Option Investor
Newsletter

Daily Newsletter, Saturday, 8/11/2012

Table of Contents

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

Market Wrap

Three Month Closing High

by Jim Brown

Click here to email Jim Brown

The Dow, S&P and Nasdaq all managed to close at three months highs thanks to short covering at Friday's close.

Market Statistics

Friday and short squeeze. It seems like those three words have been in the same sentence a lot lately. The day did not start off in positive territory after China's exports declined sharply. That caused the Dow to trade under 13,100 at the open but the dip was quickly bought. The Dow traded in negative territory until 3:PM when a small buy program triggered a flurry of short covering and the resulting +50 point jump pushed the Dow to a three-month high.

It should be noted that the Dow's range for the week was ONLY 121 points. That is the narrowest range in the last 18 months. Last August we saw ranges of 800 points. This year volatility has dried up and volume has disappeared. Volume on Friday was only 4.9 billion shares dropping the average for the entire week to 5.5 billion per day. Bank of America economist Ethan Harris called it the "sounds of silence" because so many money managers were on vacation.

The morning dip, courtesy of China, was erased quickly because of expectations for stimulus to be announced this Sunday. Weekends are when China announces policy moves. Considering the severity of the export decline I am surprised the markets did not implode. China's exports for July fell to +1% growth compared to estimates for +8% and the 11.3% increase in June. That is a dramatic decline and very close to a contraction. Exports to Europe fell -16%. Since numbers out of China can't be trusted we will never know if that 1% was a government supplied number and maybe exports are already in a contraction. Chinese imports grew by +4.7% compared to estimates for a +7% gain. The trade surplus declined to $25.1 billion from $31.5 billion and compared to estimates of $35.1 billion.

These numbers come on the back of reports out on Thursday that China's industrial output rose at the slowest rate since the recession and the inflation rate had fallen to a 30-month low. This is even more indications that China will need to move quickly and dramatically to halt the economic decline. All the major economists cut China's expected GDP for Q3 after the bad numbers for the week. China is now expected to see growth decline to 7.3% - 7.5% GDP for Q3. This is down from more than 9% in Q3-2011. Bank lending fell to $85 billion and lower than all 30 estimates in a survey by Bloomberg and the lowest level since September. The Peoples Bank of China said the "primary risk for the global economy is still the European debt crisis and the possibility Europe will trigger a double dip recession for the global economy."

On the U.S. economic calendar there was nothing major to move the market on Friday. Import prices for July declined -0.6% and the fourth consecutive month of declines compared to expectations for a +0.1% rise. Import prices fell -2.4% in June and prices are now -3.2% lower than the same period in 2011. Export prices rose +0.5%. Prices for corn, wheat and soybeans surged by double digit percentages and they are just getting started.

The Treasury Budget deficit for July rose to -$69.6 billion. The deficit is on track to end the year at -$1.14 trillion depending on how the administration defers payments in an effort to avoid another debt ceiling confrontation ahead of the elections.

The calendar for next week is much busier with several material reports. The biggest report for the week is the Philly Fed Manufacturing Survey on Thursday. That is seen as a proxy for the national ISM the first week of September.

The prices indexes, CPI and PPI, would normally be important but with inflation declining thanks to lower oil prices and slowing demand they will not be closely watched. The NAHB Housing Market Index will be scrutinized for signs the builder boom is not fading with the end of the summer outlook.

Probably one of the biggest events next week is the Cisco (CSCO) earnings on Wednesday after the close. Consensus estimates are for 45 cents with a whisper number of 48 cents. That bullish whisper number could be a serious challenge for Cisco if they just report earnings and revenue in line with estimates. I will not be surprised if they miss on the revenue. Cisco competitors are booming.

Economic Calendar

We had a busy IPO week capped by the Manchester United (MANU) debut on Friday. It was not pretty. The IPO was expected to price between $16-$20 and it priced at $14. That values the club at $2.3 billion and they raised $233 million in the IPO. The club has $663 million in debt and only had $40 million in cash as of March 31st. They sold 16.7 million shares at $14 and more than 33 million shares traded. The IPO syndicate managed to hold the price at $14 or above until the close but that level cracked immediately in afterhours trading. The odds are good it will trade lower on Monday. Manchester setup a shell corporation in the Cayman Islands called Red Football, which owns Manchester United Plc, which owns Red Football Holdings Ltd, which owns Red Football Shareholder Ltd, which owns Red Football Joint Venture Ltd, which owns Red Football Junior Ltd and Manchester United Ltd and "various operating subsidiaries." Various shareholder rights groups have issued warnings about the organization of the shell companies.

Manchester Chart

Other IPOs this week included Outback Steakhouse (BLMN) and several small cap offerings with mixed results. Bloomin Brands was the most easily recognized name.

Bloomin Brands

Peregrine Semi

Performant Financial

Yahoo (YHOO) shares declined -5% after the new CEO, Marissa Mayer, launched a strategy review that may change prior plans to return billions of dollars to shareholders. Yahoo is selling its stake in Alibaba for $6.3 billion in cash and that money was slated to be returned to shareholders in a dividend or stock buyback. Mayer is reviewing all the Yahoo business strategies with an eye towards restructuring the company for long term growth. That includes the "cash position and planned capital allocation strategy." Investors were not pleased and Yahoo shares crashed.

Yahoo Chart

Research in Motion (RIMM) rallied 6% on a rumor that IBM was looking at their enterprise services unit for an acquisition. IBM made an informal approach about possibly acquiring the division according to the rumors. The division operates a network of secure servers to support BlackBerry devices. IBM is the largest global provider of computer services to enterprises. RIMM's network generated $4.1 billion in revenue for the company last year. Analysts said a RIMM sale of that division would be a death knell for the company because the phone business was hemorrhaging customers. Most analysts believed RIMM would wait until after it actually launched BlackBerry 10 before making any structural changes. If BlackBerry 10 can't stop customers from abandoning the BlackBerry ship in favor of Apple and Android then the enterprise business will be all that RIMM has left.

RIMM Chart

JP Morgan (JPM) won a preliminary approval from a federal judge on a $100 million class action settlement with credit card customers who complained about the bank boosting minimum payments. During the credit crisis JPM boosted minimum payments for credit card customers from 2% to 5% of their account balance. Cardholders claim JPM had induced them to transfer balances from other banks into Chase card accounts. Then Chase reportedly forced them to either make higher payments or accept a higher interest rate. The bank also escalated interest rates whenever a payment was late and that led to higher payments and more defaults. Lawyers for the suit will seek to keep $25 million as their legal fees.

JPM also said it has halted its stock buyback plans until 2013. Previously the company had announced a new $15 billion buyback. That was made up of $12 billion in 2012 and $3 billion in Q1-2013. It was halted when the Whale Trade surfaced. When they announced Q2 earnings Jamie Dimon said they were hopeful of restarting the buyback in Q4. The bank announced on Friday it was delaying the restart until at least Q1-2013 because the investigation was not over and the losses were gradually increasing. Not good news for investors.

JPM Chart

Monster Beverage (MNST) shares lost -8% after the company disclosed a probe by an unspecified attorney general.

Chesapeake Energy (CHK) lost -2.6% after it said the company had received a subpoena from the SEC antitrust office. They are looking into possibly antitrust allegations over oil and gas leases. There have been allegations that companies conspired to fix bids for leases or to not bid at all. More trouble brewing for CHK.

Ubiquiti Networks (UBNT) fell -42% after earnings missed estimates. The company said the miss was due to distributors making counterfeit equipment under the Ubiquiti brand. The company said it was making good progress legally and the drain on sales should not last more than two quarters. I thought this was a strange excuse. How many distributors would make counterfeits and how many boxes could they make that it would drag sales down to $66 million when analysts were expecting $98 million?

UBNT Chart

Goldman Sachs (GS) was cut to a BBB+ from AA- by Egan Jones citing the banks weaker results, concerns over proprietary positions and the higher potential for losses. Other major issues were potential costs to comply with the Volcker Rule and a weak investment banking environment.

A study released on Friday said the costs to banks to implement Dodd-Frank could be as much as $34 billion. That is up from prior estimates at $19-$22 billion. This is another reason for a Romney rally because he has vowed to kill Dodd-Frank because of its major impact on employment. The banks are not going to just eat these costs. They will pass on what they can to customers but they will have to cut jobs, offices and expenses to make up for the rest of the costs.

The Dodd-Frank bill is 2,319 pages and regulators are only 25% through it in translating the broad meaning into laws. That 25% has created 3,826 pages of financial regulations and guidance which, according to one estimate, will take 24 million man hours a year to comply with the new laws. Banks have filed suit claiming the law is unconstitutional.

The national average for gasoline prices in the U.S. rose to $3.67, an increase of 34 cents since July 1st. The rise in crude prices, refinery outages and pipeline shutdowns were blamed for the spike. The recent fire at the Chevron refinery in California has slowed gasoline production on the West Coast. The Richmond refinery produces 15% of the gasoline used in California. Prices in California have risen 15 cents since the fire. Prices are not expected to reach the $3.94 we saw in the spring because the driving season is almost over and there is plenty of oil in inventory.

Hurricane Ernesto failed to cause any damage to the Gulf installations because it turned to make landfall over Mexico and lost strength. A new tropical storm, number 7, was heading into tornado alley south of Puerto Rico on Friday but it evaporated Saturday morning.

Gasoline Chart

Elsewhere in the commodity sector the USDA warned that the drought continued to worsen and the corn crop could be the worst in a decade. However, it could still be the eight largest crop ever. The USDA said farmers planted 96.4 million acres this year, the most since 1937. The agency cut its crop yield estimates for the third time in a month to the latest expected level of 10.8 billion bushels. If that estimate holds it would be enough to meet the world's needs and ensure there are no shortages. However, prices will rise in everything including beef, pork, chicken, food, drinks and cosmetics and almost anything that uses high fructose corn syrup. The rising cost of corn to feed livestock has prompted many ranchers to sell off herds and that will push meat prices down over the next several weeks but then prices will rise as fewer animals come to market later in the year. Corn prices sold off slightly after hitting $8.34 intraday as traders took profits ahead of the weekend.

CORN Chart

The Dow, S&P and Nasdaq have not all been down on the same day since August 2nd. The gains this week were minimal but they were still gains. There was a slow decline in the intraday highs through Thursday but the dips were bought almost instantly.

With the volume incredibly light at 4.9 billion shares on Friday it is not surprising that a minor buy program late in the day would trigger some short covering. The same week in 2011 averaged 7.84 billion shares. Traders have been reluctant to carry shorts into the weekend for several weeks now. That is strange since last Monday was the first Monday in ten weeks that actually posted a gain but there is always the danger of some overseas event catapulting stocks higher. Across the broader market on Friday there were 3139 advancers and 3192 decliners. That is about as close to a sentiment tie as you can get.

There was a serious lack of European headlines last week. We remain on ECB watch for the "whatever is necessary" move that Mario Draghi promised. Actually we are on ECB, BOE, BOJ and PBOC watch. China is very likely to take action this weekend and it could be dramatic given the accelerating rate of their economic decline. The Bank of Japan could move at any time as well.

Traders are betting on central banks all around the world acting to prevent the global economy from sliding back into recession. It is no longer just the Bernanke put but the global central bank put. The potential for the ECB to introduce literally trillions of euros of stimulus over the next couple years is approaching 100%. They may do it through the EFSF, ESM or directly from the ECB but it will happen. Spain, Italy and France are going to continue circling the drain and massive bond buying by the ECB and friends will be required to keep their debt rates in check for the coming decade. However, there may not be any significant plan presented until after the Sept 12th vote in Germany on the changes to the EFSF.

We are three weeks away from the Bernanke speech at Jackson Hole on August 31st. That is where he dropped a serious hint about QE1 beginning several weeks later. While I don't expect him to announce anything this time around there are quite a few traders betting on some revelation from above. We could see a significant letdown if the ECB and Uncle Ben don't do anything by Labor Day.

The S&P has been flirting with the resistance at 1405 all week and that is where it closed on Friday. The 1405-1426 resistance band should be strong but we have not seen any indications of a pending retracement. The narrow 13 point range for the week may prove to be a consolidation ahead of the next move higher rather than the next decline. The low volume is a key indicator that traders lack conviction. However, Art Cashin reported there were more than $1 billion in buy on close orders on the NYSE on Friday. That is contrary to the recent pattern of sell on close orders.

I mentioned last week that we would know when sentiment changed when the market rose at the close rather than sold off. Was this our defining moment or was it just caution or speculation ahead of a weekend on ECB/China watch?

Initial S&P support is 1396 with strong resistance from 1405 to 1426. Any move higher into that resistance band could be a huge sentiment indicator for the bulls. It could also be a trigger for the bears but the dip buyers are in control at present.

S&P Chart - 10 Min

S&P Chart - Daily

The Dow's narrow range of 121 points also had a pattern of lower highs but the opening dip on Friday to 13,100 was instantly bought. Dow 13,214 was the intraday high on Tuesday and should be initial resistance. However, the Dow is within range of the high close for May at 13,279.32 and that is the real resistance target. Nine Dow stocks closed negative on Friday and only one gained more than $1 and that was McDonalds.

Dow Chart - 10 Min

Dow Chart - Daily

The Nasdaq spiked above the critical 3,000 resistance on Tuesday and then used that level as support for the rest of the week. The Nasdaq was not able to equal the 3,028 intraday high from Tuesday but there was no selling either.

The last three days were very flat with a range of only a 20 point range from 3,002 to 3,022 and it closed at the high end of that range at 3,020. Dip buyers appear to be in control but resistance at 3,020 is also firm. We are just waiting for the next headline.

Nasdaq Chart - 10 Min

Nasdaq Chart Daily

The fly in the bullish ointment is the Russell 2000. The 800 level is acting as a price magnet and prevented the Russell from rebounding through minor downtrend resistance from Tuesday's high. The Russell remained in negative territory and suggests fund managers are still lacking conviction in the rally. They are putting money in the big cap highly liquid blue chips but not in the small caps. This means the Russell has again become the canary in the coal mine as the sentiment indicator for fund managers. If the Russell moves to a new low below 795 then it has risk to 765 and a level it touched just seven days ago.

Russell Chart - 10 Min

Russell Chart - Daily

The Dow Transports are still not confirming the Dow rally. The Transports did see a little short covering at the close on Friday but it was only enough to turn it mildly positive after a week of lower lows. Had it not been for the short covering Friday afternoon this chart would have a much bleaker outlook. This is a caution signal.

Dow Transport Chart - 10 Min

Dow Transports - Daily Chart

The Dow Total Stock Market Index (TSMI) finally moved over resistance at 14,550 after several days of congestion at that level. If the Friday close holds then the next test should be 14,715.

Dow Total Market Index Chart

The VIX closed at 14.74 and only .74 away from a multi-year closing low. You have to go back to 2007 to see a number under 14 for any period of time. We did dip under 14 in March on an intraday basis but it never closed under 14. When the VIX is low it is time to go BUT as we saw in early 2011 it can remain low for weeks at a time before exploding higher. This is another caution indicator.

VIX Chart - Weekly

Dow component Cisco Systems reports after the bell on Wednesday so that could be a market mover on Thursday. However, I believe the central bank put is alive and well unless somebody with a microphone develops a bad case of foot in mouth disease.

For next week we remain on central bank watch. China is the most likely to move followed by the ECB. China should not have as much impact on our markets unless they really pull out all the stops like they did for the 2008 Olympics. The ECB is the key for the U.S. markets. Eventually Draghi has to do something or his next speech will be ignored.

Lastly, U.S. treasury yields have risen for three consecutive weeks as selling in treasuries increases. Is the bond bubble about to burst? If institutions are selling bonds where is that money going? In theory it should be going into equities and maybe that is exactly why there is a strong bid under the equity market. I don't see treasuries falling completely out of favor but the gains there are limited and that could be the reason investors are switch to equities.

Ten Year Note Yield Chart

This is expiration week for options and last week is where we normally see the volatility. That did not happen so there is always the possibility it will happen early this week.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

"Better to remain silent and be thought a fool than to speak out and remove all doubt."
Abraham Lincoln


Index Wrap

New Highs For the Current Move Only

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The Market hasn't hit new 12-month highs in any of the major stock indexes but all have gone to new highs for the advance dating from June lows. However, with SPX, OEX and the Composite hitting overbought readings on a 2-week basis the odds of a further big up leg isn't high.

In terms of Dow theory, something I haven't visited in awhile, the Dow Industrials (INDU) only needs a weekly close above 13232 (from Friday's 13207) to 'confirm' INDU's major uptrend. However, the key confirmation looked for with the TWO Dow Averages in tandem is if/when the Dow Transportation Average (TRAN) also pierces its prior weekly closing high which is far away. TRAN closed this past week at 5063 versus its prior weekly Closing high at 5548. The Transports would have to gain 9.6% to achieve a confirmation of the overall Market uptrend and the gain year-to-date in the S&P isn't yet much over 9%.

There's been a nice run up from the bottom as finally reflected in a bit more of an uptick in my bullish trader sentiment indicator into Tuesday. As can be seen with the S&P 500 (SPX) and Nasdaq Composite (COMP) charts, my CPRATIO line isn't yet at any kind of 'overbought' extreme. This is in fact part of the technical dynamic in the Market climbing a 'wall of worry'. In a contrary opinion sense it's a bullish plus. This dynamic isn't likely enough to cause the Market to go to new 12-month highs. It should take further news related to economic growth to do that.

Bottom line, anything further you gain on the upside in index calls or other bullish strategies is a 'gift' looking out 1-2 weeks. I don't bet on gifts so much. Meanwhile the odds of a downside correction or at least a sideways trend, looks better than 50/50. This is not to say that the charts are not currently bullish. However, normal probabilities for a further sustained advance versus a pullback, isn't stacked in the bulls favor.

A couple of our Subscribers asked me to continue to include each week the kind of longer-term hourly chart that I'm able to keep on my (TradeStation) charting application. The key thing with the 21-hour RSI on the hourly index charts has for many weeks now has been to look for a short-term trend reversal when and after overbought OR oversold extremes are seen.

Eventually such a simplistic reversal pattern stops 'working' which looked to be true on the S&P 100 (OEX) hourly chart seen below. While we haven't seen a downside reversal in the OEX after it hit its last RSI extreme, we have seen a potentially bearish price/RSI 'non-confirmation' as the 21-hour RSI so far as failed to ALSO go to a new closing high along with prices. The failure for RSI to confirm OEX's new high isn't an automatic 'sell signal and to say that would be too much. However, this kind of price/RSI divergent pattern is seen a lot at at least interim tops, suggesting not overstaying in bullish strategies.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart is bullish in its pattern. While this is true, don't find it likely that SPX will see a move higher than to the 1420-1427 area in the coming 1-2 weeks, which is my mostly unchanged view from when I last wrote a week ago. My view here is largely based on the overbought condition reached by the 13-day RSI and the fact that this past week SPX mostly trended sideways (reflecting the overbought condition) although the Index did manage to hold above 1400.

Near resistance is seen at 1405, the closing SPX high from early-May, with resistance then extending to 1415, the intraday high from that period. Next resistance, also based on a prior earlier Close is highlighted at 1419, extending to the 1422 intraday high and perhaps to the top end of the price channel, which intersects at 1427 currently.

Near support comes in around 1386, extending to the area of the 21-day moving average at 1374. Major support is assumed to lie in the 1353 area, at the lower end SPX's uptrend price channel. A Close below the up trendline turns the chart picture bearish. While we could see a move up the UPPER end of the price channel which intersects in the 1427 area before seeing show-stopper resistance, I'd be surprised if SPX continues that strong.

Bullish sentiment picked into Tuesday, but hasn't increased even though the big cap OEX and NDX indices had good moves. This lack of strong bullish conviction is a mild bullish plus in a contrary opinion sense. The market continues to do better than many if not most pundits expect.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart continues bullish although I'd also note the definite slowing of upside momentum in the same sideways trend as evident with the broader S&P 500.

Once OEX hit the highs of late-March/early-April, the overbought condition suggested by the 13-day Relative Strength Index came into play also in my estimation. If RSI was a neutral 50 instead of an overbought 70, the odds would be better of a move to a decisive upside move to new highs for the year. Still of course a breakout move can happen, especially since OEX managed to Close at a new high relative to its 4-5 day sideways trend. If there is a decisive upside penetration of 646, next technical resistance is suggested in the 656 area, at the top end of OEX's broad uptrend price channel.

In terms of technical support, I've highlighted the 21-day moving average as expected support around 632. Trendline support should come into play around 625. Major support is seen in the 610-615 area.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) Average did of course move to new high last week relative to the uptrend dating from its early-June low. However, this past week has seen INDU mostly churning around in a relative narrow 100 point range, from 13200 to 13100.

I highlighted a key resistance last week as 13200. Creating a bullish week-ending finale, the Dow closed just over 13200. Next key resistance comes in in the 13280 to 13338 price zone. I'm expecting major INDU resistance to come in at the intersection of the Dow's broad uptrend channel at 13475.

I mention above in my 'bottom line' commentary that a weekly Close in the week ahead above 13232 would be a move to a new Closing high on a weekly chart basis, which in turn would 'confirm' the Industrials in a primary uptrend. In turn, a Dow Theory confirmation of this new weekly high in the Industrials by the Dow Transports (TRAN) also climbing to a new high is a long ways off. TRAN would have to climb another 10% to achieve Dow Theory confirmation of the primary or major uptrend.

Near support is up to 12950 judging by the current level of the 21-day moving average. Next key technical support is found in the 12800 area, at the current intersection of INDU's up trendline.

I don't know that there are enough Dow stocks in gear that can propel the Average to decisive new 12-month highs. INDU stocks with mild to moderate upside potential I'd list AA, CAT, CSCO, HD, IBM, JNJ, MCD, MMM, UTX, VZ and XOM. Some of these 11 stocks are in recovery mode or look capable of moving modestly higher in retracements of prior downswings. Still holding mostly strong uptrends are: CVX, DIS, possibly GE, KFT, MRK, PFE, T and WMT. If the aforementioned 7-8 stocks in still-strong uptrends were joined by another 6-7, I'd better see substantial further upside potential in the Dow. Absent that, I'm lukewarm bullish on INDU.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) looks to be in a bullish consolidation above the important 3000 level. Moreover, the pattern looks to be a bullish flag that suggests further upside potential to the 3070-3090 area assuming that Monday-Tuesday sees sustained gains above 3020 or the top end of the recent sideways consolidation formation.

COMP support is up to 2950, with next key support around 2900, at the current intersection of the up trendline.

Working somewhat against a rosy bullish upside scenario is the fact that the Composite hit a recent overbought extreme in the 13-day RSI. The reason I say that this indicator extreme works 'somewhat' against bullish expectations suggested by price action or the chart pattern, is that price action is number one in terms of technical forecasting.

Let me just wrap up COMP by saying that a sustained dip back under 3000 would be the chart action that would suggest that the recent rally had run its course for now. The chart looks bullish otherwise.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) Index is in a bullish consolidation above 2700 which I had highlighted last week as a key resistance. Very near resistance is at the line of this past week's daily highs is at 2723-2327. Next key chart resistance is in the 2740 area, extending to 2750-2755. Major resistance begins at 2785, the prior high Close in early-April.

One question with NDX becomes whether buying interest is sufficiently strong to propel NDX much higher, especially to above 2750, at the upper resistance line of NDX's broad uptrend channel; especially so given the 'overbought' condition suggested by the 13-day RSI. This is a time that those in bullish positions should be wary of overstaying in calls or in other bullish strategies.

The thing with high RSI extremes is that the risk grows of a correction not that a correction 'has' to happen. A correction 'alert' would sound early in coming week if NDX started falling below 2700, especially on a Closing basis. If so, next support comes in at 2650, with next technical support coming in in the low-2600 area, extending to the dominant up trendline, currently intersecting around 2585.

Nasdaq bellwether Apple Computer (AAPL) has resistance in the coming week at 627-630. A weekly close above this area should be a boost to the big cap Nas 100/NDX. As I wrote last time, a weekly AAPL close above 630 should lend support to NDX. Still, I see the 2740-2750 price zone as being likely tough resistance in NDX in the coming week.

I also wrote last week about the fact that a move above the upper 3% envelope line provides another suggestion of not only that the Index is overbought but gives an idea of the price area where this is happening. The RSI doesn't do this; it rather just suggests that the index or stock is 'overbought' without pointing to a specific price area where this is occurring.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) chart pattern is bullish although this past week's intraday is already touching technical resistance implied by QQQ's upper trend channel boundary. This upper channel line also intersects in the area of the prior Closing daily high from late-March/early-April at 67.25. Resistance then extends to the prior intraday high at 67.6.

Near support is seen at 65.0, with next key support at the Q's up trendline at 63.5.

The very low recent daily volume numbers don't suggest much new buying coming in. The next big volume jump should occur if QQQ starts breakdown below 66 and especially if the NDX tracking stock falls to or below 65/64.6. On Balance Volume or OBV is trending higher, which is the key volume indicator, at least when QQQ is trending higher.

RUSSELL 2000 (RUT); DAILY CHART:

Upside price movement in the Russell 2000 (RUT) this past week while bullish, especially given the move above the key 21-day moving average (note that the daily low at the beginning of the week found support precisely AT the Average), reflects RUT being pulled higher especially by the Nasdaq. RUT's consolidation above 800 suggests that the Index could challenge next resistance in the 810 area. Next important resistance then is seen at 820, extending to 830.

Near support in the Russell 2000 Index is at 790, then at 780. RUT remains within the broad uptrend channel highlighted on the daily chart but I don't envision a move to the upper end of that channel anytime soon. The Index seems most likely to follow the Nasdaq and the rest of the Market gradually higher if the overall uptrend continues of course. If not, RUT may dip below 790 and reach the 780-770 zone again.

I take RUT action to reflect individual investor enthusiasm for stocks and right now it looks lukewarm. You've probably heard of the billions and billions that have flowed out of stocks in the past year with that money largely finding a home in bond funds. Times of doubt and uncertainly find the buy Treasuries theme resurrected, alive and well.



GOOD TRADING SUCCESS!


New Option Plays

Wireless & Auto Parts

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate, consider these stocks as possible trading ideas and watch list candidates. Many of these need to see a break past key support or resistance:

(bullish ideas) ROP, SNA, OXY, SHW, PH, AGU, XOM, GTLS, TWC, WPI, UTX, ASH, BWA, FFIV, AMGN, CYT, CVX, MMM, MOS, ADP



NEW DIRECTIONAL CALL PLAYS

SBA Communications - SBAC - close: 60.41 change: +0.12

Stop Loss: 57.75
Target(s): 64.90
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
SBAC owns thousands of wireless communications towers across North and Central America. The stock appears to be in a new long-term up trend. On a short-term basis SBAC has been consolidating sideways near potential round-number resistance at $60.00 but just set a new closing high on Friday.

We want to play the trend. I am suggesting a trigger to buy calls at $60.75 with a stop loss at $57.75. Our multi-week target is $64.90. We might need some patience on this one. SBAC doesn't move super fast. FYI: The Point & Figure chart for SBAC is bullish with a long-term $100 target.

Trigger @ 60.75

- Suggested Positions -

buy the Sep $60 call (SBAC1222i60) current ask $1.75

- or -

buy the Dec $65 call (SBAC1222L65) current ask $1.20

Annotated Chart:

Entry on August xx at $ xx.xx
Average Daily Volume = 1.5 million
Listed on August 11, 2012


NEW DIRECTIONAL PUT PLAYS

O'Reilly Automotive - ORLY - close: 84.62 change: -0.38

Stop Loss: 84.75
Target(s): 80.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
ORLY plunged back in late June after guiding its same-store sales numbers lower. The stock produced a dramatic rebound back only to reverse lower once it had filled the gap. Now ORLY is in a bearish trend of lower highs. Shares look poised to breakdown under short-term support near $84.00.

I am suggesting a trigger to launch bearish positions at $83.75. Our first target is $80.25. More aggressive traders may want to aim lower. FYI: The Point & Figure chart for ORLY is bearish with a long-term $48 target.

Trigger @ 83.75

- Suggested Positions -

buy the Sept $80 PUT (ORLY1222u80) current ask $1.75

Annotated Chart:

Entry on August xx at $ xx.xx
Average Daily Volume = 1.5 million
Listed on August 11, 2012



In Play Updates and Reviews

Another Gain for the Week

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 index continues to post gains and closed near new relative highs.

I am suggesting an early exit for our DLTR and AKAM trades.

Current Portfolio:


CALL Play Updates

BRCM - Broadcom - close: 35.35 change: +1.02

Stop Loss: 33.25
Target(s): 38.50
Current Option Gain/Loss: +13.3%
Time Frame: 4-6 weeks
New Positions: see below

Comments:
08/11/12 update: BRCM shot higher on Friday thanks to an analyst upgrade to "outperform". The rally pushed shares past resistance at its 100-dma and the $35.00 level with a +2.9% gain on the session. The next challenge for the bulls could be the mid June peak at $35.54 and then the $36.00 level, which was support back in late April. I am not suggesting new positions at this time.

- Suggested Positions -

Position: Nov $36.00 Call (BRCM1217K36) entry $1.80

08/08/12 new stop loss @ 33.25
no follow through, turning cautious
08/07/12 triggered @ $34.75
08/06/12 adjust stop loss to $32.45

chart:

Entry on August 07 at $34.75
Average Daily Volume = 10 million
Earnings Oct-23rd
Listed on Aug 4, 2012


Caterpillar - CAT - close: 88.94 change: +0.54

Stop Loss: 84.90
Target(s): 91.50
Current Option Gain/Loss: +19.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/11/12 update: CAT continues to rally and is fast approaching what could be round-number resistance at the $90.00 level. More conservative traders may want to take profits early as CAT gets close to $90.00. I would expect a short-term pullback at $90 before CAT moves higher. Our target remains $91.50. I am not suggesting new positions at current levels.

Earlier Comments:
I do consider this somewhat aggressive. CAT's recent earnings were strong and the company raised guidance but its stock price is probably still vulnerable to negative economic headlines. Furthermore the $90.00 level might be round-number resistance.

- Suggested (SMALL) Positions -

Long Sep $90 call (CAT1222I90) Entry $1.90

08/07/12 triggered @ $87.25

chart:

Entry on August 07 at $87.25
Average Daily Volume = 8.6 million
Listed on August 6, 2012


Celgene Corp. - CELG - close: 71.94 change: +0.69

Stop Loss: 69.90
Target(s): 75.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
08/11/12 update: CELG has spent the last four days churning sideways in the $70.75-72.00 zone. Friday's rally to the top of this range leaves CELG poised for a bullish breakout higher. I am suggesting a trigger to buy calls at $72.25. Our target is $75.75.

FYI: The Point & Figure chart for CELG is bullish with an $81 target.

Trigger @ 72.25

- Suggested Positions -

buy the Sep $75 call (CELG1222I75)

chart:

Entry on August xx at $ xx.xx
Average Daily Volume = 3.4 million
Listed on August 7, 2012


Dollar Tree - DLTR - close: 50.72 change: -0.94

Stop Loss: 49.45
Target(s): 54.50
Current Option Gain/Loss: -23.6%
Time Frame: exit prior to earnings on Aug. 16th
New Positions: see below

Comments:
08/11/12 update: We are growing increasingly worried about DLTR. What looked like a bullish breakout higher past its trend of lower highs has reversed. Friday's close left DLTR under its 100-dma and the $51.00 level. There is a chance that DLTR might bounce near its recent lows near $50.00 but we do not want to risk it.

I am suggesting an early exit immediately (Monday morning) to cut our losses.

- Suggested Positions -

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

08/11/12 exit on Monday morning
08/06/12 new stop loss @ 49.45, adjust time frame to exit prior to Aug. 16th earnings report

chart:

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


PPG Industries - PPG - close: 110.82 change: -0.55

Stop Loss: 109.75
Target(s): 117.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
08/11/12 update: We are not giving up on PPG just yet. Shares underperformed on Friday but traders bought the dip near $110 and its 10-dma. We are still waiting for a bullish breakout past resistance.

I am suggesting a trigger to buy calls at $112.25. We'll use a stop loss at $109.75. The $115 level could be resistance but we are aiming for $117.50. FYI: The Point & Figure chart for PPG is bullish with a $137 target.

Trigger @ 112.25

- Suggested Positions -

buy the Sep $115 call (PPG1222I115)

chart:

Entry on August xx at $ xx.xx
Average Daily Volume = 1.3 million
Listed on August 8, 2012


Qualcomm - QCOM - close: 61.98 change: -0.02

Stop Loss: 57.75
Target(s): 64.50
Current Option Gain/Loss: +22.9%
Time Frame: 4-6 weeks
New Positions: see below

Comments:
08/11/12 update: After a strong week QCOM managed to hold on to its gains with a sideways move on Friday. The stock is up four weeks in a row so I would not be surprised to see a little pullback in QCOM soon. A dip in the $61.00-60.50 zone could be a bullish entry point. More conservative traders may want to start adjusting their stop loss higher.

- Suggested Positions -

Position: Oct $62.50 Call (QCOM1222J62.5) entry $1.70

08/07/12 triggered @ 60.51

chart:

Entry on August 07 at $60.51
Average Daily Volume = 1.5 million
Listed on Aug 4, 2012


WellPoint Inc. - WLP - close: 57.91 change: +1.12

Stop Loss: 54.40
Target(s): 59.75
Current Option Gain/Loss: +36.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/11/12 update: WLP continues to show relative strength. The stock outperformed on Friday with a +1.9% gain. I would not chase it here. More conservative traders might want to start adjusting their stop loss higher. Broken resistance near $56.00 should be new support.

- Suggested Positions -

Long Sep $57.50 call (WLP1222I57.5) Entry $1.60

08/08/12 triggered @ 56.50

chart:

Entry on August 08 at $56.50
Average Daily Volume = 4.4 million
Listed on August 7, 2012


PUT Play Updates

Akamai Technologies - AKAM - close: 35.97 change: -0.24

Stop Loss: 36.75
Target(s): 32.00
Current Option Gain/Loss: -54.2%
Time Frame: 2-4 weeks
New Positions: see below

Comments:
08/11/12 update: AKAM underperformed the market's major indices on Friday. Unfortunately this stock has not been cooperating with us the last several days. We want to exit early and cut our losses. I am suggesting an exit on Monday morning. The current bid is 70 cents.

- Suggested Positions -

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

08/11/12 prepare to exit
08/02/12 triggered @ $34.85

chart:

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


Edwards Lifesciences - EW - close: 98.17 change: -0.13

Stop Loss: 100.25
Target(s): 91.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
08/11/12 update: EW spent Friday's session hovering just underneath its 50-dma. I do not see any changes from my Thursday night comments.

I am suggesting a trigger to open bearish positions at $97.75. Our target is $91.50. FYI: The Point & Figure chart for EW is bearish with an $86 target.

Trigger @ 97.75

- Suggested Positions -

buy the Sep $95 PUT (EW1222u95) current ask $2.40

chart:

Entry on August xx at $ xx.xx
Average Daily Volume = 950 thousand
Listed on August 9, 2012


FB - Facebook - close: 21.81 change: +0.80

Stop Loss: 23.25
Target(s): 17.00
Time Frame: 2-4 weeks
Current Option Gain/Loss: -37.9%
New Positions: see below

Comments:
08/11/12 update: According to the press, FB's CFO Mr. Ebersman was in New York this past week trying to convince large investors to hold on to their FB stock before the next lock up period expires. That's going to be a hard sell. This coming week is the next big lock up expiration. The exact date is a little unclear. I've seen it listed as August 15, 17, or the 18th. The 18th is a Saturday and I suspect it's probably this Wednesday (Aug. 15th).

This coming lock up is for about 270 million shares. That would increase the float by about 40%. There is another (huge) lock up expiration of 1.2 billion shares in November. One of the problems FB faces is the expectation for rising taxes on capital gains. Investors are going to WANT to sell their FB stock now before we hit the year 2013 to avoid paying higher taxes on their stock.

At this point any rally in FB is probably a shorting opportunity but it remains a volatile stock. If somehow we do get stopped out prior to the lock-up expiration date, then nimble traders may want to reload their bearish positions. We currently have a stop loss at $23.25.

Earlier Comments:
Facebook has turned into the stock everyone loves to hate. 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 (some time) after the August 15th share lock up expiration.

Suggested Positions

current position: Sept $20 PUT (FB1220U20) entry $1.45

08/07/12 triggered @ 20.95
08/06/12 adjust entry trigger to $20.95

chart:

Entry on August 07 at $20.95
Average Daily Volume = 80.0 million
Listed on August 5, 2012


iShares Russell 2000 ETF - IWM - close: 79.92 change: -0.28

Stop Loss: 80.75
Target(s): 76.50
Time Frame: 3-5 weeks
New Positions: Yes, see below

Comments:
08/11/12 update: The small caps underperformed the large caps on Friday. The IWM dipped to $79.50 and its 150-dma before bouncing on Friday. I don't see any changes from my prior comments. I remain very cautious on this trade and suggest readers limit their position size to reduce risk.

Currently the plan is open small bearish put positions if the IWM trades at $79.40 or lower.

Entry Trigger: buy puts at $79.40

- Suggested (SMALL) Positions -

Buy Oct $78 PUT (IWM1220V78)

08/08/12 Adjust entry/stop/exit
Use a trigger @ 79.40, stop @ 80.75, target 76.50. Small Positions Only!
08/07/12 adjust trigger to buy puts up to $78.90

chart:

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


Vornado Realty Trust - VNO - close: 79.89 change: -0.12

Stop Loss: 80.55
Target(s): 72.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 5 weeks
New Positions: Yes, see below

Comments:
08/11/12 update: VNO continues to look weak but it has not hit our entry point yet. I don't see any changes from my prior comments.

You can tell on the weekly chart below that it almost looks like a bearish head-and-shoulders pattern. I am suggesting a trigger to open bearish positions at $78.45. Our target is $72.50 but keep in mind that the $75.00 level might be round-number support. FYI: The Point & Figure chart for VNO is bearish with a $74 target.

Trigger @ 78.45

- Suggested Positions -

buy the Sep $75 PUT (VNO1222u75)

chart:

Entry on August xx at $ xx.xx
Average Daily Volume = 943 thousand
Listed on August 9, 2012