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Daily Newsletter, Saturday, 6/23/2012

Table of Contents

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

Market Wrap

Cleanup After the Storm

by Jim Brown

Click here to email Jim Brown

The market suffered through a headline storm last week and survived with mixed results.

Market Statistics

Greece voted and traders took profits. They successfully formed a pro-bailout coalition and the market ignored them. The meeting in Moscow between Iran and the six UN nations failed as expected and ensured the oil embargo would proceed as planned on July 1st. Oil prices fell instead of rallied. Spain's 10-year debt yields rose over 7% and the markets sold off again. German, European and Chinese economics all took a turn for the worse and the markets weakened again. On Wednesday the FOMC failed to add any new stimulus and only extended the Operation Twist until year end and the markets churned intraday but ended flat. USA economics fell off a cliff with the Philly Fed Survey on Thursday and the Dow fell -250 points for the worst decline in June. Worries over a Moody's downgrade of the major banks accelerated the selling into Thursday's close. It was a very volatile headline driven week.

Compared to the last seven days the coming week should be a walk in the park even though the economic calendar is full. Earnings are going to start grabbing a larger share of the headlines but that may not necessarily be positive. There are three more regional manufacturing reports and similar declines like we saw in the Philly Fed last week would be very negative for the market. The headline number fell from -5.8 to -16.6 and is now at a nine month low. New orders fell to -18.8 from -1.2, shipments fell from 3.5 to -16.6 and backorders fell from an already negative -9.4 to -16.3.

Philly Fed Chart

Jobless claims hit 387,000 and still rising. The prior week was revised higher to 389,000 and the current week will probably be revised higher as well. Layoffs are increasing as the economy weakens. Look at the trend on the chart since the January low. The gains are not huge but they are definitely consistent. We could see something over 400,000 in the very near future. This is already depressing estimates for the nonfarm payrolls in two weeks. Jobs for May declined to 69,000 and less than half of consensus and some estimates for June are already slipping to the 25-50,000 range.

Jobless Claims Chart

The Fed said they were willing to do more if the economy weakened any further and we could be just two weeks away from that action. If the payroll report does show another sharp decline, possibly turning into job losses and we could see an instant Fed reaction. I seriously doubt it will be another QE program because the problem is not liquidity. The economy is swimming in cash. Pushing interest rates another quarter point lower is not going to solve the problem. This is going to take some really creative action on the part of the Fed. The three manufacturing reports next week are going to be critical as indicators of economic direction. All were still in expansion mode last month so a drop into contraction territory should ramp up the Fed debate.

Economic Calendar

On Friday St Louis Fed president, James Bullard, said there was a "pretty high hurdle" before the Fed would announce another round of quantitative easing or QE3. The Fed has "done what it can do." He believes another round of QE would be effective but it would mean adding a lot of additional risk to the Fed's balance sheet and risk damaging the Fed's credibility. The Fed already has more than $2.3 trillion in securities on its books and eventually they will have to sell those treasuries. That may not be anytime soon but it will happen. Analysts believe the selling will start in 2015.

Interest rates are going to rocket higher once that selling starts so the economy needs to be moving at a decent pace to absorb the increase in rates. If the Fed were to announce another QE program of $600-$700 billion it would push their holdings to $3 trillion and what some analysts believe is an insurmountable hurdle for the economy once the selling begins. That is one reason the Fed does not want to further extend their ownership. They may end up having to hold them until maturity if the economy does not improve. By extending Operation Twist to exchange another $267 billion of short term securities for longer term securities that just moves their maturity window farther out into the future.

The Fed has kept rates low since late 2008 and they are promising to keep them low until late 2014. Bullard warned this is far "outside of normal business cycle adjustments" and the future implications are unknown and highly unpredictable. If you nurture a generation of new businesses accustomed to rates near zero what will happen when those rates return to normal and business costs rise?

The biggest problem for the Fed is going to be employment. The economy needs to add 150,000 jobs per month to keep up with immigrants and graduates entering the workforce. Add in the number of spouses being forced to go to work to support the family and that number jumps even more. The official unemployment rate is currently 8.2% and the Fed said they did not expect a material change this year. The U6 rate, which includes everyone currently working part time because they can't find a full time job, is now 16% or roughly 22 million people. Creating jobs at only 69,000 a month as we saw in May is going to cause civil problems along with higher costs for support services like unemployment compensation and food stamps. Unemployed youth tend to cause trouble as we have seen in places like Greece, Spain, Italy and the Middle East.

The number of Americans with jobs is at the lowest percentage level (58.5%) since the early 1980s. The chart below is from the St Louis Fed.

Percentage of Population Employed

I am afraid the country is heading for trouble. For several months I have pointed out the declining economics but most analysts were blaming the slowdown on Europe and Greece. I believe it is a wider problem and it will continue to fester in the USA as we get closer to the elections and the fiscal cliff at year end.

We are reaching a point where optimism can't continue to prop up the markets. We saw earnings warnings last week from a number of high profile companies. They were mostly multinationals and blamed shortfalls on slowing European sales and the impact of foreign exchange on their profits. The dollar hit a two-year high in May and the euro a two-year low. That means exchanging euros for dollars was a losing proposition.

With economic conditions in Europe worsening the impact is worldwide. Germany reported the worst business sentiment since 2009 and numbers all over the EU are worsening. Chinese manufacturing weakened again in May. What goes around comes around and the Philly Fed report last week showed us it is coming pretty fast.

I don't want this commentary to turn into a gloom and doom session but the forecast is definitely turning to storm clouds. This earnings cycle could be a turning point for market sentiment.

Phillip Morris (PM) warned on Thursday that lower sales overseas and foreign exchange losses could knock 25 cents off its full year earnings. Tobacco companies have normally been immune to economic problems. Nicotine addiction does not respond to economic headlines.

Proctor & Gamble (PG) warned that sales would decline as much as -2% compared to prior forecasts for +2% growth. Organically sales are expected to grow +2.5% compared to prior estimates of 4.5%. Expected earnings are now 75-79 cents compared to prior estimates of 79-85 cents. The reason for the decline was "slowing global economy and sluggish market share growth in developed countries and China."

PepsiCo (PEP) said slowing sales and a sharp impact from foreign exchange rates could reduce earnings by 5% for 2012. When Frito-Lay snacks, Quaker oatmeal and Tropicana orange juice sales are slowing you know there is some cost cutting underway by global consumers.

FedEx (FDX) warned that a slowdown in package traffic from Asia and Europe would depress earnings over the next 12 months. Shipments from Asia fell -3.9% and shipments in the U.S. fell -5% due to the slowdown in the global economy.

United Technology (UTX) warned that the slowdown in Europe was worse than expected in their Q2 guidance and they were "very concerned" about future sales in European countries with an emphasis on Spain and Italy.

Adobe (ADBE) warned of weakening European demand. Earnings expectations were lowered to the 59 cent range and analysts were looking for 61 cents. The declines don't appear to be material but anyone saying "weakness in European sales" is going to be hit by sellers.

Bed Bath and Beyond (BBBY) warned on lower profits after rising expenses to increase sales were offset by consumers moving to lower priced, lower margin products.

Ryder System Inc (Nyse:R) was knocked for a -$5 loss on Friday after they warned earnings would decline to a range of 90-95 cents from prior estimates of $1.07-1.12. They said demand for their rental trucks dropped sharply over the last two months. They said the housing and construction markets, normally big users of rental trucks, remained very weak.

In related news the American Trucking Association said tonnage shipped, the biggest demand metric for the industry, fell sharply in April and May. Consecutive declines in tonnage show the economy is slowing according to Bob Costello, the chief economist for the association.

Analysts are now expecting Q2 profits for the S&P-500 to rise only +6.3% compared to estimates of +9.2% on April 1st. Excluding Bank of America (BAC) and their special loss in Q2-2011 the S&P earnings growth would only be +1.1%. Bank of America had a monster one-time loss in Q2-2011 that will not be repeated this quarter and that makes their comparisons unrealistic. If you remove Apple and BAC the earnings growth for the other 498 companies would be negative.

The slowdown in Europe that is impacting U.S. earnings is best seen in the German statistics. Germany is the strongest economy in the eurozone. Sentiment fell sharply in June. The expectations for the future (orange line) and current business climate (red line) are moving to post recession lows. Germany is dependent on the rest of Europe to buy its goods. Those buyers are drying up thanks to austerity, worries over the financial system and even the fate of the euro itself. Germany was the cleanest shirt in the dirty clothes hamper but apparently the smell from those lower in the pile has finally transferred to top. Associate with the dogs and you will smell like a dog.

German Economic Sentiment Chart

The slowdown in spending is not just overseas. Darden Restaurants (DRI) operates several brands of stores. Overall sales declined -1.9% for the quarter as fewer people opted for an expensive meal at Red Lobster and Olive Garden. Same store sales for Red Lobster were down -3.9% and Olive Garden -1.6%. The vast majority of their sales come from the 704 Red Lobster stores and 792 Olive Gardens. The smaller brands posted slightly better numbers. LongHorn Steakhouse +3%, 386 stores. The Capital Grille +2.8%, 46 stores. Bahama Breeze +2.8%, 30 stores and Seasons 52 +1.9%, 23 stores.

There are a few earnings reports next week but we are still over two weeks away from the start of the cycle. What we are likely to get more of next week are earnings warnings as corporations can now see through the quarter end and realize there is no hope of making their estimates. Analysts have been lowering expectations but I suspect they are still too high. Further warnings will only hasten the revision process and depress the market.

The biggest reports for the week will be Nike and Research in Motion on Thursday. RIMM is heading for a new low and confusion over which new phone will have a keyboard and which ones won't is causing concern among investors. Maybe I should say speculators instead of investors since any buyer of RIMM today has got to be betting on a buyout rather than a recovery. Analysts claim their cash on hand, service business, network and patents are worth about $20 a share but the stock is trading for less than $10. The brand is damaged by the repeated failures to produce a new product that buyers want. How do you win those buyers back once they switch to the iPhone or Android? That is a tough sell.

RIMM Chart

Volume surged at the close on Friday as the Russell indexes were rebalanced. This happens once a year in June in order to adjust the various indexes for changes in market cap over the prior year. Russell calculates the market cap for the universe of stocks that fit its criteria. The top 3,000 become the Russell 3000 index. The top 1,000 become the Russell 1000 and the next 2,000 stocks become the Russell 2,000 index. As stocks increase in value they can move up from the 2000 to the 1000 and each move higher kicks some other stock back into the smaller cap index.

Worldwide it is estimated there is more than $3 trillion in investments indexed to the Russell indexes.

Volume this year was lighter than normal but still hefty. The Nasdaq said it traded 687.9 million shares of Nasdaq listed stocks at 4:PM, worth $9.5 billion in 1.15 seconds. On an average day the market on close orders run about 50 million shares. Last year there were 750.8 million shares worth $10.6 billion executed in 1.105 seconds.

One noted addition to the Russell 1000 on Friday was Facebook (FB). Facebook shares have rallied for the last week as investors and fund managers bought up FB shares ahead of the inclusion. The prior week FB shares rallied into option expiration as a large volume of options at the $30 strike price pinned the stock at $30.01 on expiration Friday. Settlement day on Monday was also strong. FB shares rallied +4% on Friday to close at $33.00. That just happens to be decent resistance and it will be interesting to see if it can hold the gains as we near their first public earnings report and the first lockup expiration in August.

Facebook Chart

First Solar (FSLR) shares rallied +9% after LA County Dept of Public Works agreed to approve the solar panels proposed for the 230-megawatt plant in the high desert known as Antelope Valley. The 2100 acre facility is expected to power 75,000 homes. First Solar is building the plant for Exelon Corp (EXC). The project had been delayed when a county inspector refused to certify the electrical connectors for the panels. Since this is the first industrial scale solar installation built by the department they are being very careful about the construction process. First Solar is building two different 550-megawatt plants in other areas of California and a 290-megawatt facility on the Arizona border.

First Solar Chart

For more than a month now investors have been expecting a downgrade to the major banks. On Thursday afternoon Moody's warned again it was going to announce the downgrades after the close. You would have thought the world was going to come to an end with those downgrades. Fortunately the world did not implode and the downgrades did not impact the sector. When investors get a warning a month in advance they are able to price in the risk and position their portfolios. Most of the banks rebounded slightly on Friday as they shook off the downgrades.

What is Moody's thinking? It is more than three years after the financial crisis. Banks have flushed the majority of their nonperforming loans, streamlined their balance sheets and doubled their capital base. They are far better off today than three years ago and Moody's is on the warpath to cut the banks off at the knees. One noted analyst said years ago the job of a ratings agency was to conduct a survey after a battle, point out the winners and terminate the injured. Does anyone actually care what Moody's says about the banks at this point?

Financial Sector XLF Chart

It was a very bad week for oil. WTI has now fallen -$30 from the 2012 highs and Brent is down -$34. The spiking dollar and the plunging economics are driving commodity investors to the sidelines. When commodities correct they do it in style and we have definitely seen a rout over the last month.

Brent declined to $88.50 before rebounding. This is a critical level for OPEC. They were producing about 2.5 mbpd over their official quota in early June. After the OPEC meeting they announced the over production would stop. Personally I had serious doubts about their sincerity but after the decline to $90 I would be very surprised if they did not stop. It is not that $90 is so bad for them but if they don't put a bottom under $90 they could see the slide continue. It is easier to stop the drop now than wait and hope prices firm on their own.

WTI Crude Chart

Brent Crude Oil Chart

Oil could see a bounce on Monday after Syria shot down a Turkish fighter plane on Friday evening. Syria said the fighter intruded into Syrian airspace and was shot down by coastal air defense batteries. Turkey vowed retaliation but did not say how they would retaliate. As of late Saturday both sides have signaled they don't want to escalate the incident and that is dramatically different from Friday night's headlines. Still, there could be a bounce in Brent prices if the war of words is still in progress on Monday.

Gold dropped -$62 from Monday to Friday's low at $1558. With no QE from the Fed and no countries leaving the EU this week the spiking dollar took its toll.

Gold Chart

Silver declined nearly 9% from Monday's highs to $26.50 at Friday's lows. The drop over the last two days was dramatic. However, support at $26 held. The problem for silver is that it is not used as a reserve currency by central banks. It is the poor man's gold but it is also a manufacturing staple. It is used in everything from cell phones and tablets to solar panels, electric cars and guided missiles. When silver is used in manufacturing it is seldom recovered when that product reaches end of life. Once used, silver is gone forever.

The decline supposedly occurred because of the bad manufacturing numbers out of China, Europe and the USA. If manufacturing of any electronic commercial product slows then demand for silver slows. However, it will NOT decline below current mine production. Silver is being consumed at a rate of 150 million ounces more than is being mined every year. With less than 900 million ounces in global inventories that means there will be a shortage of silver by the end of the decade. If/when the economic cycle kicks back into high gear the consumption of silver will accelerate.

I could be completely wrong but I believe this is a fantastic buying opportunity for silver in any form. You can use the SLV ETF or simply buy circulated silver coins or silver eagles.

I will give everyone a word of caution. During the financial crisis silver declined to a low of $8.50. While I don't think we are about to go through another Great Recession there is a good possibility we could see a normal recession on a global scale. How that will impact silver is unknown. Could we see $20 again? That is entirely possible depending on what happens to the economy. For me I am going to be adding to my silver stash with every drop in price. I firmly believe we will see $50 silver by 2020 if not higher.

Silver Chart

Commodities are now in a bear market as represented by the Goldman Sachs Commodity Index ($GSCI). The index has fallen from its high of 717 in February to a low of 558 on Thursday. That is a drop of 22%. This is a challenge for the Fed although it is keeping inflation in check. Unfortunately it could be a sign of deflation and the Fed will do anything to keep that from happening. Commodities are declining because manufacturing is declining as a result of the global economic slowdown.

Commodity Index Chart

An article by Keith Bradsher in the NY Times on Friday suggested China may be lying about the drop in manufacturing activity. That should come as no shock to our readers since the possibility has been mentioned in these pages many times. Bradsher said local and provincial officials in China are hiding the depth of the slowdown but they can't hide the physical signs. Record setting mountains of excess coal have accumulated at the country's biggest storage areas because power plants are generating less electricity to meet demand. According to Bradsher, power sector executives claim Beijing has forced plant managers not to report the full extent of the manufacturing decline. Corporate officials are urged to keep two sets of books, showing improving business results and tax payments that do not exist.

Electrical usage is considered the gold standard for measuring what is really happening in a country's economy. Since China's track record of reporting of economic numbers is highly questionable analysts must turn to the fundamentals behind the numbers for the real picture. Even Li Keqiang, expected to become China's premier this fall, said in 2007 that he regarded China's measures of economic growth as "man made and therefore unreliable."

A chief executive in the power sector said "government officials don't want to see negative numbers." They tell power managers to report usage declines as "no change." A different official with access to grid data for two provinces with heavy industry said power consumption had fallen -10% in May from the year ago period. An analyst at Wood MacKenzie said coal stockpiled at the port of Qinhuangdao reached a record 9.5 million tons in early June. That surpasses the prior record of 9.3 million tons in November 2008 at the bottom of the financial crisis. Three other large storage areas in Tianjin, Caofeidian and Lianyungang are also at record levels. HSBC and Markit released their independent survey of Chinese purchasing managers on Thursday and the 48.1 headline number was the second lowest since March of 2009.

I noted several months ago that China was probably very glad Greece was hogging the headlines because it kept the focus off the slowdown in China. The government's sudden rate cut in June and increase in loan authorizations suggests China is moving aggressively to combat the slowdown but until the European economy begins to recover and consumers buy more goods there is little the Chinese government can do. They already built enough ghost cities to last the next 20 years.

Next week is healthcare week. The Supreme Court has run out of time. They can't procrastinate the announcement any longer. This week is the last week they are in session until October if I remember correctly. That means they have to render their verdict on the Affordable Care Act. In theory that will happen on either Monday or Thursday. The Senate has asked the court to televise the proceedings because of the impact on everyone in the USA. That means we should have a little warning before the decision is released. Regardless of the decision is will be a market mover in the healthcare sector.

The leaders in Europe meet again on Thr/Fri to discuss the financial crisis. I have lost count but this is like the 29th summit on the problem and it is still a problem. One analyst said it was time for the EU to either go big or go home. They need to announce a major program and be in agreement on getting it done. This monthly meeting to agree to put more money in the pot is like a death by 1000 cuts. It is the nightmare that never ends. They need to step up and take their medicine and put a sweeping and costly program in place to avoid repeating the process again in July. I doubt this will actually happen but every armchair commentator in America knows this is what needs to be done. Expect more talk and less action from the summit.

The markets continued to rally early in the week but then faded as the headlines became more negative. The S&P punched through 1325 last week and then returned to test that level on Thursday. That is currently initial support followed by 1307 and then 1285. A break below 1325 is troublesome but a break below 1285 is a disaster. Resistance is now 1362 and the 100-day average at 1360. That gives the market a wide range to navigate without traders needing a lot of conviction. A move out of the current range could trigger a material move and right now I would bet on the downside.

On March 21st Goldman Sachs announced that it was the best time to buy equities in a generation. Goldman's Chief Global Equity strategist Peter Oppenheimer said stocks were cheap relative to bonds and the anticipated economic growth rate. The report was titled "The Long Good Buy." The S&P at the time was 1,405. Maybe Peter was referring to a generation of something other than humans. On Thursday Goldman's head of the Macro Equity team issued an email advising clients to short the S&P-500 citing economic weakness. In fairness they are only looking for a -5% decline (1285) and they probably already have the Long Good Buy Part II email already to send.

S&P Chart - 120 Min

S&P Chart - Daily

The Dow failed at exactly the 61% Fib resistance level after testing it three times last week. The Dow also bounced at exactly 12,575, prior resistance now support. This was a perfect test in both directions. Should initial support at 12,575 break the secondary levels are 12,400 and 12,325. A decline below the 12,325 suggests we will see a new low for the year.

The large multinationals in the Dow are all going to be impacted by Europe and the dollar. IBM will be a key indicator when they report earnings. That assumes they don't warn in advance.

Dow Chart - 120 Min

Dow Chart - Daily

The Nasdaq managed to close with a gain for the week thanks mostly to the biotechs and chip stocks. Apple and Google did manage to make it into the top 20 on Friday with low single digit gains. The Nasdaq only managed to retrace to the 50% level from the June lows compared to the Dow's 61% Fib spike.

Tech stocks do not normally perform well in the summer months so I would continue to be wary of the tech sector. Resistance is now 2930 and support 2860.

Nasdaq Chart - Daily W/Fibs

Nasdaq Chart - 120 Min

Nasdaq Chart - Daily

The Russell indexes are not relative this weekend because of the rebalance impact. The NYSE and Dow 5,000 are carbon copies of the S&P so no reason to show the charts.

The focus next week should be regional manufacturing reports, earnings warnings and the EU summit on Thr/Fri. It is time for the EU to either go big or go home. The monthly summits have accomplished nothing other than to prolong the pain. Rip the band-aid off and get it over with.

Italy's new Prime Minister, Mario Monti, warned on Friday of the apocalyptic consequences of failure at the coming summit. He warned, "We have only a week to save the eurozone." That is very strong language and he went on to detail the problems confronting the EU leaders. This is going to be the headlines all week. With Spain now saying they only need 62 billion euros to save their banks instead of the 100 billion the EU promised, the focus will shift to Italy and the next target in the shooting gallery for the bond vigilantes.

If the EU does not pull out the bazookas at this meeting we could see some marked deterioration in the European outlook.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

"It is the mark of an educated mind to be able to entertain a thought without accepting it."
Aristotle

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Index Wrap

More Worries

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The S&P 500 reached my upper overbought 'trading band' at 3% above its 21-day moving average after which it got slammed on a bunch of new worries about a slowing economy. Technically, the pullback found buyers at a 'predicted' chart support. This was an area of buying interest suggested by the hourly S&P 500 (SPX) chart and its inverse 'Head & Shoulders' pattern outlined last week. This chart formation suggested that technical support could be found on a pullback to what had been prior resistance, at the H&S 'neckline'. See the hourly chart below. Amazing how accurately SPX followed this script so far.

An idealized upside objective for SPX as seen above is to 1390 based on the measuring implication of the aforementioned H&S bottom pattern for the Index. The inverse Head & Shoulder's bottom was traced out not only in the hourly SPX chart but on all the major indices. A note of caution about putting too much faith on the resulting upside targets implied by the pattern: objectives implied the INVERSE (bottom) H&S, as opposed to the Head & Shoulder's TOP pattern, don't tend to be AS accurate a predictor. Prices tend to fall farther and faster in a mixed market (with all those worries!) when fear takes over. The implied 'minimum' downside objective for the H&S top pattern is more often hit, or exceeded.

Time will tell on a further advance, either to test resistance again in the 1360 area in the S&P or to the 2935-2940 area in the Nasdaq Composite (COMP). Since COMP has been lagging in the current market cycle I've modified COMP and NDX's upper moving average envelope from 4% above the 21-day moving average down to 3% (same as the S&P and Dow) as you'll see on those charts. I typically use a 4% envelope value for the Nasdaq indices, but not always. Envelope values need adjusting from time to time.

While I'm using a 3% UPPER envelope value currently for COMP and the Nas 100 (NDX), I've kept the 4% value for the LOWER envelope line. If what you use for charting only allows ONE value for BOTH upper and lower envelope values, use 3 per cent; keeping in mind that another sharp downswing may well overshoot a lower 3% envelope line in Nasdaq. Use of the moving average envelope lines (with a 21-day moving average on the daily chart) is another way of estimating where upside or downside moves are overbought or oversold respectively.

You may well wonder what factors will keep UPSIDE moves afloat. I won't try to predict what the fundamentals are or will be that could influence that. There is a lot of bearishness out there and a lot of shorting going on. Goldman no less suggested to its clients being short S&P 500 futures after the Fed indicated no new MAJOR simulative moves. Short-covering rallies can then ensue on even minor bullish influences that come along; e.g., a better than expected housing starts number or a larger add than anticipated to non-farm payrolls, etc.

In terms of all daily charts seen below; they still look to have some further bullish potential as long as support holds up at the 21-day averages. Longer-term, it's also true that EACH rally since the early-April high has topped out at a lower relative high leading me to rate the intermediate-term picture as mixed to bearish. As you'll see on my charts, a move about 1372 in SPX, 622 in OEX, 12850 in the Dow, to above 2946 in COMP and 2632 in NDX, is needed to penetrate their April-May down trendlines. Conversely, a decisive downside penetration of 1320 in SPX in the coming week would suggest we've already seen a maximum upside move for now and little chance of a breakout move anytime soon.

I'm always mainly looking for a good-sized price swing, such as we got after the SPX dip below 1270, Dow 12100 and NDX's fall to the 2450 area. The ensuing rallies stopped in their tracks at the overbought upper envelope lines (revised to 3% for Nasdaq), among other ways of measuring technical resistance such as AT the down trendlines already mentioned. I still am holding some index calls, until and unless there's break below the 21-day moving averages or to below key SPX support around 1320. Shorting rallies by buying puts or in other bearish strategies looks to have a favorable risk to reward when prices reach the upside resistance extremes noted on my normal line up of index charts below.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart is mixed in its pattern. It's bearish on an intermediate-term basis. A move above 1372 is needed to pierce the April-May down trendline. A breakout above implied resistance at the down trendline is the key technical/chart determinant of whether there's further upside potential in the S&P. The recent rally stopped at the 3% upper envelope line; as soon the index reached an 'overbought' price level in this sense, there was a downside reversal that followed. The rally failure in the 1360 area was also resistance implied by a prior line of support in April-May.

More factors then not suggest the recent rally has run its course. On the bullish side of things, is the bounce from the 'neckline' of the Head & Shoulder's bottom; an example is seen in the hourly SPX chart I show above in my initial 'bottom line' comments. The ability so far for the index to hold above its 21-day average is also a bullish plus. Stay tuned on that.

Key resistance is in the 1370 to 1375 price zone. Key near support is at 1320, with next support at the important 1300 level in SPX.

Bullish sentiment has increased in my sentiment model to a 'neutral' level; not particularly bullish or bearish. The 13-day RSI indicator has also fallen back to a neutral range.

It seems that investors wants to have a reason to be bullish but our market is captive to bearish global economic events and concerns.

S&P 100 (OEX) INDEX; DAILY CHART

The big cap S&P 100 (OEX) rally failed at the internal down trendline seen on the daily chart. (An 'internal' trendline connects the MOST number of highs or lows; highs of course in the case of the highlighted down trendline.) A decisive upside penetration of trendline resistance at 622 would be bullish. Absent that, lower levels ahead looks likely.

I mentioned other bearish chart factors for the S&P 500 above; the same is seen with OEX. The rally failed at my upper 3% moving average (the 21-day average) envelope line, which tends to mark the high end of a back and forth trading range. The pivotal technical aspect is the rally failure at the down trendline, suggesting the Index is back in a sideways to lower trend.

Key resistance is in the 620 to 625 range. 622 is trendline resistance. It doesn't look likely that the down trendline will be pierced.

The key support zone is 597-603. Fairly major support begins around 590, extending to 580.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU), which had been in a rebound, although INDU was lagging, reversed at its own down trendline, dating from its early-May peak. As soon as the Dow got to my upper envelope line, suggesting that the Average was 'extended' on the upside, the bears lowered the boom or we could say the bulls ran into a buzz saw of bearish news. Europe is a mess, what can I say. Integration is one hard prolonged process, witness our own economic (and political) union.

Bank stocks are doing a bit better and still-bullish is AXP, DIS, maybe GE, HD, IBM probably, KFT, KO, MRK and PFE probably, T, VZ, and WMT. Others of the Dow are at correcting, at beat neutral and some are the new 'dogs of the Dow'; I won't mention any names. But hey, put Apple in the Dow, take out HPQ and you've got an immediate boost to INDU.

Key resistance implied by INDU's down trendline is at 12850, with next resistance in the 13000 area. Near support is highlighted at 12500, up just a 100 points from last week; next support then looks like 12400.

Last week I was more optimistically thinking that the Dow could 'ideally' reach the 13100-13200 area, but that kind of target seems far out of reach now that we've seen the rally stop dead in its tracks at INDU's down trendline.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) saw upside follow through this past week but its rally hit a technical brick wall at the upper envelope line, when adjusted downward from 4% to 3%. Most importantly chart wise, was the newly EXTENDED down trendline dating from the April-May highs. This past week's intraday high made for the 3rd point in what's now an April-May-June down trendline. The third point of intersection of any trendline tends to make for a best defined line of resistance; two points begins a trendline, but 3 or more points make it a 'tougher' resistance.

So, trendline resistance is seen now at 2946. I've also highlighted 'resistance' at 2949, at the upper envelope line, with next resistance coming in around 3000 a point if reached that would represent a bullish break out above the current down trendline.

Near support implied by the 21-day moving average intersects at 2843; next support comes in at 2800-2785.

On balance, the path of least resistance looks lower; only a bullish breakout above the down trendline changes the chart picture to a more bullish one. As noted with the S&P 500, my key indicators, bullish/bearish sentiment and the Relative Strength Index are more or less at 'neutral' readings so I can't cite a bullish or bearish influence suggested by them.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) Index continued bullish chart action this past week UNTIL its most recent high hit an extension of the April-May down trendline. After that tech and rest of the market mostly got slammed. I find it fascinating that bearish news often 'comes out' AFTER technical resistance is hit. The same is often true of bullish news 'coming out' after the market gets very oversold, hits the lower end of a downtrend channel, etc.

I lowered my upper (overbought) envelope line to 3%, from 4%, given the lackluster nature of the latest tech advance. This redrawn envelope line also got intersected at the recent top. I'll keep the upper line for NDX (and COMP) set to 3% above the 21-day moving average. I don't use a lot of indictors but using 3-4% envelope lines on the major stock indices is one I recommend to all. They get adjusted from time to time depending on volatility. The envelope model provides an idea of where the market is not only over-bought or over-sold but also (very importantly) at what PRICE level this is occurring at.

NDX rebounded a bit on Friday of course but the most promising strategy looks to be shorting rallies as the path of least resistance looks lower. A rally back up to near the down trendline has a favorable risk to reward for puts, assuming an exiting stop just over the trendline. A bullish upside penetration of the down trendline suggests further upside potential; enough so I wouldn't want to be short.

Near resistance is at 2600, with pivotal resistance at the down trendline, currently intersecting around 2625. Near support is suggested by the 21-day moving average, currently at 2544 and next support at 2508-2500. As long as NDX holds above the 21-day average, the chart doesn't look all that bearish. I consider the short-term trend to reverse to lower if the average is however pierced.

I wrote last week that a "'minimum' upside target implied by NDX's Head and Shoulder's bottom formation suggests the index could reach 2677..." Given the reversal at the down trendline, this much upside seems well out of reach.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) chart now looks bearish with the NDX rally failure at its down trendline. I've noted near resistance at 64.0, extending to 64.5. A move through this resistance zone (64-64.5) would also represent a bullish upside penetration of the down trendline.

A Close above 64.25 would be an early warning to exit short positions/puts in QQQ. If there's a move above resistance, 66 is a possible target. Not likely but possible.

Near support is seen at 62-61.8; I didn't highlight very near support implied by the 21-day moving average at 62.45.

It surprised me some when volume didn't really SPIKE on Thursday's sell off and I take this action as a mild bullish plus. Maybe QQQ is somewhat 'sold out' of the weak-hands bulls and there's another rally in store for us, such as back to retest our most recent highs. Stay tuned on any such bullish surprise, especially a breakout move above 64-64.25.

RUSSELL 2000 (RUT); DAILY CHART:

The most recent rally in the Russell 2000 (RUT) failed at its down trendline dating from March and late-April/early-May.

There were a couple of closes above the key 50-day moving average but the reversal at the down trendline was the stopper. Pivotal (down) trendline resistance currently intersects at 785. I've highlighted initial resistance at 780, extending to 785.

Support is seen at 760, extending to 750.

RUT looks lower from here but an upside breakout still shouldn't be ruled until/unless the key 21-day moving average is pierced for more than a day.



GOOD TRADING SUCCESS!


New Option Plays

Biotech & Engines

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

iShares Biotech - IBB - close: 128.85 change: +2.45

Stop Loss: 124.90
Target(s): 134.85
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The IBB biotech ETF has managed to avoid most of the market's pain. Shares reversed Thursday's pullback to close at new all-time, record highs on Friday. We like the relative strength here.

I am suggesting a trigger to buy calls at $129.25. We'll use a stop loss at $124.90. Our multi-week target is $134.85. More aggressive traders could aim higher.

Note: Readers may want to keep their position size small (see chart).

Trigger @ 129.25

- Suggested Positions -

buy the Jul $130 call (IBB1221G130) current ask $1.95

- or -

buy the Sep $135 call (IBB1222I135) current ask $2.45

Annotated Chart:

Entry on June xx at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 576 thousand
Listed on June 23, 2012


NEW DIRECTIONAL PUT PLAYS

Cummins Inc. - CMI - close: 90.39 change: -1.09

Stop Loss: 92.55
Target(s): 82.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
CMI makes diesel engines and related components. Unfortunately the industrial stocks are being sold on growing worries of a global slowdown. Shares of CMI are in a bearish channel and they just recently broke down from a pennant consolidation pattern.

The early June low was $89.44. I am suggesting a trigger to buy puts at $89.35. We'll set our first stop loss at $92.55. Our target is $82.50. FYI: The Point & Figure chart for CMI is bearish with an $82 target.

Trigger @ 89.35

- Suggested Positions -

buy the Jul $87.50 PUT (CMI1221S87.5) current ask $2.25

Annotated Chart:

Entry on June xx at $ xx.xx
Earnings Date 07/31/12 (unconfirmed)
Average Daily Volume = 2.8 million
Listed on June 23, 2012



In Play Updates and Reviews

Trader Indecision

by James Brown

Click here to email James Brown

Editor's Note:

Stocks managed a bounce on Friday but we saw a lot of "inside day" type of moves. These typically suggest indecision by traders.

We've removed SNA. WMT was stopped out.

Current Portfolio:


CALL Play Updates

Citrix Systems - CTXS - close: 80.14 change: +2.09

Stop Loss: 77.75
Target(s): 86.50
Current Option Gain/Loss: -45.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/23/12 update: After Thursday's market decline CTXS managed a decent bounce on Friday (+2.6%). Unfortunately, I would not put too much faith in it. Friday's move is an "inside day", which suggests indecision by traders. There is short-term support at $78.00 and the 50-dma but last week's move as a whole looks like a potential failed rally/bearish reversal pattern.

I am not suggesting new positions at this time.

- Suggested Positions -

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

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

chart:

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


U.S. Oil ETF - USO - close: 30.10 change: +0.65

Stop Loss: 28.49
Target(s): 33.00
Current Option Gain/Loss: Jul$30c: +22.3% & Aug30c: +17.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/23/12 update: Our new USO call trade is off to a pretty good start. The oil ETF gapped higher at $29.57 and rallied to a +2.1% gain on the day. However, I will point out that Friday's move is an "inside day", where it's inside the prior day's range. This suggests indecision by traders. This is an aggressive, higher-risk trade so I would still consider new positions now. More conservative traders may want to wait for the USO to close above short-term resistance at the $31.00 level before considering new positions.

Earlier Comments:
Make no mistake, this is an aggressive trade since we're trying to call a short-term bottom in oil prices here. The commodity could definitely see some strength as we get closer to the EU oil embargo against Iran, which is scheduled to start on July 1st.

- Suggested Positions -

Long Jul $30 call (USO1221G30) Entry $0.94

- or -

Long Aug $30 call (USO1218H30) Entry $1.36

chart:

Entry on June 22 at $29.57
Earnings Date --/--/--
Average Daily Volume = 8.6 million
Listed on June 21, 2012


Whole Foods Market, Inc. - WFM - close: 96.27 change: +2.10

Stop Loss: 93.25
Target(s): 95.00 & 98.50
Current Option Gain/Loss: Jul $92.50c: +45.4% & Aug $95c: +20.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/23/12 update: WFM managed to completely erase Thursday's decline with Friday's +2.2% gain. Yet technically Friday's move is just an "inside day" type of move, which suggest indecision by traders. WFM failed to close above Thursday's high. Essentially Thursday's bearish reversal pattern is still in play and has not been negated yet.

I am concerned that there is a growing chance that we'll get stopped out as WFM drops toward support in the $91-90 zone. I am not suggesting new positions at this time. Readers will want to seriously consider taking profits right now!

- Suggested Positions -

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

- or -

Long Aug $95 call (WFM1218H95) Entry $4.40

06/23/12 Readers will want to seriously consider taking profits and exiting right now
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

chart:

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

Deckers Outdoor Corp. - DECK - close: 45.00 change: +0.29

Stop Loss: 50.05
Target(s): 42.00
Current Option Gain/Loss: Jul45p: +55.5% & Aug45P: +24.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/23/12 update: DECK's oversold bounce on Friday stalled at the $46.00 level. Shares eventually saw its bounce fade to just +0.6%. The trend is down but I'm not suggesting new positions at this time.

Earlier Comments:
This is 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. FYI: The Point & Figure chart for DECK is bearish with a $34 target.

- Suggested (SMALL) Positions -

Long Jul $45 PUT (DECK1221S45) Entry $1.35

- or -

Long Aug $45 PUT (DECK1218T45) Entry $2.90

chart:

Entry on June 21 at $47.31
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 1.45 million
Listed on June 20, 2012


CLOSED BULLISH PLAYS

Snap-on Inc. - SNA - close: 62.10 change: +0.15

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

Comments:
06/23/12 update: I am giving up on SNA as a short-term bullish candidate. The plan was to buy calls on a breakout higher but that hasn't happened yet.

Trigger @ 64.55

Trade did not open.

06/23/12 removed SNA. Trade did not open.

chart:

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


Wal-Mart Stores Inc. - WMT - close: 67.30 change: -0.40

Stop Loss: 67.40
Target(s): 72.00
Current Option Gain/Loss: Jul$70c: -56.5% & Aug$70c: -46.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/23/12 update: I cautioned readers on Thursday that WMT appeared to be reversing lower. The stock underperformed again on Friday and hit our stop loss at $67.40. The next level of support is the $66.00 area but I would not launch new positions there either. WMT will probably need to see a deeper correction before I would jump in again.

- Suggested Positions -

Jul $70 call (WMT1221G70) Entry $0.46, exit $0.20 (-56.5%)

- or -

Aug $70 call (WMT1218H70) Entry $0.94, exit $0.50 (-46.8%)

06/22/12 stopped out at $67.40
06/21/12 triggered @ 68.65

chart:

Entry on June 21 at $68.65
Earnings Date 08/16/12 (unconfirmed)
Average Daily Volume = 11.7 million
Listed on June 20, 2012