Option Investor
Newsletter

Daily Newsletter, Saturday, 6/30/2012

Table of Contents

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

Market Wrap

New Plan to Make a Plan

by Jim Brown

Click here to email Jim Brown

European leaders ended their 20th summit on the sovereign debt crisis with another plan to make a plan. Will this pattern ever end?

Market Statistics

The headline read "after a tortuous 13.5 hour session European leaders agree on a long-term union." Let's put that in perspective. The entire world is sinking into an economic recession thanks to the indecision in Europe. I think it should have been 130.5 hours instead of just 13.5 hours. I have kids that play video games for longer than that in one session.

Secondly, "leaders agree to long-term union." I thought that is why the eurozone was started in the first place and not just to create an opportunity for the leaders to get together once a month to drink wine and eat expensive food. Was the original eurozone just an elaborate experiment as some have suggested?

Obviously I am poking fun at their expense but come one, another plan to make a plan? You may remember back in October when they last decided to come up with this major plan to rescue the eurozone. The markets rallied for a couple weeks but the plan never actually appeared in any form that made a difference.

The new plan this time will allow the EU bailout funds, the EFSF and ESM, to loan money directly to problem banks rather than give it to the governments to loan to the banks. Does anyone else see the flaw in this plan? If a bank is already insolvent and needs a multi billion euro bailout from the government then it is probably not a great credit risk. By having the ESM and EFSF loan the money to the government and the government loan it to the banks then the government basically becomes a guarantor to the loan. If the funds loan directly to the banks, admittedly already in financial trouble, then there is no guarantor. Call me stupid but this appears to be a recipe for disaster when the next crisis appears. Even worse, they agreed to drop the demand for the ESM and EFSF loans to be considered "priority" loans, which would be the last to be defaulted if trouble arises. Now they will be just a normal loan and lumped in with all the other loans to the banks.

The rationale for loaning directly to the banks was to not lump more debt on the country and drive up interest rates. Spain would have had to take on another 100 billion euros in debt in addition to the already 945 billion they currently have.

Another agreement the leaders came up with was to drop demands for stringent austerity measures for any new bailout loans to struggling countries. Greece was positively put through the grinder with layer after layer of stringent austerity requirements and now the EU leaders have said there will be no future requirements for bailouts. How does that make Greece feel now? What are the odds Greece will suddenly demand a cancellation of its austerity deal? I would say they are pretty good. How many months did we waste on that process? Ireland will be up next demanding its terms be changed.

The leaders also agreed on a joint banking supervision body vaguely similar to the FDIC in the USA. They agreed to a "general" long-term plan for tighter budgetary and political union. Note they said "general."

The markets exploded higher as though the leaders had finally discovered the secret to unlimited fusion energy and decided to share it with the rest of the world.

What is wrong with this picture? There is NO plan. There is only a plan to come up with a new plan. The leaders agreed they would come up with a firm proposal by sometime in October. If the proposal was acceptable and was ratified by all 17 nations over the following months then the actual plan could be implemented in January or February. I would take bets against that actually happening.

The October proposal is supposed to have a "time bound" roadmap for the achievement of a "genuine economic and monetary union." According to EU Council president, Herman Van Rumpuy, "The aim is to make the euro an irreversible project." Good luck with that! Doesn't that imply that the current euro project is reversible?

Since the only real outcome of the EU summit was another plan to make a plan the potential for this rally to continue is questionable. Yes, yields on debt for Spain and Italy did decline on Friday but until the plan is actually ratified and put into practice it is just wishful thinking.

Barclays said of the prior 18 EU summit meetings, plans for immediate action were announced after ten of them. Most of the time the markets responded positively over the next two days but fell again in the week that followed.

The euro exploded higher and the dollar imploded, which pushed commodity stocks into a major short squeeze and powered the short squeeze spike in equities.

Euro Chart

Dollar Index Chart

Gold had fallen back below $1600 earlier in the week as the dollar rose on problems in Europe and China. The currency reversal powered gold to a +$48 point rebound on short covering. Silver spiked +4.4% for the same reasons.

Gold Chart

Silver Chart

By far the biggest commodity gainer was the one that had been beaten the worst over the last six months. WTI crude oil rallied +9% or +$7.15 to $85 on hopes Europe is going to solve its problems, the currency reversal and the pending oil embargo on Iran. Brent rallied +7% to $98. The weakness of the last two weeks was completely erased. The gains on Friday were the largest since 2009. The gains were the fourth largest one day gains on record. The market was heavily short with speculators cutting net long positions by more than half late in the quarter.

While the Europe news may have started the short squeeze in crude there was a bigger story. Iran, Europe and the West were involved in a headline war over the pending start of the EU oil embargo and the increase in sanctions by the USA. Nobody wanted to be short over the weekend with the potential for shooting in the Persian Gulf.

Iran again declared in a letter to the UN on Thursday that it had an "inalienable right" to enrich uranium to whatever level it wanted. Iran said it would refuse to attend any further meetings until the sanctions were lifted. Only then would they be agreeable to discussions on their nuclear future. Clearly that is not going to fly and the UN fired back with their own comments that once Iran halts enrichment and dismantles the Fordo underground nuclear site they would consider removing the sanctions. Technical experts are scheduled to meet with Iran on Tuesday but the letter to the UN on Friday suggests the meeting will not be successful. The technicians were meeting to see if there was any common ground for another meeting of the six nations with Iran. I am guessing there is no common ground.

Iran threatened to break ties with any country that halts purchases as a result of the July 1st embargo. South Korea was signaled out in comments from Iran. Korea is reportedly halting purchases because they can no longer insure the cargoes. Iran offered to ship the oil to Korea on Iranian tankers so the refiners would not have to provide insurance.

The U.S. administration has already ruined its sanction program against Iran by giving exemptions to 20 countries for either hardship reasons or because they claim to have already cut purchases since January 1st. On Friday China and Singapore were given exemptions. China is still the largest purchaser of Iranian oil so how does giving China an exemption further the sanctions process?

WTI Crude Chart

Brent Crude Chart

The U.S. received some economic news of its own on Friday. The Chicago ISM rose slightly from 52.7 to 52.9. Analysts were trying to spin the headline as positive but the consensus estimate was for a reading of 53.5 so that was still a big miss.

The +0.2 uptick was minimal considering the May reading was the lowest level since September 2009. New orders declined one point to 51.9 and backorders fell -4 points from 46.3 to 42.2 and further into contraction territory. The only real positive was a +3 point gain in the employment component to 60.4.

The Chicago ISM is directly related to auto production and manufacturers have recently said that slowing sales and rising inventories were a problem. Vehicle sales due out next week are likely to show declines.

Chicago ISM Chart

Consumer Sentiment for June declined sharply from 79.3 to 73.2. This was a point lower than the initial reading for June. The present conditions component declined from 87.2 to 81.5 and the expectations component declined from 74.3 to 67.8. The drop in the headline number broke a string of consecutive monthly gains since last September. The decline in new jobs was credited with pushing sentiment lower. It certainly was not gasoline prices, which have fallen for 11 weeks. The expectations component was lower on worries about Europe.

Consumer Sentiment Chart

The economic calendar for next week is highlighted by the national ISM reports and employment. The national ISM Manufacturing is Monday and consensus estimates are looking for a decline of about a point but still in expansion territory over 50.

The June employment series will start on Thursday with the ADP Employment, which showed a gain of +133,000 jobs in May. The Nonfarm Payrolls on Friday are "officially" expected to show a marginal gain of 90,000 compared to the +69,000 in May. There are whisper numbers as low as +25,000 for the nonfarm report. Any negative number would be very detrimental for the market and would probably bring instant action by the Fed.

Economic Calendar

Next week is earnings warning week. There are only a handful of U.S. companies reporting earnings but that is not the problem. This is the last week where an S&P company can warn without being too close to their actual earnings date. After next week most companies will enter their quiet period ahead of earnings. That means they have to decide immediately if the damage is bad enough to warn or just hold off and report crummy earnings later.

The expectations for Q2 earnings continue to drop with earnings growth now in the range of +1.5% and revenue growth in the range of +2%.

Earnings last week were definitely ugly. Nike (NKE) reported earnings of $1.17 compared to estimates of $1.37 and warned that sales declines in Europe and China along with higher component costs were taking a toll. Margins declined -150 basis points to 42.8% due mostly to higher costs. Inventories rose +23.4% as sales slowed.

Nike had beaten estimates 17 of the last 18 quarters. Revenue rose only +2% in Europe and the slowest growth in any region. Revenue rose +18% in China but the company warned that growth was slowing and earnings would be volatile for the next year. Nike shares fell -9.4% to $88.

Nike Chart

Research in Motion (RIMM) posted weaker than expected earnings, larger than expected layoffs and postponed the release of the BlackBerry 10 operating system until 2013. Lately all news from RIMM has been bad and this is no exception. Shares declined -19% on worries it would not have the cash to actually launch its new operating system.

RIMM said it had $2.2 billion in cash and is debt free but the business is in a terminal dive without any new products. Previously analysts had said the breakup value of the RIMM assets was in the $16-$20 range but that is dropping fast. Bank of America said Friday they no longer believe RIMM can revive its own ecosystem enough to compete with Apple and Google. RIMM is planning on cutting 5,000 more jobs by March. That is almost one third of its workforce.

RIMM Chart

Ford (F) warned that Q2 profits will be "substantially lower" because losses from overseas had tripled from Q1 levels. Losses in Europe, Asia and South America could exceed $570 million. Ford lost $190 million in those regions in Q1. Ford said market conditions have "deteriorated significantly" since the beginning of 2012 and the company expects profits to be pressured from those regions "for the foreseeable future."

Ford said the European debt crisis was crippling consumer confidence and lowered auto sales industry wide. Losses in Europe for the full year could exceed $1.1 billion according to Morgan Stanley. Currency conversion issues are also dragging down profits.

Ford Chart

The Ford warning and Nike earnings symbolize the challenges U.S. companies are facing for Q2. The outlook for earnings is weak but there is the possibility analysts have over corrected and are now expecting too little. We won't know until the first week of actual earnings begins on July 9th. This could be a rocky earnings cycle.

Prior to Friday investor sentiment was weakening on the earnings outlook and the events in Europe. According to the AAII Sentiment Survey bearish sentiment rose +8.5 points to 44.4% last week and bullish sentiment declined by -4.2 points to 28.7%. The historical average is 39% for bullish sentiment. The 13-week streak of below average bullish sentiment is the longest since the 14-week streak that ended on March 20th 2008.

The post Supreme Court, post EU summit rally may have changed those sentiment numbers for next week but I seriously doubt the long term outlook has changed. Earnings from RIMM, NKE and Ford probably increased the negativity cloud around the U.S. markets. Disappointing numbers from the payroll reports next week could be the final data point that pushes us over the cliff. Positive payroll numbers could offset some negative earnings.

There was another headline on Friday that depressed the banking sector but it had mostly blown over by the close. There was a headline in the New York Times saying JP Morgan's trading loss could rise to $9 billion in a worst case scenario and wipeout earnings for the quarter and the year. CNBC reported that JPM had already closed or sold 65% to 70% of its position in the CDX Index and was well ahead of the 12 month timeframe projected by Jamie Dimon in prior comments. The NYT report suggested the speed at which JPM was exiting the position could increase the losses.

Another report said JPM had enlisted the help of several hedge funds in liquidating the illiquid positions. It will be interesting to find out exactly what positions JPM had at the start and how they closed them when the obituary is finally written on this trade. Fortunately, the NYT story had been rebutted by quite a few analysts before the close and JPM only lost 15-cents for the day.

JP Morgan Chart

Volume on Friday was 7.6 billion shares and 6:1 advancers to decliners. That was the highest volume for the month except for the Russell rebalance the prior Friday at 7.8 billion shares.

I hate to break the news to any diehard bulls reading this but this was purely a short squeeze. It was NOT a rally. Given the AAII sentiment levels I listed earlier there was a heavy volume of shorts that expected the EU summit to fail once again. Merkel had been adamant going into the meeting that shared responsibility and joint liability, etc, would not occur in her lifetime. While it remains to be seen if she buckled the odds are good she did not. The plan to make a plan has a long way to go before it is accepted by the 17 nations and then ratified by parliamentary votes in each nation. Merkel is being hammered in the headlines in Germany so her incentive to hold the line may be growing.

Regardless of the reason there were plenty of shorts going into the close on Thursday although late Thursday headlines did prompt some short covering in the last 30 minutes. Those that covered at the close on Thursday avoided the massacre at the open on Friday. It was brutal with the +20 point opening SPX print the low for the rest of the day.

S&P Chart - 5 Min

The S&P rallied exactly to resistance at the 100-day average at 1360 and stopped. The remaining shorts throwing in the towel in the last 15 min pushed the index +2 points over the 100-day but it does not count. For all practical purposes this was a dead stop at resistance. The odds are very good the futures will open negative on Sunday night after all the negative news reports in Europe over the weekend. The analysts are having a field day with the lack of any material details in the plan to make a plan.

The headline flow out of Europe is likely to be negative next week as well. The summit is over and now it is open season for the pundits to slice and dice the potential outcomes and explain why it will never work. There will probably be very few positive headlines since all the politicians will be back at work in their home countries and ducking the hard questions of reporters. I could be wrong but that is my guess.

The S&P is likely to pull back slightly and then take another run at 1360 and that will be the turning point for the week. A failure projects a retest of 1325 on earnings warnings but a breakout produces more optimism and more short covering. The only number that matters on Monday is SPX 1360.

S&P Chart - Daily

The Dow chart is a clone of the S&P with the Dow just barely easing over the 100-day at the close on a final burst of frantic short covering. The Dow came very close to retesting the 12,900 resistance high from June 19th but just could not quite reach it. This is the line in the sand for traders for Monday. A move over 12,900 suggests a potential retest of the 2012 highs.

I would be very surprised if we retested those highs in July but I have been surprised before. The earnings negativity is enormous but then whenever something is overblown there is the potential for a contrarian move. In this case I prefer to just let the charts lead us and for that Dow that magic indicator is 12,900.

Dow Chart

The Nasdaq is trailing the Dow and S&P in that it has yet to reach the 100-day average resistance at 2953. The June highs at 2940 have proven to be solid resistance and the 50% retracement from the Mar-Jun dip is also providing some quicksand to slow the rally. The tech stocks performed very well on Friday with a 3% gain for the Nasdaq but that is more of a testament to how heavily they were shorted rather than how much they were favored on the rebound. This was purely a short squeeze and not a referendum on the future of tech stocks.

A break over the 100-day average should power higher to test strong resistance at 3,000 but I would be very surprised if it happened without some new headline to squeeze the shorts again.

Nasdaq Chart

For the broadest look at the markets the Dow TSMI has an identical chart to the Dow and S&P. The resistance high from June 19th at 14,208 is exactly where the index closed on Friday. When every index is telling us exactly the same thing we had best observe the signs and trade accordingly.

Dow Total Stock Market Index

Helping to increase the volatility or depress it depending on the news flow will be the lack of volume next week. With the 4th of July on Wednesday there will be half of the trading world taking a very long weekend with Mon/Tue off and the other half taking Thr/Fri off. The result will be insanely low volume all week.

With the ISM on Monday and Payroll reports on Thr/Fri the biggest volatility should be Thr/Fri but also the lowest volume. The market could be extremely erratic.

This was the best June for the markets since 1999. Obviously that is a direct result of May being horrific with several sectors entering bear market territory. That normally prompts a rebound but now we are faced with the summer doldrums and a good chance of a disappointing earnings cycle. I would avoid loading up on long positions even if we do move higher in the short term. There is always another entry point just ahead.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

"Always go to other people's funerals, otherwise they won't come to yours."
Yogi Berra


Index Wrap

Exciting Week For the Bulls

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

On the recent pullback, the major indexes held key support, discussed last week, at the 21-day moving averages with the exception of the 6/25 close. The 1-day (only) Close below the Average invokes my 1-day 'rule' that suggests that a single day only below a support trendline or key moving average isn't necessarily bearish. (Conversely, the '1-day rule' also applies to a single 1-day close above a key down trendline or to above a key moving average resistance.)

More importantly, the strong rally following the 8/25 dip broke out above key resistance (down) trendlines with the exception so far of the S&P 500 (SPX). Note also that the Nasdaq 100 (NDX) has yet to clear its down trendline by more than a hair's breath.

Bullish price action of this past week furthers the idea that there's more upside potential ahead as first suggested by the Head & Shoulder's bottom patterns I've written about since the 6/8-6/13 formation of the 3rd bottom forming the Right Shoulder.

If SPX decisively pierces its down trendline currently intersecting at 1368, the 'minimum' upside objective implied by the Inverse Head & Shoulder's bottom as highlighted on the hourly SPX chart below suggests that 1390 (or higher) remains a potential upside objective. This would make some sense for SPX since 1400 may be a tough resistance; but, getting NEAR this level looks more doable.

There are well-defined uptrend price channels on the major hourly index charts suggesting upper channel resistance on an approach to the upper channel lines such as seen with the SPX hourly chart below. I won't be showing hourly charts for the other indexes but this first one, for SPX, shows the pattern.

Lastly, as you'll see on my CPRATIO sentiment model with the SPX (and Nas Composite) chart, there's been little build up in bullishness during this most recent sharp advance which in a contrary opinion sense, suggests that this recent rally may have 'legs' and stocks could go still higher.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart went from being mixed in its pattern to one with more bullish potential; with potential for SPX to pierce its April-May down trendline. SPX went to a new closing high for the current move which is bullish. I've noted current trendline resistance at 1368. Next big resistance then comes in around 1400. I've had a bullish potential objective to around 1390 since the index traced out a Head & Shoulder's Bottom which with this past week's upside movement doesn’t seem as far-fetched.

On a weekly chart basis (not shown), SPX closed above the 1340 level, significantly technically as this level formed a line of prior highs dating back to the Feb-April-July 2011 top. If prior highs have 'become' support, longer-term bulls should hope that closing weekly highs continue above 1340.

Support is at 1340, then at 1320-1310, extending to 1300.

Bullish sentiment has been in a recent downward slide (a fall off in bullishness). In light of the fact that the Index this past week held key support in the 1310 area, and stayed all days but one at a closing level above the key 21-day moving average, followed by a very strong Friday rally, should be encouraging to the bulls but ... NOT so much. Rallies where traders don't jump into heavier call buying are often the most surprising and sustained. Beware where the talking heads all get very bullish very quickly and stop talking about all the things that could derail stock prices; especially in the good old summertime. Well, it's 'good' at my coastal Pacific home but not so much back in Colorado where the rest of the Stevens clan resides. And, my prior Manhattan haunts ... Furgetabotit!

S&P 100 (OEX) INDEX; DAILY CHART

The big cap S&P 100 (OEX) rally looks the best of the rest as the Index cleared not only resistance at its down trendline but lifted decisively above prior recent highs as well.

The last OEX advance stopped right at my 3% upper envelope line where an 'overbought' level is suggested; i.e., at 3 percent above the 21-day moving average. This is not a resistance level like a prior high or even a down trendline, but sometimes the envelope bands 'act as' a definite resistance; or better, we could say a likely turning point in a trading range market. Not so much in strong uptrend. In a downtrend within a bull market at least, the lower envelope (at 3% under the 21-day average), is often a place to look for a rebound.

A well-defined internal down trendline (one drawn touching the MOST number of intraday highs) is a current key resistance technically and I rate the chart as having achieved a bullish breakout. Important however that pullbacks be limited to 620 not lower. If so, further upside is suggested to 633-635 or higher, especially to 640 and a measured move objective for SPX.

On the bearish side, a couple of days where OEX trades below 620, suggests the Index remains more or less in the same downtrend OEX has been in since the early-April peak. Next support below 620 is 610, with 600 as fairly major support.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) achieved a decisive upside move above its down trendline, ending the week quite close to prior intraday highs just under 12900. Next key resistance is 13000. INDU could reach the 13200 area at some point. 13100 area is the top end of broad uptrend price channel that the hourly Dow is in currently but only the daily chart is shown here.

Near support is at 12800, then 12600. The recent rally was fueled by 14 Dow stocks showing continued or renewed strength: AXP, DIS, GE, HD, IBM, JNJ, KFT, KO (at new highs), MRK, PFE, T, TRV, VZ, and WMT.

I'm back thinking the Dow could at least hit 13000 again and perhaps 13100-13200. Holding at or above 12800 keeps bullish chart potential alive.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

As I wrote last week, "only a bullish breakout above the down trendline changes the chart picture to a more bullish one." Check this off for the Nasdaq Composite (COMP), so far at least. There was one bearish Close below the important 21-day average, but with subsequent closes then back ABOVE this line as seen on the chart. Yet to come would be for COMP to continue to hold above its bearish down trendline and to move above prior highs around 2940. Next resistance and a key one is at the 3000 level.

A measured move objective, if realized, would be to around 3025. As long as prices hold above what has been a resistance down trendline, the chart pattern suggests further upside potential. I've noted very near support at 2920, but not a lot of expected support until around 2850.

Judging by the Relative Strength Index (RSI), COMP isn't at an overbought extreme on an intermediate-term basis; short-term is another story as COMP is at or near overbought extremes on a 2-3 day basis. I mentioned in my initial 'bottom line' comments that my CPRATIO indicator (seen at the bottom of the COMP chart) showed little jump in bullishness on the most recent rally. This makes for some bullish potential in a contrary opinion sense. Low expectations can lead to bullish surprises. Stay tuned on the next news out of Europe, China or the U.S.!

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) Index sharp 2-day rebound carried right to the area of NDX's bearish down trendline. It was a very strong advance on Friday with its Close at the intraday high, which is bullish action, but also suggests short-covering ahead of the weekend. Yet to come is a further sustained advance that carries the Index to well over its down trendline and to above the prior 2633 intraday high as implied next resistance; further resistance then looks comes in around 2660.

IF a 'measured move' objective was realized, where there was a second up leg from the 2518 area that equaled the earlier rebound (from 2444 up to the trendline at 2633), NDX could again advance to around 2700.

If prices start falling below Friday's intraday high at 2615 and then starts slipping below 2600, the pattern would then suggest another rally failure in the area of the down trendline, continuing its sideways to lower pattern. Hey, it's summertime. Floods, fires, winds, hurricanes, etc. Not so good seasonally typically for the market with choppy price action.

I've noted a key support in the 2540 to 2520-2518 zone.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) chart is starting to look bullish again with initial upside penetration of RUT's down trendline. The stock hasn't cleared resistance by much and yet to come is a challenge and possible move above the prior 64.6 intraday high.

Next resistance above 64.6 looks like 65.5. 65.5 is my highest upside objective currently and would take QQQ to the top end of its hourly uptrend channel (not shown here). A measured move objective could take the stock closer to 67 over time.

Near support is suggested at 64. If instead prices start sinking again below 64, the pattern looks like another rally failure in the area of the resistance/down trendline. Support as noted by the green up arrow is highlighted at 63, then at 62. A close below 62 suggests bears still in control or just not enough buying interest to lift the stock in a sustained way; if so, pattern then looks part of more backing and filling.

A low volume rally on Friday, suggested it was driven more by short-covering than a wave of strong new buying.

RUSSELL 2000 (RUT); DAILY CHART:

The second to last rally in the Russell 2000 (RUT) failed at its down trendline but not this most recent power move. In fact RUT gapped higher above this resistance trendline. A measured move objective, should that be realized, is to around 820. 830 was a prior intraday high on the last big upswing. Near resistance is at 800-802, extending to 807.

Near support is at 780, extending to 776, with next technical support in the 760 area. A Close below 760 suggests a short-term downside reversal. The chart looks bullish if prices don't settle back below 780, at the previously pierced up trendline.



GOOD TRADING SUCCESS!


New Option Plays

Chemicals & Defense

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Ashland Inc. - ASH - close: 69.31 change: +0.93

Stop Loss: 67.75
Target(s): 74.75, 77.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
ASH is a specialty chemicals company. The stock has been testing resistance near $70 this month. Traders have been buying the dips near its prior highs (now new support) in the $67 area. Shares of ASH now look poised to breakout to new multi-year highs.

I am suggesting a trigger to buy calls at $70.25. The stock's all-time high is $75.17. We'll set our first target at $74.75. FYI: The Point & Figure chart for ASH is bullish with a $90 target.

Trigger @ 70.25

- Suggested Positions -

buy the Jul $70 call (ASH1221G70) current ask $1.45

- or -

buy the Aug $75 call (ASH1218H75) current ask $1.05

Annotated Chart:

Entry on June xx at $ xx.xx
Earnings Date 07/24/12 (unconfirmed)
Average Daily Volume = 937 thousand
Listed on June 30, 2012


NEW DIRECTIONAL PUT PLAYS

FLIR Systems - FLIR - close: 19.50 change: +0.41

Stop Loss: 20.35
Target(s): 17.75
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of FLIR are underperforming both the market and its peers in the aerospace and defense industries. The stock hit new multi-year lows this past week. Friday's short-covering bounce didn't make it very far. We think the down trend continues.

I'm suggesting bearish put positions now or you can wait for a bounce closer to likely resistance at the $20.00 mark instead. Our target is $17.75. FYI: The Point & Figure chart for FLIR is bearish with a $7 target.

- Suggested Positions -

buy the Jul $20 PUT (FLIR1221S20) current ask $1.25

- or -

buy the Aug $19 PUT (FLIR1218T19) current ask $0.65

Annotated Chart:

Entry on June xx at $ xx.xx
Earnings Date 07/20/12 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on June 30, 2012



In Play Updates and Reviews

EU News Sparks Short Covering

by James Brown

Click here to email James Brown

Editor's Note:

The Germans caved into the pressure and new EU proposals helped send stocks higher on Friday.

AMT, MCK, and SAM were all triggered.

CMI and JOY, both industrial names, were stopped out.

Current Portfolio:


CALL Play Updates

American Tower Corp. - AMT - close: 69.91 change: +0.23

Stop Loss: 67.40
Target(s): 74.50
Current Option Gain/Loss: - 9.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/30/12 update: I am unimpressed with AMT's performance on Friday. Shares gapped open higher at $70.19 and hit $70.65 before reversing course. AMT spent most of the day hovering underneath resistance at the $70.00 level and only gained +0.3% for the day compared to a +2.5% gain in the S&P 500. That's not very inspiring.

The stock did hit our trigger to buy calls at $70.25 and the trade is open but I would wait for a new rally past $70.25 before launching new positions.

Trigger @ 70.25

- Suggested Positions -

Buy the Aug $70 call (AMT1218H70) entry $2.15

06/29/12 triggered @ 70.25

chart:

Entry on June 29 at $70.25
Earnings Date 08/02/12 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on June 27, 2012


Costco Wholesale - COST - close: 95.00 change: +2.08

Stop Loss: 91.75
Target(s): 99.00
Current Option Gain/Loss: Jul$92.50c: +86.3% & Aug95c: +144.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/30/12 update: It was a big day for COST on Friday. The stock gapped open higher and surged to new record highs with a +2.2% gain on the day. You could argue COST is now short-term overbought so don't be surprised to see a pullback toward the $93 area. I am not suggesting new positions at this time. We are adjusting the stop loss to $91.75.

The plan was to keep our position size small. FYI: The Point & Figure chart for COST is bullish with a $116 target.

- Suggested *Small* Positions -

Long Jul $92.50 call (COST1221G92.5) entry $1.61

- or -

Long Aug $95 call (COST1218H95) entry $0.88

06/30/12 new stop loss @ 91.75
06/28/12 triggered @ 92.50

chart:

Entry on June 28 at $92.50
Earnings Date 10/11/12 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on June 26, 2012


McKesson Corp. - MCK - close: 93.75 change: +0.48

Stop Loss: 91.45
Target(s): 99.00
Current Option Gain/Loss: Jul92.50c: -11.7% & Aug95c: - 7.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/30/12 update: I am not very impressed with MCK's performance on Friday. The stock gained +0.5% versus the market's +2.5% surge. Shares did gap open higher at $94.47, which was way above our proposed trigger entry price at $93.55. So not only did MCK underperform the market but the gap higher negatively impacted our trade. We are lucky the options did not see a bigger gap higher on Friday morning.

The $93.50 level "should" be short-term support and traders could buy calls now but I would be tempted to wait for a new dip into the $92.50 area and then buy a bounce instead.

- Suggested Positions -

Long Jul $92.50 call (MCK1221G92.5) Entry $2.21

- or -

Long Aug $95 call (MCK1218H95) Entry $1.90

06/29/12 triggered on gap higher at $94.47 (trigger was 93.55)

chart:

Entry on June 29 at $94.47
Earnings Date 07/30/12 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on June 28, 2012


Boston Beer Co. - SAM - close: 121.00 change: +3.04

Stop Loss: 117.25
Target(s): 127.50
Current Option Gain/Loss: + 7.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/30/12 update: The market's big rally on Friday helped push SAM past resistance at the $120 level. The stock hit our trigger to buy calls at $120.25. We'll start with a stop loss at $117.25. More aggressive traders may want to give SAM more room and put their stop under short-term technical support at the 10-dma (near 116.35) instead.

- Suggested Positions -

Long Aug $125 call (SAM1218H125) Entry $3.35*

*option entry price is an estimate. option did not trade when our play opened
06/29/12 triggered @ 120.25

chart:

Entry on June 29 at $120.25
Earnings Date 08/02/12 (unconfirmed)
Average Daily Volume = 117 million
Listed on June 27, 2012


U.S. Oil ETF - USO - close: 31.83 change: +2.33

Stop Loss: 30.49
Target(s): 33.00
Current Option Gain/Loss: Jul$30c: +130.8% & Aug30c: +91.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/30/12 update: The EU summit news helped spark a big drop in the U.S. dollar, which sent commodity prices soaring. Oil surged and the USO delivered a +7.8% gain. The ETF is testing resistance near $32.00.

Readers may want to go ahead and take some money off the table now. We are raising our stop loss up to $30.50. I am not suggesting new positions at this time.

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

06/30/12 new stop loss @ 30.49
06/29/12 USO surges as oil rallies on dollar weakness.

chart:

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


PUT Play Updates

Deckers Outdoor Corp. - DECK - close: 44.01 change: +0.76

Stop Loss: 50.05
Target(s): 42.00
Current Option Gain/Loss: Jul45p: + 70.3% & Aug45P: +34.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/30/12 update: On Friday morning most of the market was in rally mode yet DECK quickly reversed the morning pop and tagged a new relative low at $42.16. Shares recovered and spent the rest of the day churning sideways near $44.00.

We've been aiming to exit at $42.00 and now given the market's big rally readers may want to go ahead and just take profits now. 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

06/29/12 DECK almost hit our target but bounced at $42.16
06/25/12 readers may want to take profits early now.

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 BEARISH PLAYS

Cummins Inc. - CMI - close: 96.91 change: +4.65

Stop Loss: 92.55
Target(s): 82.50
Current Option Gain/Loss: -82.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/30/12 update: Industrial names were some of the biggest winners on Friday. Odds are it's mostly short covering since the economy did not suddenly improve overnight.

CMI gapped open higher and broke out past resistance. We had a stop at $92.55 but CMI opened at $95.80!

- Suggested Positions -

Jul $87.50 PUT (CMI1221S87.5) Entry $2.80 exit $0.50 (-82.1%)

06/29/12 CMI gapped open above our stop loss
06/25/12 triggered on the gap down at $89.06 (trigger was 89.35)

chart:

Entry on June 25 at $89.06
Earnings Date 07/31/12 (unconfirmed)
Average Daily Volume = 2.8 million
Listed on June 23, 2012


Joy Global, Inc. - JOY - close: 56.73 change: +2.80

Stop Loss: 55.05
Target(s): 47.50
Current Option Gain/Loss: -63.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/30/12 update: JOY is another industrial name that is probably rising on short covering. The stock gapped open higher above resistance at $55.00 and above our stop loss at $55.05. Friday's close is also a breakout above one of its key trend lines of resistance. Plus, chart readers will point out that on the weekly chart the newest candle looks like a bullish engulfing reversal pattern. In spite of the big rebound the larger trend is still down but the bounce may not be over yet.

- Suggested *SMALL* Positions -

Jul $50 PUT (JOY1221S50) Entry $1.60 exit $0.58 (-63.7%)

06/29/12 JOY gapped open higher at $55.30, which is above our stop loss at $55.05

chart:

Entry on June 26 at $52.23
Earnings Date 08/29/12 (unconfirmed)
Average Daily Volume = 2.6 million
Listed on June 25, 2012