Option Investor
Newsletter

Daily Newsletter, Saturday, 11/17/2012

Table of Contents

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

Market Wrap

Failure to Communicate

by Jim Brown

Click here to email Jim Brown

The markets rebounded from significant losses after the gang of four made a joint statement following their White House meeting with the president. Traders were obviously not paying attention.

Market Statistics

The four leaders of the House and Senate were the picture of bipartisanship when they walked in front of the cameras Friday afternoon. John Boehner, Harry Reid, Mitch McConnell and Nancy Pelosi knew they had to say something positive and avoid divisive comments to prevent a market meltdown. What the market heard was double speak clearly scripted to pull the markets back from the brink on worries over a deadlock on the fiscal cliff. Basically they said they agreed on the need to cut spending and raise additional revenue and they would work on a bipartisan framework to get this done. Cue the applause and everybody quickly exits stage right as the Dow rebounds from a -71 point loss.

We have a failure to communicate. What traders did not hear were the qualifications. Harry Reid said they would work through the Thanksgiving recess and have some proposals in early December. Nancy Pelosi said they hoped to have something done before Christmas. For me that was some bad news. The markets are crashing on fears the cliff will not be resolved soon. Instead of getting together and coming to an agreement in the coming days they are talking about mid to late December for "something" to be done.

That means investors will not have any reduced uncertainty for weeks into the future rather than days. That means investors don't know if the tax rates are going to change and which rates will change so they can make decisions.

Even worse, despite the Kumbaya moment for the TV cameras, we know there will be disagreements and delays in the process. The president has already locked himself into an unbreakable position and we know there is no common ground between Harry Reid and John Boehner. Despite the positive comments there will be some hard line positions and some ugly headlines as the fiscal cliff approaches.

I expect we will eventually get a deal to agree on a deal. This is similar to what the EU Finance Ministers have been doing for the last three years. They agree to agree on some major plan and the markets breathe a sigh of relief. Unfortunately the devil is in the details and the plans never seem to have the impact they envisioned. The House and Senate may agree to agree on a plan and then pass some stop gap legislation to kick the can down the road and end the worry over the fiscal cliff. I simply don't see them actually coming together with a comprehensive plan that accomplishes any major goals.

I believe the market rebound today was more short covering ahead of the weekend than optimism over a soon to be announced fiscal cliff deal. The initial rebound was on the lack of outright hostility rather than a vision of a deal.

With Thanksgiving week normally bullish and the next headlines on the cliff not likely to start impacting sentiment until the week after Thanksgiving there was no reason to hold shorts over the weekend. This entire cliff conversation is now on hold until after the holiday. Black Friday shopping will quickly move to the forefront for consumers and investors alike. After the shopping weekend I would expect investors to come back to the markets in search of the next entry point.

The market will not have a lot of external input next week. On the economic front the only material reports are the housing sector reports on Monday and Tuesday. Those are important but we already know the sector is improving. However, I would expect some weakness there simply because the summer buying season is over and shoppers are more focused on holiday shopping than house shopping.

Economic Calendar

Friday's economics helped to push the market lower at the open after the Industrial Production for October declined -0.4% rather than the +0.3% gain analysts expected. The government said the decline was related to disruptions caused by Hurricane Sandy. Since Sandy did not approach the northeast until Oct 29th I fail to see how that would have had any material impact on production in October. The government said Sandy's impact to production was a full -1.0%. Manufacturing output fell by -0.9% while mining output rose +1.5%.

Treasury International Capital Flows fell from $90 billion to $3.3 billion in September. That means foreigners and central banks bought $86.7 billion less in U.S. treasuries in September. That is a MAJOR change and it could be a harbinger of some serious trouble on the horizon. Analysts always warn that America can continue on its path of annual trillion dollar deficits only as long as China and others continue buying our debt. The talk of the approaching fiscal cliff and our $16.4 trillion in debt may finally be hitting home for foreign investors. China only bought $300 million in treasuries in September to bring their total to $1.16 trillion. If the Fed was not buying treasuries every month in Operation Twist and $40 billion a month in mortgage backed securities the bond market could get very ugly.

Internet E-commerce sales totaled $57 billion in Q3 compared to $54.8 billion in Q2. This is the 15th consecutive quarterly increase and Q4 is likely to be a blockbuster. Online purchases were up +17.3% from Q3-2011. The fourth quarter could see a major increase with the trend towards store shopping and then online buying really accelerating. Q4-2011 only saw $51.6 billion in sales and Q3-2012 is already well above that.

The ECRI Weekly Leading Index declined for the third consecutive week with a reading of 125.4, down from 126.1 the prior week. The WLI attempts to predict the direction of the economy by consolidating the monthly economic reports. The short term decline in the WLI could be related to Sandy since the regular economic reports have been impacted by the storm. For instance the weekly Jobless Claims spiked to 439,000 last week from 361,000 the prior two weeks. This spike is factored into the WLI and a reason why the index would have declined. The WLI is not an index to watch week to week but to be followed month to month. If the decline continues it could be pointing to a slowing economy.

In stock news Sears Holding (SHLD) was crushed for a -$11 loss after reporting a loss of -$1.99 per share for Q3. Earnings were down -20% and revenue -6%. The biggest problem appears to be the Kmart division. They are getting beat up by the dollar stores and Wal-Mart. Kmart has been treated like the adopted stepchild and ignored by Sears and it is dragging them down. Apparel and appliance sales at Sears improved and the online business grew by 20% so the Sears division is doing better. The company is going to have to speed up the restructuring or the problem areas are going to continue to drag results lower.

Sears Holding Chart

Dell (DELL) lost -7% after they missed earnings and cut their revenue forecast for Q4. Adjusted earnings of 39 cents missed by a penny and revenue of $13.79 billion missed estimates of $13.89 billion. Neither miss was a big deal but they also cut revenue estimates for Q4 to $14.2 billion and slightly less than the $14.5 billion estimate. That is a -13% decline from Q4-2011. The problem with the PC sector is the shift to the tablet. The common PC is fading and Dell and Hewlett Packard are fighting for market share in a shrinking market. That means lower prices and tighter margins. This is not going to get better any time soon since tablets are only going to get faster and cheaper. Dell shares have been cut in half since February.

Dell Chart

Dell Chart - Quarterly

Apple shares dipped to $505 intraday before rebounding +22 to close at $527. Analysts are tripping all over themselves claiming Apple to be a buy at this level. Historically Apple dips -30% when it corrects. That would $493. I doubt we will see that level since $500 is such a round number target.

The problem with Apple is the capital gains tax hike coming on January 1st. If you bought Apple in Nov 2011 at $360 you have a monster profit even at the current depressed level. Do you really want to give Uncle Sam an extra 15% in taxes if you sell it next year? No, so the answer is to sell now. The selling has been brutal but it may be over at least temporarily. Volume was nearly double on Friday at 45.24 million shares and the majority of it was positive volume. The sellers were overrun by the buyers when it dipped to $505.

I believe Apple is going to explode higher once this financial crisis ends. Even with Mapgate and the product shortages the fourth quarter is going to be a blowout in terms of revenue. Morgan Stanley is predicting sales of 50 million iPhones this quarter. The current record is 37 million for a Q4.

The Apple stores are the most popular on the planet. They make about $6,050 for every square foot of floor space. That is twice the Tiffany rate of $3,017 per foot. Apple hosted 94 million visitors in its stores in Q3 or a rough average of about 19,000 per week per store.

Buy Apple at $500 or as close as you can get.

Apple Chart

Schiff Nutrition (SHF) rallied +29% to $43.75 after England based Reckitt Benckiser offered to buy the company for $42 a share. What makes this interesting is that Bayer AG (BAYAR) had already agreed to buy Schiff for $34 a share on Oct 30th. When the first offer was made SHF was trading at $23. Now they are at $43.75 in anticipation of yet another offer. Clearly they were underpriced at $23.

Schiff Chart

There really is an expiration date on Twinkies. Hostess Brands asked the bankruptcy court for permission to go out of business after failing to get wage and benefit cuts from thousands of striking bakery workers. The 82-year old company employed 18,500 employees. The company immediately suspended operations at all 33 plants and put plans in motion to sell its assets.

The company said the unions had been the death of the company. There were 12 unions and the company had been fighting since January to get concessions that would allow the company to stay in business. Hostess had started implementing an 8% pay cut and a 20% increase in the cost of health care on November 1st. Workers went on strike Nov 9th in protest. The company gave employees a deadline of Thursday to return to work but the unions refused.

Now 18,500 workers are unemployed and the 82 year old brand is going to disappear. Actually, I am sure the brand will be purchased in the liquidation auction but it may be a long time before Twinkies and Ding Dongs are for sale again. Hostess has 33 bakeries, 565 distribution centers and 570 bakery outlet stores. Other than Hostess its brands include Wonder Bread, Natures Pride, Dolly Madison, Home Pride, Merita, Drakes and Butternut.

That means the last Hostess Twinkie has been baked and consumers were racing from store to store trying to score as many packages of Twinkies, Ding Dongs, Zingers, and cupcakes as they could find. A box of 10 Twinkies was selling for as much as $45 on Ebay with 5,361 auctions listed.

Extinct Hostess Products

With the Q3 earnings cycle nearly over we have a pretty good idea how it is going to end. 460 S&P companies have reported. Revenues were down -3.6% and earnings declined -2.2%. 62.2% beat on earnings but only 38% beat on revenues. That is the worst quarter in three years. Energy was the biggest loser with earnings down -19.8%.

In the commodity sector the price of oil rebounded on news Israel had activated up to 75,000 troops in its reserve force for a possible ground attack into the Gaza Strip. The trigger for this increase in posture was the targeting of Jerusalem by Hamas. Several long range missiles fell in the Jerusalem area. This was the first time Jerusalem has been targeted since the 1967 war. Three Israeli's have died. Over 550 rockets have been fired into Israel over the last two days with 197 intercepted by the Iron Dome missile defense system. In response Israeli airstrikes have hit more than 600 targets in Gaza.

Egypt has vowed to protect Palestinian rights. Egypt's prime minister visited Gaza and called for an international effort to end the violence. If Israel sends in ground troops it might force Egypt to retaliate and that would escalate the conflict. The U.S. would be forced to support Israel.

A ground war in Gaza could unsettle the entire Middle East since the various new regimes might be compelled to take some action to show they are not afraid of Israel and the USA. This flare up is a liability for the U.S. in the Arab world especially post Arab Spring. This could cause civil unrest in the Arab countries and possibly lead to disruptions in oil production.

WTI Crude Oil Chart

UN inspectors working for the IAEA reported on Friday that Iran had jumped ahead in its nuclear capability. The report said Iran had installed all 2,800 centrifuges in the underground Fordow nuclear facility. This will allow them to accelerate the enrichment process. The IAEA also said Iran's inventory of uranium already enriched to 20% had increased by 50% in just the last three months. Uranium at this level of enrichment can quickly be further refined into bomb grade material. Iran claims it needs the highly enriched uranium for its medical reactor but the IAEA claims Iran has far more of the enriched uranium than they need for that purpose. The IAEA claims it can no longer verify that all enriched uranium is being used for peaceful purposes because of the rapidly growing size of the inventory and diverse locations. It would be easy for Iran to set aside enough uranium for a weapon and the inspectors would not be able to detect it.

If Israel was not already involved in the Gaza war these new revelations from the IAEA would be increasing worries over an attack on Iran.

There was an explosion at an oil production platform in the Gulf of Mexico that left four men critically injured, with 11 taken to local hospitals and two still missing. The platform was not in production at the time and there was no material spill. The fire was put out almost immediately. The platform was owned by Black Elk Energy. It is one of 854 oil wells and 155 platforms owned by Black Elk. This particular one is in 56 feet of water and is not a spill risk.

The news of the explosion came at 10:AM and coupled with the Israeli news helped push oil prices higher.

Black Elk Rig Fire

Once President Obama was reelected it took only a week before BP settled on the criminal portion of the Macondo spill liability for a record $4.5 billion. They still have the big case ahead of them. The remaining problem is the fines for polluting under the Clean Water Act. If the U.S. can find them guilty of gross negligence the fine could be close to $20 billion. If not gross negligent it would be closer to $5 billion.

The U.S. also announced the indictment of multiple BP employees in conjunction with the spill. Don Vidrine and Robert Kaluza were charged with 11 counts of "seamans manslaughter," 11 counts of involuntary manslaughter and one violation of the Clean Water Act. They could face up to 10 years in prison for each count. The charges stem from misinterpretation of safety tests and violations of standard procedures. David Rainey, BP's former head of Gulf exploration, was charged with obstruction of Congress and making false statements to law enforcement personnel about how much oil was being discharged into the gulf.

Kurt Mix, a former BP engineer, has been charged with destroying evidence in the probe.

Several BP employees have refused to testify and lawyers have asked the court for permission to declare them hostile witnesses and to assume their testimony would have been detrimental to BP's case. Basically the judge will assume the worst in regard to the questions they will not answer.

Since BP has no further reasons to drag out the case and going to trial has significant risks we should expect to see them settle this case in the weeks ahead. Both sides admit to settlement talks but no details. The government spokesman simply said, "We have not been offered a settlement price that is acceptable." Clearly this is going to be an expensive settlement for BP and they still have thousands of individual suits to fight.

BP Chart

Natural gas prices rallied more than 25 cents for the week to end at $3.79 and only a penny below the high close for the year. The incentive for the rally was the first draw down of gas from inventory for the 2012 heating season. The EIA reported an 18 BCF decline in storage. However, gas in storage is still at record levels so the rally may not have much farther to run unless a new ice age descends on the USA.

Natural Gas Chart

Gold prices continue to disappoint with a close just over $1700 and no material movement since mid October. The reason is the strong dollar, which closed at a three month high on Friday. Europe is in a recession. Germany's economy is nearing a recession and China's economy is struggling to turn the corner as the new leaders take over. Greece and Spain remain in the headlines and that is pushing the euro lower and supporting the dollar. A strong dollar pressures gold and silver. This is a temporary situation but frustrating for the gold bugs.

Gold Chart

Dollar Index Chart

After two weeks of declines the markets have entered oversold territory. The reason for the declines has not changed and will be with us for the weeks ahead. However, oversold markets tend to stimulate bottom fishing even when the reason for selling still exists.

The markets can benefit from seller exhaustion. That means sellers either ran out of stock to sell or they no longer want to sell it at the current price. In the case of equity funds they will expect a rebound from a critical support area like S&P 1350 and so they temporarily stop selling in hopes of a decent bounce so they can resume selling at a higher level.

I believe that is what we will see next week. The normally bullish holiday week will benefit from the drop to 1350 on Thr/Fri and we could see a rebound to 1385 or even 1400 before the next wave of selling begins the week after Thanksgiving.

With Washington politicians leaving town for Thanksgiving the headlines on the fiscal cliff should be subdued. The news shows will replay the Friday statements from the gang of four and blather on about how the new bipartisan compromises will come up with a deal before the cliff arrives. The news or actually lack of news will be conducive to a trading bounce in the market. At least that is my theory and I am sticking with it until proven wrong.

The S&P dipped to 1348 on Thursday and 1343 on Friday but both days saw closes back above 1350. This double test of support should have the antsy money chomping at the bit to buy something on Monday.

Clearly this theory could fall apart depending on the headlines but Black Friday news stories should begin to blanket the news early next week. Hopefully that will keep everyone distracted.

The worst case scenario is targeting a dip to 1265 over the next 3-4 weeks. Maybe I should say the next to worst case since signs of a heated partisan argument rather than compromise could push us back to 1200 very easily in early December.

I would use any Thanksgiving bounce to add to bearish positions.

S&P Chart

The Dow declined to its initial target at 12,500 and that support level held as the week ended. The intraday rebound on Friday from a -71 point loss still left the index down -177 for the week and more than -1000 points from the October 5th high close at 13,600. The damage is not over for the Dow but we could see a trading bounce next week. The next downside target would be a retest of 12,000.

Dow Chart

The Nasdaq never had a chance last week. With Google and Apple both dropping like a rock, Dell crushing the PC sector and semiconductors hitting four month lows I am surprised we did not break below that soft support at 2800.

Next week could be an improvement. Apple is being talked up as a buy in nearly every chat room and on CNBC. At $500 I believe it but we simply don't know how much the pending capital gains tax hike is going to hurt stocks like Apple. Big gains mean big taxes and investors don't want that bite to be even worse.

I expect support at 2800 to eventually be broken and that could push the Nasdaq into a freefall with the next closest support at 2500. Let's hope that does not happen.

Nasdaq Chart

Just because I see the possibility of a trading bounce it does not mean it will happen. We need to remain focused on the longer term trend and until the fiscal cliff is much closer to being solved I believe that trend is down. The ratings agencies are just waiting for signs of a logjam between the House, Senate and the president as a signal to warn of another ratings downgrade. We also have the debt ceiling debate coming soon. Add in the recession in Europe, rising tensions in the Middle East and crummy earnings and there is no reason for the market to rally.

Definitely, enter passively and exit aggressively over the next few weeks!

Jim Brown

Send Jim an email

"A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world’s greatest civilizations has been 200 years."
Alexis de Toqueville


Index Wrap

Downside Targets Met or Exceeded; Fear of 'Cliff' Discounted?

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

There's some lower technical targets that were met this past week and bearish sentiment jumped. The Market may have fallen enough to discount fear of higher taxes, especially on dividends as high yield stocks got whacked.

The S&P 500 and 100 have now retraced into the next lower Fibonacci retracement zone at a 62-66% give back of the last major leg up, the June to September advance.

The Nasdaq Composite Index (COMP) almost got to 2800 support and not yet to its June intraday low in the low-2700 area. The Nasdaq 100 Index (NDX) got to 2500 chart support; not quite low enough to test its June intraday lows around 2450. Big cap tech bellwether Apple Computer (AAPL) at $505 almost hit a long-held target I've had for a pullback to 500. Google (GOOG), reached technical support in the $650 area and looks like it may be attractive for big funds and the like.

Speaking of NDX, its weekly Close was ON potential support implied by its long-standing up trendline dating from its March '09 low, basis its Close-only line chart. NDX is also now at an 'oversold' Relative Strength Index (RSI) extreme on an 8 and 13-week basis.

The relevant NDX weekly price and RSI plots are seen in my first chart. Further on, with the SPX and COMP charts you'll see the low registered to date on my CPRATIO market 'sentiment' indicator. I noted recently in both my last (Saturday) Index Wrap and my Wednesday Trader's Corner, that I thought a bearish outlook (i.e., 'sentiment') would have to get more extreme in terms of bearishness with trader types before we'd see even an interim bottom. See more of my take on things with my regular weekly Index commentaries.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart remains bearish in its pattern. While SPX fell well under my 50% retracement target at 1370 this past week, it has also reached my next lower technical objective in terms of price, an oversold extreme in the RSI and in terms of bearish sentiment. My next lower retracement target was to the 62 to 66% give back area relative to June-September advance.

In terms of the Relative Strength Index on a 13-day basis the RSI dipped under the 30 level, which is about as low as this indicator gets and to still be within bull market parameters; and I consider (to date) the market to be correcting WITHIN its longer-term up trend. (A Close below the June lows that persisted would give us a different picture as far as the dominant trend.)

Lastly, in terms of trader 'sentiment' and the outlook among options traders, my CPRATIO indicator has finally registered an 'oversold' extreme bearish reading in recent days, which tends to precede an interim if not 'final' low for corrections.

Support is seen in the 1340 area, with fairly major support at 1310-1300.

Resistance is at 1370, then in the 1390-1400 price zone.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart also remains bearish but interestingly did bounce from the 2/3rds/66% retracement level as highlighted on the daily chart. Often, when a major index like OEX gives back more than half of a prior major advance (June to September), it will drop to the 62 to 66% retracement levels; in this case it was 66%, something that has often marked a low.

Not that OEX couldn't still fall to support at 600 or even back to the June intraday low in the 580 area. I just don't see another such down leg without an attempt to rally or by a sideway move and some 'basing' action. Stay tuned on this outcome!

OEX also got quite oversold here recently as OEX bellwethers like IBM and GE got hit. GE is at some support at $20 and IBM is near technical/chart support in the low $180 area.

All in all, I wouldn't bet on a lot of further downside, at least not before there's some attempt for the Index to stabilize and at least go sideways in a possible basing pattern. One thing to remember is that there are levels where the major market indexes at least initially 'discount' the current bearish expectation; e.g., that congress and the President won't reach some accommodation with the eyes of all on them (even if its AFTER the lame ducks go quacking home).

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) Average remains bearish in its pattern but Has also fallen to an area of possible support in the 12500 area where that was a minor rebound. Even if short-covering, there's always a floor of support at some level found in the monster cap stocks comprising the Dow.

Next lower technical support looks like 12400 and then at the June lows near 12000. INDU is certainly now 'oversold' enough for a bounce or some base-building by buying interest coming in on dips to the 12500 area or a bit under.

AA, AXP, BA, CAT, CSCO, DIS, HD, KFT, INTC, JNJ, KO, PFE, T, TRV, and VZ (15 Dow stocks) are all capable of at least minor rallies either from recent lows or from levels not too far below their recent lows.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) chart seems to be in free fall but has also reached potential support implied by the low end of its steep downtrend price channel , which is also an area of support suggested by a cluster of COMP lows from late-June. Yet to be tested is 2800 support, which looks even more significant, although June saw a final dip to the low-2700 area before starting a multimonth rally. I don't anticipate a big rally anytime soon based on the current political climate as investors focus on a possible 'self-inflicted' recession by our fearless (ha!) political class.

What we can anticipate is that there's a level where COMP has discounted a significant muddling through. I think we're at or near that level based more on the big-cap Nas 100 Index and the possibilities of long-term weekly chart Support is noted in the 2800 area, then at 2750-2725. Resistance is highlighted at 2950, with fairly major resistance in the 3000 area.

COMP is quite oversold and bullish sentiment has fallen low enough (high bearishness) to suggest at least a bounce in prices OR in the Index drifting sideways at least, such as by trading within the 2800-2900 zone.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) Index remains bearish in its pattern but the NDX weekly chart is showing the possibility that the Index has reached and may bounce from, its long-term up trendline. The relevant NDX weekly chart is seen in my initial bottom line commentary above. Moreover, it's apparent also how 'oversold' NDX is on an 8-week and 13-week basis, according to the RSI indicator; again, see my first chart of the weekly NDX with its highlight of its weekly up trendline dating from March 2009.

As to another way of measuring the RSI, the 13-day Relative Strength Index seen below is nearly at the extreme low reading of the June low.

Anyone holding NDX puts and having other bearish positions on should consider taking at least partial profits. It's my trading stance in these circumstances to not 'fight' it out for the last bit of downside as lows often tend to be made all of a sudden; this versus highs that tend to build over a longer time span. I'm not a 'trend follower'. There are more trading philosophies and styles than mine of course. I like to anticipate rather than REACT, which tends to go with a 'technical' approach.

Support is seen at 2500, then is suggested at the June lows in the 2450-2444 area. Resistance is at 2600-2625, extending to 2650 with fairly major resistance at 2700.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock's (QQQ) chart is in the same bearish 'free fall' pattern as the underlying NDX of course and there not more to say about its PATTERN, just potential support and resistance; as well as possible comments on volume.

Near support could be found in the 61 area, then at the June lows at 60. Initial resistance is at 64, then at 64.5-65. Fairly major resistance begins in the 66.0 area.

Daily trading volume as been well above normal in the recent continued sharp decline and at some point enough holders of the QQQ tracking stock will have exited to set the stage for a rebound. I think this is coming sooner rather than later.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) chart remains bearish but RUT could be at or near at least an interim bottom based on how oversold it is and based on the idea that it may not retreat ALL the way to a retest of its June lows.

Near support is at recent lows at 763-765, then at 760, with fairly major support in the 735-730 area.

Key near resistance is seen at 800, extending to the 21-day moving average, currently intersecting at 808. Fairly major resistance begins in the 830 area, extending to 840-843.

As with the other major indexes, RUT has reached an oversold extreme basis its 13-day RSI.



GOOD TRADING SUCCESS!


New Option Plays

Machinery & Biotech

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Dover Corp - DOV - close: 61.57 change: +0.87

Stop Loss: 59.85
Target(s): 67.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
When DOV reported earnings back in October the company lowered its guidance yet that hasn't stopped investors from buying the dips. Shares have a steady trend of higher lows. The company recently announced a $1 billion stock buyback program for the next 12 to 18 months.

It looks like DOV is coiling for a breakout past resistance at $62.00. The Nov 6th high was $62.23. I am suggesting small bullish positions if DOV can trade at $62.30. We will aim for $67.50.

Trigger @ 62.30

- Suggested Positions -

buy the 2013 Mar $65 call (DOV1316c65) current ask $2.00

Annotated Chart:

Entry on November xx at $ xx.xx
Average Daily Volume = 1.7 million
Listed on November 17, 2012


Pharmacyclics Inc. - PCYC - close: 51.77 change: +1.33

Stop Loss: 48.75
Target(s): 56.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
PCYC delivered what should have been considered a decent earnings report back in early November. Yet cautious comments from management about competition for some its cancer drugs sparked a sell-off. Now PCYC is seeing an oversold bounce. I suspect we could see PCY try and fill the gap before it rolls over again.

I do consider this a more aggressive, higher-risk trade. Anytime you trade a biotech stock it can be a high-risk trade since you never know when a negative headline could send the stock crashing. Yet on a short-term basis PCYC is bouncing.

I am suggesting small bullish positions at the open on Monday with a stop loss at $48.75. Our target is $56.50. More aggressive traders could aim for the $59-60 zone instead.

- Suggested *Small* Positions -

buy the Dec $55 call (PCYC1222L55) current ask $3.40

Annotated Chart:

Entry on November xx at $ xx.xx
Average Daily Volume = 1.0 million
Listed on November 17, 2012



In Play Updates and Reviews

Oversold Bounce

by James Brown

Click here to email James Brown

Editor's Note:

Stocks are starting to bounce from oversold levels. We noticed a lot of intraday reversals on Friday.

Current Portfolio:


CALL Play Updates

Netflix, Inc. - NFLX - close: 80.90 change: -0.58

Stop Loss: 78.20
Target(s): 89.75
Current Option Gain/Loss: - 21.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/17/12: Our new bullish play on NFLX has been triggered. Unfortunately shares failed to maintain its gains. The stock was somewhat volatile but traders bought the dip midday near $80.00. At this point I would wait for shares to rally past $82.00 again before consider new bullish positions.

Earlier Comments:
NFLX could see a short squeeze. The most recent data listed short interest at 31% of the 54.1 million share float. NFLX can be volatile so I am suggesting small positions to limit our risk.

- Suggested Positions -

Long DEC $85 call (NFLX1222L85) Entry $4.60

11/16/12 triggered @ 82.25

chart:

Entry on November 16 at $82.25
Average Daily Volume = 6.5 million
Listed on November 15, 2012


PUT Play Updates

Avalonbay Communities - AVB - close: 128.87 change: +1.18

Stop Loss: 132.05
Target(s): 121.50
Current Option Gain/Loss: - 12.1%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
11/17/12: I warned readers on Thursday that AVB looked ready to bounce. The stock should have potential resistance at the $130.00 level and the $132.00 level. We have our stop at $132.05. More conservative traders may want to lower their stop instead. I am not suggesting new positions at this time.

- Suggested Positions -

Long DEC $125 PUT (AVB1222x125) entry $1.65

11/14/12 triggered @ 129.75

chart:

Entry on November 14 at $129.75
Average Daily Volume = 593 thousand
Listed on November 13, 2012


Carpenter Tech. - CRS - close: 45.20 change: +0.39

Stop Loss: 48.05
Target(s): 42.50
Current Option Gain/Loss: +52.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
11/17/12: CRS dipped toward $44.00 before bouncing. Looking at the intraday chart I suspect the bounce is not over yet. Look for shares to rebound back into the $46.50-47.50 zone. I am lowering our stop loss down to $48.05.

I am suggesting we go ahead and take some money off the table by selling at least half of our position at the open on Monday.

Earlier Comments:
Our multi-week target is $42.50. CRS can be somewhat volatile so readers may want to limit their position size to reduce risk.

- Suggested Positions -

Long Dec $45 PUT (CRS1222x45) Entry $1.15

11/17/12 new stop loss @ 48.05, sell half of our position on Monday morning
11/14/12 new stop loss @ 49.05

chart:

Entry on November 12 at $48.23
Average Daily Volume = 460 thousand
Listed on November 10, 2012


Dow Jones Industrial Average (ETF) - DIA - close: 125.60 change: +0.42

Stop Loss: 128.15
Target(s): 125.25
Current Option Gain/Loss: +29.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/17/12: It looks like the DIA has also formed a short-term bottom. I would expect this ETF to bounce higher into the $127.50-128.00 zone. We will adjust our stop loss down to $128.15. I am not suggesting new positions at this time.

- Suggested Positions -

long DEC $125 PUT (DIA1222x125) entry $1.79

11/17/12 new stop loss @ 128.15
11/14/12 new stop loss @ 129.15
11/13/12 new stop loss @ 130.15
11/08/12 new stop loss @ 130.60

chart:

Entry on November 08 at $129.18
Average Daily Volume = 5.3 million
Listed on November 7, 2012


iShares Russell 2000 ETF - IWM - close: 77.48 change: +0.64

Stop Loss: 80.15
Target(s): 75.50
Current Option Gain/Loss: +20.1%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
11/17/12: I cautioned readers to expect a bounce in the IWM. This ETF added +0.8% on Friday. I am now expecting an oversold bounce into the $78.50-80.00 zone. I am not suggesting new positions at this time.

- Suggested Positions -

Long 2013 Jan $75 PUT (IWM1319m75) entry $1.53

11/17/12 the IWM looks poised to bounce
11/14/12 new stop loss @ 80.15
11/13/12 new stop loss @ 81.05

chart:

Entry on November 08 at $79.85
Average Daily Volume = 36 million
Listed on November 7, 2012


Lockheed Martin Corp. - LMT - close: 88.46 change: +0.88

Stop Loss: 90.65
Target(s): 84.25
Current Option Gain/Loss: -12.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/17/12: LMT added +1% on Friday. That outperformed the S&P 500. You could argue that LMT has potential resistance at $89.00, $90.00 and the $91.00 levels. We have our stop loss at $90.65. More aggressive traders may want to adjust their stop so it's above $91.00 instead. I am not suggesting new positions at this time but a failed rally at $89 or the $90 level could be used as a new entry point.

Earlier Comments:
We do want to keep our position size small because LMT has produced a new breakdown on its daily chart but it has not yet broken below potential support on the weekly chart. It is possible the stock could bounce off the trend line displayed on the weekly chart but I doubt it given the market's broader weakness.

- Suggested *Small* Positions -

Long Dec $85 PUT (LMT1222x85) Entry $1.60

chart:

Entry on November 15 at $88.02
Average Daily Volume = 1.6 million
Listed on November 14, 2012


Lufkin Industries - LUFK - close: 50.09 change: -0.09

Stop Loss: 51.55
Target(s): 45.15
Current Option Gain/Loss: -53.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/17/12: Shares of LUFK are not moving. The stock appears stuck in the $49.50-51.00 zone. While the larger pattern still looks bearish I am suggesting we go ahead and close positions early on Monday morning.

- Suggested Positions -

Long DEC $45 PUT (LUFK1222x45) entry $1.50

11/17/12 prepare to exit early on Monday morning
11/14/12 time to turn cautious. LUFK is not participating in the market weakness. new stop loss @ 51.55

chart:

Entry on November 09 at $48.95
Average Daily Volume = 467 thousand
Listed on November 8, 2012


Las Vegas Sands - LVS - close: 40.56 change: -0.36

Stop Loss: 44.05
Target(s): 36.50
Current Option Gain/Loss: Dec40p: - 2.7% & Jan40p: + 1.8%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
11/17/12: It has been a volatile week for shares of LVS. The stock's sharp breakdown has been follow up with a sharp bounce as well. LVS rebounded right back to technical resistance at its 10-dma and 100-dma on Friday. I am not suggesting new positions at this time. More conservative traders may want to lower their stop loss.

- Suggested Positions -

Long DEC $40 PUT (LVS1222x40) Entry $1.10

- or -

Long 2013 Jan $40 PUT (LVS1319m40) entry $1.65

11/14/12 triggered @ 42.25

chart:

Entry on November 14 at $42.25
Average Daily Volume = 6.4 million
Listed on November 13, 2012


Vornado Realty - VNO - close: 73.23 change: -0.05

Stop Loss: 75.25
Target(s): 72.50
Current Option Gain/Loss: Dec75p: +85.7% & 2013Jan$75p: +68.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
11/17/12: On Thursday night I was concerned that VNO was too oversold and might see a big bounce on Friday. Our plan was to take some money off the table and sell half of our position on Friday morning at the open. Fortunately for us VNO opened at $73.38 and actually fell to a new relative low at $72.64 before paring its losses.

The stock remains oversold. More conservative traders may want to exit completely. I am lowering our stop loss down to $75.25.

- Suggested Positions -

Long DEC $75 PUT (VNO1222x75) entry $1.40*

- or -

Long 2013 Jan $75 PUT (VNO1319m75) entry $1.90*

11/16/12 sold half of our position to lock in gains.
1/2 exit Dec $75 put @ $2.55 (+82.1%)
1/2 exit 2013 Jan $75 put @ $3.10 (+63.1%)
adjust the stop loss down to $75.25
11/15/12 SELL HALF of our positions to lock in gains tomorrow morning,
move the stop loss down to $76.25 for the rest
11/14/12 readers may want to start taking profits now
new stop loss @ 78.05
11/12/12 trade opened on gap down at $76.89
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:

Entry on November 12 at $76.89
Average Daily Volume = 1.1 million
Listed on November 10, 2012


Whole Foods Market - WFM - close: 90.54 change: +1.92

Stop Loss: 91.05
Target(s): 82.50
Current Option Gain/Loss: - 44.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/17/12: I did not see any headlines to explain the relative strength in WFM on Friday. Shares rallied +2.1% and closed back above what should have been resistance at $90.00 and its 200-dma and exponential 200-dma. This is very bad news for our bearish trade. Odds are very strong that WFM will hit our stop loss at $91.05 on Monday. I am not suggesting new positions at this time.

Earlier Comments:
I am suggesting small positions because it is possible that WFM could bounce on its long-term trend line but given the market's widespread weakness I am expecting new lows.

- Suggested *small* Positions -

Long DEC $87.50 PUT (WFM1222x87.5) entry $2.69

11/16/12 the bounce on Friday is very bad news for our put position and WFM will likely hit our stop on Monday

chart:

Entry on November 15 at $88.02
Average Daily Volume = 1.6 million
Listed on November 14, 2012


CLOSED BEARISH PLAYS

Mercadolibre - MELI - close: 75.43 change: +0.98

Stop Loss: 75.55
Target(s): 70.25
Current Option Gain/Loss: -25.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
11/17/12: I cautioned readers that Thursday's session had produced a bullish reversal candlestick pattern. Friday's rally confirmed the reversal and shares pushed past likely resistance at $75.00. Our stop loss was hit at $75.55.

Earlier Comments:
I do consider this a higher-risk trade. MELI can be volatile and is arguably already oversold with a four-week decline. Of course stocks can always get more oversold.

- Suggested *Small* Positions -

DEC $72.50 PUT (MELI1222x72.5) entry $2.75 exit $2.05 (-25.4%)

11/16/12 stopped out at $75.55
11/14/12 new stop loss @ 75.55
11/13/12 play triggered on gap down at $74.56. suggested trigger was $74.75

chart:

Entry on November 13 at $74.56
Average Daily Volume = 603 thousand
Listed on November 12, 2012