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Daily Newsletter, Saturday, 7/14/2012

Table of Contents

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

Market Wrap

Seventh Day Rally

by Jim Brown

Click here to email Jim Brown

After six days of declines the markets rested. Thank China and JP Morgan for the short squeeze.

Market Statistics

A combination of strong oversold conditions and traders not wanting to be short over the weekend combined with good news from China and earnings from JP Morgan to produce another Friday short squeeze. I said on Tuesday "I would be looking to sell any short squeezes and you know there is one in our future somewhere." We have to wait until next week to see if the short recommendation works out but at least the squeeze was right on schedule.

Conditions were very oversold. The Dow and S&P had been down for six consecutive days. Bank America put out a note on Thursday saying stocks were the most hated of any period in the last 15 years. Stocks were selling at the biggest discount to bonds since Bank America/Merrill Lynch began keeping records.

The American Association of Individual Investors (AAII) investor sentiment survey showed bullish sentiment at 30% compared to the long term average of 39%. Bullish sentiment has been below the long term average for 15 consecutive weeks and the last time that happened was in 1993. The S&P only gained +35 points for the entire year but then the S&P was also 435 not 1435.

Year to date global equity funds have only seen net inflows of $1 billion. Global bond funds have seen inflows of $130 billion. That is a lot of money looking for the safety of a guaranteed low single digit yield rather than at risk in the equity market.

The point here is that investors are afraid of the future. For whatever reason including the fiscal cliff, Europe, China, the election, etc, they are moving to cash equivalents in near record numbers.

Those staying in the market are betting on the downside and after six days of declines we were due for a short squeeze. Coming on a Friday the 13th you would probably have been expecting a move in the opposite direction.

Starting out the rally overnight was news that China grew at a rate of +7.6% in Q2 or at least that is what the official GDP release showed. Who knows what the real GDP number was. That was the slowest growth rate in three years and leaves China on track for its slowest full year of growth since 1999. It was the sixth consecutive quarterly decline. Retail sales for June grew by +13.7% compared to May's +13.8%. Industrial production grew by +9.5% compared to estimates of +9.8%.

While the numbers were not great for China they were definitely better than many analysts had expected. China is targeting a full year GDP of 7.5% while some analysts fear growth as low as 6.8% to 7.3%. The consensus back in April was 8.4% so you can see how drastically the estimates have changed. Since China controls what numbers they release and this is a once in a decade transition year for the leadership I suspect they will magically "meet" their targets.

China has cut interest rates twice in recent weeks, cut the reserve ratio three times since November and announced a new loan discount rate for banks in an effort to stimulate the economy. Bank lending rose +16% from May to June as a result of the new discounts. This sudden surge of policy liberalization suggests conditions are worse than the official numbers show. In order to save economic face and avoid massive factory layoffs we may see China announce even further moves in the near future. Turning the giant Chinese economy is like maneuvering an oil tanker. You have to plan your turns well in advance and then wait patiently while the course corrections take effect. You can't afford to act hastily or the result could take years to erase.

The less bad GDP numbers removed a worry component for traders overseas and those market gains carried forward to the U.S. at the open. However, the overall economic numbers from China were still weak and there are some analysts expecting further stimulus from China, possibly as early as Sunday.

Update Saturday afternoon: China announced it would provide $5 billion in subsidies to renovate four million rural homes. Each dilapidated home will be given an average of 7,500 yuan with 130,000 poverty-stricken homes in border areas granted another 2,500 yuan. Besides the stimulus factor of paying for improvements to four million homes this is also a "social engineering" project to keep the poor from causing civil unrest.

The other factors juicing the market were earnings from JP Morgan (JPM) and Wells Fargo (WFC). JP Morgan reported earnings of nearly $5 billion in Q2 thanks to a +29% jump in mortgage originations. Earnings were $4.96 billion or $1.21 per share. This included $4.4 billion in actual losses as a result of the whale trade. Those losses have risen in total to $5.8 billion and JPM said they could rise at most another $1.7 billion but would likely be more in the range of $700 million. The trading losses reduced earnings by 69 cents per share.

Investors were relieved the losses were not worse and amazed by how good the quarter would have been without the bad trade. However, there are some new problems. The bank revealed that traders may have intentionally recorded the value of those trades at favorable prices rather than actual liquidation value in order to avoid reporting paper losses. Since reporting large losses would have been a red flag drawing attention to the oversized positions it appears some traders reported the value of the position when it was entered rather than the fair market value of the position at the end of the quarter.

Jamie Dimon has promised to get to the bottom of the trades and heads will roll. Actually Ina Drew, CIO over the division, has already left and the bank said she would be returning several million in salary as a result of the lax oversight. The actual "London whale" that made the big bets, Bruno Iksil, has also left JPM. The CIO risk officer, Irvin Goldman, has also resigned. The bank only had good things to say about Goldman saying "he behaved with integrity and we wish him well." Archilles Macris, CIO in Europe, and colleague Martain Javier-Artajo have also disappeared from the employee database according to Reuters.

JP Morgan will restate Q1 earnings reflecting a $459 million reduction in income because of the inflated position reports. JPM said the bank combed through more than one million emails, tens of thousands of taped conversations and mountains of other "evidence" to determine how the positions were initiated, valued and who was responsible. At this point you can bet that the regulators will be filing charges or suits over the misrepresentations and lack of oversight. However, anything that happens from this point is just nuisance news. The whale trade is over for all practical purposes even though the story and the regulation aftermath will continue for years. JPM remains hugely profitable and once the stock moves over resistance at $37 the rally will begin.

JPM Chart

Also helping the financial sector was earnings from Wells Fargo (WFC). The bank reported earnings of $4.6 billion or 82 cents per share. That compared to 70 cents in the year ago quarter. The +17% jump in earnings came from $2.9 billion in profits from mortgages, up from $1.6 billion. The CEO said the mortgage pipeline was at record levels and Q3 would be very robust in terms of mortgage profits. Total loans increased by $8.7 billion to $775.2 billion. The 82 cent profit compared to analyst estimates of 81 cents. It was not a big beat but the strong guidance helped power the stock to a +3% gain and a new two month high.

Wells Fargo Chart

The earnings news may have helped power the short squeeze on Friday with a couple high profile reports but next week is going to be a real challenge. With estimates declining daily we could see a rolling disaster as each day adds to the prior day's woes. However, since earnings sentiment has been so negative in recent weeks the bar is so low a snake could cross it and not notice the bump.

We are facing the potential for a flurry of "less bad" earnings from some major names that could call into question the impact of Europe's austerity recession. I am not ready to forecast an earnings rally but the sentiment is so negative that it would be hard to miss on the downside. Remember, the sentiment facts I reported earlier. Investors are simply avoiding stocks regardless of the news. The market movement we are seeing is from traders only. Volume was EXTREMELY low at 5.3 billion shares on Friday.

We definitely have some high profile earnings next week with banks Citi, AXP, BAC, MS, GS and USB leading the list. For tech stocks we have INTC, EBAY, IBM and MSFT. The banks should continue to outperform but the tech sector could be a problem. IBM is expected to report only a +10% increase in earnings along with a drop in revenue. Intel is expected to report a -12% drop in earnings on minor gain in revenue. Microsoft is expected to post a -8.7% decline in earnings.

On July 1st 2011 the estimate for Q2-2012 earnings was for +14.15% growth. On October 1st that had fallen to +7.92%. By April 2nd it was down to +1.68% and as of today the S&P earnings are expected to decline -2.12%. That includes a whopping gain by Apple and Bank America. Without those two companies the S&P earnings estimates would be a decline of more than -5%. Why should the market be in rally mode? Currently Q4 earnings are expected to rise by +14%. Where do you think those estimates will be six months from now?

On average there are nearly three companies warning about earnings for every company that is issuing positive guidance. This is the worst pace since the recession.

Declining earnings are never positive unless analysts have over compensated on their bearish estimates and companies surprise with bad but better than expect numbers. If by some remote chance those earnings declines I listed above turned into earnings gains we could be off to the races.

Don't under estimate the possibility that pessimism may now be the base case scenario. With pessimism so high any positive news from any direction, earnings, Europe, economy, etc, could have a bullish impact on stocks. Analysts, writers and reporters have been pounding home the negativity for months now. Eventually investors will become immune to the daily dose of bad news. I seriously doubt there are very many investors that can't list the bullet points causing the current bout of global economic uncertainty.

Earnings Calendar

On the U.S. economic front the Producer Price Index (PPI) for June rose unexpectedly by +0.1% compared to consensus estimates for a -0.6% decline. That was the first gain in four months. Finished energy goods declined -0.9% but the consumer foods index rose +0.5%. Meat prices rocketed higher with vegetable prices not far behind. Crude materials prices declined -3.6% month to month and -9.4% year over year.

Core prices, excluding food and energy, rose +0.2% for the fourth consecutive month. Price increases for trucks and household appliances accounted for the majority of the gain.

Lower commodity prices are a factor throughout the manufacturing sector and will continue to insulate manufacturers against the slowing economy. The European recession and China's manufacturing decline have hurt commodity prices since investors don't want to invest in commodities until demand returns. The PFG Best bankruptcy should continue to keep commodities depressed with hundreds of millions of dollars in commodity traders funds locked up for months to come.

However, corn and soybean prices are soaring because of the drought. If there is no material rain in the Midwest over the next three weeks there could be a serious shortage of soybeans and corn and result in a bidding war later in the summer. The next three weeks are critical for soybean growth and crop yields. Corn and soybean meal are critical inputs to poultry growers and could send price ripples throughout the food chain.

The initial reading for Consumer Sentiment for July declined from 73.2 to 72.0 for the second consecutive monthly decline and the lowest reading since December. The gains for the year that pushed the survey to a high of 79.3 in May have now been erased. That represents a -10% decline in only two months.

Present conditions rose slightly from 81.5 to 83.2 but expectations declined from 67.8 to 64.8. Given the recent improvement in the outlook for the housing sector and the sharp drop in fuel prices it is surprising to see sentiment decline so sharply. Consumers are clearly worried about the slowing job gains, the fiscal cliff and the European debt crisis.

Consumer Sentiment Chart

The June National Federation of Independent Business (NFIB) Sentiment Survey fell 3 points to 91.4. The image below shows the declines in the various components that make up the index. Only one component improved and that was credit conditions. Earnings trends declined -7 and Expect Economy to Improve fell -8. This survey was conducted before the Supreme Court decision on healthcare. With 20 new taxes in the healthcare law the July survey is expected to decline even farther.

NFIB Components

The economic calendar for next week contains some high profile events. The Bernanke testimony to the Senate on Tuesday will be the first hurdle. If Bernanke continues the sentiment expressed in the FOMC minutes last week then the market could swoon again. If by chance he decides to tease the market with comments about adding policy to stimulate jobs we could see traders dreaming of QE3 rush back into the market.

Unfortunately the testimony is not likely to give traders that QE tease because many lawmakers are dramatically opposed to further QE. Mentioning the possibility of future QE in any meaningful terms would be inviting some scathing attacks in the Q&A section of the testimony. Lawmakers are going to be posturing for the election so any attack on Bernanke is likely to be seen as free publicity. That suggests Bernanke impact on the market on Tuesday could be limited unless he unexpectedly talks up the economy. That is not likely to happen since the Fed Beige Book, due out on Wednesday, will be the actual recap of activity in every Fed district. Bernanke will have that information on Tuesday and he could color his testimony with positive points from the report but that assumes there are positive points.

He gets to repeat his testimony again on Wednesday in the House. He has changed his House testimony in the past from what he gave in the Senate when he thought the market reporting got it wrong. If the market swoons on Tuesday he could embellish it for Wednesday in an effort to correct the impression. He is pretty good about his phrasing so I would not expect any changes. However, the House has the advantage of seeing the testimony and questions from the day before so they can be better prepared to ask even tougher questions.

Bernanke is more than likely going to complain about the fiscal cliff and plead with Congress to remove problems currently weighing on stocks. He will say the Fed has done all it can do unless the economy weakens considerably. In June he began pushing the economic blame off the Fed and on to Congress in his speeches so we will see if that continues.

Bank of America analyst, Ethan Harris, commented on pending FOMC action. "We expect that the outlook (at the July meeting) will be weak enough to warrant additional Fed easing by the September 12-13 FOMC meeting; we look for Fed officials to both push out their forward guidance on rates until at least mid-2015 and to launch QE3."

The Philly Fed Manufacturing Survey on Thursday is the last major report for the week. This survey is seen as a proxy for the national ISM, which is reported in the first week of the month. That makes the Philly Fed important for sentiment for the rest of the month. It is actually expected to rebound from the -16.6 number in June. The estimate is -6.6 and while a rebound it is still in contraction territory.

Jobless claims on Thursday are expected to rebound to 363,000 from the statistical error last week. Claims declined from 376,000 to 350,000 not because of a sudden hiring spurt. They declined because auto makers did not close their plants for the normal summer model changeover. The 25,000 or so workers that are normally laid off temporarily while the plants are changed over to produce the new models were not laid off. Automakers are experiencing such strong demand for existing models they kept the plants open longer. The Labor Department has a normal seasonal adjustment to accommodate the temporary layoffs only the layoffs did not occur as expected. The seasonal adjustment skewed the numbers and we should not expect the weekly jobless claims to remain at the 350,000 level.

Economic Calendar

Normally the video game market resists slowing consumer trends. Young people will scrimp, save and borrow whatever is needed to acquire the latest games. That trend has ended in the current environment. Sales of video games and hardware declined in June for the seventh consecutive month. Overall sales fell -29%. Sales of games fell -29% while sales of hardware like game consoles fell -45%. This decline was blamed on reduced discretionary spending and a lack of any new must have titles. While I believe new titles would spur some sales the overall trend is clear and I believe it has to do with lack of employment. With the U6 unemployment rate at 14.9% and youth employment in the same range they don't have the money to spend. What money they do have is being spent on smartphones and data plans, which are rising in cost every quarter. A teenager can do without a video game but they can't live without their phone.

While on the topic of economics I am going to share some random thoughts this weekend. In the process of doing the weekend commentary I easily read well over a hundred articles each weekend. This week I thought several were worth sharing. These are in no particular order.

John Mauldin on growing problems in Europe: The Beginning of the Endgame

ECRI Lakshman Achuthan: The U.S. recession has already started

Nouriel Roubini: 2013 Perfect Storm May Surpass 2008 Crisis

Charles Biderman: Bernanke Put Unlikely to Survive

Moody's downgrades Italy on worries over Greek exit.

Spanish banks borrow record 365 billion euros from ECB in June

Crude prices rallied after Iran bragged on its navy again saying the recently concluded war games showcased missiles with improved accuracy and the ability to hit Israel and U.S. bases in and around the Persian Gulf. The news report put out by the Ministry of Defense said the firing sequence had been improved allowing missiles to be fired in "seconds" if Iran found itself under attack. Iran warned that 35 American military bases in the Middle East are within Iran's missile range and would be destroyed within seconds after any attack on Iran.

The comments came after the U.S. announced new sanctions on Iran on Thursday. The Treasury Dept announced new financial sanctions against 11 companies affiliated with the Iranian Defense Ministry, Revolutionary Guard and the national shipping company. The Treasury Dept said the move was taking direct aim at disrupting Iran's nuclear and ballistic missile programs as well as its deceptive efforts to use front companies to sell and move its oil. Iran announced last week it was allowing private companies to sell its oil in order to avoid the sanctions against the nation of Iran and the government oil company.

Also pushing prices higher was the news from Britain's MI6 spy agency that Iran would have nuclear weapons by 2014. The head of the intelligence service, Sir John Sawyers, said covert British spies had prevented Iran from developing nuclear weapons as early as 2008. He did not say specifically how they did it but he said "without the actions by MI6 you would have had a nuclear Iran in 2008."

He said the threat of a nuclear Iran by 2014 was real and credible and that threat increased the potential for an attack by Israel and/or the U.S. in the near future. He said the threat of a nuclear Iran would create a new nuclear arms race in the region and have serious destabilizing effects throughout the Middle East. A nuclear Iran would force Saudi Arabia and others to go nuclear as a deterrent against aggression by Iran. He said the new Middle East cold war would pose an even greater threat of nuclear conflict than the stand-off between the USSR and the USA because there would be no safety mechanisms in place.

WTI Crude Oil Chart

I am surprised to see gains in any commodities other than grains because of the impact from the PFGBest scandal. It was revealed late Friday that CEO Richard Wasendorf Sr was arrested on charges he stole more than $200 million from clients. He tried to commit suicide on Monday by asphyxiation. He left a suicide note saying he had forged financial documents for 20 years until the losses became too large to hide over the last several weeks. He said in the note, "I have committed fraud. For this I feel constant and intense guilt. I am very remorseful that my greatest transgressions have been to my fellow man. Through a scheme of using false bank statements I have been able to embezzle millions of dollars from customer accounts at PFGBest."

The initial charge was "making and using false statements" but prosecutors said it was just the beginning. Read Article with details Wasendorf was just married on June 30th in Las Vegas. How is that for a honeymoon present?

Richard Wasendorf Sr

Apple shares rebounded after the company said it made a mistake in withdrawing from the Electronic Product Environmental Assessment Tool (EPEAT). The agency is a global registry where consumers can turn for information when shopping for greener electronics. Apple dropped out of the organization after its ratings on some items declined due to the new manufacturing requirements to make them slimmer, faster, cooler, etc. For instance permanently gluing the battery into a laptop made it harder to recycle so the rating declined. Apple apparently thought the agency was not worth the effort but they found out otherwise. Government agencies, colleges and companies like Ford and KPMG require electronics they purchase to be listed on EPEAT. The City of San Francisco has a policy that any electronics they buy have a minimum rating of "gold" on the EPEAT system. Almost immediately after news broke they had left the system the complaints appeared. On Friday Apple SVP Bob Mansfield said "I recognize this was a mistake" in an open letter on the Apple website. Apple quickly rejoined the EPEAT system.

Ford (F) warned that European sales fell -10% in the first half when it decided not to match heavy discounting by rivals as the region fell back into recession. In June alone sales declined -16.1% in its 19 western European markets. The chief of Ford's European sales said, "The economic environment in Europe remains very difficult." In late June Ford said Q2 losses in Europe may have tripled from the -$190 million loss in Q1.

In related news Peugeot announced it was closing some facilities and laying off 8,000 workers. Peugeot said it was losing $245 million a month. On Saturday the new socialist president of France immediately demanded that Peugeot reconsider its plan for the layoffs. Hollande said the announced layoffs are simply not acceptable. He said Peugeot should not be allowed to terminate anyone unless the company has found them new jobs elsewhere or has supplied them with "voluntary" settlement packages. In other words Peugeot would have to offer workers huge cash settlements to leave but workers would not have to accept. Hollande said Peugeot made bad decisions in the past about application of funds to increase profits and benefit shareholders. He would not allow those past decisions to hurt 8,000 workers and would "exert pressure" on Peugeot to keep the plants open. He promised a government rescue plan for the ailing auto sector to be announced by July 25th that would include incentives for purchasing Peugeot cars. Welcome to the new socialist state of France and what may soon be the nationalization of Peugeot.

Volkswagen was at least breaking even with European sales growth of +1.8%. Unfortunately they warned that would change in the second half with a rapidly declining outlook.

Ford Chart

A major problem in Europe that has not received much play in the U.S. as yet is the LIBOR scandal. (London Interbank Offered Rate) Reportedly up to 15 major banks may have conspired to manipulate the rate between 2005-2008. The Federal Reserve may have known as early as 2007 that the rate setting process was flawed but probably did not know it was being manipulated. In 2008 Tim Geithner sent suggestions to British banking authorities on how the process could be improved. The CFTC estimates there are more than $800 trillion of financial instruments pegged to LIBOR, including $350 trillion in swaps. Numerous suits have already been filed and hundreds more are expected.

Last week Barclays paid roughly $450 million to settle charges that its traders manipulated LIBOR. That was probably the best decision they have made in years. Analysts believe the eventual fines and awards could be in the tens of billions if not more. Morgan Stanley said a rough calculation could be $14 billion through 2014 but acknowledged the estimate was a crude calculation of regulatory fines and costs. LIBOR has been the base rate in almost every financial instrument for the last 20 years. The potential for damage awards is enormous.

The S&P rebounded +22 points on Friday but that was only about half of the loss since the 1375 high on July 3rd. The S&P declined to 1325 on Thursday. The rebound saw the S&P close within three points of the 100-day average at 1360 and a critical level that has seen repeated tests in June/July. The S&P gained +19 points in the opening spike and then spent the rest of the afternoon consolidating before short covering at the close added the additional three points.

I believe the 100-day will provide strong resistance but a breakout there would encounter even stronger downtrend resistance at 1370 and the July high at 1375. It will not be easy to move higher but not impossible on the right news.

The short squeeze or relief rally, whatever you want to call it, occurred on only 5.3 billion shares. That is very low for 200 point Dow move. Market reporters were bragging on the breadth but I did not see it. Advancers were only a little more than 3:1 over decliners.

However, the actual rebound started on Thursday afternoon. Whether that was just shorts deciding to exit ahead of China and JPM or there was some other reason other than oversold we will never know. With Friday's rally we have gone from oversold to overbought in about 24 hours. Follow through on Monday will be the key to the puzzle but it still may not last without some major headlines to keep the move going.

S&P Chart

The Dow may have spiked on the JPM news but it was IBM, CAT, BA and UTX doing the heavy lifting with gains over $1.75 each. Hewlett Packard (HPQ) was the only Dow stock to post a loss. The +200 point gain was only enough to recover half of the prior loss and push the Dow to a +4 point gain for the week.

Techs will rule the Dow next week with the big three, MSFT, INTC and IBM reporting earnings. Financials will help with AXP and BAC reporting. Bank America is expected to post a huge relative gain because Q2 last year contained a monster loss. However, with BAC only an $8 stock the impact on the Dow will be negligible.

Dow 12,900 is the key level to watch. A breakout there could trigger additional short covering. Key support is 12,600.

Dow Chart

The Nasdaq lagged the other indexes in relative performance. The +42 point rebound left the index still 80 points from its July highs. It would take two more days like Friday just to recover the losses from the prior week.

Note that all the big caps are represented in the winners list but the amount of their gains was minimal. For Apple to gain $6 after declining nearly $30 in the prior two days was lackluster to put it mildly. Google had declined $38 and gained only $6 on Friday.

Initial resistance is 2930-2935 followed by the 100-day at 2952. Support would be the Thursday low at 2840.

Nasdaq Winners & Sinners

Nasdaq Chart

The Russell was 100% a short squeeze. It spiked to 800 at the open and closed at 800.68. There was no further gain and you can tell by the very narrow range after the open that there was no volume and no volatility. Volume in the Russell 2000 stocks was only 729 million shares and the lowest volume day of the week.

Russell 2000 Chart - 30 Min

Next week is option expiration. That means Friday should have been volatile with high volume with most funds closing option positions in the week before opex. Those expiring options were just one more reason why the squeeze was strong. All those puts were flushed when the spike began.

The questions for next week are these. Are negative earnings already priced in? Are expectations too low? What kind of guidance should we expect?

If a small earnings decline is already priced in but companies warn on their second half outlook will that cause a market disruption? If you think about it most companies are probably going to take the "Europe ate my earnings" excuse and use it to hide other problems they want to flush through the books without anyone noticing. If you blame Europe in the headlines you can then blame inventory markdowns on Europe as well. Call it a kitchen sink quarter where everyone can sweep their dirt under the European rug.

In keeping with my prior analysis I would be looking for any pause in the rebound to take profits in longs and establish new short positions. Market visibility is too clouded to suggest the rally continues unless there are some earnings surprises we are not expecting. I would love to be writing this commentary next weekend and talking about the S&P testing resistance at 1425 but I am not expecting that to happen.

The wildcard is the Bernanke testimony. QE addicted traders are wishing for one more fix. If Uncle Ben does not break out the QE commentary we could see some disappointed traders go into withdrawal again.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

"I would give my right arm to be ambidextrous."
Yogi Berra


Index Wrap

Market Whippy in Familiar Summertime

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The intermediate trend remains down until there's a new closing index high above the early-May top, whereas the short-term and long-term trends are up.

To assess the long-term trend your 'homework' (should you chose to accept it) is to look at the monthly S&P or Nasdaq Composite chart. The pattern you'll see since the late-March 2009 bottom is one of higher highs and higher reaction (pullback) lows and the 'classic' definition for an UP trend.

SHORT-TERM: In what's been a common pattern over 3 years anyway, summertime becomes a short-term trader's market. To assess the short-term chart picture my first chart is the Nasdaq Composite (COMP) hourly chart dating from COMP's early-June low.

The pattern here is of higher highs and higher (corrected from 'lower' - 7/15/12) lows as you see. A reliable way (for the time frame shown) to assess shorting/bearish opportunities (tops) is by trading contrary to 'extremes' (overbought and oversold) suggested by the 21-hour Relative Strength Index (RSI). You see the same or similar hourly chart patterns in the S&P, Dow, Nas 100 (NDX) and the Russell 2000 (RUT). Except for RUT, this last panic low took prices to a bit under the hourly up trendline, but prices then rebounded quickly. The uptrend channel remains basically intact.

The most bullish technically of the 3-month hourly index charts currently is the Russell (RUT). Because RUT has maintained a classic bullish technical chart and stayed within a well-defined uptrend channel, I'm watching the RUT hourly chart (seen next) as a current Market bellwether; e.g., if RUT's up trendline gets pierced this warns of possible further Market weakness or, conversely, if RUT's prior top is exceeded, it suggests upside breakouts may follow in the S&P and Nasdaq.

Even if you don't follow the Russell the daily RUT chart is of interest so the best is also the last (chart).

My bullish/bearish sentiment indicator, on a single day basis, fell to an 'oversold' 1.2 reading on Wednesday, one day prior to the Thursday panic low; i.e., CBOE equity call volume on Wednesday was 1.2 times total daily put volume. It's typical for sentiment to 'bottom' anywhere from 1 to 5 days before a price low. It was a pretty good ancillary tip off of being close to an upside reversal. That and the low extreme seen in the hourly RSI indicator (indicator length setting: 21).

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) continues in the same uptrend pattern dating from the early-June lows, as our most recent low was ABOVE the prior (down) swing low. Successively higher relative highs AND reaction/pullback lows equals an UPtrend.

The key resistance trendline remains as highlighted below; the key point of resistance at this trendline currently is 1368. A decisive upside penetration of 1368, then 1375, is needed to suggest a bullish upside chart breakout. However, the intermediate uptrend resumes only on a Close above 1405, the early-May top. This event seems doubtful in our current low- volume 'whippy' summertime environment.

Pivotal short-term technical support is suggested at the internal up trendline (connecting the greatest number of lows) currently intersecting at 1340; support then extends to 1325, with fairly major support in the low-1300 area.

Repeating from my initial Bottom Line comments on the most recent trader 'sentiment' readings: my sentiment indicator, on a single day basis, fell to an oversold 1.2 reading on Wednesday, one day prior to the Thursday panic low; i.e., CBOE equity call volume on Wednesday was 1.2 times total daily equities put volume.

It's typical for sentiment to bottom anywhere from 1 to 5 days before a price low. It was a pretty good ancillary tip off of being close to an upside reversal. My trader sentiment indicator is seen above. The CPRATIO low was coupled with a low extreme seen in the hourly RSI per my first chart, the hourly Nasdaq Composite.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) index chart is mixed, but the most recent Close in OEX has brought it right TO my internal down trendline. I've noted first resistance and a possible breakout point, at 623.

More broadly speaking, OEX would need to churn through resistance and pop out above the 623-629 price zone to suggest that the index was again capable of a sustained advance. In terms of what would shift the intermediate-term trend higher would be for OEX to pierce its 638.8 Closing high of 5/1.

Key near support could be thought of as first at the up trendline at 615 (not highlighted), with next support in the 610 area per the green up arrow highlight. Major support begins at 600. A break below 610 for more than a day suggests 600 may again be tested.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) will hit key resistance implied by its down trendline at 12880 near-term. The Thursday panic low pulled INDU briefly below (intraday low: 12492) the daily chart up trendline I was working with. I consider 1-day intraday spikes ONLY below such trendlines, followed by a strong rebound, as part of the heavy stop-loss selling and culminating panic mood that often 'sets up' an upside reversal.

Key resistance is seen initially at 12880 and extends to 12961, with a next key resistance at the even 13000 level.

Near support is at 12600, extending to around 12500. Major support begins at 12400.

There are a number of (around 13) Dow stocks that are in strong weekly uptrends and that could keep a rally going, especially looking out past August. The stocks include AXP, DIS, possibly GE, HD, (not HPQ, which looks like it's going to 0$!) IBM if it holds $184, JNJ, KFT, KO, possible MCD, MRK, T, VZ, and WMT (to the moon!).

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) daily chart is mixed. The intermediate uptrend resumes if/when the prior 3069 Closing high of late-April is exceeded. However, bullish upside potential resumes if resistance implied by COMP's down trendline is pierced at 2966, as well thereafter the prior intraday high at 2988. I've noted via the red down arrows resistance at 2966, with next key resistance at 3000.

On the recent decline, the COMP intraday low at 2837 held above the previous 2818 (down) swing low. Absent a 1-day spike low, COMP mostly held the up trendline shown on my most recent chart, which is a bullish plus. Yet to come is decisive UPSIDE action.

In the sense of price action since the early-June low, COMP is showing a rising stair-step price trend of higher relative highs and higher downswing lows. Yet to come is a decisive upside breakout above the dominant down trendline. The 3 extreme intraday highs in COMP make for a well-defined line of chart resistance so there significant focus on a possible (or not) trendline breakout.

Repeating from my initial Bottom Line comments on the most recent trader 'sentiment' readings: my sentiment indicator, on a single day basis, fell to an oversold 1.2 reading on Wednesday, one day prior to the Thursday panic low; i.e., CBOE equity call volume on Wednesday was 1.2 times total daily equities put volume.

It's typical for sentiment to 'bottom' anywhere from 1 to 5 days before a price low. It was a pretty good ancillary tip off of being close to an upside reversal. My trader sentiment indicator is seen above. The CPRATIO low was coupled with a low extreme seen in the hourly RSI per my first chart, the hourly Nasdaq Composite.

NASDAQ 100 (NDX); DAILY CHART:

The key upside test for the Nasdaq 100 (NDX) Index is the ability for NDX to pierce its down trendline, currently intersecting at 2643; resistance than extends to 2660 at the prior intraday high.

Key support comes in just under 2550 and extending to Thursday's intraday 2523 panic low. Next pivotal support begins at 2515.

In this market it's hard to predict week to week given the whippy price action. The near-term trend is up but the prior 2660 high needs to be exceeded at some point to suggest a continuing up trend. That should happen over time. Eventually, the really KEY test is the ability (or not) for NDX to go to a new Closing high above 2741 and to thereby exceed the late-April top.

Meanwhile, it's also important for the bulls that the recent rally find some legs. A move above the 21-day moving average would be a plus.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) stock has the same technical dynamics, properties and potentials as the underlying Nas 100 Index so I won't repeat those here. A trendline 'breakout' level for the QQQ tracking stock is at 65-64.9, with a further move above the most recent swing high at 65.2 as being a strong indicator of further bullish potential.

On the recent decline, QQQ Closed above the up trendline highlighted below and this action suggests the trendline is still the one to watch ... enough so that I've noted near support at 62.5, at the intersection of the trendline. 61 is rock bottom support. I'm not expecting it but a weekly close below 61 yields a further downside swing objective to around 59.3.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) has evolved into the most bullish looking chart as seen in its well-defined up trendline and apparent both on the daily chart below but also on the hourly RUT chart seen at the top of this column (my 'bottom line' comments). All this don't mean a (bullish) thing as the song says unless there's an eventual move that exceeds the 825 late-April Closing high. A typical bull move keeps taking out prior significant highs until it doesn't any more and the trend shifts to sideways or lower.

I said last week that I thought that: "Support may get tested next in the 800-795 area. Next key support comes in at the intersection of the previously broken down trendline, at 776 currently..." The low was 778 so the further trend unfolded pretty much as the chart pattern would have predicted.

Ahead, the chart dynamic is whether the recent rally has much in the way of legs and there's a test of resistance at 810 to 820; resistance then extends to 830, and a most pivotal resistance. The intermediate uptrend resumes on a move above 830.



GOOD TRADING SUCCESS!


New Option Plays

Drugstores & Specialty Retail

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

CVS Caremark Corp. - CVS - close: 48.05 change: +0.53

Stop Loss: 46.75
Target(s): 52.00
Current Option Gain/Loss: Unopened
Time Frame: exit prior to the August 76th earnings
New Positions: Yes, see below

Company Description

Why We Like It:
CVS runs a chain of drugstores. The stock broke out past significant resistance in late June at the $46 level. Now the stock is bouncing after a recent correction lower and CVS looks poised to breakout to new highs.

I am suggesting a trigger to open bullish positions at $48.40. We'll start with a stop loss at $46.75. It is possible that the $50.00 level could be round-number, psychological resistance but we are going to aim for the $52.00 mark. Just remember to exit prior to the August 7th earnings report.

Trigger @ $48.40

- Suggested Positions -

buy the Aug $50 call (CVS1218H50) current ask $0.43

Annotated Chart:

Entry on July xx at $ xx.xx
Earnings Date 08/076/12 (confirmed)
Average Daily Volume = 7.3 million
Listed on July 14, 2012


NEW DIRECTIONAL PUT PLAYS

Tractor Supply Co. - TSCO - close: 81.01 change: -1.85

Stop Loss: 84.15
Target(s): 76.00
Current Option Gain/Loss: + 0.0%
Time Frame: exit prior to the July 25th earnings
New Positions: Yes, see below

Company Description

Why We Like It:
TSCO continues to breakdown through support levels. The oversold bounce on Thursday is already failing. TSCO looks poised to drop toward what should be support near $75.00. I am suggesting we launch new bearish positions at the open on Monday with a stop loss at $84.15. Our target is $76.00. Bear in mind that this is going to be a short-term trade. We want to exit prior to the July 25th earnings report. FYI: The Point & Figure chart for TSCO is bearish with a $70 target.

- Suggested Positions -

buy the Aug $80 PUT (TSCO1218T80) current ask $3.50

Annotated Chart:

Entry on July xx at $ xx.xx
Earnings Date 07/25/12 (confirmed)
Average Daily Volume = 1.0 million
Listed on July 14, 2012



In Play Updates and Reviews

Stocks Snap Six-Day Slide

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. markets finally produced a gain to end a six-day decline. The rally on Friday looks like a typical oversold bounce to relieve some of the oversold conditions.

We did see both AMGN and WLK get triggered on Friday.

Current Portfolio:


CALL Play Updates

Amgen Inc. - AMGN - close: 76.96 change: +1.15

Stop Loss: 73.95
Target(s): 79.85
Current Option Gain/Loss: + 11.6%
Time Frame: exit prior to the July 26th earnings
New Positions: see below

Comments:
07/14/12 update: AMGN continued to show strength on Friday. The stock broke out to new highs and hit our trigger to buy calls at $76.35 along the way. Our target is $79.85. More aggressive traders could aim higher but we do not want to hold over the July 26th earnings report.

- Suggested Positions -

Long Aug $77.50 call (AMGN1218H77.5) Entry $1.42

07/13/12 triggered @ 76.35

chart:

Entry on July 13 at $76.35
Earnings Date 07/26/12 (confirmed)
Average Daily Volume = 5.3 million
Listed on July 12, 2012


Athenahealth, Inc. - ATHN - close: 81.84 change: -0.70

Stop Loss: 79.85
Target(s): 89.00
Current Option Gain/Loss: -35.0%
Time Frame: exit prior to earnings on July 19th
New Positions: see below

Comments:
07/14/12 update: Hmm... the relative weakness in ATHN on Friday is disappointing. The market produces a very widespread rally and ATHN fails to participate. That's not a good sign. We only have a few days left. ATHN is due to report earnings on July 19th, after the closing bell. We will plan to exit on the 19th at the close to avoid holding over the announcement.

NOTE: the spread on our option suddenly got a lot wider on Friday. Hopefully it will return to normal next week. The current bid/ask spread is $1.30/2.05.

- Suggested Positions -

Long Jul $85 call (ATHN1221G85) Entry $2.00

07/14/12 remember, we want to exit prior to earnings on the 19th
07/03/12 new stop loss @ 79.85

chart:

Entry on July 03 at $81.51
Earnings Date 07/19/12 (confirmed)
Average Daily Volume = 481 thousand
Listed on July 02, 2012


Dollar General - DG - close: 54.53 change: +0.53

Stop Loss: 53.45
Target(s): 59.50
Current Option Gain/Loss: -41.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
07/14/12 update: The action in DG on Friday was also disappointing. Shares did bounce from the $54.00 area but only managed a +0.9% gain on the session. The action this past week with the failed breakout and reversal lower is bearish. More conservative traders may want to just abandon ship now. I'm not suggesting new positions at this time.

- Suggested Positions -

long Aug $55 call (DG1218H55) Entry $2.05

07/14/12 looking at DG's performance this past week, the breakout to new highs looks like a bull trap. readers may want to exit early

chart:

Entry on July 11 at $55.51
Earnings Date 08/30/12 (unconfirmed)
Average Daily Volume = 3.8 million
Listed on July 10, 2012


Westlake Chemical Corp. - WLK - close: 55.08 change: +1.14

Stop Loss: 52.35
Target(s): 62.00
Current Option Gain/Loss: -10.7%
Time Frame: exit prior to earnings on August 2nd
New Positions: see below

Comments:
07/14/12 update: Our WLK is now open. On Thursday night we adjusted our entry point and Friday saw WLK surge +2.1%. Shares hit our new trigger to buy calls at $54.55. I would still consider new positions now but keep in mind that we want to exit prior to the company's earnings report on August 2nd.

- Suggested Positions -

Long Aug $60 call (WLK1218H60) Entry $1.12

07/13/12 trade triggered @ 54.55
07/12/12 adjusted the trigger to buy calls to $54.55, stop to 52.35
07/11/12 removed the July option

chart:

Entry on July 13 at $54.55
Earnings Date 07/31/12 (unconfirmed)
Average Daily Volume = 543 thousand
Listed on July 09, 2012


PUT Play Updates

FLIR Systems - FLIR - close: 18.77 change: +0.18

Stop Loss: 19.45
Target(s): 17.75
Current Option Gain/Loss: Jul20p: +26.3% & Aug19p: +23.0%
Time Frame: exit prior to the late July earnings report
New Positions: see below

Comments:
07/14/12 update: FLIR managed a +0.9% bounce but remains in a bearish pattern. The path of least resistance is down. Keep in mind that we only have a week, maybe two left on this trade. FLIR is due to report earnings some time in the July 20-27th range. We do not want to hold over the report.

More conservative traders may want to just take profits now!

*NOTE: There seems to be something wrong with the July $20 put option quotes. One source lists the ask at $2.70. Another source lists the bid/ask spread at $0.10/1.70. (at Thursday's close it was $1.30/1.55).

- Suggested Positions -

Long Jul $20 PUT (FLIR1221S20) Entry $0.95

- or -

Long Aug $19 PUT (FLIR1218T19) Entry $0.65

*07/14/12 can't get a good quote on the July 20 put. This is an estimate.
07/12/12 new stop loss @ 19.45
07/11/12 odd bid/ask spread on the July $20 puts affecting our P/L.

chart:

Entry on July 02 at $19.56
Earnings Date 07/20/12 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on June 30, 2012


Fossil, Inc. - FOSL - close: 67.98 change: +1.66

Stop Loss: 70.05
Target(s): 60.50
Current Option Gain/Loss: -21.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
07/14/12 update: I warned readers on Thursday that FOSL looked poised to bounce. I said look for a bounce to $68 or $70. Sure enough, FOSL rebounded to $68 (a +2.5% gain). A failure here or near the $70.00 level can be used as a new bearish entry point.

FYI: The Point & Figure chart for FOSL is bearish with a $54 target.

- Suggested Positions -

Long Aug $60 PUT (FOSL1218T60) Entry $2.60
07/12/12 FOSL has produced a one-day bullish reversal pattern.

chart:

Entry on July 11 at $65.99
Earnings Date 08/07/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on July 10, 2012


Illinois Tool Works - ITW - close: 50.75 change: +0.71

Stop Loss: 51.65
Target(s): 45.50
Current Option Gain/Loss: -39.4%
Time Frame: exit prior to the July 24th earnings report
New Positions: see below

Comments:
07/14/12 update: ITW is seeing a short-term correction of the most recent drop that began on Tuesday. The close above the June 28th low near $50.35 is arguably short-term bullish. However, the stock should encounter resistance in the $51-52 zone. We have a stop loss at $51.65. More aggressive traders may want to put their stop above $52.00 instead. Wait for this bounce to roll over before launching new trades. Our target is $45.50 but we'll plan to exit prior to the July 24th earnings report.

- Suggested Positions -

Long Aug $50 PUT (ITW1218T50) Entry $1.90

07/12/12 triggered @ 49.75

chart:

Entry on July 12 at $49.75
Earnings Date 07/24/12 (confirmed)
Average Daily Volume = 3.4 million
Listed on July 11, 2012


J.C.Penney Co. - JCP - close: 20.02 change: -0.02

Stop Loss: 21.35
Target(s): 19.50, 15.50
Current Option Gain/Loss: +32.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
07/14/12 update: JCP continues to look weak as it hovers near the $20 level. The fact that shares did not bounce on Friday is a good sign for the bears. Readers may want to take profits now and re-start new positions on a bounce near $21.50ish.

Our first target is the 2010 lows near $19.50. Our second much more aggressive target is $15.50. FYI: The Point & Figure chart for JCP is bearish with a $7.00 target.

- Suggested Positions -

Long Aug $20 PUT (JCP1218T20) Entry $1.20

07/12/12 new stop loss @ 21.35
07/10/12 triggered @ 21.30

chart:

Entry on July 10 at $21.30
Earnings Date 08/08/12 (unconfirmed)
Average Daily Volume = 9.3 million
Listed on July 03, 2012


Sohu.com Inc. - SOHU - close: 38.99 change: -0.63

Stop Loss: 41.75
Target(s): 35.25
Current Option Gain/Loss: July40p: + 3.4% & Aug37.50p: +10.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
07/14/12 update: Friday was a good day for SOHU bears. The bounce reversed near resistance at $40.00. This looks like a new entry point for bearish positions.

We will want to keep our position size small to limit our risk because the most recent data listed short interest at 23% of the small 29.6 million-share float. FYI: The Point & Figure chart for SOHU is bearish with a $32 target.

*Small Positions* - Suggested Positions -

(July options expire after July 20th)
Long Jul $40 PUT (SOHU1221S40) entry $1.45

- or -

Long Aug $37.50 PUT (SOHU1218T37.5) entry $1.85

07/11/12 triggered @ 39.65

chart:

Entry on July 11 at $39.65
Earnings Date 07/30/12 (unconfirmed)
Average Daily Volume = 634 thousand
Listed on July 09, 2012


WABCO Holdings - WBC - close: 49.43 change: +0.84

Stop Loss: 50.05
Target(s): 44.00 & 41.00
Current Option Gain/Loss: -48.6%
Time Frame: exit prior to the July 27th earnings report
New Positions: see below

Comments:
07/14/12 update: WBC is really not cooperating with us. Thursday's breakdown to new relative lows quickly reversed higher. The bounce continued on Friday. I suggested readers to look for resistance near $50.00. So far that level is holding. Wait for this rebound to rollover before launching new positions.

We'll set our first target at $44.00 and our second target at $41.00.

- Suggested Positions -

Long Aug $45 put (WBC1218T45) Entry $1.85

07/12/12 triggered at $47.40

chart:

Entry on July 12 at $47.40
Earnings Date 07/27/12 (confirmed)
Average Daily Volume = 648 thousand
Listed on July 11, 2012


Weight Watchers Intl. - WTW - close: 49.64 change: -0.18

Stop Loss: 50.75
Target(s): 42.00
Current Option Gain/Loss: Jul47.50p: -81.8% & Aug45p: -32.8%
Time Frame: exit prior to the early August earnings report
New Positions: see below

Comments:
07/14/12 update: WTW's performance on Friday is encouraging if you're bearish. The market produced a big bounce and yet WTW struggled to get past resistance near $50.00. More conservative traders might want to adjust their stops toward Friday's high near $50.23. A failed rally near $50.00 could be used as a new bearish entry point.

FYI: The most recent data does list short interest at 10% of the small 26.6 million share float. That raises the risk of a short squeeze but lately the any short covering has failed at the 10 or 20-dma.

NOTE: July options expire after July 20th.

- Suggested Positions -

Long Jul $47.50 PUT (WTW1221S47.5) Entry $1.10

- or -

Long Aug $45 PUT (WTW1218T45) Entry $2.01

chart:

Entry on July 09 at $48.28
Earnings Date 08/02/12 (unconfirmed)
Average Daily Volume = 764 thousand
Listed on July 07, 2012


Youku Inc. - YOKU - close: 18.92 change: +0.42

Stop Loss: 21.25
Target(s): 16.00
Current Option Gain/Loss: +16.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
07/14/12 update: The oversold bounce in YOKU struggled with resistance near its May 21st low near $19.50. I don't see any changes from my prior comments. Shares should also have resistance near $20.00 and its 10-dma. Readers may want to adjust their stop loss closer to the $20 level. A failed rally near $20 or the 10-dma can be used as a new bearish entry point.

FYI: We want to keep our position size small because YOKU already has a high amount of short interest. The most recent data listed short interest at almost 19% of the 50.2 million share float and that raises the risk of a short squeeze higher.

*Small Positions* - Suggested Positions -

Long Aug $19 PUT (YOKU1218T19) Entry $1.55

07/10/12 triggered @ 19.90

chart:

Entry on July 10 at $19.90
Earnings Date 08/08/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on July 02, 2012