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Daily Newsletter, Saturday, 8/25/2012

Table of Contents

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

Market Wrap

Summer Friday

by Jim Brown

Click here to email Jim Brown

One more summer Friday behind us and only one more to go before traders return to sort out positions ahead of the Sept 12th FOMC meeting.

Market Statistics

It was a typical low volume summer Friday with the markets opening lower but then rebounding on short covering after a Bernanke letter to House Oversight Chairman Darrell Issa was released. The letter said there was "scope for further action" by the Fed. Essentially the letter was a cut and paste of the most recent minutes from the FOMC but did say the Fed has room for further stimulus. The letter was dated August 22nd so it represented Bernanke's most recent position on further Fed action. It was under reported that the letter also contained the warning that "there are potential costs and risks to consider before taking action."

Even though the points reiterated were discussed in the FOMC minutes on Wednesday the knee jerk reaction was short covering and that rescued the markets from a -33 point opening loss on the Dow and pushed it to a gain of +100 points for the day. Never short a dull market.

There was so little news on Friday that even the blog sites were quiet. All eyes are on the Bernanke speech next Friday and the speech by Mario Draghi on Saturday. The two most powerful men in banking speaking back to back and the markets will be dysfunctional leading up to the event. Bernanke is expected to drop some tidbit over when the Fed will announce the next round of QE. Draghi's speech will be scrutinized for clues to his "whatever is necessary" action that has yet to appear.

The market is likely to be disappointed by Bernanke and probably by Draghi as well. Bernanke has only a few bullets left in his gun and Draghi will not want to release any specific plans before Germany votes on the ESM on the 12th. He will not want to jeopardize that vote. This means all of next week will be spent in anticipation of news that may not appear. Volume will be even lower than it was last week since it is the last vacation week before Labor Day. The market will either be extremely erratic in the low volume or extremely boring while we wait on the speeches.

The Republican convention starts on Monday so the airwaves will be full of convention coverage and any economic events or stock news will be overshadowed by that coverage. The following week is the Democratic convention.

There was only one economic report on Friday. The Durable Goods report for July saw orders rise +4.2% and well over the +1.6% increase in June. Consensus estimates were for a rise of +2.4%. However, if you exclude the +14.1% rise in transportation orders for big ticket items like planes and trains, orders fell -0.4%. Despite the large headline number the core components pointed to continued slowing in the manufacturing sector.

New orders for capital goods rose +6.7% but if you remove the aircraft orders the number fell to -5.6%. Orders for core capital goods declined -3.4% and worse than the -2.7% decline in June. This report was not a factor for Friday's market. It was ignored.

The calendar for next week includes two regional Fed manufacturing reports and the Chicago ISM (PMI). Those reports will take a back seat to the Fed Beige Book due out on Wednesday. That is the survey of economic conditions in all of the Fed regions. The revision to Q2-GDP is also Wednesday and it is expected to decline only slightly to +1.5%.

All of these reports will be new bricks in the wall of worry while traders wait for the speeches. I envision a very boring week despite a lot of events in the mix.

Economic Calendar

Adding a little drama to the convention is the approach of tropical storm Isaac. The storm is expected to turn into a hurricane after it crosses Cuba on Sunday and could make landfall in the Tampa area on Monday afternoon. While that won't halt the convention it may make life miserable for the legions of protestors scheduled to camp out around the convention center. It will also add just one more story line for the mob of reporters trying to produce a sound bite.

Isaac was followed by Joyce but late Friday that storm degenerated into an unorganized group of storms and was downgraded to junk status. Another storm is brewing farther east of Joyce and that could be named over the next several days.

Isaac Chart

Isaac, Joyce and soon to be named Tropical Storm 11

Isaac is not only disrupting convention planning but oil drilling in the Gulf of Mexico. The current storm track may favor a turn up the west coast of Florida there is also a decent chance it moves farther west towards New Orleans and right through the eastern edge of the oil patch. If weather patterns changed only minutely it could head even farther west for a direct hit. If it strengthens as expected once it passes Cuba then it could turn into a category 1 or 2 hurricane.

Oil drillers are already moving nonessential personnel ashore from the rigs and production platforms that could be impacted. There are thousands of workers on more than 100 active rigs and platforms in the gulf and whenever a storm threatens the oil companies have to start evacuation and shutdown procedures several days in advance in order to get everyone moved safely ashore.

Tropical storm Isaac only has winds of 65 mph today but forecasters remember how quickly Katrina escalated from a category 3 to a category 4 and changed its track. A category one is 74-95 mph, two 96-110, three 111-129, four 130-156, five is greater than 156 mph. Isaac only has to gain 9 mph to become a category one hurricane and once over the warm waters of the gulf that can happen quickly. Forecasters believe Isaac could possibly become a category 2 hurricane if it holds together as it passes over Cuba.

Transocean alone has 14 rigs in the gulf and they are already moving personnel ashore. If Isaac turns just a few degrees to the west it could also hit the 10 refineries in the New Orleans and Baton Rouge area. Those refineries have a capacity of 2.5 mbpd. Refineries in Mississippi and Alabama account for roughly 500,000 bpd.

Shell reported that drilling operations have been suspended on its eastern assets but no production has been shut in as of yet. BP is evacuating employees from its Thunder Horse production platform and said it is shutting down the oil and gas production there. It is also evacuating from the Na Kika, Horn Mountain and Marlin fields. Murphy Oil, Apache and Diamond Offshore also reported evacuations.

Oil prices declined on Thursday and Friday despite the potential for a decline in supplies from the storm. The reason for the decline was a story in the Petroleum Economist citing anonymous sources that the IEA had agreed to endorse a plan to release oil from strategic reserves. On Friday multiple publications had picked up the story and embellished it to claim it could be as large or larger than the 60 million barrels released in 2011. Late Friday the IEA Executive Director responded to questions about the release saying, the agency remained in close communication with member countries and stood "prepared to act as necessary in response to a physical disruption." She avoided the questions on whether there was active consideration underway of a potential release. She did say "However, as I said as recently as last week, at this time the conditions that would warrant such a response by the IEA are not present."

Analysts believe that although there are no conditions that would justify a release the IEA may be forced to react to requests from the U.S., France and Britain, countries that want a release for political reasons to lower fuel prices. If those countries acted independently then the IEA would lose credibility. The IEA could change its stance at the request of those countries under the guise of lowering prices to add to the impact of the sanctions on Iran. Currently Iran is selling less oil but the prices it is receiving are about 25% higher than June. By going through the motions of releasing strategic reserves the price of oil would decline at least in theory. In 2011 that decline lasted about a week so the whole idea of a release to lower fuel prices is purely a political exercise in an election year.

The head of the French strategic reserve agency said "I have received no official instruction telling me to stand ready to release reserves and I am unaware of such plans." He said a release would not be "reasonable" under the current circumstances and would only be "legitimate" if geopolitical tensions between Iran and Israel worsened noticeably.

The Petroleum Economist claims France, Britain and Saudi Arabia have "endorsed the strategy" as requested by President Obama. Saudi Arabia said it saw no need for a release but the decision was up to the consumer countries. Japan, South Korea and Germany continued to say they were opposed to a political release.

A story late Friday suggested there would be no announcement of the move until after Labor Day and the end of the driving season in the USA. Also, Brent prices at $115 or $120 were discussed as a possible trigger for the move.

WTI Crude Chart

Brent Crude Chart

The Apple - Samsung suit was decided by the jury late Friday. Samsung lost. The jury ordered Samsung to pay Apple $1.05 billion for copying parts of the iPhone design in the Samsung phones and tablets. Apple had demanded $2.5 billion and a halt to sales of the infringing products. The jury rejected all of the Samsung claims in their suit against Apple. Not all of Apple's claims were allowed with the jury ruling against Apple on some but it was still an Apple win.

Apple lawyers will formally demand that Samsung pull its most popular smartphones and tablets from the U.S. market. They can also ask the judge to triple the damages to $3 billion. The judge will decide on all those motions over the next several weeks. Samsung will also petition the judge to overturn the jury's verdict.

The verdict in Apple's favor will likely cause many smartphone makers to reconsider their allegiance to the Android platform on worries that Apple will become emboldened with the win and launch suits against everyone else on the same grounds that have now been proven in court. ISI Group said the verdict was as much a blow to Android as it was to Samsung. Samsung said in a statement that the verdict will be a loss for the American consumer. It will lead to fewer choices, less innovation and potentially higher prices.

Apple has filed similar suits in eight other countries including South Korea, Germany, Japan, Italy, the Netherlands, Britain, France and Australia. Some other countries have already rejected Apple's claims so it is not a slam dunk that those suits will be won. Analysts believe Apple had the home field advantage with the case being tried just ten miles from the Apple headquarters and jurors were picked from the heart of Silicon Valley where Apple is the revered technological innovator.

Samsung won a suit against Apple in South Korea on Friday. The court ruled Samsung did not copy the look and feel of the iPhone and also ruled that Apple infringed on Samsung's wireless technology.

The real result of these cases will be whether Apple CEO will want to continue the "thermonuclear war" Steve Jobs had started (his words) or whether it makes more business sense to come up with a global settlement where everyone wins a little and business can continue. Considering Apple's cash hoard and the aggravation they can cause everyone else the odds are good they will press their win and keep fighting. Unfortunately for Apple that will create tens of millions of additional Apple haters so the company had better make a careful decision. Even the best innovator can struggle if consumers start believing you are arrogant and becoming an unfair monopoly.

The news came after the close but Apple shares rose +$10 to $675 in afterhours.

Apple Chart

The speeches next week by Bernanke and Draghi should shed more light on how the central banks plan to disperse stimulus in the future. The ECB is discussing a bond-buying program where it will set yield targets in a band in order to avoid speculators trying to cash in. If they know where the ECB is going to buy bonds then they can profit from it. The ECB is trying to develop a strategy that lets it buy bonds without a fixed limit in order to keep the program in operation for as long as needed. If the ECB said it would buy 100 billion euros of bonds it would limit its effectiveness. By having an open ended program without naming amounts it would keep speculators guessing. Essentially the ECB wants to keep yields on bonds like the Spanish 10-year at an affordable rate. Mario Draghi may reveal some of the concepts in the Sept 1st speech but the ECB is not likely to announce anything until after the Sept 6th ECB meeting and the Sept 12th ESM vote in Germany.

Analysts in the U.S. have taken recent comments from various Fed officials as suggesting the FOMC may announce a similar strategy. They may set targets like 3% inflation or 6% unemployment and then continue buying bonds (QE3) until those targets are reached. While that may sound like a plausible strategy it could result in the Fed's balance sheet expanding dramatically if growth did not begin to accelerate soon. The Fed is trying to refine its strategy and how it communicates that strategy.

In the FOMC minutes on Wednesday the Fed said "Many participants" embraced an open-ended bond-buying program for any future stimulus. Such a change would itself be a change in communications, said Barclays economist Michael Gapen: "It would, in effect, say that the Fed is in motion until the data tells it to stop." We would not have the monthly question of "Will the Fed change its policy at this meeting?" It would remove the uncertainty from the market since everyone could watch the monthly inflation and unemployment numbers and know exactly when the Fed was going to change its monetary policy.

For the last two years Chicago Fed President Charles Evans has argued the Fed should vow to keep adding stimulus until the unemployment rate falls below 7% and sticking to that plan unless inflation threatens to break 3%. His views are not in agreement with all the members. Some feel the simple rules would be limited and dangerous. Evans himself said on Friday that simple rules may not work but the Fed had to find a solution to the problem of communicating policy well in advance. While there is no clear answer at present we can expect the Fed to continue experimenting with the communications until they find a balance that satisfies the market and the economists.

St Louis Fed President James Bullard said on Thursday the expectations derived from the FOMC minutes that the Fed was going to add stimulus at the September 12th meeting was probably wrong. He believes the economic data has improved since the July FOMC meeting referenced in those minutes and the Fed will continue to remain on hold unless the situation deteriorated. He said the minutes were deliberately vague but made clear the threshold for action was high. "Continuing along at this slow pace is not enough to justify gigantic action."

Although he is not a voting member until he rotates into that position next year I think his comments are probably indicative of why Bernanke will disappoint the markets next Friday. Bernanke only has one major bullet left and that is QE3. I suspect he will not want to use that bullet this close to the election and without a significant decline in economic activity. If you only have one bullet left you don't want to be shooting at mice when there may be an alligator around the next corner.

There are alligator pits around the world and the Fed needs to save its ammunition in case of an escape. One pit is of course China. We learned last week that China can't really increase stimulus significantly because real estate prices are still elevated and inflation is still a risk in their mind. China's government leadership changes every ten years and the current leadership is preparing to hand over the reins to the new leadership in October. The fifth generation of leadership, expected to be Xi Jinping as president and Li Keqiang as premier, will take charge in October at the national congress. They will inherit an economy growing at the slowest rate in three years at just over +7% GDP and suffering from a global slowdown.

People claim China's growth is the big problem. It is not China. It is the rest of the world. If the rest of the world was consuming goods it would be China producing them. The global economy has slowed and we found out last week that inventory is backing up in warehouses and at manufacturers in China to the point where they are running out of storage space. Inventories rose faster in August than in any month since records were started in April 2004. Revenue growth for Chinese companies rose only 10% in Q2 compared to 20% in the year ago quarter. That is a three year low. China can't afford to shutter factories and see unemployment rocket higher. That would cause civil disturbances and unrest ahead of the leadership change. What we are likely to see is maintenance of the status quo until the leadership change in October and then the new leaders launching a major stimulus event as a signal of their commitment to growth. If China can't sell what it has already made then they are not going to buy more raw materials to make new goods.

The Chinese auto industry has grown 1000% over the last decade to become the world's largest. However, with cities now limiting the number of cars that can be registered in an effort to curb congestion and pollution the number of cars in inventory at dealers now exceeds their ability to store the cars. Dealer inventories of new cars have risen from 900,000 on December 31st to 2.2 million through June. Factories are now running at only 65% of capacity and it takes 80% to be profitable. New factories are being built so fast that new capacity added over the next three years will equal that of the total U.S. and Japan combined. The Shanghai Composite Index closed at a three year low on Friday.

Shanghai Index Chart

The HSBC PMI for China came in with a preliminary reading of 47.8 for August compared to 49.3 for July's final reading. If the reading holds for the rest of the month it will be the tenth month below 50 in contraction territory and the longest streak in the history of the report.

China PMI Chart

A sign of just how far global commerce has declined is the Baltic Dry Index or BDI. This is the cost to ship dry bulk goods like coal, copper, ores, building materials, etc. These are inputs into the manufacturing process so the index of shipping costs is a reliable indicator of economic activity. The Baltic index is an assessment of shipping costs across 23 shipping routes as measured on a time/charter basis. If there are 100 loads and 95 ships bidding for the loads then prices go up. If there are 95 loads and 100 ships bidding then prices go down. It is a supply-demand model that began in 1744. Today's Baltic Exchange was formed in 1823.

On May 20th 2008 the BDI reached an all time high of 11,793. By December 2008 it had fallen to a 20 year low at 663. After the recession it topped out again at 4,661 in 2009 before making a multi decade low of 647 on February 3rd, 2012. The index is heading back towards that low with a close at 717 on Friday. Since this is an actual index based on shipping activity there is no speculation involved. This is a clear indication that global economic activity is declining and reaching dangerous levels. Having Bernanke use his last bullet now will have no impact on this chart.

Baltic Dry Index (BDI) Chart

The market rebound on Friday after three days of declines was short covering with a little bit of speculative buying. The S&P dipped below 1400 at the open and that was strong support and an opportunity for shorts to exit gracefully and buyers to step in at a clearly defined support level. Unfortunately there was no conviction.

Volume was the second lowest of the year for a full trading day at 4.6 billion shares. The daily average for the full year is 6.6 billion and that is after the last five weeks of significantly weak volume otherwise it would be a lot higher.

The reason for the lack of volume is simple. This was a summer week with plenty of traders still on vacation until after Labor Day. Everyone is waiting on the Fed and ECB to announce their new stimulus plans. That means September 6th or later for the ECB and Sept 13th or later for the Fed.

The economy is trudging along at a snail's pace of +1.5% GDP and U.S. manufacturing has declined for the last four months. This is also August when market declines normally begin so there is no upside conviction.

After five weeks of gains there is no bearish conviction either. According to the AAII Investor Sentiment survey bullish sentiment rose +5.1% last week to 42% and bearish sentiment declined -2.2% to 25.9%. The long term averages are 39% for the bulls and 30% for the bears. That puts the current numbers just outside the averages and gives us yet another reason to be complacent. Investors are not overly bullish or bearish although the bulls are in control.

Last Sunday I pointed out that 1400 was the critical line in the sand and that proved to still be the case on Thursday and Friday. The failure of the bears to push us lower and the immediate rebound on the slightest news is confirmation the bulls are still in control. Until support at 1400 breaks or resistance at 1426 is surpassed we are just in a holding pattern.

S&P-500 Chart - 60 Min

S&P-500 Chart - Daily

The Dow actually broke below critical support at 13,100 on Thursday and it appeared we might be in for a trend change. That dip was bought on Friday to ease bearish speculation but the next decline below that level could be an indication of a future correction. The term correction may be too strong of a term and might be better referred to as a retracement. Dow 12,800 would be the first test but several analysts are predicting 12,600 as more likely.

Dow Chart - 60 Min

Dow Chart - Daily

The Nasdaq tried to form support at 3050 but there was a definite series of lower lows all week. Apple should help on Monday as traders capitalize from the Samsung loss but Google could decline as a result of the hit to the Android platform. Nasdaq 3085 remains resistance with 3000 as real support.

Nasdaq Chart - 60 Min

Nasdaq Chart - Daily

The Russell 2000 remains weak on a relative basis. It is far below its highs and under strong resistance at 820. At this point a move below 800 would be damaging to sentiment. Where I would normally watch the Russell for market sentiment I believe the S&P at 1400 and Dow at 13,100 are better indicators this week.

Russell 2000 Chart - Daily

Volume should be extremely light this week as the focus moves to the Republican convention, hurricane Isaac, monthly manufacturing reports, GDP and the expectations for the Bernanke/Draghi speeches and the Labor Day weekend. This is not a week to be going "all in" regardless of market direction.

With low volume and lack of market depth any program trades are going to have a dramatic influence on the market without any rhyme or reason. Watch S&P 1400 and 1422 for direction and keep your positions small.

Europe has been very quiet for the last several weeks without any deadlines to terrorize the markets. That is going to change soon. Greece is running out of money. The Greek Prime Minister Antonis Samaras visited Merkel in Berlin last week looking for more time to put reforms in place and Merkel said no. Greece is expected to run out of money in October and the EU does not want to pour good money after bad. The Netherlands, Finland, Estonia, Slovakia and Austria and Germany are against any further loans. The next EU summit is October 6th and without a major change in policy stance by the EU Greece will default again and start the entire conversation over again about leaving the euro.

In the U.S. five companies issued guidance warnings for every one company that raised guidance in their Q2 results. Only 41% of S&P companies beat on revenue and that is the lowest in three years. It is only the fourth time in ten years that it fell below 50%. Earnings estimates for Q3 continue to fall, now at -0.5%, but Q4 expectations are still in double digits. Q4 estimates have come down from estimates of 16% at the end of March to +10.3% today. Unfortunately there is no reasoning on why earnings are going to spike so significantly in just three months.

For the market to be challenging new highs with the fundamentals so bad it is clear most investors are betting on the Fed. Unfortunately they are likely to be disappointed unless you believe in the Fed's desire to propel the markets over the fiscal cliff. There is a train of thought that suggests the Fed will launch a QE3 program of sufficient magnitude to launch the markets above the year end cliff. SF Fed President John Williams, a voting member of the FOMC, has been proposing this since mid July. By announcing an open ended QE3 the Fed could power the stock market, the sentiment indicator for the masses, across the cliff and to a calm landing at some point in the future. Boston Fed President Eric Rosengren seconded Williams's comments in an interview on August 7th. By putting further downward pressure on interest rates it would provide additional support for the recovery and improve market conditions according to Rosengren.

We know that Bernanke sees the market as the sentiment indicator for the consumer. He has said so multiple times in past speeches. For instance in November 2010 in an op-ed in the Washington Post on QE2 he explained that "Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending." With the CBO now predicting a recession in 2013 as a result of the fiscal cliff it is possible the Fed will take action to accelerate the equity markets in hopes of avoiding a cliff dive at year end. However, it would seem that the Fed would want to wait and see who won the election before using their last major bullet on a last ditch effort to stave off the recession. If Romney and the republicans win they have already pledged to kick the cliff can another year down the road to give them time for major tax and spending reform. Surely with rates already near record lows the delay in announcing a new QE program for 75 more days would be justified. Who knows what thoughts are lurking in that Fed head but hopefully the next three weeks will reveal the Fed's plan.

Bill Gross said on Friday that QE3 was "almost a certainty" because the Bernanke Fed likes to telegraph moves in advance and "I can't remember such explicit hints such as this without follow through." With those kinds of statements from people like Bill Gross headlining the airwaves it is not surprising the markets are testing recent highs. Let's hope he is right about the Fed adding to the punchbowl or the hangover is going to be ugly.

Got 5 minutes? Read this: Serious trouble ahead

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

"Before I got married I had six theories about bringing up children; now I have six children and no theories."
John Wilmot


Index Wrap

A 'Normal' Technical Correction

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

Traders looking for this market to have a steep retracement may face disappointment. Last week, the indexes fell within nominal and 'normal' technical corrections (even the Dow) and then started to rebound.

I mention the Dow 30 (INDU) as it's been the 'weak sister' of the major stock indexes but the Dow rebounded from the low (support) end of its hourly uptrend price channel. I feature INDU's extended hourly chart here; note that INDU also hit a short-term oversold extreme this past week.

In talking about 'nominal' or normal technical pullbacks that remain WITHIN uptrend patterns, the S&P indices (SPX and OEX) rebounded from their 21-day moving averages and the Nasdaq Composite (COMP) and the big cap Nas 100 (NDX) rebounded from levels a bit above support implied by a line of prior highs.

I don't want to suggest that there's NO risk of, for example, a double top (relative to the weekly highs of late-March/early-Apr) in the strong Nasdaq 100 (NDX). SPX and COMP have not pierced and exceeded their highs from then either. Nevertheless, I don't anticipate that the very strong rally we've had dating from the early-June lows is just going to neatly fold here at the 2012 highs. The correction would likely be sharper and more pronounced if this was going to occur. We'll see if this coming week brings a steeper drop in line with that the bears are sure is to follow. I'm not so sure, regardless of European muddles and messes, no Fed action and so on. Stay tuned.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) remains within its broad uptrend channel. The doubt about SPX's continued strength technically is its recent failure to take out its earlier year highs in the 1419-1422 area. On the bullish side, the pullback to date from resistance has been modest and support so far has come when it 'needed' to maintain a bullish chart, in the 1400 area. Next lower technical support then comes in around 1370, at the current intersection of SPX up trendline.

Near resistance is in the 1420 area, with next higher resistance projected around 1440.

The 13-day RSI has fallen to below its 'typical' overbought zone at 65-70 with the recent sideways to lower move, but this indicator isn't at a 'neutral' (or oversold) reading either. Recent rallies have come after the Relative Strength index has fallen to 45-50 midrange readings; this pattern is something to watch for.

My CPRATIO sentiment model has fallen also. This indicator isn't at an 'oversold' bearish extreme but is showing continued caution about the staying power of this rally, which in its way is a mild bullish plus.

Based strictly on price action, Friday's rebound from key support at 1400 is encouraging for the bulls but 1400 'needs' to hold up as support to give much more than mild encouragement; e.g., regarding another attempt to go to new yearly highs.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart found support in the same manner as the S&P 500, as OEX also bounced from its 21-day moving average. Unlike big brother SPX, OEX was already at a new yearly high. Moreover, the pullback and rebound was from the area of the prior 2012 OEX highs in the 642-646 area. Prior resistance, once exceeded, should 'become' subsequent support in a continuing advance.

I'd rate OEX as still in a maximum bullish pattern if support holds at 643-640. The chart would remain overall bullish as long as the support up trendline stayed intact and didn't get pierced. Trendline support currently comes in around 634. (Major support begins at 620 and extends to the 600 area.)

Key overhead resistance is at 652-656. Next projected resistance, at the intersection of the upper channel line, is at 665.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) Average fell briefly below its 21-day moving average but only for a day so far anyway. Key support remains at 13000, at the current intersection of INDU's up trendline. Next significant technical support then comes in at 12800.

Near resistance at 13280 has turned the Dow back from its recent rally attempt; resistance extends from 13280 to the 13340 area. Major resistance implied by the upper trend channel line comes in around 13626 currently.

Keeping the rally alive is bullish, or mostly bullish, action in CSCO, CVX, DIS, HD, KFT, KO, PFE, TRV, WMT and XOM. Further advances in these 10 plus modest rallies in another 8-10 of the Dow 30 could be enough for INDU to mount another challenge to 13300 resistance.

INDU's RSI reading has hit a 'neutral' 50 level which could also help out the bulls here.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The bullish flag traced out previously with the Nasdaq Composite (COMP has seen the upside follow through suggested by this particular bullish pattern. COMP reversed after touching the upper end of its broad uptrend channel at 3100. Resistance at the prior 2012 highs, both Closing and intraday is at 3122 to 3134. It remains to be seen if COMP can pierce this key resistance given that it hit an overbought RSI extreme.

COMP's 13-day Relative Strength Index (RSI) hasn't fallen much below the area considered overbought. This kind of pattern can lead to further weakness as protective profit taking selling sets in. I somehow don't see this rally failing just yet, whether the index hasn't retraced much of its prior advance or not. It's a fake out for the bears if there was an upside penetration ahead of 12-month highs in spite of the recent faltering rally.

Price action is the key here. If 3032-3050 holds up as support we could see COMP test and maybe exceed prior 2012 highs. If not, next support and a key one, is at 3000. A Close below 3000, unless reversed (back to the upside) the next day would suggest a possible retest of support at the up trendline currently intersecting around 2930.

Bullish trader sentiment levels, based on the daily equities call to put volume ratio on the CBOE, have fallen in recent days but I tend to go with the contrarian view that the recent advance may revive and continue a while longer.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) Index has failed to pierce prior yearly highs in the 2800 area. On the other hand, the recent pullback as been minor so far and NDX has stayed above near support at 2740. Key support is next seen at the 21-day moving average, currently intersecting at 2717. The S&P rebounded from this key trading average but NDX held well above it so far as it shows better relative strength. Tech stocks continue to outpace the more mainstream economy stocks of the S&P.

Near resistance is at 2785-2800. This past week's high touched my 4 per cent upper envelope line which suggests an overbought extreme. Following this upper envelope line into its intersection early in the coming week suggests possible next resistance coming in around 2836.

Near support as I already noted is at 2740, next support in the low-2700 area, with major support beginning at 2650-2625.

NDX's minor recent weakness hasn't pulled the 13-day RSI very far under the 'overbought' 70-75 extreme zone. A question becomes whether NDX drifts sideways to lower such that the RSI at least pulls back to a 'neutral' reading around 50-55; or, of course, NDX could get oversold again. I doubt that because I don't see the Index making a double top for any prolonged period with a deep correction to follow; it could happen, I don't project it based on what I'm seeing currently.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) chart pattern remains bullish, as the recent correction is to date holding support implied by its previously broken upper channel line. The prior bullish breakout to above the upper end of QQQ's uptrend channel suggests that support might now be found at this previous line of resistance. Stay tuned on that because QQQ has failed so far to Close above the line of 2012 resistance at 68.5.

I've noted near support at 67.8 but should also mention expected near technical support as extending down to 67.3. Next lower support comes in at the 21-day moving average, as has been the case recently in the S&P.

Near resistance is at 68.5-68.9. 68.8 was the intraday high of Tuesday, which touched the upper 4% envelope line relative to the 'centered' 21-day moving average. A move to the upper envelope line suggests not only that the NDX tracking stock was overbought but the PRICE at which this was the case.

Daily trading volume ran up some on weakness after the Tuesday rally failure and extended into Wednesday on a minor rebound. This slight daily volume increase was moderate and nothing like what is typically seen in cases of a sharp correction. On Balance Volume (OBV) continues mostly on an upward path, which is a mild bullish plus.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) is lagging the rest of the major indexes but remains in its bullish uptrend channel. 820-827 remains a strong zone of resistance which needs to be overcome at some point to maintain a bullish trend.

There's no bearish tip over while RUT continues to trade above its 21-day moving average. Key support is currently at 800, extending to 790. A Close below 790 that wasn't reversed (back to the upside) the following day would suggest a possible retest of a line of support at 767-764.

Near resistance continues to be seen around 820, extending to the 827-830 area.

The 13-day Relative Strength Index for the Russell continues to slide from the 'overbought' RSI reading at 65 hit on 8/17. It looks plausible to me that technical support, especially at the low end of the highlighted uptrend price channel, will hold up and the RSI not slip below a neutral midrange reading again in the low-50 area before RUT rallies again.



GOOD TRADING SUCCESS!


New Option Plays

Biotech & Conglomerates

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) ROST, MMM, TFM, AMG, ITW, GCO, ACN, FIRE, IBB

(bearish ideas) MNST, CLH


NEW DIRECTIONAL CALL PLAYS

Celgene Corp. - CELG - close: 72.04 change: +0.57

Stop Loss: 70.45
Target(s): 77.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
We are seeing some strength in the biotech sector and CELG looks poised to breakout past resistance near $72.00. This stock has been building on a bullish trend of higher lows since June.

Friday's high was $72.53. I am suggesting a trigger to buy calls at $72.75 with a stop loss at $70.45. Our target is $77.50. FYI: The Point & Figure chart for CELG is bullish with a $81 target.

Trigger @ 72.75

- Suggested Positions -

buy the Sep $75 call (CELG1221i75) current ask $0.69

- or -

buy the Oct $75 call (CELG1220j75) current ask $1.57

Annotated Chart:

Entry on August xx at $ xx.xx
Average Daily Volume = 2.9 million
Listed on August 25, 2012


United Technologies - UTX - close: 80.08 change: +0.88

Stop Loss: 78.85
Target(s): 84.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
UTX is a major conglomerate and a Dow-component. The stock rallied to new three-month highs a week ago. Now after a four-day consolidation shares look poised to run higher again. Friday's high was $80.20. I am suggesting a trigger to buy calls at $80.30. We'll use a stop loss at $78.85, just under Friday's low of $79.00. Our target is $84.00 but more aggressive traders may want to aim higher.

Trigger @ $80.30

- Suggested Positions -

buy the Sep $80 call (UTX1222i80) current ask $1.61

- or -

buy the Oct $82.50 call (UTX1220j82.5) current ask $1.33

Annotated Chart:

Entry on August xx at $ xx.xx
Average Daily Volume = 3.7 million
Listed on August 25, 2012



In Play Updates and Reviews

Stocks Bounce But Not Enough

by James Brown

Click here to email James Brown

Editor's Note:

Stocks rebounded on Friday but it was not enough. The S&P 500 ended a multi-week winning streak.

We want to exit our JOY trade early on Monday.

PVH was closed as planned. UA was removed.

Current Portfolio:


CALL Play Updates

Amgen Inc. - AMGN - close: 84.59 change: +0.93

Stop Loss: 81.45
Target(s): 88.50
Current Option Gain/Loss: Sep85c: - 0.7% & Oct85c: + 9.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
08/25/12 update: AMGN is looking strong with a +1.1% gain on Friday and a close above resistance at $84.00. This could be the bullish entry point you've been waiting for.

- Suggested Positions -

Long Sep $85 call (AMGN1222i85) Entry $1.35

- or -

Long Oct $85 call (AMGN1220j85) Entry $2.15

08/15/12 triggered at $83.75

chart:

Entry on August 15 at $83.75
Average Daily Volume = 4.8 million
Listed on August 14, 2012


BRCM - Broadcom - close: 35.35 change: +0.14

Stop Loss: 34.40
Target(s): 38.50
Current Option Gain/Loss: + 7.2%
Time Frame: 4-6 weeks
New Positions: see below

Comments:
08/25/12 update: Traders bought the dip near $35.00 for the third day in a row. Readers might want to inch their stop loss higher. The bullish trend of higher lows and higher highs is still in place for now. I am not suggesting new positions at this time.

- Suggested Positions -

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

08/18/12 new stop loss @ 34.40
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


Concur Technologies - CNQR - close: 72.20 change: -0.46

Stop Loss: 69.75
Target(s): 74.75
Current Option Gain/Loss: Sep75c: + 0.0% & Nov75c: + 2.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/25/12 update: CNQR spent almost the entire week churning sideways between $71.50 and $73.00. Odds are growing that we'll see this stock dip toward what should be new support near $70.00.

- Suggested Positions -

Long Sep $75 call (CNQR1222i75) Entry $1.25

- or -

Long Nov $75 call (CNQR1217j75) Entry $3.60

08/21/12 new stop loss @ 69.75
08/16/12 new stop loss @ 68.75
08/15/12 triggered at $70.25

chart:

Entry on August 15 at $70.25
Average Daily Volume = 577 thousand
Listed on August 13, 2012


Dresser-Rand Group - DRC - close: 51.66 change: +0.06

Stop Loss: 49.45
Target(s): 54.75
Current Option Gain/Loss: - 6.0%
Time Frame: exit prior to Sept. option expiration
New Positions: see below

Comments:
08/25/12 update: DRC is still consolidating sideways in what almost looks like a mild bull-flag pattern. I don't see any changes from my prior comments. If you're worried about the broader market then consider waiting for DRC to dip in the $50.50 area as your entry point. FYI: The Point & Figure chart for DRC is bullish with a $58 target.

- Suggested Positions -

Long Sep $50 call (DRC1222i50) Entry $2.50

chart:

Entry on August 21 at $51.14
Average Daily Volume = 489 thousand
Listed on August 20, 2012


Express Scripts - ESRX - close: 61.76 change: +0.18

Stop Loss: 59.75
Target(s): 67.50
Current Option Gain/Loss: Sep62.5c: + 8.4% & Oct$62.5c: + 6.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
08/25/12 update: ESRX provided nimble traders a morning dip toward its 10-dma before the stock rebounded. I don't see any changes from my Thursday night comments and would still consider new positions now at current levels.

FYI: The Point & Figure chart for ESRX is bullish with a $76 target.

- Suggested Positions -

Long Sep $62.50 call (ESRX1222i62.5) Entry $0.95

- or -

Long Oct $62.50 call (ESRX1220j62.5) Entry $1.67

chart:

Entry on August xx at $ xx.xx
Average Daily Volume = 5.1 million
Listed on August 23, 2012


Joy Global, Inc. - JOY - close: 55.59 change: -1.25

Stop Loss: 55.25
Target(s): 59.75
Current Option Gain/Loss: Sep $57.5c: -24.4% Oct60c: -22.0%
Time Frame: exit prior to the Aug. 29th earnings report
New Positions: see below

Comments:
08/25/12 update: We are worried about JOY and suggesting an early exit. The stock seems to have peaked back on Tuesday. We're concerned shares could see a deeper correction. I am suggesting readers exit positions on Monday morning at the opening bell. More aggressive traders may want to widen their stops and hang on since there is still a chance that JOY will dip to and bounce in the $55-53.50 area. The simple 50-dma is at $53.66, which could offer some support.

Exit on Monday morning.

- Suggested Positions -

Long Sep $57.50 call (JOY1222i57.5) Entry $2.70

- or -

Long Oct $60.00 call (JOY1220j60) Entry $2.50

08/25/12 prepare to exit on Monday morning.
08/21/12 new stop loss @ 55.25

chart:

Entry on August 17 at $56.27
Average Daily Volume = 2.1 million
Listed on August 16, 2012


Netflix, Inc. - NFLX - close: 63.16 change: -0.89

Stop Loss: 61.25
Target(s): 69.50
Current Option Gain/Loss: -31.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/25/12 update: Heads up! Readers may want to consider an early exit from our NFLX trade. The stock was down on Friday following news that Amazon.com (AMZN) had just inked a deal with NBC Universal to a significant amount of content to AMZN's digital streaming video service. In summary, AMZN is getting to be tougher competition for the likes of NFLX. To make matters worse NFLX looks technically weak here. Thursday's decline produced a short-term bearish reversal pattern and Friday's decline might be considered confirmation of the reversal.

I am not suggesting new positions. Readers may want to hit the eject button.

Earlier Comments:
I do consider this an aggressive trade. NFLX can be volatile.

- Suggested (SMALL) Positions -

Long Sep $67.50 call (NFLX1222i67.5) Entry $2.23

08/25/12 NFLX not working for us. Readers may want to exit early
08/21/12 new stop loss @ 61.25

chart:

Entry on August 16 at $63.46
Average Daily Volume = 5.8 million
Listed on August 15, 2012


Qualcomm - QCOM - close: 62.43 change: +0.39

Stop Loss: 60.95
Target(s): 64.25
Current Option Gain/Loss: +17.6%
Time Frame: 4-6 weeks
New Positions: see below

Comments:
08/25/12 update: QCOM has been churning sideways the last few days following Tuesday's bearish decline. Prior support at the 10-dma has become new short-term resistance. I am still concerned that QCOM could see a deeper correction after a multi-week rally.

I am not suggesting new positions at this time.

- Suggested Positions -

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

08/18/12 adjust exit target to $64.25
08/16/12 new stop loss @ 60.95
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


Snap On Inc. - SNA - close: 69.96 change: +0.19

Stop Loss: 69.65
Target(s): 74.90
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
08/25/12 update: SNA has spent an entire week now consolidating sideways under resistance near the $71 level. The larger trend remains bullish. We are waiting for shares to hit our trigger at $71.00. Our target is $74.90. More aggressive traders could aim higher.

Trigger @ $71.00

- Suggested Positions -

buy the Sep $70 call (SNA1222i70)

chart:

Entry on August xx at $ xx.xx
Average Daily Volume = 390 thousand
Listed on August 21, 2012


Whole Foods Market, Inc. - WFM - close: 97.03 change: +1.95

Stop Loss: 94.75
Target(s): 104.50
Current Option Gain/Loss: Sep$100c: -24.8% & Oct$100c: - 7.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
08/25/12 update: Good news! There was no follow through on Thursday's ugly reversal lower. WFM gapped open higher (a little bit) on Friday and completely erased Thursday's decline. However, shares have not conquered the $98 level yet. At this point I would wait for a rally past $98.25 before launching new positions.

Earlier Comments:
Keep position size small to limit risk.

- Suggested *SMALL* Positions -

Long Sep $100 call (WFM1222i100) Entry $1.45

- or -

Long Oct $100 call (WFM1220j100) Entry $2.50

chart:

Entry on August 23 at $98.00
Average Daily Volume = 1.7 million
Listed on August 22, 2012


Westlake Chemical - WLK - close: 69.50 change: +0.37

Stop Loss: 68.40
Target(s): 74.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
08/25/12 update: The sideways consolidation in shares of WLK seems to be narrowing. That would suggest the stock should breakout one way or the other soon. I am suggesting we use a trigger to buy calls at $70.25. Our initial target is $74.75.

Trigger @ 70.25

- Suggested Positions -

buy the Sep $70 call (WLK1222i70)

chart:

Entry on August xx at $ xx.xx
Average Daily Volume = 507 thousand
Listed on August 22, 2012


WellPoint Inc. - WLP - close: 57.66 change: -0.07

Stop Loss: 55.85
Target(s): 59.75
Current Option Gain/Loss: -16.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/25/12 update: The lack of follow through on Wednesday's bullish breakout higher in WLP is still a concern. Yet at the moment WLP still has a bullish trend of higher lows. Readers may want to inch up their stops.

I am not suggesting new positions at this time.

- Suggested Positions -

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

08/16/12 new stop loss @ 55.85
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

FB - Facebook - close: 19.41 change: -0.03

Stop Loss: 20.35
Target(s): 17.00
Time Frame: 2-4 weeks
Current Option Gain/Loss: - 3.4%
New Positions: see below

Comments:
08/25/12 update: Things have been quite for FB the last few days. There was no follow through on the breakdown below $20 and no follow through on Monday's oversold bounce. The stock has been stuck in a narrow sideways range the last four days. The $20.00 level "should" be overhead resistance but I am not suggesting new positions at this time.

You'll notice on the chart tonight that the sideways consolidation is narrowing and that would suggest a breakout one way or the other very soon.

FYI: The next big lock up expiration date is in November!

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

08/18/12 new stop loss @ 20.35, readers may want to take profits now
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


Weight Watchers Intl. - WTW - close: 48.05 change: -0.28

Stop Loss: 50.55
Target(s): 42.50
Current Option Gain/Loss: Sep47.5p: - 8.1% & Oct45p: -13.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
08/25/12 update: So far so good. WTW underperformed the market on Friday with a -0.5% decline. Our trade opened on the gap down at $48.21. I don't see any changes from my Thursday night comments. The stock looks poised to resume the longer-term downtrend.

- Suggested Positions -

Long Sep $47.50 PUT (WTW1222u47.5) Entry $1.85

- or -

Long Oct $45.00 PUT (WTW1220V45) Entry $1.85

chart:

Entry on August 24 at $48.21
Average Daily Volume = 929 thousand
Listed on August 23, 2012


CLOSED BULLISH PLAYS

PVH Corp. - PVH - close: 87.94 change: +0.87

Stop Loss: 85.75
Target(s): 91.50
Current Option Gain/Loss: +16.2%
Time Frame: exit prior to the Aug 27th earnings report
New Positions: see below

Comments:
08/25/12 update: PVH conveniently cooperated with our exit plans. We wanted to exit on Friday at the closing bell to avoid holding over earnings on Monday. Shares rallied +0.99% on Friday.

- Suggested Positions -

Sep $87.50 call (PVH1222i87.5) Entry $3.27 exit $3.80 (+16.2%)

08/24/12 closed on Friday
08/22/12 new stop loss @ 85.75, prepare to exit on Friday (08/24) at the closing bell
08/18/12 more conservative traders may want to take profits early
08/16/12 new stop loss @ 84.75
08/14/12 triggered on gap open at $85.62 (trigger was 85.25)

chart:

Entry on August 14 at $85.62
Average Daily Volume = 845 thousand
Listed on August 13, 2012


Under Armour, Inc. - UA - close: 55.87 change: -1.32

Stop Loss: 55.70
Target(s): 64.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
08/25/12 update: UA has spent two weeks consolidating in the $56-58 range. Now it looks like shares might be poised for a deeper pullback. Our trigger to open bullish positions at $58.55 has not been hit. We're removing UA as a candidate.

Trade did not open.

08/25/12 removed UA as a candidate.

chart:

Entry on August xx at $ xx.xx
Average Daily Volume = 2.1 million
Listed on August 18, 2012