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Newsletter

Daily Newsletter, Saturday, 8/4/2012

Table of Contents

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

Market Wrap

Oversold to Overbought

by Jim Brown

Click here to email Jim Brown

Oversold conditions were met by new headlines from Europe and a stronger than expected payroll number resulting in yet another short squeeze.

Market Statistics

The Dow declined the first four days of the week with a total decline of nearly 200 points. Friday's short squeeze erased that loss in about 30 minutes and the Dow ended with a +20 point gain for the week. Four days of headline dodging ended with surprise headline on jobs that could not be ignored.

However, the S&P futures were already up +13 points when the payroll report was released. The futures spike was due to further headlines out of Europe suggesting the Mario Draghi announcement after the ECB meeting was actually more bullish than initially expected. I won't go into the details but essentially analysts are now expecting some real action from the ECB in the coming weeks.

After further review of the post meeting comments from various officials the EU could grant banking licenses to the EFSF and ESM in about three to four weeks. That would supersize those funds and allow them to greatly leverage their capital and enable far more firepower to be brought to bear as needed. Officials in Germany helped fuel the rally after making comments that seemed to suggest they would drop their objections to the ECB plan. That buoyed the markets overseas and lifted our futures ahead of the payroll report. Remember, Draghi said the ECB would do "whatever is necessary" to preserve the eurozone. He did not say he would do it "right now" but after the ECB meeting he promised changes in the "coming weeks." Time will tell if he is right.

The Nonfarm Payroll report for July showed +163,000 jobs added compared to estimates for a gain of +100,000 jobs. Prior numbers for May and June were also revised. May was revised +10,000 higher to a gain of +87,000. June was revised lower by -16,000 to a gain of only +64,000. Those revisions lowered the average job gain for the prior three months to +73,000. Odds are very good the July number will be revised as well.

This was the largest jobs gain since February but there were some negatives as well. The unemployment rate rose by a tenth of a point to 8.3% because the separate Household Survey showed a loss of -195,000 jobs in July. More people joined the labor force and drove the labor participation rate down a tenth to 63.7%. An average of 150,000 new workers are added to the labor pool every month from immigration and graduations.

Analysts were quick to point out that the report included normal seasonal adjustments for automakers shutting down to retool for the new models, which they normally do in July. That did not happen this year as regularly scheduled so the adjustment actually added as many as 20,000 jobs to the total that really don't exist. Those will be revised out at a later date.

Education and healthcare normally adds about 20,000 to 30,000 jobs per month. In June they only added 6,000 ahead of the Supreme Court ruling on healthcare. In July the number of those jobs added spiked to 38,000, which inflated the July headline number. The sudden spurt suggests the hiring delayed by the verdict was accelerated after the verdict and there will probably not be an equivalent addition in August.

Analysts agree that August hiring will probably drop back to the 100,000-120,000 range once all the adjustments and onetime events are removed.

Nonfarm Payroll Chart

There was a lot of speculation on Friday that the jump in payrolls will keep the Fed on hold until at least the mid September FOMC meeting. I am in agreement with that consensus. I did not believe the Fed was going to act. I reported last week that "some analysts believe the Fed could act as soon as Friday" or possibly delay until Monday if the Jobs report was ugly. I believe they could have been induced to act if jobs had been negative. However, I believe it will take overwhelming evidence the economy is worsening before the Fed acts this close to an election.

I think Bernanke will try to talk the equity markets up and interest rates down when he speaks at the Fed's Jackson Hole conference on August 31st. He used that speech in 2010 to tell the markets that QE was coming. He can use it again to telegraph future moves later this year if needed. With the FOMC meeting two weeks after the Jackson Hole speech there will be high anxiety surrounding that meeting if he "suggests" policy is about to change.

The Monster Employment Index did not reflect the same jobs bullishness as the Nonfarm Payrolls. The index, released on Friday, saw the headline number fall from 153 to 147 for July, a decrease of -3.9%. The index tracks the number of online help-wanted ads. Job ads always decline in the summer because of vacations so this report was ignored.

Moody's MEI Chart

Another positive report on Friday was the ISM Nonmanufacturing Index. The headline number rose slightly to 52.6 from 52.1. Analysts had expected it to be either flat or down. The new orders component rose a point to 54.3 but employment declined -3 points to 49.5 and into contraction territory. Backlogs declined -3 points to 44.5 and well into contraction territory as well. Backorders have fallen -8.5 points in just the last two months. The overall business activity component surged from 51.7 to 57.2 and possibly suggesting the index will rise again in August.

The ISM Manufacturing report from earlier last week was 49.8 and the second month in contraction territory. Services had been doing better but with auto sales declining the service business could suffer in the month ahead.

ISM Services Chart

The economic calendar last week contained some major events creating volatility in the markets but the major indexes ended flat on the week. The economic calendar for next week has nothing of importance to attract attention of traders. There is nothing on the list that I could highlight as a material event.

That means traders will be left to trade on headlines out of Europe and the slowing frequency and quality of Q2 earnings reports. That suggests stock fundamentals are going to rise to the surface again and those have not been too favorable in recent weeks.

Economic Calendar

The Q2 earnings cycle will begin to wind down next week as the majority of companies have already reported. So far in the cycle 67% have beaten on earnings and 60% have missed on revenue. More than 64% have warned on future guidance. That is not a glowing recommendation to buy stocks next week.

August has been the weakest month for the S&P over the last 20 years. Volume is going to decline even further as the summer vacation season comes to a close. Traders who have not yet squeezed in that family vacation will have only a couple weeks left before the kids are forced to pick up the schoolbooks again in late August.

Volume on Friday, with a +250 point Dow intraday move, was only 6.3 billion shares. That was on a major market move where millions of stop losses were hit and shorts forced to cover. This is very weak volume for that kind of move. Up volume was 5:1 over down volume for obvious reasons. It was a monster short squeeze just like the nine others we have seen since June 6th. If it were not for the short squeezes we would have had no upward movement in the market. That makes a pretty strong case for contrarian investing after 4-5 days of losses.

One stock that will be praying for a massive short squeeze will be Knight Capital Group (KCG). Knight is one of the largest market makers in the business. Knight cleared an average of $19.5 billion in equities every day in June. They averaged clearing 711 million shares every day.

A software error on Wednesday morning caused their computers to spew out erroneous orders for about 45 minutes before the program was halted. About 140 symbols were impacted but trades were only canceled for less than a dozen. Knight has to cough up $440 million to cover the bad trades. This compares to a net income for Knight of $115 million for all of 2011. Knight was forced to ask Goldman Sachs (GS) to bail them out of the Wednesday disaster and buy them out of all the positions they accidentally accumulated. Knight has until August 6th to complete payment for all of those transactions. Goldman has contracted with Knight to assume those liabilities and fund the shortfall. (Info based on multiple reports but still unconfirmed) Knight confirmed on Friday they had secured a short term credit line to keep them running through Friday.

Multiple names were being rumored as possible new partners or acquirers of Knight Capital. Ameritrade, Citadel and even Goldman were mentioned as well as several private equity firms. Goldman has $375 million in Knight bonds that just imploded so they have a vested interest in seeing the company succeed. In the past Knight's market cap was as high as $4.8 billion in 2000. Last week it was $1 billion and on Thursday it was $330 million and less than the amount they owed on the trades. Late Friday it was rumored that bond trading firm Cantor Fitzgerald or Jefferies Group could be the new owners or partners on Monday.

Knight shares fell from $10.38 at Wednesday's open to $1.85 late Thursday and losing 82% of their value. They rebounded 56% on Friday but that was 56% from a much lower level to only get them back to $4. So, what do you think that programmer will put on his resume when looking for his next job?

Knight Capital Chart

Earnings are still a focus with some companies posting results that surprise investors. EOG Resources (formerly Enron Oil and Gas) spiked 11% on Friday after posting earnings of $1.16 a rise of +34% and beating consensus estimates by 24 cents. EOG increased liquids production 52% in Q2 and they raised their full year guidance for +9% production growth. The company said it was going to drill 30 more wells this year than initially planned to bring the total to 330 and do it with 4 less rigs thanks to increased efficiencies. The company bragged on its Eagle Ford wells that produced 103,000 boe/pd in Q2 saying the Eagle Ford may be the largest North American oil discovery in the last 40 years. EOG shares rallied +11% on the news.

EOG Chart

Facebook did something unusual on Friday. Its shares actually posted a gain for the day. After trading below $20 on Thursday the market short squeeze rubbed off on Facebook and the shares were up +$2 at one point before closing with a gain of +1.05. Sellers were quick to pounce on that bounce with analysts beating up the stock on a daily basis. Mark Hulbert was on CNBC reiterating his price target of $13.80 based on a variety of factors including the 268 million shares coming to market on August 15th. Hulbert is not the only one with a low target price. There are plenty of detractors for Facebook today.

We also found out last week that as many as 85 million Facebook accounts are bogus. That suggests their growth numbers for new accounts could be misleading.

Facebook Chart

The Nasdaq (NDAQ) warned late Friday that is expects to be hit by "significant additional expenses" from the Facebook IPO problems. Additional costs from nine lawsuits and costs associated with implementing technical changes would lead to the expenses. Nasdaq has put aside $62 million to cover its voluntary reimbursement program. The company remains adamant that the suits are "meritless" and refuses to put aside any legal reserves for the suits. The Nasdaq CEO said the $62 million voluntary reimbursement program is the company's "final offer." Good luck with that line of thought Mr. Greifeld.

Nasdaq Chart

Jefferies Group has reportedly confirmed from a number of sources that Apple will hold an announcement event on September 12th. Jefferies believes this will be the iPhone 5 announcement with deliveries beginning almost immediately. Jefferies believes an iTV and iPad Mini announcement will be held at a later date. Jefferies has a $800 price target on Apple. Remember, Apple normally rallies into these events and then declines immediately after in a sell the news bout of profit taking. Whether that will happen this time remains to be seen.

Apple Chart

The two charts below are not some psychological brain teaser. The top one is the Euro with a whopping +1.61% gain on Friday. The bottom is the dollar index and a -1.2% decline. These are monumental moves for currency traders representing many thousands of dollars per contract. The Euro rallied on expectations the ECB could reactivate its program to buy bonds of peripheral countries to drive rates lower. It was a double whammy for currency traders. I hope you were long the euro and short the dollar and not the opposite.

Euro Chart

Dollar Index Chart

The rapidly crashing dollar plus the better than expected jobs sent crude prices roaring higher to the tune of a +5% gain. That is a monster move that I am sure had plenty to do with shorts getting crushed in the futures. The WTI contract settled at $91.39 and above the $90 resistance from the last two weeks. The Brent contract only rallied +2.6% but that was enough to push it to a new two month high at $108.71. Energy equities were soaring along with crude.

WTI Crude Chart

Brent Crude Chart

Gold rallied +1% but remained stuck in its recent congestion range under $1630. Gold has lost its luster recently as the safe haven investment because the U.S. continues to muddle along at around 2% GDP as Europe continues to kick the can down the road and it appears most days that they will resolve their problems. Obviously appearances can be deceiving but until the next major liquidity event arrives gold is probably stuck in a rut between $1550-$1630.

Gold Chart

Gold Chart - Weekly

Late on Friday AIG was halted for trading, news pending. The Treasury Dept said it was going to sell 163.9 million shares of AIG in a public offering for $30.50 each ($5 billion). Underwriters have the option to buy 24.6 million additional shares for over-allotments. The Treasury Dept currently owns 61% of AIG, down from 92% at the end of the financial crisis. This offering will reduce the government stake to 55%. AIG is still the biggest holding of the TARP program. Immediately after the announcement AIG said it would buy $3.0 billion of those shares in the offering. The government said it would like to be a minority shareholder by year end. AIG shares closed at $31.35.

AIG Chart

Bill Gross, head of Pimco, made news last week saying that stocks are dead as an investment vehicle. He wrote "The cult of equity is dying. Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors impressions of 'stocks for the long run' or any run have mellowed as well." Gross added his name to a growing list that believe stocks as an asset class are fading. The global economic problems may be impacting them now but the real challenge is the aging of the baby boomers. As they approach retirement they are less and less acceptable to risk and will continue moving investments from stocks to bonds for the long term. They can't afford any additional 50% bear markets like we saw in the Great Recession. Time is not on their side.

David Rosenberg, economist and strategist at Gluskin Sheff, said on Monday "the equity cult is nearly over." The common terminology comes from Wharton professor Jeremy Siegel. He has used that term over the last 20 years to promote his believe in consistent returns in stocks over the long haul.

For whatever reason investors pulled $9.4 billion out of equities in the week ended on Wednesday and piled that money into high yield bond funds. TrimTabs.com CEO, Charles Biderman, went 100% bearish this week saying the Black Swan is aloft and ready to kill the Bernanke put. Biderman is an economic bear and pointed out that the government spends $100 billion a month more than it takes in and borrows the difference and eventually this debt is going to kill the stock market. Biderman Video

While I am posting links this is an interesting letter from Jeremy Grantham on the growing global crisis of food and water. Have your kids and grandkids read this. Welcome to Dystopia

The equity markets did not rally +200 Dow points on the nonfarm payroll numbers. The S&P futures were flat with Thursday's close until 2:AM Friday morning and the European markets began to rally on additional comments about the Draghi proposals. High officials in Germany suddenly started warming up to the idea of bond buying by the ECB and possibly a banking license for the bailout funds. It also appeared that Spain may be considering an official request for a bailout. Why that would be bullish I don't know but yields for sovereign debt in Europe began to fall rapidly and equities moved higher. That was translated into the S&P futures and they were up +13 points before the Nonfarm Payrolls were even released.

Investors were already in for a giant short squeeze and the positive payroll report only increased that anxiety to get out of short positions immediately at any cost.

S&P Futures - Intraday Chart

The S&P rallied to resistance at 1392 and failed. There was a short spike to 1394 but it was quickly sold, twice. The initial intraday high was at 12:00 and each succeeding peak was a lower high with a sharp sell off at the close. I guess "sharp" is relative since the S&P gained +26 points and closed only -4 points off its highs.

Intraday support appeared at 1389 and we are a long way above that 100-day average at 1359 that has been a factor several times recently. That was support on Thursday's decline and I am sure it will be a speed bump again if we have another sell off.

The next resistance level is 1406 followed by 1422.

S&P Intraday Chart

S&P Chart - Daily

The Dow returned to the scene of the crime from the prior Friday when the short squeeze lost traction at 13,125. That level also proved to be troublesome on the second try and the index is setup for a potential decline again next week.

If the Dow does move over 13,125 it would trigger additional technical buying that would probably take us to a retest of 13,300.

Dow 12,800 is initial support.

Dow Chart - 30 Min

Dow Chart - Daily

The Nasdaq rallied +2% to a screeching halt at the 61% Fib retracement level for the third time since early July. This has proved to be a major resistance level at 2,978. The next test would be 3,000 if this level breaks. Near term support is 2,900 but that is a good two days away even if the selling was moderate.

Nasdaq Winners and Sinners

Nasdaq Chart - Daily

The Russell 2000 small caps rallied +2.6% BUT they are still well below the other indexes in relative position. The Dow and S&P are trying to break out to new highs and the Russell is stuck at the 50% retracement level at 788. The small caps are telling us that the rally has no legs. The strong rebound in the Russell came from Thursday's close below 770 and very close to a five week low.

The Russell was the most heavily shorted index so it rebounded the most in percentage terms but remains weak overall.

Russell Chart - Daily

The Dow Transports are not confirming the rebound as a bullish event. Like the Russell they are seriously lagging and if it were not for short covering there would have been no rally at all. The Transports hit a critical intraday low on Thursday at 4950 before rebounding. Note the series of lower highs on the chart since early July. This is bearish.

Dow Transport Chart

Last weekend I said we would probably finish this week lower unless we got a sharply higher payroll number. I was close and as of Thursday night the prediction was on track. We did get the higher payrolls but that was not the key to the short squeeze. It was the changing outlook in Europe so I was close but not quite right.

I also said my bearish outlook was clouding my judgment. This week the facts are clouding my judgment. Disregarding the payroll numbers the economics are still weak. Europe is still lacking a plan and is very short on action. By all rights the markets should be weak. August is historically the weakest month of the year over the last 20 years.

HOWEVER, yes all caps, I am very close to an about face. When the markets refuse to acknowledge the facts we should always go with the market. I have been bearish on every bounce for the last month. Sell offs always occurred but they were followed by higher highs and higher lows. Cleverly hiding behind the poor earnings and weak economics was a market that did not want to go down. Traders and analysts are trying to push it down but they have been unsuccessful.

When in doubt follow the trend. The trend here may be hard to see but it is up. After a lot of soul searching I am applying the law of election dynamics to the current trend. This is an election year. Despite the negative economics and earnings we have a positive market where none should exist. It may be time to quit selling the rips and buy the dips.

I do NOT think the market is going to go straight up. I believe it will remain volatile and hostage to the headlines but as long as we keep making higher lows we should just plan on buying those lows. If we move higher on Monday then I would expect a temporary failure at 1406 on the S&P and eventually another dip to buy.

Since I am trading my fur coat for a pair of horns the market is sure to tank next week. I welcome any decline because it gives me a chance to test my theory. I would like to see one more decent bout of selling that ended in the 1330 range or above.

Last Monday was the ninth consecutive Monday the market posted a loss. Will this Monday make it ten in a row? The odds are good given the monster squeeze. What happens the rest of the week is up to the headlines.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

"Even if you’re on the right track, you’ll get run over if you just sit there."
Will Rogers


Index Wrap

Chart Breakouts

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

There were breakouts above some key prior tops (not yet 12-month highs) in the S&P and Nasdaq and the overall but gradual advance continues. The S&P is now up 9% from its early-June bottom and for the year. As a colorful former Merrill Lynch colleague would say: "Hey, 9%, better than a kick in the head!"

There's no particular chart other than the usual daily charts I feature below that is especially striking or telling. Clear cut moves above prior highs are especially apparent in the S&P 500 (SPX), the big-cap S&P 100 (OEX) and the Nasdaq 100 (NDX). The other major indexes are following along with the small to mid-cap Russell 2000 (RUT) just barely maintaining its up trendline. The Nasdaq Composite (COMP) finally poked its head above its March-May-July down trendline, but hasn't yet also cleared a line of prior highs in the 2976 area.

While none of the major indexes had fallen under prior downswing lows, the upside had been lacking in that prior swing highs from early-May hadn't been pierced. OEX finally managed to move to a new closing high above its peak Close of May 1st. Hard to predict if this is a harbinger of the Market making decisive new 12-month highs. When Europe groans again we should better see how much further the current advance will get.

I remain bullish but consider playing the further upside in August to have increasing risk given an approach to overbought readings on an intermediate-term basis. Currently, the market is nearing another short-term overbought condition but isn't there yet. There isn't sufficient bullishness to propel this market to any major extremes yet.

As I've been showing for some weeks now, short-term 21-HOUR indicator extremes have been coinciding with upside or downside price reversals. Buying pullbacks to hourly oversold RSI readings have been profitable but so have several high RSI extremes marked points for profitable short-term bearish plays. The LAST instance of a 21-hour high reading in the 70 area led to less of a pullback than in prior instances of such overbought extremes; e.g., 27 points in SPX from peak to trough.

Of course, maintaining bullish positions from the early-June lows have kept traders on the side of the intermediate uptrend. It's just been slow going and required some longer-term strategies.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

I wrote last week that the S&P 500 "could see a possibly touch to 1400 but a short-term retreat looks 'due'." The retreat came first, a decline to the 1355 area and a touch to the higher and prior up trendline I was working with; the rally toward 1400 came later. Price action was bullish with the move to a new high for the current move.

I don't anticipate a move higher than to the 1420 area in the coming week (or two). It's unlikely SPX will fall below 1360 but the uptrend looks intact even if there's another decline to the low-1340 area again, assuming support develops there.

Near support comes in at 1380, near resistance in the 1400 area, extending to 1420. Yet to come is a challenge to the early-May Closing high around 1406 and an intraday high at 1415. There's potential for SPX to challenge these prior highs or a bit above; e.g., to the 1419 Closing high of early-April.

A Close below 1360 turns the near-term chart picture bearish. Bullish sentiment picked up on Friday with an increase in equities call volume. Another shot higher such as with closes in the 1400-1420 area would result finally in a likely 'overbought' Relative Strength Index (RSI) extreme. Such a move doesn't mean a short 'signal' but there is the danger of a double top that could dominate near-term. I don't like situations where the Market is so captive to events outside the U.S. It's hard enough to figure what the US Fed will do. With the ECB, furgetabotit!

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart was bullish coming into this past week and more so by Friday. I didn't think (last week) that OEX would pierce prior Closing highs at 638 or 645. I could see the danger of another pullback, in this case to support implied by the 21-day moving average. And of course OEX did then go on to close above its May 1 638 Closing high. If any index was going to surmount May highs, it would likely be the big cap S&P 100.

Money managers go with the mainstream biggest stocks when there's such uncertainty as we've had as to how much U.S. growth we'd see. Better than expected employment figures surprised the Market. As much as I DON'T lie awake thinking about such things, I thought better job numbers could come again but I'm a believer in probabilities. Spring growth, summer slowdown, time for a change.

Potential resistance looks like 643, extending to 645-646 or perhaps to 650. I assess major resistance as beginning around 680. I wouldn't take this as an objective just yet. The overall uptrend since the June low in the 580 area is impressive, even with whippy 2-sided price swings. On the other hand, an approach to a high for the year to date, especially accompanied by an overbought RSI, carries high risk for corrective action.

After any new highs or even from the area of Friday's closing level at 640, OEX could be vulnerable to a pullback to the 626-620 support area. Next key lower support has to be assumed as at the prior intraday lows at 616 to 609.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) Average is bullish in its pattern but there's also a cluster of prior highs in the 13100 area that INDU needs to overcome to suggest a next up leg. Next resistance above the very near-term 13100 level looks like 13200, extending to 13280-13300.

I wrote last time that a "bullish chart is well maintained if there is a pullback to around 12950, with subsequent lows mostly above it." Pretty much this was the price action with an intraday low at 12800, followed by a Close at 12878 but a next day close well above that near 13100.

I've highlighted near support at 12800, then at the current intersection of the up trendline at 12725. 12600 is next support.

It's still mostly the same Dow stocks driving the Average higher; especially the following 11: CVX, DIS, GE, HD, KFT, KO, MRK, PFE, T, VZ, and WMT. As long as most other Dow stocks are marking time and not falling forever like HPQ, a strong 10-11 of the INDU will drive the Average higher. More solidly bullish would be 15 very strong Dow stocks and 5 drifting higher. Still, the 11 mentioned could take INDU to the 13300 region. Stay tuned on that!

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

Last week I wrote about the Nasdaq Composite (COMP) being at a 'crossroads' in terms of its chart. I was seeing what would likely be tough resistance at COMP's well-defined down trendline. In a bullish plus COMP rallied above this down trendline but a stronger 'breakout' move would come next if the Index pierces the line of prior highs in the 2976 area; resistance also extends to the prior intraday high at 2988 and then most definitely at the important 3000 level.

A Close above 3000 that was mostly maintained in subsequent days would be a strong bullish development and suggest another up leg that could carry to the 3060 to 3085 price zone, perhaps to a challenge of 3100.

They used to talk about the 'dogs of the Dow' when there were a few that were seriously lagging the rest of the Dow Average. We could coin a new term and say that there are too many 'dogs of the Composite' these days. The big cap NDX is definitely where the action is these days.

Near support is suggested at 2950, then at 2880, extending to 2850. A Close below 2850, certainly one not reversed quickly the subsequent day(s) would turn the chart bearish.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) Index remains bullish and has gone into a bullish 'overdrive' so to speak with its decisive upside penetration of its line of prior highs in the 2660 area. Look for 2660 to form an initial support if this recent breakout move in NDX is a valid one. Next resistance for NDX looks like 2700, extending to 2725 or a bit higher such to the 2750 area.

Nasdaq bellwether Apple Computer (AAPL) has been struggling to break out above recent congestion and has resistance at 627-630. A weekly AAPL close above 630 would likely mean that NDX was in a next up leg.

I wrote last week that the "key to a new up leg is the ability for NDX to pierce its line of prior highs at 2660." I'd still say the same about next key resistance then coming in around 2700. The 2700 area is currently at my upper 3 percent envelope line; i.e., a line that 'floats' 3% above a centered 21-day moving average. A move to or much above this upper envelope line suggests that an index is extended well above its mean, which I represent as the 21-day average in the major indexes. This is especially so in a market like this that's been having numerous wide-swinging moves both up and down.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) broke out above a line of resistance at 65.2, action which tends to 'confirm' the dominant uptrend. Very near support is suggested at this same level, 65.2, as resistance once penetrated is presumed to 'become' subsequent support. Next lower support comes in at 64, with trendline support suggested at 63.2 currently.

I estimate overhead resistance at 66.2, extending to 67 at the upper channel boundary. Volume remains on the low side but volume on QQQ advances doesn't tend to expand as is the typical case with an individual company stock that is rallying.

I see upside as somewhat limited near-term, perhaps to 67 or a bit higher such as to a challenge of the 67.2 May Closing high.

RUSSELL 2000 (RUT); DAILY CHART:

It's again the this week that the Russell 2000 (RUT) barely remains within its broad uptrend channel. This is the picture even with the strong rally with the other major indexes. RUT still appears to be finding resistance at its 21-day moving average. Immediate resistance is therefore suggested at 790, then at 800. RUT would do very well to rally to the 810 area, where I've highlighted resistance on my RUT daily chart below. Major resistance begins around 820.

There was one dip to below the uptrend price channel I've constructed on Thursday. Because the Index regained its up trendline so quickly, this trendline still marks key near support at 775 with next lower support coming around 767, extending to 760.

I noted last week that if technical support at 775-770 gave way, 750 would become a possible lower target. I'd say that's still true if RUT dipped under 775 for more than a day, but 760 would become my 'maximum' current downside objective at least near-term.



GOOD TRADING SUCCESS!


New Option Plays

Eating From the Apple Tree

by Jim Brown

Click here to email Jim Brown
Adam may have suffered from his bite of the apple but investors can profit from the growth of that tree.

Editor's Note:

Apple (AAPL) shares traded at $615 on Friday. Apple options are way too expensive for most traders to use for speculation. How do we solve this problem and profit from the Apple product revolution?

Instead of buying Apple directly we buy the component suppliers that make Apple products so successful. Today I am recommending Qualcomm and Broadcom. The reason I am doubling up on the Apple derivatives is the pending announcement of the iPhone 5 or whatever they are going to call it.

Jefferies Group claims they have confirmed from multiple sources that Apple will soon announce a product event on September 12th that will be the iPhone 5 introduction. Whenever Apple is heading into a major product event the stock rises along with the stock of all the component manufacturers. We want to ride that wave into the iPhone 5 announcement.

At the same time Facebook is likely to go in the opposite direction. Friday's short squeeze was just that a squeeze, not a sudden desire to own FB. Price targets are dropping almost daily and shares of FB should decline into the mid teens before the next share lockup on August 15th.

Lastly, we were stopped out on the Russell 2000 ETF put on Friday's short squeeze. I believe that squeeze will fail to attract any follow on buying and I am putting the IWM put back into play.

However, as I said in my Option Investor commentary I am on the verge of turning bullish rather than expecting a normal Aug-Oct decline. The market refuses to go down and every dip is bought. The next dip will be critical. If we see another higher low then it will be time to move into dip buying mode rather than selling the bounces.

James is on vacation this week.


NEW DIRECTIONAL CALL PLAYS

Qualcomm - QCOM - close: 60.24 change: +1.36

Stop Loss: 57.75
Target(s): 64.50
Time Frame: 4-6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Qualcomm is riding a wave of success with the Apple iPhone products. While Apple saw sales slow in Q2 they are currently ramping up for new deliveries of the iPhone 5 in late September.

Jefferies has confirmed that Apple will hold an announcement event on Sept 12th and they believe it will be the iPhone 5.

Qualcomm executives met with representatives of Goldman Sachs last week and the results were positive. Goldman reiterated a buy rating on the stock with a price target of $71. Analyst Simona Jankowski said the meeting reaffirmed her view that QCOM is the favorite stock in the commtech group.

Qualcomm believes that the extended handset replacement cycle in mature markets like North America and Western Europe over the last two quarters (replacements declined) will likely prove temporary rather than structural, as consumers hold out for the strong Q4 line-up and carriers save their subsidy money for the Q4 launches.

QCOM reported earnings with a 28% increase in revenue but warned that the current quarter would be slower. However, they also guided estimates much higher for Q4. Research firm iSuppli, said Apple is increasing chip orders by 15% and QCOM is supplying chips for other makers as well with new devices coming out in Q4.

Apple is set to have record Q4 sales of the iPhone 5 with many new features including 4G communication.

Qualcomm also just announced a new tablet carrying their new "Pro" version of the Snapdragon S4 quad-core chip.

I believe QCOM is the way to play Apple without paying $600 a share for stock.

After Friday's short squeeze I am suggesting we try to buy QCOM on a dip to $59.50. However, if we do get a breakout over the 100-day average at $60.50 I would suggest we enter the trade.

Trigger: Enter with a QCOM trade at $59.50 or a breakout over the 100-day at $60.50.

- Suggested Positions -

Position: Buy Oct $62.50 Call (QCOM1222J62.5), currently $1.62
QCOM Chart

Entry on UNOPENED xx at $ xx.xx
Average Daily Volume = 1.5 million
Listed on Aug 4, 2012


BRCM - Broadcom - close: 34.01 change: +.56

Stop Loss: 32.50
Target(s): 38.50
Time Frame: 4-6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Broadcom is a supplier to Apple and like Qualcomm it should have a very strong Q4 as deliveries of iPhones and smartphones from other manufacturers make Q4 the largest quarter in history for smartphone sales.

Broadcom saw earnings decline -9.7% in Q2 as a result of slowing iPhone sales during a lull in the replacement cycle. However, gross profit margins were 52.5% which are very strong. This should mean the Q3/Q4 earnings will be strong because chips for the next cycle of phones are currently in production in order for Apple and others to deliver their phones in October, or even late September as some analysts predict.

Shares of BRCM declined to $29 after the Apple earnings miss but have rebounded strongly in the three weeks since. Shares have consolidated under $34 for the last eight days and could be about ready to breakout to higher ground. The 100, 200 and 300 day averages all converge at that mid $34 level so a breakout could be strong.

I am recommending a November $36 call because the next closest strike is September and I think that is too short. I am currently profiling a breakout entry but should we get another market decline next week I would suggest revising it to a buy the dip entry. However, BRCM did NOT decline last week with the broader market. That suggests holders are locked in for the next Apple rally.

Trigger: Enter only with a BRCM trade at $34.75

- Suggested Positions -

Position: Buy Nov $36.00 Call (BRCM1217K36), currently $2.06
BRCM Chart

Entry on UNOPENED xx at $ xx.xx
Average Daily Volume = 10 million
Earnings Oct-23rd
Listed on Aug 4, 2012


NEW DIRECTIONAL PUT PLAYS

FB - Facebook - close: 21.09 change: +1.05

Stop Loss: 23.25
Target(s): 17.00
Time Frame: 2-4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Facebook has turned into the stock everyone loves to hate. After they reported earnings the prior week the shares had declined from $29 to less than $20 on Thursday. The market short squeeze on Friday spiked FB back to $22 but it was quickly sold to close at $21. I believe this is an opportunity to launch a new short play.

Facebook has 674 million shares outstanding as of Friday. On August 15th another 268 million shares will see their lockup expire and become available for trading. That is 40% additional shares.

If you were an investor or employee and you watched your shares decline from $35 to $20 ahead of your lockup expiration you are probably just waiting for an opportunity to sell.

Another factor is that taxes are due on the awarded shares regardless of whether they are sold. That means employees have a big tax bill and they have not been able to sell those shares to pay the taxes. That is an additional incentive to pull the trigger on at least part of their position on August 15th.

Facebook has hundreds of detractors and they seem to be racing each other trying to put a lower price target on the stock. Mark Hulbert was on CNBC on Friday with a $13.80 price target based on a bunch of different metrics.

Facebook also has the various lawsuits over the IPO including the valuation and the various claims made about users and revenue in the days leading up to the IPO. There are plenty of clouds and no real catalysts to pump up the stock.

Facebook said expenses grew by 60% in Q2 and they would grow faster in Q3/Q4. That means earnings will decline.

I am recommending a September option with plans to exit after the August 15th share expiration.

The target is a decline to $17.

Entry Trigger: FB shares must be negative to open the trade.

Positions

Buy Sept $20 PUT (FB1220U20) currently $1.60
FB Chart

Entry on Unopened XX at $ XX.XX
Average Daily Volume = 80.0 million
Listed on August 5, 2012


iShares Russell 2000 ETF - IWM - close: 78.61 change: +1.83

Stop Loss: 81.25
Target(s): 75.75
Time Frame: 2-4 weeks
New Positions: Yes, see below

ETF Description

8/4/12 Update
We were stopped out of the IWM put from last week on the monster short squeeze on Friday. The Russell failed to reach the same heights as the prior Friday squeeze but I had the stop too close going into this Friday. Who knew there would be a +250 point intraday Dow rally?

I am reinitiating the IWM put because I think the short squeeze gains are unsustainable. The Russell has the worst chart of the major indexes and has rebounded the least on a relative basis. If we don't get any bullish follow through on Monday then I think we will retest Thursday's lows.

You can read the prior play description HERE

The target is a decline to the June support at $75.

Trigger: IWM trade at $78.45

Positions

Buy Oct $78 PUT (IWM1220V78) currently $3.07
IWM Chart

Entry on Unopened XX at $ XX.XX
Average Daily Volume = 60.0 million
Listed on August 5, 2012


In Play Updates and Reviews

Another Friday Squeeze

by Jim Brown

Click here to email Jim Brown
Two Friday's in a row have produced major short squeezes on headlines out of Europe.

Editor's Note:

The short squeeze began at 2:AM Friday morning when the European markets rallied on comments from some German officials that appeared to support bond buying by the ECB. S&P futures were up +13 before the stronger numbers in the payroll report were released. This was a double whammy for shorts and the Dow spiked +250 points intraday.

The IWM put play that was looking so good on Thursday night with the Russell 2000 about to break to five week lows, was stopped out on the spike. In retrospect I had the stop loss to close at 78.50 but because it was close we only lost a few cents on the exit. The IWM spiked +3 points from the Thursday low.

I reinstated that IWM play for Monday.

The URI put play was also stopped. Basically anything that was heavily shorted saw a giant squeeze. There was no news on the stock.

The Mosaic trade remains unopened and although shares spiked higher from the Thursday decline they closed well off the highs. If there is no improvement in the outlook on Monday I will drop Mosaic as a potential trade.

The HCN play was closed at the open as planned ahead of earnings. That happened to be the high of the day so that worked out well.

Akamai rebounded slightly but came to a dead stop at prior resistance so I think our chances improved on that position.

The economic calendar is very slim this week so we will be hostage to the European headlines for at least one more week.

Current Portfolio:


CALL Play Updates

Hess Corp. - HES - close: 47.71 change: +1.19

Stop Loss: 45.35
Target(s): 49.85
Time Frame: 3 to 6 weeks
New Positions: see below

08/04/12 update:
Hess rallied on the $4 short squeeze in oil. Nice gain but we still need to see a move over 48.50 to trigger new buying.

- Suggested Positions -

Long AUG $47.50 call (HES1218H47.5) Entry $1.05

- or -

Long SEP $47.50 call (HES1222I47.5) Entry $2.02
07/26/12 triggered on gap open higher at $46.65

HESS Chart

Entry on July 26 at $46.65
Earnings Date 07/25/12
Average Daily Volume = 4.3 million
Listed on July 25, 2012


Mosaic - MOS - close: 57.97 change: -.14

Stop Loss: 57.50 (Unopened)
Target(s): 67.00
Time Frame: 4-6 weeks
New Positions: Yes, see below

Company Description

Update 8/04/12
The Mosaic trade remains unopened and although shares spiked higher from the Thursday decline they closed well off the highs. If there is no improvement in the outlook on Monday I will drop Mosaic as a potential trade.

Why We Like It:
Mosaic is a fertilizer stock and its products are in high demand in normal growing seasons. This year we are experiencing a major drought that could impact crop yields dramatically and farmers are already plowing under corn fields and soybeans.

According to Citibank analyst PJ Juvekar the last two times in recent history when we had severe droughts (1983, 1988) the demand for fertilizer actually rose by +8% for phosphate and +2% for potash. Not being a farmer I can't tell you why but those are the facts.

Juvekar said Citi now prefers Mosaic to Potash (POT) over the next 12 months and sees a near term target of $66. MOS closed at $58 on Wednesday. The company has $3.8 billion in cash that could be used for share buybacks.

I have been watching MOS for a breakout to play it in another publication. There is strong resistance at $59.75 but I believe a positive market such as we might see from new ECB action will send buyers into Mosaic stock.

Shares have not declined since their earnings in mid July. Despite the bad market last week they held their gains. This underlying bullishness suggests a positive market could break through that resistance.

All the reasoning I have given above supports a longer term play than is normally suggested in these pages. However, I believe investors are looking at longer term fundamentals as they shop for stocks that can rebound in the next market move higher. Secondly I believe they will see the underlying strength in Mosaic as a position of safety in an unstable market. Mosaic just declared a 25 cent dividend and that attracts longer term buyers.

Trigger: Enter only with an MOS trade at $60.25

- Suggested Positions -

Position: Long Sept $62.50 Call (MOS1222I62.5), currently $1.62
MOS Chart

Entry on UNOPENED xx at $ xx.xx
Average Daily Volume = 3.0 million
Listed on Aug 1, 2012


Dollar Tree - DLTR - close: 50.63 change: +.62

Stop Loss: 49.50
Target(s): 54.50
Time Frame: 3-4 weeks
New Positions: Yes, see below

Company Description

Update 8/04/12
DLTR gapped open to $51.42 at the open. Our entry trigger was $51.25 so the gap triggered the entry into the play with the option at $1.90. Now we need to see some follow through on the short squeeze.

Why We Like It:
Dollar Tree is a dollar store. In these times of economic stress and high unemployment consumers are always looking for a way to stretch their dollars. Shopping at a store like Dollar Tree is a great way to save with items priced 35% to 50% below normal retail in a regular store.

Dollar Tree has a profit margin of 7.39% overall compared to Wal-Mart at 3.68%, Target at 4.68% and Costco at 1.73%. The downside is that Dollar Tree does not have all products all the time. Consumers have learned to live with that limitation.

We saw consumer sentiment decline in July to the lows of the year and the risk of recession rose to the highs for the year. This makes the dollar stores even more attractive.

With the market in turmoil and no solid trend institutions will be looking for solid, under loved, companies for their investable cash. Dollar Tree has 45% institutional ownership with only a 2.74% float.

DLTR has limited exposure to Europe or to currency conversion issues currently impacting international companies. They recently split the stock 2:1 on June 26th and companies that split normally regain the prior price ($110) within 12 months. That rebound has not yet appeared.

The 100-day average has been strong support since early 2011.

Trigger: $51.25 hit on August 3rd.

- Suggested Positions -

Position: Long Sept $52.50 Call (DLTR1222I52.5) @ $1.90
DLTR Chart

Entry on Aug 3rd at $ 51.42 (gap open)
Average Daily Volume = 1.5 million
Listed on Aug 2, 2012


PUT Play Updates

Akamai Technologies - AKAM - close: 35.47 change: +.79

Stop Loss: 36.75
Target(s): 32.00
Time Frame: 2-4 weeks
New Positions: Yes, see below

Company Description

08/04/12 update:
The short squeeze in the market caused a decent bounce in AKAM but it could not clear existing resistance. That solid stop at $35.60 is a good indication the stock is going lower. With the +250 Dow intraday and +68 Nasdaq AKAM only managed a +79 cent bounce. That should discourage any weak holders and cause them to sell.

Why We Like It:
Akamai reported earnings of 43 cents last week that beat the street and raised guidance. The stock soared +25% on the news. That was on Thursday. Friday's market short squeeze failed to add any material gains to that spike BUT Monday's lackluster market also failed to produce a material decline in AKAM.

After a 25% spike well above the consolidation range of the last three months you would expect the spike to fade and profit taking appear. The raised guidance is probably what is holding shares up. However, if the Nasdaq begins to roll over on less than expected help from the ECB/Fed then profit taking could begin with a vengeance.

This is a high risk play. If we do get a dip to trigger our put entry and the market turns around the dip in AKAM could be seen as a buying opportunity.

I am looking for AKAM to retrace about half of its gains from last week if profit taking appears.

I am recommending we buy the Sept $34 put in anticipation of a possible decline to the June support at $32.

Trigger: $34.85 hit on 8/2 at the open.

- Suggested Positions -

Position: Long Sept $34 PUT (AKAM1222U34) @ $1.53
AKAM Chart

Entry on Aug 2nd at $ 34.85
Average Daily Volume = 3.0 million
Listed on July 30, 2012


CLOSED BULLISH PLAYS

Health Care REIT - HCN - close: 61.20 change: -0.98

08/04/12 update:
HCN was closed at the open on Friday as planned ahead of earnings on Monday. The stock opened at $62.10 before declining 98 cents to close at $61.20.

FYI: The Point & Figure chart for HCN is bullish with a $70 target.

- Suggested Positions -

Long Aug $60 call (HCN1218H60) entry $1.55, bid at $1.90 @ open.

HCN Chart

Entry on July 24 at $61.15
Earnings Date 08/06/12 (confirmed)
Average Daily Volume = 1.5 million
Listed on July 23, 2012


CLOSED BEARISH PLAYS

United Rentals, Inc. - URI - close: 30.22 change: +2.16

Stop Loss: 30.55
Target(s): 23.00
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

08/04/12 update:
The short squeeze bit us on URI. The stock gapped up to $30.68 and hit our stop at $30.55 to end the play. There was no news. It was purely a market short squeeze.

FYI: The Point & Figure chart for URI is bearish with a long-term $17 target.

Trigger: None

Positions

Long Sep $26 PUT (URI1222U26) @ $1.25, exit 0.85, -0.40 loss.
URI Chart

Entry on July 30 at $ 29.70
Earnings Date 07/17/12
Average Daily Volume = 4.4 million
Listed on July 26, 2012


iShares Russell 2000 ETF - IWM - close: 78.61 change: +1.83

Stop Loss: 78.50
Target(s): 75.75
Time Frame: 2-4 weeks
New Positions: Yes, see below

Company Description

08/04/12 update:
The play was going so well until the short squeeze spiked the IWM to $79 on the payroll numbers and European rally. We were stopped at $78.50. Fortunately because I was aggressively lowering the stop we only lost 13 cents on the option.

I am going to reinitiate the play for Monday.

The target is a decline to the June support at $75.

Trigger: IWM at $78.85, hit at 11:40 AM on July 39th

Positions

Long Oct $78 PUT (IWM1220V78) @ $3.26, exit $3.13, -0.13 loss.
IWM Chart

Entry on July 30 at $ 78.85
Average Daily Volume = 60.0 million
Listed on July 28, 2012