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Newsletter

Daily Newsletter, Saturday, 9/1/2012

Table of Contents

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

Market Wrap

Walking a Tightrope

by Jim Brown

Click here to email Jim Brown

Ben Bernanke successfully walked a tightrope in his Friday speech with just enough hints to satisfy all sides.

Market Statistics

Bernanke gave a 24-page speech on changing monetary policy since the financial crisis and he waited until the very last sentence before he said what analysts wanted to hear.

"As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation. The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.

Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability."

He discussed the various benefits and drawbacks of nontraditional (QE) monetary policy for several pages then he setup the close with the jobs mandate "enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years." Then in the last paragraph he basically said regardless of the costs and limits "The Fed WILL provide additional policy accommodation as needed." Since he just described why it was needed the last sentence was the message to the markets.

Full text of speech here: Monetary Policy Since the Onset of Crisis

The markets were not impressed at the beginning of the speech with the Dow falling -100 points from its opening high at 13,122 but then the Bernanke bulls rushed into the dip to power the index back to higher highs at 13,152. They could not hold the highs and the Dow bled points at the close but it still ended with a +90 point gain.

Dow Intraday Chart

Since Mario Draghi cancelled his appearance and speech at the Jackson Hole conference the next critical event is the ECB meeting on Thursday and then the Nonfarm Payrolls on Friday. The ECB is expected to announce a bond-buying program BUT it may not be announced until after the September 12th vote on the ESM by Germany.

Draghi said on Friday the ECB members will have an advance copy of the bond-buying plan on Tuesday so they can think about it before being forced to discuss it and vote on Thursday. Analysts at Commerzbank AG and JP Morgan said the apparent complexity of the plan may prevent the details from being released until after the Sept 12th German vote. They don't want to scare Germany into a negative vote and throw the process back another six months. Reportedly there will be caps on sovereign bond yields based on spreads on German bunds.

The German Bundesbank is openly opposed to further bond purchases. Reportedly Bundesbank president Jens Weidmann has considered quitting over the new Draghi plan.

Also clouding the issue is the imminent bailout requests by Spain and Italy. Merkel has "reportedly" asked each country NOT to ask for a bailout until after the German vote. Also, any country asking the ECB and ESM to buy their bonds would have to sign a Memorandum of Understanding agreeing to the conditions for the aid. Spain is already resisting agreeing to anything because the MoU could contain budget requirements, spending cut mandates, priority repayment rules, etc.

The next two weeks are going to see a roller coaster of headlines from Europe and from the U.S. with the FOMC meeting on Sept 12th, the same day as the German vote.

Economic reports in the U.S. on Friday were not exciting with a mixture of pessimism and optimism. The Chicago ISM (PMI) for August came in at 53.0 compared to consensus estimates for a decline to 53.5 but the internal components showed promise. The July reading was 53.7.

New Orders rose from 52.9 to 54.8 and production rose from 54.5 to 57.4. Employment rose from 53.3 to 57.1. Unfortunately the back orders component declined sharply from 52.8 to 41.7. That suggests future activity will slow due to falling backlogs.

Auto manufacturing has caught up with the pace of slowing auto sales and that will force a slowdown in the companies that supply parts to the automakers. I would expect the headline number to decline further in September as a result.

Chicago ISM Chart

The final reading on August Consumer Sentiment rose to 74.3 from 73.6 and nearly +2 points over consensus estimates for a decline to 72.5. The July number was 72.3 and the reading for the first half of the month was 73.6. Analysts blamed the gains on the rise in the equity markets to test the resistance highs. The present conditions component rose from 82.7 to 88.7 while the expectations component declined slightly from 65.6 to 65.1.

Consumer Sentiment Chart

Factory Orders for July rose +2.8% and well over the consensus for a gain of +1.8%. This compares to the -0.5% drop in June. However, as in the Durable Goods report last week if you remove aircraft orders the number fell to -4.0%. Overall the demand for capital goods continues to weaken and we are looking forward into the holiday season so orders today should be strong. This report continues to show weakness in the broader economy and these same numbers for Q3 could be ugly. Core capital goods orders are down -16.7% annualized over the prior three months.

The economic events for next week are headlined by the ISM on Monday, ADP Employment, ISM Services and ECB meeting on Thursday and then the Nonfarm Payrolls on Friday. Currently the estimates for Friday's jobs report are for a gain of +128,000 jobs compared to a gain of +163,000 last month.

However, the weekly jobless claims have been rising with the last two weeks at 374,000 each compared to the mid 350,000 range in July. This suggests there will not be a big upside surprise in nonfarm payrolls this month. This is the report that could drive the Fed to ease again the following week. If jobs are weak then Bernanke's long term unemployment warning in the Friday speech will come into play. Most analysts expect a weak jobs report and that is why the market rallied after Bernanke spoke. They don't expect the report to be bad, just weak.

Jobless Claims

The ECB meeting could move our markets more than anything else until Friday. After Draghi's promise to do "whatever is necessary" analysts and investors are going to expect him to follow through on his promise. If the ECB wimps out again I doubt any amount of can kicking is going to rescue the equity markets. This is a do or die meeting for the ECB and Draghi. Even dragging out the announcement until after the German vote on the 12th could be market negative simply because expectations are so high.

Economic Calendar

Announcements next week that are stock related include the Wednesday announcement by Microsoft and Nokia of a new generation of Nokia phones running the Microsoft OS. Also on Wednesday is the Motorola and Verizon announcement rumored to be a phone with a display that runs from edge to edge. No more wasted borders. With the trend to larger phones with larger viewing areas this could be an interesting proposition.

Lastly Amazon is expected to announce the new version of the now sold out Kindle Fire. Existing Kindles have been "sold out" according to Amazon for several weeks now so their scheduled announcement is expected to be a new Kindle line. Included is a 7 inch Kindle Fire and according to the WSJ it is an advertising supported Kindle. When you turn the device on an advertisement pops up before the menu page. Since they have had advertising supported Kindle e-readers you have to wonder what took them so long on the tablets.

There are rumors that Amazon could give away a mini Fire with a Prime membership. What a great way to induce more buying on their website and build brand loyalty among their best customers.

The following week on the 12th is Apple's big announcement, which is expected to be the iPhone 5 and possibly a new iPad as well. Apple is expected to announce a 7 inch iPad mini.

With only 115 days until Christmas all of these offerings are expected to produce a buying frenzy in electronics. The best part about it is the expected reduction in prices. With so many firms competing for your electronics dollar the prices are going to fall. For those buyers that can control their emotions and wait until January the prices should be even lower.

We could get a different kind of phone announcement next week as well. It is rumored that Google and Apple are in the midst of a summit meeting after Apple won the suit against Samsung. At risk is the Android operating system and the phones that run it. If the two companies can bury the hatchet and call a patent truce then Google should prosper. Google is in a lot better position after it acquired Motorola and their 7,000 wireless patents. I am sure they have explained to Apple that several hundred of those could cover something that Apple may have done in the iPhone and iPad that may have infringed the Motorola patents. Both companies are very patent savvy and odds are good they will reach an agreement to cross license and peacefully coexist. The problem for Google is that the company will want Apple to coexist with all the Android phones in production not just the ones made by Google and Motorola. That is the only way Google can continue to push the Android OS. Apple may not want to sign a peace treaty that covers the planet for anything with an Android OS. Time will tell. On Friday Apple petitioned the court to add four more devices to the Samsung suit and ban them from the USA.

Google shares closed at $685 on Friday and right at an all time high. Apple shares have faded slightly from their post Samsung high. Apple faithful should remember that Apple shares typically rally into the product announcement but then decline immediately afterwards in a bout of sell the news profit taking.

Google Chart

Apple Chart

Facebook shares hit a new historic low at $18 on worries over slowing earnings and the 1.5 billion shares still to be unlocked before year end. FB still has a PE of 67 and declining earnings so investors are fleeing the stock. Those who thought there would be a sell off and then a bounce have given up looking for the bounce. I was hoping to see a decent bounce to the resistance at $22.50 so I could launch a new short but it does not look like I am going to get that chance. BMO Capital Markets cut their price target by $10 to $15. Bank of America Merrill Lynch, an underwriter of the IPO, cut its target by $12 to $23.

Facebook Chart

Crude prices rallied $2 after the Bernanke speech as shorts were forced to cover on expectations for QE from the ECB on the 6th and FOMC on the 13th. After three days of declines the losses were erased in one session as is normally the pattern in the futures market. Crude closed at $96.50 for WTI and $115 for Brent.

Most oil and gas companies in the Gulf were in the process of restarting production with no reports of any major damage. Only one refinery, the Phillips 66 Alliance in Belle Chase LA, reported flooding. The 247,000 bpd refinery was working on pumping out the water so they could restart.

Offshore Shell and Anadarko were going to restart production platforms on Friday. At one point last week 95% of gulf oil production and 73% of natural gas was offline. As of Thursday 936,500 bpd of refinery production was still offline due mostly to power issues. The EIA said the majority of the 1.3 mbpd of oil production and 3.2 Bcf of gas production should be back in operation by early next week. Pipelines had been restarted and the Louisiana Offshore Oil Port (LOOP) and Henry Hub gas terminal were operating normally Thursday night. Rail shipments of crude were expected to resume on Friday.

WTI Crude Chart - Weekly

Brent Crude Chart - Weekly

Crude prices have been supported by the headlines over a potential Israel/Iran conflict. Israeli Prime Minister Benjamin Netanyahu said he will speak on the dangers of Iran at the U.N General Assembly in New York in late September. In his statement he said he would "Tell the nations of the world in a clear voice the truth about the terror regime of Iran, which represents the greatest threat to world peace." This should be an interesting speech. Israel is being pressured by numerous nations not to attack Iran alone. The timing of this speech should mean there will not be any attack in September.

Crude rose more on the falling dollar and expectations for QE than on Isaac damage, which was very light. The Dollar Index fell to a three-month low on expectations for QE. That pushed commodities including silver, gold and oil higher. Silver rallied for a +4.4% gain of +1.34 to $31.79 and a four-month high. Gold rallied +2% or $35 to $1692 and a five-month high. Citi is still expecting gold to reach $2400 in the next 12 months.

Dolar Index Chart

Silver Chart

Gold Chart

The market moved sideways all week before ending with a minor gain on Friday. Volume for the last week of the summer hit a new low for the year on Thursday at only 3.9 billion shares traded. Friday's volatility was good for a spike back to 5.1 billion and the most volume in the last six days but still relatively weak.

We should not have expected much in the way of volume for the last vacation week of summer. Friday was expected to post a gain assuming Bernanke did not spoil the party. Since 1928 the Friday before Labor Day has posted a gain 73% of the time.

Monday is a holiday and Tuesday will be recovery day where vacation returnees try to figure out what they missed and where the market is going. Since Friday was month end we "should" see an upward bias on Tuesday from retirement contributions but the ISM report could be a pothole.

Thursday is the key with the large calendar of events. This should be the pivotal day for the market. The S&P found support at 1400 twice over the last two weeks and that remains the critical level to watch. Initial resistance is 1415. Trading this horizontal pattern should be a slam dunk. Buy the breakout and short a breakdown.

S&P Chart - 90 Min

S&P Chart - Daily

The Dow broke down on Thursday to a new four-week low at 13,000. Support at 13,100 failed and now appears to be resistance. IBM, CVX and AXP were the big gainers on Friday with only MRK and T posting losses. Friday was not a fundamentals day. It was strictly Bernanke related in a low volume market.

The lower low at 13,000 is now the critical level to watch. Since September is normally a bad month for the markets the bears will be watching the support levels like a hawk for signs of a failure.

Dow Chart - 90 Min

Dow Chart - Daily

Unfortunately for the Dow the Transports imploded last week to end with a -111 point decline for the week. It could have been cancelled airline flights because of Isaac or high fuel prices or any number of things. However, the +14 point rebound on Friday was nothing. For an index that has lost more than 200 points in the last two weeks the minor gain was a definite lack of confidence.

If the transports slip below that 4930 support level it could be lights out for the Dow. A breakdown will not go unnoticed.

Dow Transports Chart - Daily

The Nasdaq has been moving perfectly sideways between 3040-3085 and showing very little volatility. The Nasdaq has been holding near its highs and has not dipped like the Dow. Support at 3040-3050 has been firm. If Apple and Google can bury the hatchet somewhere besides in each other then the tech outlook is positive. Apple's Sept 12th announcement is expected to provide upward momentum until at least the 12th. The other phone/tablet announcements this week should also be positive.

Nasdaq Chart - 90 Min

Nasdaq Chart - Daily

The Russell 2000 took a hit on Thursday and failed to recover on Friday. The index was weak relative to the large cap indexes. The 805-808 level as support is now critical. Resistance at 820 has been solid.

Russell Chart - 90 Min

Russell Chart - Daily

In theory the threat of QE by the ECB on Thursday should support the markets. However, threats only work if you actually follow through on them from time to time to show you are serious. Mario Draghi has failed to follow through on more than one occasion and there is always the possibility they will try to kick the can down the road until after the Sept 12th vote in Germany. It all depends on how they phrase the delay if it appears.

Europe was on vacation for most of August and will be back at work next week. The lull in headlines should end. The Olympics are behind us and there is nothing to distract Europe from the problems in Portugal, Greece, Spain and Italy. Expect them to take center stage once again.

On this side of the pond the critical reports are the ISM, ADP and Nonfarm Payrolls. Depending on your market view you want either blowout reports suggesting the economy has begun to rebound or weak reports so the Fed will act again.

I had a reader email me last week asking this question. "Do you want the Fed to announce more QE?" I thought that was interesting since it shows me that I have not expressed my opinion correctly. I get in the habit of reporting the facts as others see them and not making it clear how I stand. Some may not want to know where I stand while others may be interested. While I am not as rabid as Ron Paul against the Fed I do believe the constant QE is damaging our economy long term. I would rather they not do any more QE but that decision is up to people smarter than me. Personally I have been buying silver for quite a while now in anticipation of more QE and rampant inflation farther down the road. I have recommended silver for an investment/hedge several times in these pages so that should not be a surprise. We can be against something and still profit from it. I am against QE long term but I will profit from it because of its impact on oil and silver.

Bill Gross said again 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." He is a prime example of someone planning on profiting from events beyond our control.

However, QE is only an attempt to buy time while the economy repairs itself. QE has limits and consequences. Eventually it has to end and the withdrawal process is going to be very painful. Before this is over the Fed will likely have more than $3 trillion in securities bought with QE funds. They will have to return their balance sheet to a reasonable level in order to be prepared for the next crisis. There are only two ways to reduce this $3 trillion balance. They either have to sell those securities back into the market at which time interest rates will spike as a result or they can wait for the securities to mature and be paid off. When the balance sheet was weighted towards the lower end of the curve in the 18-36 month range the waiting for maturity process was acceptable. With their recent Operation Twist program they sold their short dated securities and bought long dated securities in the 7-10 year range. Now they can't afford to wait for the maturity process. They will have to sell these back into the market in order to be prepared for the next crisis, which normally occurs on a five year cycle.

Goldman Sachs reported last week that the U.S. budget is facing an additional $8 trillion shortfall through 2022. That assumption assumes a "business as usual" stance and no significant spending cuts. The same estimate applies regardless of who wins the election. If Obama wins taxes will go up but spending will go up more. If Romney wins taxes will go down along with spending so the deficit result is the same according to Goldman.

That would put the deficit around $25 trillion by 2022 when you include interest. Eventually the world is going to quit buying our debt once they understand that it is mathematically impossible for us to pay it. That means interest rates will go up because of weaker debt sales at approximately the same time the Fed will need to be unloading their $3 trillion hoard.

Here is where the U.S. public gets the raw end of the deal. The Fed will have to allow inflation to rise to previously unacceptable levels in order to generate revenue for debt payments. For every dollar spent today somebody pays taxes on it eight times as that dollar winds its way from a retail purchase back through the supply chain to the manufacturer. The remainder eventually makes its way back into a paycheck for someone and the entire process starts over. If inflation begins to rise significantly then the goods purchased by that dollar cost more and requiring more dollars to purchase them. That inflation moves up the supply chain and eventually requires higher salaries to bring incomes in line with inflation. The government's revenue increases significantly because there are more dollars moving through the system and taxes received from those dollars increase.

The government (Fed) understands they will need to foster inflation at some point in the future in order to raise revenue and make debt payments. QE cannot solve this problem and actually will add to it when the cycle reverses. Inflation will move significantly higher. Count on it. QE cannot make up for the fiscal cliff or for inaction in Washington. At this point the only thing QE can do is force interest rates to remain low for a couple more years while inflating the stock market. Bernanke even took credit for inflating the equity markets and increasing the wealth effect in his Friday speech. Apparently the Fed has decided it has three mandates instead of two. Stable prices, low unemployment and higher equity prices. The current QE cycle will eventually end badly. Since the Great Depression the Fed has NEVER been able to successfully remove monetary stimulus from the economy without a market crash. The Fed has NEVER before had this much stimulus in the economy. Do the math.

"Politics is not the art of the possible. It is choosing between the unpalatable and the disastrous." John Kenneth Galbraith (hat tip to John Mauldin)

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

"Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime."
Proverb


Index Wrap

New Monthly Closing Highs in OEX and NDX

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The current most favored sectors, the big cap S&P 100 and Nasdaq 100, ran up to new monthly closing highs for 2012. Even the S&P 500 came close to exceeding its March high Close making it look like bullish influences are coming.

BIG PICTURE (MACRO) CHART VIEW; MONTHLY S&P 500:

I don't often show a monthly chart like my first one, that of the S&P 500 (SPX), but I myself look at the monthly chart periodically. In his day, Charles Dow would have only considered monthly Closes in terms of major market progress and relative to the primary trend in what became (after Dow) 'Dow Theory'.

With the SPX monthly chart here, I want to highlight that SPX is only within a couple of (S&P) points of a new 12-month Closing high. If there's a September Close above 1408, this would be the highest Closing monthly high since May, 2008. I'd also note again that 'overbought/oversold' concepts are all RELATIVE to the time frame being studied and on a 5-month basis SPX isn't yet at an historical overbought RSI extreme on this longest term chart.

A further note on the S&P is that the big cap S&P 100 has gone to a new monthly high close. You next have to go back to December 2007 to find the highest previous OEX closing monthly high. One point in this price history is to remind that the current market remains within a major/primary uptrend. Focus on bearish fundamental factors that are seen currently isn't the whole story, certainly not technically.

Comparing the S&P to Nasdaq, the Nas Composite Index (COMP) is nearing its prior monthly high (March 2012) at 3091 (August Close: 3067). However, the big cap Nasdaq 100 (NDX) is the other (besides OEX) major index to exceed its 2755 March 2012 Close as NDX finished August at 2772. This makes for NDX's highest monthly Close since October 2000. It also means that NDX is closing in on a 50% upside retracement (at 2806) of the massive March 2000 to October 2002 bear market decline. I view this 50% NDX retracement both as a milestone and as possible tough resistance.

SMALL PICTURE (MICRO) HOURLY CHART VIEW; OEX:

Picking an extended hourly chart to focus on the near to intermediate trend, the S&P 100 (OEX) hourly chart is seen next. Technically, a couple of things stand out: 1.) the importance of the lower (up) trendline, currently suggesting support coming in around 640 and that 2.) the sideways to lower move has brought the 21-hour Relative Strength Index (RSI) down to nearly what would be a short-term 'oversold' condition. Stay tuned as to whether there's a bounce soon, especially from a successful test of OEX support in the 640 area.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

As long as the S&P 500 (SPX) continues to consolidate prior gains and remain mostly above 1400 the chart remains optimally bullish in its pattern. There could be a day at or slightly below this line of prior support but as long as a rebound followed in the next 1-2 days, a bullish chart is intact.

1400 is a pivotal level, but also key in terms of potential technical support is the June-July up trendline, currently intersecting in the 1380 area. A close below this trendline would suggest the possibility or likelihood of a further drop such as for a retest of the prior (down) swing low at 1330.

Resistance is seen in the 1419-1422 area then up, around 1450. To keep a rally going, a couple of closes above 1420 is needed to suggest a move to the 1450 area as a next target.

Obviously, the S&P is marking time such as for some next (e.g., Fed meds) event(s). A sideways move can be a consolidation prior to another up leg OR price action that is 'building a top'. So far, a consolidation looks true. It's also true that a sideways move tends to 'throw off' a short to intermediate-term overbought condition; see the declining 13-day RSI. This would be a continuation of the pattern of recent weeks, whereby the RSI didn't fall lower than its 'neutral' 50-45 zone before another rally occurred. Another bullish plus is seen with my trader sentiment (CPRATIO) indicator hitting a low bullish/high bearish 'oversold' type extreme on Thursday.

S&P 100 (OEX) INDEX; DAILY CHART

I noted last week that the S&P 100 (OEX) chart would remain bullish as long a support holds at 643-640. This week I'd put technical emphasis on the up trendline currently intersecting in the 639-640 area. As long as this trendline (mostly)'holds' as support, there's little suggestion of a downside reversal. There is the possibility that both S&P indices are 'building' a top and a hint of a bearish Head & Shoulder's in OEX. Next support below the trendline comes in at 630; major support begins at 620.

I take a mostly bullish view of the chart pattern as a high-level consolidation prior to another rally. It's also true that the sideways move has been throwing off the 'overbought' 13-day RSI extreme of 8/20-8/21. In strong uptrends, sometimes the Relative Strength Index will only fall back to a 'neutral' 50 or so before another rally develops. A full-blown correction will of course tend to see a fully oversold extreme occur before a bottom, such as was only last seen back in May-June.

Key overhead resistance is at 652-656. Next projected resistance, at the intersection of the upper channel line, comes in around 670.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

Key technical support in the Dow 30 (INDU) Average is at 13000 and that held mostly into the Thursday low; see chart highlights. Next support looks like 12800, with major support beginning in the 12600 area.

INDU is lagging the other key indices as we know, as attention has turned more to higher-growth stocks. Of course we still have Dow stocks that are seeing continued strong earnings, but they are mostly consumer defensive/consumer staple type companies. Namely or especially AXP, CVX, DIS, HD (wish I'd bought more!), KFT, KO, MCD, PFE, TRV, WMT and probably still XOM (there's some question as to it topping out). We can probably safely say that a third (10) of the Dow 30 could pull the overall Average up further but there's 10 that are lagging and dragging and another 10 that will mostly get pulled up with a continued strong market.

As to further upside potential or possibilities, a better play that the Dow is in OEX or NDX. On the next full-blown Market correction, it looks like DJX puts would be a way to play the downside.

Resistance is still the same as noted last week as those prior closing and intraday highs at 13280 to 13340 haven't changed any. Major resistance begins around 13600 in my estimation. The 'MAXIMUM' Dow upside is probably back to the 14000 area; the all-time INDU peak is in that area per its late-2007 top.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) continues to manage its bullish consolidation above support implied by a line of prior highs in the 3030 area. Key support is there and next at 3000. Continued ability for COMP to stay above its 21-day moving average maintains a bullish chart picture.

Next up for further bullish possibilities is for the Index to Close above 3085. Next resistance then comes in at 3122-3134, at the top end of COMP's uptrend channel.

Key support as already noted is 3030, extending to 3000. Trendline support comes in at 2960. Major support begins at 2900, extending to 2850.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) Index continues to stall out when there have moves into the area of yearly highs around 2800. On the other hand, a line of support has been seen on dips to the 2750 area. NDX is in a narrow trading range. Usually, in chart or technical (analysis) terms, give the benefit of the next move to the prior trend, which has been strongly up of course.

On the other hand, a sideways drift after hitting a prior key high starts to look like a double top. The only 'sure' way so to speak to play or stay in the next move is to wait for either a bullish (upside) breakout or a bearish breakdown below a prior pivotal chart low or lows; or, sometimes as seen with a move to below a key moving average like the 21-day average.

So, PIVOTAL near support is at 2750, then down at 2700. Major support begins at 2650-2625.

A clear cut line of resistance is at 2785-2800. A Close above 2800, that wasn't reversed a day or two later, looks good for another 50-75 points higher.

NDX bellwether Apple Corp (AAPL) flirted with key technical resistance in the 680 area this past week, up a bit from the prior week. AAPL's chart pattern isn't clear yet either. A decisive upside penetration of 680 sets up a possible test of pivotal resistance at 700 in AAPL. Stay tuned. iPhone 5 is coming folks as the Google and Apple giants fight it out for dominant market share in phones and operating systems!

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) chart pattern remains bullish like the underlying Nas 100 index but QQQ has the same bullish 'challenge' so to speak, which is to pierce a well-defined line of resistance in the 68.5 area. Next resistance and what may prove to be fairly major resistance then looks to come in around 70.

Implied support is at the 21-day moving average at 67.5 currently, with next support coming in at 67.0

Volume jumped on Friday on the rally which is unusual for the Q's. I take it as bullish and suggesting short-covering and some new buying likely based on the strong Bernanke speech regarding doing more as unemployment is still 'too high'. Elements in this discourse of further easing or Fed action seem to minimize one aspect of the Fed's DUEL mission of fostering low inflation AND strong employment. I don't think inflation is AS low as I'd like (e.g., commodity prices) but I KNOW that unemployment is too high for our young graduates and young and older in general.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) remains within its broad bullish uptrend channel but also continues to drift sideways of late. A strong line of resistance comes in at 820, extending probably to the one intraday high that spiked to 827. Major resistance begins at 850 in my analysis.

Near support is at 806, 800 and then at 795 at current trendline support. Major support is anticipated in the 770 to 760 price zone.

I don't have a solid conviction on the trend of the Russell 2000 except that it should follow Nasdaq higher if there's a further up leg coming later in the month. Or, RUT will follow the rest of the market down if that's the way it goes later in September. I don't see much 'independent' strength in the small to mid-cap RUT sector, a theme that seems to play out more strongly in Q1.



GOOD TRADING SUCCESS!


New Option Plays

Children's Apparel & Foreign Oil

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Carter's Inc. - CRI - close: 55.71 change: +0.40

Stop Loss: 54.65
Target(s): 59.85
Current Option Gain/Loss: Unopened
Time Frame: 3 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
CRI is a children's apparel retailer. They also market some of their products through department stores. The long-term up trend stalled back in April 2012. Shares have been consolidating sideways in a $49-56 trading range since then. Now CRI finally looks poised to breakout from this range.

I am suggesting a trigger to buy calls at $56.25. We'll use a stop loss at $54.65, which is just under Friday's low. Our target is $59.85.

FYI: There are three weeks left on the September options. Octobers are available but the spreads are too wide.

Trigger @ 56.25

- Suggested Positions -

buy the Sep $55 call (CRI1222i55) current ask $1.90

Annotated Chart:

Entry on September xx at $ xx.xx
Average Daily Volume = 441 thousand
Listed on September 01, 2012


NEW DIRECTIONAL PUT PLAYS

PetroChina Co. Ltd. - PTR - close: 120.30 change: +1.18

Stop Loss: 121.25
Target(s): 111.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
PTR is a major integrated oil company in China. Unfortunately for PTR the government of China limits gasoline prices. That's definitely squeezing margins for PTR's refining operations. Shares of PTR have fallen to support near $120. The July lows were near $119.

I am suggesting a trigger to buy puts at $118.75. Our target is $111.00. I do consider this somewhat of an aggressive trade since PTR gaps open (up and down) quite often as its price adjusts to trading back home overnight in China.

Trigger @ 118.75

- Suggested Positions -

buy the Sep $120 PUT (PTR1222u120) current ask $2.80

- or -

buy the Oct $115 PUT (PTR1220v115) current ask $2.70

Annotated Chart:

Entry on September xx at $ xx.xx
Average Daily Volume = 125 thousand
Listed on September 01, 2012



In Play Updates and Reviews

MDVN Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:

The market's reaction to Ben Bernanke's speech on Friday was incredibly anti-climatic. I was really expecting to see some market movement. Maybe everyone left early for their Labor Day weekend holiday.

Shares of MDVN soared on news of an FDA approval for a new prostate cancer drug. The stock hit our exit target on Friday.

We are doing a little pruning and removing SNA and WLK as plays. Neither had opened yet.

Current Portfolio:


CALL Play Updates

Amgen Inc. - AMGN - close: 83.15 change: -0.57

Stop Loss: 82.40
Target(s): 88.50
Current Option Gain/Loss: Sep85c: -34.0% & Oct85c: -12.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/01/12: AMGN outperformed both the broader market and the biotech index with a +0.9% bounce on Friday. Today's high was $84.42. Readers may want to use a rise past $84.50 as a new entry point.

Thursday's low was $82.59. I am raising our stop loss to $82.40.

- Suggested Positions -

Long Sep $85 call (AMGN1222i85) Entry $1.35

- or -

Long Oct $85 call (AMGN1220j85) Entry $2.15

09/01/12 new stop loss @ 82.40
08/27/12 new stop loss @ 81.95
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: 35.53 change: +0.54

Stop Loss: 34.40
Target(s): 38.50
Current Option Gain/Loss: +11.1%
Time Frame: 4-6 weeks
New Positions: see below

Comments:
09/01/12: BRCM managed a bounce near the bottom of its $35-36 trading range. Bulls got some technical help from the simple 150-dma. BRCM remains under resistance near $36.00. At the moment the stock has an intermediate trend of higher lows.

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


Celgene Corp. - CELG - close: 72.04 change: +1.21

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

Comments:
09/01/12: A positive market environment allowed CELG to bounce back toward resistance near $72.00. The stock looks poised to breakout higher.

I am suggesting a trigger to buy calls at $72.75 with a stop loss at $70.45.

Trigger @ 72.75

- Suggested Positions -

buy the Sep $75 call (CELG1221i75) current ask $0.50

- or -

buy the Oct $75 call (CELG1220j75) current ask $1.43

chart:

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


Concur Technologies - CNQR - close: 72.40 change: +0.20

Stop Loss: 69.75
Target(s): 74.75
Current Option Gain/Loss: Sep75c: -12.0% & Nov75c: +11.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/01/12: Aside from some volatility in the first hour of trading CNQR's Friday looked like the rest of the week - boring. The stock continues to churn on either side of the $72.00 level.

More conservative traders might want to consider a higher stop but I am expecting $70.00 to act as support.

I am not suggesting new positions at this time.

- 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


Express Scripts - ESRX - close: 62.62 change: +0.89

Stop Loss: 59.75
Target(s): 67.50
Current Option Gain/Loss: Sep62.5c: +34.7% & Oct$62.5c: +27.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/01/12: ESRX tagged its all-time high set on August 9th this year with a +1.4% gain on Friday. Shares look ready to run with a bullish trend of higher lows but I would not launch positions with ESRX sitting just under its high, which is technically potential resistance.

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 24 at $61.31
Average Daily Volume = 5.1 million
Listed on August 23, 2012


Whole Foods Market, Inc. - WFM - close: 96.75 change: -0.29

Stop Loss: 94.75
Target(s): 104.50
Current Option Gain/Loss: Sep$100c: -40.6% & Oct$100c: -28.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/01/12: WFM's performance on Friday was also disappointing. The stock spent almost the entire week churning inside the $96-98 zone. Wednesday's high was $98.47. Readers may want to wait for a new advance past $98.50 before initiating positions.

Currently our stop is at $94.75. More conservative traders may want to tighten their stop further.

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


PUT Play Updates

CH Robinson Worldwide - CHRW - close: 56.61 change: +0.37

Stop Loss: 58.05
Target(s): 51.25
Current Option Gain/Loss: -16.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/01/12: CHRW managed to outperform the major indices with a +0.6% gain on Friday. Yet the stock continues to trade under a bearish trend of lower highs (see chart). I would still consider new positions now or you could wait for a new drop under $56.00 as your entry point.

- Suggested *Small* Positions -

Long Oct $55 PUT (CHRW1220v55) entry $1.38

chart:

Entry on August 29 at $56.29
Average Daily Volume = 1.1 million
Listed on August 28, 2012


Cummins Inc. - CMI - close: 97.11 change: +1.37

Stop Loss: 100.55
Target(s): 92.50
Current Option Gain/Loss: + 5.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/01/12: I cautioned readers that CMI might see a bounce near the $95.00 level. Shares rebounded +1.4% on Friday. We can look for overhead resistance near the $100 level. A bounce near $100 or a failed rally near this area can be used as a new entry point for puts.

Earlier Comments:
There is potential support at $95.00 and the 50-dma but we are aiming for $92.50.

- Suggested Positions -

Long Sep $95 PUT (CMI1222u95) Entry $1.70

08/28/12 new stop loss @ 100.55
08/28/12 trade opens with CMI gapping down at $98.28

chart:

Entry on August 28 at $98.28
Average Daily Volume = 2.3 million
Listed on August 27, 2012


Dril-Quip - DRQ - close: 70.04 change: +2.09

Stop Loss: 70.75
Target(s): 64.00
Current Option Gain/Loss: -40.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/01/12: I warned readers that DRQ might fill the gap but Friday's bounce was a lot stronger than expected. The most recent data does not list a lot of short interest but Friday's move almost looks like a short squeeze. The close over the 50-dma is technically bullish. The rally did stop right at round-number resistance near $70.00. If there is any follow through higher next week we could see DRQ hit our stop loss at $70.75.

I would wait for a new drop under $69.50 before initiating new bearish positions.

The plan was to limit our risk by keeping our position size small.

- Suggested *Small* Positions -

Long Sep $70 PUT (DRQ1222u70) entry $3.30

chart:

Entry on August 30 at $68.40
Average Daily Volume = 425 thousand
Listed on August 29, 2012


FB - Facebook - close: 18.06 change: -1.03

Stop Loss: 19.15
Target(s): 17.00
Time Frame: 2-4 weeks
Current Option Gain/Loss: +44.8%
New Positions: see below

Comments:
09/01/12: Shares of FB continue to disappoint investors. The stock plunged to new lows with a -5.3% drop on Friday. This breakdown under support at $19.00 looks pretty ugly. Broken support should be new resistance so we are adjusting our stop loss down to $19.15.

Readers may want to exit now but we are aiming for $17.00 on FB.

NOTE: We are starting to hear more chatter about "attractive valuations" for FB. That may be true but a stock can always get "cheaper" especially one with another billion plus shares coming available in November. Personally, I do think FB could be a "buy" but that might be near $10.00 and could be months away. We'll have to wait and see.

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 (FB1222U20) entry $1.45

09/01/12 new stop loss @ 19.15
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: 47.77 change: +0.22

Stop Loss: 50.10
Target(s): 42.50
Current Option Gain/Loss: Sep47.5p: -24.3% & Oct45p: -18.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/01/12: WTW managed a bounce that was in-line with the major indices on Friday. Yet the overall trend for WTW remains bearish. I would still consider new positions now at current levels or nimble traders could try and launch positions near the 50-dma around $49.

- Suggested Positions -

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

- or -

Long Oct $45.00 PUT (WTW1220V45) Entry $1.85

08/28/12 new stop loss @ 50.10

chart:

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


CLOSED BULLISH PLAYS

Medivation, Inc. - MDVN - close: 104.86 change: +7.44

Stop Loss: 94.75
Target(s): 104.50
Current Option Gain/Loss: +42.5%
Time Frame: exit prior to Sept. 24th and the 2-for-1 split
New Positions: see below

Comments:
09/01/12: Target achieved!

It was a strong Friday for MDVN thanks to news that the F.D.A. had approved MDVN's prostrate cancer drug. The treatment, with labeled as Xtandi, was jointly developed with Astellas Pharma Inc., a Japanese company. According to Bloomberg, today's FDA approval could boost MDVN's sales by six-fold to $357 million next year.

The stock opened at $97.79 and slowly drifted toward $99.00 before being halted for news pending. Then in the last hour of trading MDVN reopened and shot higher toward $105.00. Our target was hit at $104.50.

- Suggested Positions -

Oct $105 call (MDVN1220j105) Entry $4.00* exit: $5.70** (+42.5%)

08/31/12 target hit at $104.50
**exit price is an estimate. option did not trade at time of our exit.
08/30/12 triggered @ 98.50
*entry price is an estimate. The option did not trade at the time our play opened.

chart:

Entry on August 30 at $98.50
Average Daily Volume = 360 thousand
Listed on August 29, 2012


Snap On Inc. - SNA - close: 69.42 change: +0.03

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

Comments:
09/01/12: A three-cent gain in SNA on Friday is disappointing. The stock is churning inside the $69-70 area. I am giving up on SNA for now. We can revisit the stock if shares breakout past $71.00.

Our trade did not open.

09/01/12 removed from the newsletter.

chart:

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


Westlake Chemical - WLK - close: 68.78 change: +0.42

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

Comments:
09/01/12: WLK continues to churn under resistance at the $70.00 level. We are going to drop our play on WLK. Our trade has not opened yet. Readers may want to keep an eye on this stock for a bullish breakout past $70.00.

Trade did not open.

09/01/12 removed from the newsletter.

chart:

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