08

Stop Loss: 77.75
Target(s): 86.50
Current Option Gain/Loss: -33.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/20/12 update: CTXS held up reasonably well today. Traders bought the dip to $80.00 this morning. CTXS closed almost unchanged on the session. Unfortunately things don't look so great after hours.

One of CTXS' competitors, Red Hat (RHT), reported earnings after the closing bell tonight. RHT offered some disappointing guidance and the stock is down more than -10% after hours. This is weighing on shares of CTXS, which are down around $79 after hours tonight.

I would expect a weak opening tomorrow.

- Suggested Positions -

Long Jul $82.50 call (CTXS1221G82.5) Entry $3.40

06/19/12 trade opened on gap higher at $81.40

Entry on June 19 at $81.40
Earnings Date 07/25/12 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on June 18, 2012


Snap-on Inc. - SNA - close: 63.36 change: -0.88

Stop Loss: 61.95
Target(s): 69.00
Current Option Gain/Loss: Unopened
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
06/20/12 update: SNA tried to rally this morning but immediately reversed as it neared the $64.50 level. The stock retreated to its rising 10-dma before paring its losses. Aggressive traders could buy this dip to the 10-dma. I am suggesting we stick to our original plan and wait for SNA to hit our trigger at $64.55 as our entry point.

FYI: The Point & Figure chart for SNA is bullish with a long-term $79 target.

Trigger @ 64.55

- Suggested Positions -

buy the Jul $65 call (SNA1221G65)

- or -

Buy the Sep $65 call (SNA1222I65)

Entry on June xx at $ xx.xx
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 424 thousand
Listed on June 19, 2012


Whole Foods Market, Inc. - WFM - close: 96.14 change: +0.46

Stop Loss: 93.25
Target(s): 95.00 & 98.50
Current Option Gain/Loss: Jul $92.50c: +45.4% & Aug $95c: +19.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/20/12 update: Positive analyst comments helped WFM recover from its morning lows. Shares set another new closing high. More conservative traders may want to take profits early on the July calls. I am not suggesting new positions at this time.

- Suggested Positions -

Long Jul $92.50 call (WFM1221G92.5) Entry $3.30

- or -

Long Aug $95 call (WFM1218H95) Entry $4.40

06/18/12 new stop loss @ 93.25
06/15/12 first target hit at $95.00, options values at:
Jul $92.50 call @ $4.50 (+36.3%)
Aug $95.00 call @ $5.05 (+14.7%)
06/15/12 triggered at $92.05

Entry on June 15 at $92.05
Earnings Date 07/25/12 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on June 12, 2012


PUT Play Updates

Currently we do not have any active put trades.