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Daily Newsletter, Saturday, 12/8/2012

Table of Contents

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

Market Wrap

Cliffwalking

by Jim Brown

Click here to email Jim Brown

Both sides continued their posturing all week and we are no closer to a solution than the prior week.

Market Statistics

It should be no surprise to anyone that both parties are still blaming the other for the lack of progress in the fiscal cliff negotiations. We have not reached the last minute yet and both parties are still holding trump cards they can use as we get close to the deadline. Until the last minute arrives we are going to continue to see the three sentence press conferences to repeat the party lines. The tide of battle will eventually go against the side that blinks first.

The markets ignored the lack of progress because most traders understand we are still a couple weeks away from the final negotiations.

The market opened higher on Friday but then faded after the Nonfarm Payroll details and the Consumer Sentiment reports failed to impress. The payroll report showed a gain of +146,000 jobs for November compared to +138,000 in October. In theory that was good news and the BLS said the hit from hurricane Sandy was less than expected. However, the report was helped from the early Thanksgiving holiday that boosted retail employment by +53,000.

Depressing the market was news the prior two months were revised down by -49,000 jobs. That was -33,000 in October and -16,000 in September. Also the separate Household Survey showed a DECLINE of -122,000 jobs in November.

The unemployment rate dipped again to 7.7%, down -0.2%, to 12.029 million. This was NOT due to higher employment. The number of people in the labor force declined by -350,000. The Household Survey showed that those not in the labor force rose by +542,000. If this trend continues we could eventually see the unemployment rate at 5% but with 10 million more people unemployed.

You can't brag about a falling unemployment rate when the reason for the decline is 542,000 people that gave up looking for work.

The real unemployment rate, known as the U6 rate by the BLS, is 14.4% or 22.496 million people. That number is the total unemployed plus all persons marginally attached to the labor force, plus those employed part time for economic reasons and can't find a full time job. With the economy adding jobs at the rate of roughly 150,000 jobs a month it is going to be a VERY long time before the unemployment rate returns to a reasonable level around 4.5% or roughly 7.1 million workers.

The market should not have been excited about the mediocre jobs number but at least the total did not decline substantially as a result of Sandy. Analysts believe that employment will rise to something in the +200,000 jobs per month range in 2013 as the recovery continues. Unfortunately if we go over the fiscal cliff the damage will be severe. The defense sector alone is projecting a loss of -500,000 jobs.

Remember, it is not really a cliff but a slope. There will be a net impact to the economy of about $50 billion a month but the impact will grow the longer the cliff remains unresolved. Analysts believe a total cliff failure for all of 2013 would cost 3.0 million jobs. Obviously lawmakers are not going to let the problem continue unresolved for the full year. The worst case estimates believe they will have full, even if only temporary, resolution by March. All of the gloom and doom being spread by the politicians and news headlines is mostly hype since there will eventually be a resolution.

The upside to the report is that the surveys went out before the post Sandy reconstruction began. This suggests there will be a gain in construction payrolls in the December report.

Nonfarm Payrolls Chart

Also depressing the market on Friday was a sharp drop in Consumer Sentiment. The headline number declined from 82.7 to 74.5 and the lowest level since August. The -8.2 point drop was the largest drop since the -8.0 decline in August 2011 when the debt ceiling debate crashed the market. Sentiment fell -18.6 points from June through August of 2011.

The same trend is setting up today. Prior to the election it appears the majority of consumers either did not know or did not understand the looming fiscal cliff problem. Now that the election is over both parties are deadlocked in a similar pattern as the debt ceiling disaster in 2011. Every news headline is blasting the gory details and sentiment is crashing again.

The present conditions component barely moved with a decline from 90.7 to 89.9. However, the expectations component fell -13 points from 77.6 to 64.6. The worry over higher taxes in 2013 appears to have suddenly become very imminent. Did most consumers not understand when they were voting that higher taxes were going to be the result of their vote? I guess everyone thought it was only going to happen to the other guy. Consumers thought they were voting for higher taxes on the rich guy down the street but not for themselves. Surprise, surprise.

The sharp decline in sentiment suggests consumers may not be throwing money around this holiday season. They may be more conservative since their paychecks will be smaller in January. This could pressure retailer profits in December.

Unfortunately once the cliff is resolved the debt ceiling debate will be back in February. We have already seen the opening salvos with the president wanting an unlimited ceiling and the republicans warning there was no way. The next three months are going to be stressful for investors.

Consumer Sentiment Chart

The economic calendar for next week is light with the exception of Wednesday. The FOMC meeting on Wednesday is likely to end with the announcement of some new QE program. The Operation Twist program, where the Fed sells short term treasuries it owns and uses the money to buy longer term treasuries, has run its course. The Fed is out of short term paper. It was scheduled to end in December anyway.

Unfortunately the economy is still in the dumps and unemployment is still high. The Fed is expected to announce some new QE program where they buy additional securities to keep long term rates low indefinitely. QE3 is still doing that by purchasing $40 billion in mortgage backed securities (MBS) every month. There are strong rumors the Fed is having trouble finding enough MBS to purchase and is considering committing to X dollars of "when issued" mortgages to satisfy its purchase program.

If that is the case then what good will it due to announce QE4 and another purchase program? In theory QE4 would have to purchase long term treasuries outright, unlike Twist. The Twist program just moved money around by selling short and buying long. There was no actual QE attached to Twist. By announcing a QE4 for treasuries only they can actually put some new money to work in the treasury market. That would leave QE3 for mortgages and QE4 for treasuries.

If you watched the commodity market you saw that QE3 and Twist had no real impact on commodities or equities because the amount of new money pushed into the market was relatively small. If the Fed wants to push equities higher they will have to force interest rates (yields) even lower. In Fed theory this will force investors to buy stocks or houses, businesses, etc, and stimulate the economy. In reality that has not worked for the Fed like it has in the past. The debt ceiling, fiscal cliff and election clouded the issues and there was no material move higher for dollar denominated assets.

If the Fed actually believes it is still relative and can influence economic activity it may have to use a club instead of a scalpel in the next program. Trying to finesse monetary policy has done nothing but keep mortgage rates low, which is good, but also severely diminished the incomes of senior citizens who live on their investments.

These points will be discussed endlessly in the press if the Fed actually announces some new QE program. Most analysts believe we don't have a liquidity problem in America that can be solved by QE but a fiscal problem that needs to be solved by Congress. There is plenty of money in the system but very few people can qualify for it. Banks are too restricted on their loans. Businesses are too concerned about the economy and are hoarding cash. Loan demand is growing according to Jamie Dimon but not growing fast enough.

All these points make the Fed's decision on Wednesday and the Bernanke press conference at 2:15 the key for the week other than fiscal cliff events.

Economic Calendar

Friday was another low news days. The Q3 earnings cycle has run its course and the Q4 warnings cycle has yet to kick into high gear. However, of the 107 companies that have guided for Q4, 78 of them have guided lower. That is the worst preannouncement record for this week in the cycle since 2006. That suggests Q4 earnings are not going to be strong. However, with Sandy influencing earnings in the Northeast the quarter is likely to be ignored.

In what little stock news we had Apple (AAPL) was the top headline. Apple shares lost another $14 to close near the low of the week at $533 after opening the week at $593. Rumors of slower than expected sales in multiple products are weighing on the stock but there is no confirmation. The biggest problem is the slow production of the iPhone 5 and delays getting the product to customers. The iMac is also lagging in production. CEO Time Cook said the iMac would be constrained for the full quarter. He said demand is robust and that is exaggerating the shortage. The iPad Mini is also in shortage with shipments about 40% below expectations. These problems have been known for weeks and sales are still expected to set records so I doubt that is a real reason for the continued selling pressure. When you make cutting edge products that nobody has ever made before there are going to be some learning curves in the manufacturing process.

I mentioned last week that investors were hoping for a special dividend from the $125 billion cash hoard and that is looking less likely as each day passes.

Another pressure is the announcement that some carriers are doing away with the subsidies. T-Mobile USA said the price for an iPhone would be $649 for an unlocked 16GB iPhone 5. In return you get a no-contract, unlimited talk, text and data plan for $70 a month. That same plan is $120 at AT&T. Since the iPhone is the most expensive smartphone the drop in subsidies by the major carriers could be a hit to iPhone sales.

Cheaper phones and tablets are flooding the market with more than 500 million devices now using the Android operating system. Apple has sold 271 million iPhones since they were first announced in 2007.

Apple was counting on a big surge in sales from China Mobile and their 600 million users. Last week Nokia announced a deal with China Mobile to sell a phone using the Windows 8 operating system. China Mobile said they had not yet made any deals with Apple.

Research firm IDC said on Wednesday that Apple's share of the tablet market would decline to 54% this year and dip below 50% by 2016. Android tablets have surged to 43% and growing fast. Windows 8 tablets are expected to be 10% of the market by 2016.

Lastly the popularity of the 7 inch tablets at $200 forced Apple to release the iPad Mini at $329 and that is cannibalizing sales of the larger and more profitable full size products.

The battle for market share has turned tablets and smartphones into commodities where every manufacturer has multiple models and profit margins are slipping fast. Apple is no longer the sole source for new products. They may have started the revolution but the opposing armies are catching up fast.

Apple tried to spread a little excitement on Thursday when Tim Cook said they were going to bring some manufacturing back into the US. They are going to invest $100 million to produce some Macs in the U.S. in 2013. Apple does not plan on doing the manufacturing themselves but on contracting with other companies for the work. $100 million is a drop in the proverbial bucket. Steve Jobs told Obama when they met a couple years ago and Obama asked him about bringing production back, "Those jobs are not coming back." The move by Tim Cook is a public relations gimmick more than anything else.

Tax selling ahead of the expected hike in capital gains is also a problem. Even if an investor does not have a lot of profit in an Apple trade they may need to sell the shares just to raise cash. That is the problem with a $550 stock. It is expensive to hold and that is a reason to sell when shares are not performing or the investor simply needs his cash back to use for other trades. 1,000 shares of Apple is the equivalent to 53,000 shares of Bank of America or 38,000 shares of HPQ.

Whatever the reason Apple shares are crashing. Since Apple announced the iPhone 5 on September 21st and the stock hit $705.07 shares have fallen nearly -25%. Apple has lost -$150 billion in market cap. Apple is 4% of the S&P and 12% of the Nasdaq Composite so the decline has definitely weighed on the markets.

The death cross of the 50-day under the 200-day average became official on Friday when the 50-day closed at $599.50 to the 200-day at 601.36. Key round number support is now $500 and uptrend support $475.

Apple Chart - Weekly

Apple Chart - Daily

Despite all of the negatives mentioned above I found myself leaning towards an iPad purchase this Christmas. I am not an Apple fan but after doing extensive research into the competition I kept coming back to the iPad as the best tablet. I have held off for the last couple years but have finally decided to take the plunge. I favor the Android OS, 10 inch, 16gb, quad core processor and 4G. Finding one with OS 4.0+, good graphics, and those other features seems to be a losing battle. All of the Android clones are cheaper than Apple but each seems to be lacking one of the basic feature groups. Selling cheaper tablets comes with a cost of fewer overall features. I am a Verizon customer so that further limits my options. I am sure other tablet buyers have run into the same challenges and they end up back at the Apple counter. I am still holding out for the Android tablet with all the features. Eventually somebody will make one.

IBM made news last week with a change to their 401K program. Instead of matching employee contributions on a paycheck by paycheck basis they will only match at year end. If you leave IBM for any reason during the year other than retirement then you don't get the match for that year. If you make $100K a year and put the max 10% in your 401K then IBM will match up to 10% of your salary or $10K a year. By matching each month you get the advantage of average costing your investments. By matching only on December 31st you get one purchase price and quite often near the highs of the year making this change in the plan a negative for IBM employees. However, I doubt any of them will turn down the 10% contribution.

For IBM, with employee turnover in the thousands every year, this is a winner. They get to use the cash all year and they no longer have to contribute to those employees who left. About 14% of corporate 401K plans have the once a year contribution matching by employers. However, with IBM's high visibility this could cause a lot of follow on changes by other companies.

IBM Chart

Citigroup (Nyse:C) rallied more than 10% after they said they were laying off more than 11,000 workers. The restructuring will result in staff reduction in all geographies. The savings in 2013 is expected to be $900 million with the annual cost savings rising to $1.1 billion in 2014 and beyond. To get these savings Citi is going to take a pre-tax charge of $1.0 billion in Q4 and $100 million in Q2-2013. Revenues will decline by about $300 million. In addition 44 branches will be closed in the U.S., 15 in Korea, 14 in Brazil, 7 in Hong Kong and 4 in Hungary. After the closures Citi will still have more than 4,000 retail branches.

Citi Chart

Groupon (GRPN) shares rallied +23% on Friday on rumors Google might be considering acquiring the company. More than 50 million shares traded compared to average volume of 19 million. Bloomberg fueled the acquisition rumor in an old note about Tiger Global disclosing a 9.9% stake in GRPN. Groupon turned down a $6 billion offer from Google before Groupon went public. Their market cap today is only $3 billion.

Groupon Chart

The S&P struggled to move higher under the weight of Apple's losses but the S&P did end with a +2 point weekly gain. That is an amazing performance given Apple's big loss and the uncertainty over the fiscal cliff.

The S&P is up +12.7% for the year. However, average daily volume is down -19% over last year. $125 billion has been withdrawn from equity funds year to date and more than $300 billion has gone into bond funds. There is now more than $2.6 trillion in money market funds.

The S&P struggled all summer but Friday's close is only about 60 points away from the high close of the year just under 1475. When you consider what is going on in Washington, Europe, China and the Middle East we should be a couple hundred points lower.

More than $27 billion in special dividends have been announced since the election. The gains in those stocks are helping to keep the market pinned to the current levels. Once those stocks go ex-dividend the air will go out of the balloon.

I have been recommending we buy the dips for several weeks now on my belief there will be a resolution of some sort on the cliff and the worst expectations are already priced into the market.

After hearing some of the comments from lawmakers late this week I was reconsidering that thought process. However, I know the sound bites have to get worse before a deal can be done. The posturing is still not over.

I believe the closer we get to the "last minute" the louder and more aggressive the press briefings will be. As a result the market will turn more volatile and we could see some serious declines. The markets forced a resolution to the debt ceiling showdown in August 2011. When the markets fell off a cliff the lawmakers arranged a quick solution.

We will get to that point later this month. Nothing gets done until the last minute in Congress. Even if we don't get a small bargain we should be ok as long as they are meeting to resolve the problem. What we need to fear is heading into 2013 with no deal and a deadlock over the issues. That is when the market will force the issue.

For next week the FOMC meeting is the key event. Since everyone expects a QE4 announcement I don't know how the market will react if they don't announce a new program. Is that good news or bad news? It could be interpreted either way.

Support on the S&P is still 1400 and then the 200-day average now at 1386. Resistance is the 50-day average at 1417 and we closed at 1418 so we could see another move higher. Stronger resistance at 1430 remains to be tested.

S&P Chart

The Dow finally broke through resistance at 13,000 and came to a stop at 13,155 at Friday's close. That just happens to be the 100-day average but the Dow is not reactive to averages so it is just a coincidence. Resistance is now 13,279 and it should be strong. Support is 12,900 and well below the current level.

The Dow broke out of congestion and that suggests the S&P could do that next week. Dip buyers are growing in number.

Dow Chart

Unlike the Dow's breakout over round number resistance at 13,000 the Nasdaq is still fighting resistance at 3,000. The reason is Apple. The majority of computer and chip companies were up last week but even their combined gains could not overcome the drag caused by Apple.

As Apple moves closer to $500 the dip buyers should appear and that could help to stabilize the Nasdaq. Initial support is still 2950 and resistance 3000 to 3025 and that is a fairly narrow range. A breakout in either direction could attract additional volume and produce a multiday move.

Nasdaq Chart

Throughout all the market gyrations last week the Russell 2000 remained perfectly flat to close the week with only a 0.35 point gain. There was not a lot of volatility in the Russell. In fact there was almost zero volatility. This is a sign the fund managers are on hold. They have either placed their bets and are waiting for the resolution or they are waiting for the resolution to take action. I have not seen the Russell this flat in a very long time.

Fortunately this will give us a clear signal when the market decides to move. A breakout in either direction will tell us which way the market is going. Fund managers unsure of what other funds are doing will be watching the Russell for direction and once it appears there could be a lot of managers moving in that same direction.

Managers don't want to make their own decisions and be wrong. If they bet on one direction and 85% of their competitors go the other direction they can lose their relative performance and their jobs. They would rather follow the herd and be wrong but in the same performance percentile than take a chance and risk performance falling below their peers.

Support 818, resistance 824. Trade in the direction of the breakout.

Russell 2000 Chart

The market has shaken off numerous negative comments from both political parties so the vast majority of traders are still expecting a resolution of some kind. While the market may be expecting a resolution I cannot stress enough that a failure to see some compromise before late December could produce a severe market decline similar to the debt ceiling disaster in August 2011. Investors will put up with stubbornness in Washington only so long before the complacent herd stampedes.

Tax loss selling in late December is more likely than normal. High dollar stocks with big gains have been weaker than the overall market. However, this has been happening ever since the election so nobody knows how much volume is left. There could be a lot of investors still hoping a tax deal gets done before year end so they don't have to sell. If no deal appears and none seems likely the last couple weeks of December could be a challenge for the bulls.

After the FOMC meeting the market could weaken. If the Fed does nothing except produce the obituary for Operation Twist the institutional investors may abandon some of their existing QE trades. Likewise, those institutions that have put on new QE trades in recent weeks in anticipation of QE4 being announced would also abandon those positions.

If the Fed does announce QE4 or some similar program we could see dollar denominated assets continue to rise.

The worst outcome would be for no new program and Bernanke coming out strongly against the stalemate in Washington and the potential impact of the fiscal cliff. He has used his prior speeches to continually warn that the economy was facing a fiscal crisis and one that the Fed could not fix. If he uses his post meeting press conference to strongly stress the negative impact of going over the cliff he could awaken new concerns in the investing class that would have them running for cover. However, while I am sure he would like to rail against congress and the administration that would be counterproductive to his efforts to push equities higher. He wants the markets to rally and create the wealth effect that stimulates the economy through consumption. For that reason I suspect he will mention the cliff and the long term problems but he won't go so far that he damages the market. He will attempt to be a cheerleader for the economy but I worry his comments will not carry enough conviction to sustain the market.

That is the curse of the Fed Chairman position. He can't afford to go out on a limb with his comments. He must maintain a middle of the road position so history does not look back two years from now and say how wrong he was. He can't afford to damage the position of Fed Chairman. Greenspan will never live down his recommendation for everyone to apply for an adjustable rate mortgage in 2006 because they were such a good deal and interest rates would remain stable. With Bernanke's term ending soon he won't want to rock the boat unless he has already decided to exit the hot seat and go out in a blaze of glory by standing up for his convictions. That would be something to see.

Personal Commentary

Friday was December 7th and the 71st anniversary of the attack on Pearl Harbor. That attack set into motion an industrial revolution that very quickly turned the tide of war and ended with the bombs on Hiroshima and Nagasaki. America went from a calm progressive economy to a mighty war machine in only a matter of months. Tens of thousands of planes, tanks and ships were designed, built and put into service in the time it would take just to get designs approved today. America has the capability to turn our current muddle through economy into a surging and vibrant economic leader in that same period of time if only the government would get out of the way. The fiscal cliff uncertainty is a self inflicted wound. Had it been inflicted by an outside enemy we would already have risen up and squashed them in the time it has taken to get from the 2011 debt ceiling disaster to the stalemated cliff talks today.

That December 7th attack launched the greatest economic boom of our time once the war was over. That was the baby boom generation. A population explosion in the years after the war increased births by more than four million a year. The "leading edge" boomers (1946-1955) total more than 38 million and the "late boomers" 1956-1964 accounted for another 37 million. Since population demographics have shown the most consumptive years are those between age 40-55 we are heading into a period where consumption (spending) is going to decline sharply as the boomers retire.

Bill Gross penned an article this week showing per capita spending drops off a cliff once people turn 65 and retire. Currently boomers control over 80% of personal financial assets, more than half of all consumer spending, account for 80% of leisure travel, 77% of prescription drugs and 61% of over the counter drugs. Starting in 2011 more than 10,000 boomers retire every day and that will continue for the next 19 years. More than 36% claim they have nothing in retirement savings. More than 35% over age 65 rely entirely on Social Security for their sustenance. A recent AARP survey found that 40% plan to work until they die because they did not plan ahead.

In 1950 every retiree on social security was supported by 15 active workers. By the end of 2010 there were only 3.3 workers for each retiree. The government believes there will only be two per retiree by 2025.

A Wall Street Journal editorial a couple weeks ago highlighted the fact the government is facing not a $16 trillion debt but an $87 trillion debt if you take into account the unfunded liabilities of social security, Medicare and Medicaid. If you fast forward 20 years until all the boomers are retired that soars to $202 trillion according to Boston University.

Treasury Secretary Tim Geithner called the fiscal cliff discussions in Washington "orchestrated drama." I call it political theater or basically the same thing. The real problem is that regardless of the resolution it will not solve anything. We have passed the point of no return. We cannot mathematically solve this debt problem. We can only slow its progression. Arguing on whether the 2013 deficit will be $800 million or $1.2 trillion is wasted breath. It is still a deficit. Cutting spending does not mean you only increase the budget over the prior year by $700 billion instead of $900 billion. Until lawmakers can make voters understand the math of ever increasing spending and the disaster that is headed our way, they are just rearranging the deck chairs on the USS Titanic.

It is extremely frustrating to try and make sense out of the current situation when there is no real solution. We are headed for trouble in the decade ahead that will make the financial crisis of 2008 look like a picnic. I believe as educated investors we can navigate the coming disaster but everyone needs to be aware it is coming. We can't just go to work every day, come home to dinner, sit down on the couch and watch Dancing with the Stars. Everyone should be preparing for the real problems in the decade ahead by building up their investment accounts, increasing savings and reducing living expenses. Those readers that are paying attention to the problems ahead will survive it. Those that ignore the economic signposts will end up in the "work till you die" category of retirees. Fortunately we know it is coming and it will take years to arrive. We have time to prepare. Spread the word.

Annual End of Year Renewal Special

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

Jim Brown

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"I have wondered at times what the Ten Commandments would have looked like if Moses had run them through the US Congress."
Ronald Reagan


Index Wrap

Consolidation of Prior Gains

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

Price action in the major indices is unfolding bullishly about as I would expect with an initial deflection at down trendlines and the 50-day moving average, followed by a rebound to above these resistances at least in the S&P and Dow. Nasdaq remains more volatile but looks like it will hold trendline support and also go higher over time.

Of course its all "fiscal cliff" this and that but the Market seems to be discounting this situation and is holding up fairly well in line with the slowly growing US economy. The betting by the savvier professional trader types seems to be that there will be a deal even if that deal is done in early 2013. At that point we'd be looking at tax CUTS to restore any prior 2012 tax levels. And of course, tax cuts seem to be the only way to garner broad Congressional support these days.

MY BULLISH/BEARISH 'SENTIMENT' READINGS

My sentiment indicator numbers got restored by me from their missing place on my S&P 500 (SPX) and Nasdaq Composite (COMP) daily charts. Trader sentiment doesn't lean to overly bullish or bearish at this point, which isn't surprising given the wait and see attitude held by many.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart action remains bullish as the index has a consolidation or minor pullback after the initial strong initial up leg. Two bullish chart/indicator aspects are seen in the end of week rally that puts the Friday Close both above the down trendline and SPX's 50-day moving average.

I am again this week highlighting expected technical resistance at 1430-1440. Fairly major resistance begins at and above 1460.

Near support is at 1400, extending to 1380. A daily Close below 1400 that wasn't reversed (back to the upside) in the following day(s) would turn the chart to a more mixed, less bullish, near-term picture. Presently I anticipate higher levels ahead, especially as we get closer to the seasonal pattern of a 'Santa Claus' or year-end rally.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart has the same bullish chart features as the S&P 500. This is seen with OEX's initial deflection from the down trendline and the 50-day moving average, followed by another rally above the down trendline. Yet to follow is a decisive upside penetration of the 50-day moving average.

Initial resistance is seen at the 50-day average, currently intersecting at 650. Further resistance then comes in at 655-660.

Near support is in the 640 area, extending to 635. A daily Close below 640-635, that wasn't followed by a rebound back above this area in the following day(s), would suggest that OEX might drift lower again. I don't expect to see the Index take another sharp downturn however. I'm more inclined to buy dips and anticipate the market will continue to climb a 'wall of worry' into year end.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) Average is bullish in its most recent action with INDU's upside penetration of its down trendline and the Friday Close just over its 50-day moving average. The Average is only a hair's breath above this key average but it's enough to make me somewhat more confident in holding calls; certainly more confident than to be betting on another sizable decline.

The typical rally pattern for an 'oversold' rebound from such a relatively steep retracement (of a sizable prior advance) is for an initial strong 'oversold' rally that was, in turn, followed by some price consolidation. After prices chop around in this kind of situation, this period is often followed by another advance. Stay tuned on this unfolding!

Near resistance begins around 13200 and then is especially chart-evident at 13300, with resistance extending to 13400.

Near support again back at the pivotal 13000 level, extending to 12875. I'm not currently looking for a dip below 12800, at least not for long. It would turn the chart from overall bullish to mixed on any prolonged slide below 12800 in the Dow.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) chart remands within a bullish rebound. COMP saw an initial bullish breakout above its down trendline, only to be followed by a minor pullback and with the Index falling back from key resistance at 3000 and from its 50-day moving average. If however, support holds up at 2950-2940 especially on a Closing basis, COMP will likely work still higher in a second up leg.

The pivotal COMP resistance to key in on is at 3000, extending to 3030-3050. Next resistance comes in around 3100.

Near support is at 2940, where there was a prior cluster of recent intraday lows and is the level of the current 21-day moving average. 2900 is next support. A Close below 2900 turns the chart mixed again, although COMP would remain within an overall long-term uptrend.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) Index is in a bullish recovery mode. NDX pierced its down trendline and then retreated but only back to a new technical 'support' implied by its previously broken down trendline. I anticipate further advances over December on balance but am also watching for the ability for NDX to clear resistance implied by RUT's 50-day moving average.

Interestingly, (or 'tellingly'), lows so far on the recent minor pullback have occurred above support implied by the prior upside price gap. Upside price gaps that form in stocks and indexes often turn out to be areas of technical support on subsequent pullbacks.

I've noted support in the aforementioned 'gap' area at 2614-2605, with next support at 2560-2550.

Near resistance is at 2700, then at 2750. Fairly major resistance begins in the 2800-2850 zone.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) remains in a bullish recovery mode as the pullback from resistance in the 66 area appears to have support back at the trendline; resistance, including resistance trendlines, once penetrated tends to 'become' support on a subsequent pullback(s).

Key near support comes in the low-64 area, with pivotal lower support at 62.5.

Near resistance is at 66, with fairly major resistance beginning in the 68 area.

RUT appeared to have a 'classic' (high) volume selling climax at its mid-November low, suggesting sizable liquidation of long positions, setting the stage for a strong rebound.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) chart is bullish. RUT broke out above its September to mid-November down trendline with a decisively jump in prices that created an upside price gap that has yet to be 'filled in'. Upside price gaps that resist a retreat either back to or to below the gap area is evidence of technical support and that still higher levels will be seen ahead.

It looks like the very minor consolidation between 816 and 825 over the last several day period in RUT can lead to another advance. Strong rallies, followed by only a minor pullback such as seen with the Russell, is typically part of a bullish recovery.

Very near support is at 818-815, with pivotal support then coming in the low-800 area. I'd expect 800 to be defining support so to speak. The double bottom low that formed in the 765 area in RUT was indicative of a significant upside reversal.

Overhead resistance is apparent in the 830 area, extending to 842-846.



GOOD TRADING SUCCESS!


New Option Plays

Apparel, Internet, & Jewelry

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Abercombie & Fitch - ANF - close: 46.39 change: +1.07

Stop Loss: 44.49
Target(s): 49.85
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
ANF is up four weeks in a row. Yet looking more closely at the past two weeks the stock has mostly been consolidating sideways and digesting gains. Traders bought the dip near round-number support/resistance at $45.00 this past week. Now ANF looks poised to rally toward $50.00.

I am suggesting new bullish positions at the open on Monday. Our short-term target is $49.85 since the $50.00 mark could be resistance. More aggressive traders may want to aim for the $53-55 zone instead.

- Suggested Positions -

buy the 2013 Jan $50 call (ANF1319a50) current ask $1.14

Annotated Chart:

Entry on December xx at $ xx.xx
Average Daily Volume = 5.4 million
Listed on December 08, 2012


Linkedin Corp. - LNKD - close: 109.70 change: +0.65

Stop Loss: 107.45
Target(s): 117.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
LNKD was hitting new highs in September with the stock trading near $125. Unfortunately the correction pulled shares all the way down to $95 before bouncing. LNKD has spent the last couple of weeks consolidating sideways below resistance at its 100-dma and the $110 level. Now the stock is poised to breakout and if that happens we could see LNKD surged toward $115 or $120 again.

I am suggesting a trigger to open bullish positions at $110.25. If triggered our target is $117.50. More conservative traders may want to exit in the $114-115 zone instead since $115 might be resistance.

LNKD can be volatile so I would use small positions to limit our risk.

Trigger @ 110.25 *Small Positions*

- Suggested Positions -

buy the Jan $115 call (LNKD1319a115) current ask $3.00

Annotated Chart:

Entry on December xx at $ xx.xx
Average Daily Volume = 1.8 million
Listed on December 08, 2012


NEW DIRECTIONAL PUT PLAYS

Tiffany & Co - TIF - close: 58.42 change: -0.20

Stop Loss: 60.05
Target(s): 52.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Analysts are starting to worry that consumer spending this holiday season may not be as robust as previously expected. Over the past few years we've heard about how the high-dollar consumer has remain healthy. Yet TIF's sales growth is slowing down. Making matters worse for TIF shareholders the stock has a long-term trend of lower highs dating back to summer of 2011.

Right now TIF is holding above support near $58.00. Last week's low was $57.84. I am suggesting a trigger to buy puts at $57.75. If triggered our target is $52.50. Although I want to caution you that the $55.00 level is potential support. The Point & Figure chart for TIF is bearish with a $51 target.

Trigger @ 57.75

- Suggested Positions -

buy the Jan $55 PUT (TIF1319m55) current ask $1.03

Annotated Chart:

Entry on December xx at $ xx.xx
Average Daily Volume = 2.3 million
Listed on December 08, 2012



In Play Updates and Reviews

Stocks Churn on Cliff Stalemate

by James Brown

Click here to email James Brown

Editor's Note:

The market's major indices were mostly sideways for the week as Washington failed to make progress on the fiscal cliff.

Our HUM trade was stopped out.

Current Portfolio:


CALL Play Updates

Dover Corp - DOV - close: 63.73 change: +0.30

Stop Loss: 61.75
Target(s): 67.50
Current Option Gain/Loss: +11.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/08/12: DOV is still consolidating sideways. The consolidation seems to be narrowing, which might suggest a breakout one way or the other soon. Right now the past of least resistance should be higher but DOV remains under resistance at the $64.00 level. I am not suggesting new positions at this time.

- Suggested Positions -

Long 2013 Mar $65 call (DOV1316c65) entry $2.10

11/28/12 new stop loss @ 61.75
11/19/12 triggered @ 62.30

chart:

Entry on November 19 at $62.30
Average Daily Volume = 1.7 million
Listed on November 17, 2012


Energizer Holdings - ENR - close: 81.41 change: +1.01

Stop Loss: 78.40
Target(s): 84.50
Current Option Gain/Loss: - 5.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/08/12: Our new ENR trade is off to a good start. Shares gapped open higher at $80.76 and rallied to a new 2012 high with a +1.25% gain on Friday. Nimble traders may want to try and buy a dip in the $80.50-80.00 zone but there is not guarantee we'll see a dip. Our multi-week target is $84.50.

- Suggested Positions -

Long 2013 Jan $85 call (ENR1319a85) entry $0.90

chart:

Entry on December 07 at $80.76
Average Daily Volume = 784 thousand
Listed on December 06, 2012


Flowserve Corp. - FLS - close: 141.90 change: +0.51

Stop Loss: 138.90
Target(s): 148.50
Current Option Gain/Loss: - 5.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/08/12: Friday's early gains in FLS faded but shares still hit new four-week highs. I would consider new positions now but readers may want to look for a dip into the $141-140 zone as our next entry point to buy calls. FYI: The Point & Figure chart for FLS is bullish with a $153 target.

- Suggested Positions -

Long 2013 Jan $145 call (FLS1319a145) Entry $2.70

chart:

Entry on December 05 at $141.50
Average Daily Volume = 518 thousand
Listed on December 04, 2012


Home Depot - HD - close: 64.45 change: +0.11

Stop Loss: 62.90
Target(s): 69.50
Current Option Gain/Loss: -27.6%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
12/08/12: HD's performance this past week was disappointing. The stock essentially churned sideways although we're fortunate there was no follow through on the bearish reversal early in the week. I remain cautious here. Readers could use a rally past $65.00 as a new entry point.

- Suggested Positions -

Long 2013 Jan $65 call (HD1319a65) entry $1.95

chart:

Entry on December 03 at $65.35
Average Daily Volume = 8.5 million
Listed on December 01, 2012


Ingredion Inc. - INGR - close: 64.88 change: -0.86

Stop Loss: 63.90
Target(s): 69.00
Current Option Gain/Loss: -25.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/08/12: Hmm... INGR saw some profit taking on Friday and shares underperformed the market with a -1.3% decline. The stock paused at its 10-dma. A bounce back above $65.00 could be used as a new entry point. I am raising our stop loss to $63.90. More conservative traders may want to raise their stop closer to $64.50 instead.

- Suggested Positions -

Long 2013 Jan $65 call (INGR1319a65) entry $2.00

12/08/12 new stop loss @ 63.90

chart:

Entry on December 04 at $65.25
Average Daily Volume = 504 thousand
Listed on December 03, 2012


O'Reilly Automotive - ORLY - close: 90.73 change: +0.05

Stop Loss: 89.95
Target(s): 95.75
Current Option Gain/Loss: -76.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/08/12: We still have two weeks left on our December options but it's not looking well for our ORLY trade. Shares underperformed all week with a failed rally on Monday at $95.00 and a pullback toward support near its 200-dma. Now prior short-term support at the 10-dma is likely new resistance. Last week's decline has painted a bearish engulfing candlestick reversal pattern on the weekly chart although it needs to see confirmation. I am not suggesting new positions at this time.

- Suggested Positions -

Long DEC $95 call (ORLY1222L95) entry $1.90

chart:

Entry on November 20 at $92.05
Average Daily Volume = 1.8 million
Listed on November 19, 2012


Precision Castparts - PCP - close: 183.55 change: +0.60

Stop Loss: 179.75
Target(s): 188.00
Current Option Gain/Loss: - 2.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/08/12: Traders bought the dip in PCP near its rising 10-dma again. Shares remain under resistance at $185.00. More conservative traders might want to tighten their stop loss. I am not suggesting new positions at this time.

- Suggested *Small* Positions -

Long DEC $185 call (PCP1222L185) Entry $1.85

12/05/12 new stop loss @ 179.75

chart:

Entry on November 29 at $182.04
Average Daily Volume = 762 thousand
Listed on November 28, 2012


Rockwell Automation - ROK - close: 80.39 change: +0.28

Stop Loss: 78.90
Target(s): 84.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 5 weeks
New Positions: Yes, see below

Comments:
12/08/12: ROK has spent the last couple of sessions churning sideways in the $79.50-80.50 zone. The stock looks poised to breakout higher but we are waiting for a new relative high before initiating positions.

I am suggesting a trigger to buy calls at $80.60 with a stop loss at $78.90. Our target is $84.75.

Trigger @ 80.60

- Suggested Positions -

buy the 2013 Jan $85 call (ROK1319a85)

chart:

Entry on December xx at $ xx.xx
Average Daily Volume = 1.0 million
Listed on December 05, 2012


Trimble Navigation - TRMB - close: 57.28 change: +0.55

Stop Loss: 53.40
Target(s): 59.75
Current Option Gain/Loss: +23.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/08/12: TRMB has extended its gains to three days in a row. Shares hit another new high on Friday. If you missed our entry point you may want to wait for a dip back toward the $56.25 area. Our target is only $59.75 but more aggressive traders could aim higher.

- Suggested Positions -

Long 2013 Jan $57.50 call (TRMB1319a57.5) entry $1.30

chart:

Entry on November 06 at $56.15
Average Daily Volume = 708 thousand
Listed on November 28, 2012


PUT Play Updates

InterOil Corp. - IOC - close: 52.18 change: +0.71

Stop Loss: 55.15
Target(s): 50.50
Current Option Gain/Loss: +55.5%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
12/08/12: It was another ugly week for shares of IOC. The stock managed a +1.3% bounce on Friday but shares are now down four weeks in a row. We've been aiming for $50.50 but IOC is looking oversold here. Readers may want to go ahead and exit early now. I am not suggesting new positions. We will adjust our stop loss down to $55.15.

I want to remind readers that this is a more aggressive, higher risk trade. IOC is volatile and has a high amount of short interest.

*Small positions* - Suggested Positions -

Long DEC $55 PUT (IOC1222x55) entry $2.70

12/08/12 new stop loss @ 55.15
12/06/12 new stop loss @ 56.05
12/04/12 new stop loss @ 57.55
11/28/12 new stop loss @ 60.15

chart:

Entry on November 21 at $58.50
Average Daily Volume = 790 thousand
Listed on November 20, 2012


Range Resources - RRC - close: 64.68 change: +0.10

Stop Loss: 66.05
Target(s): 56.50
Current Option Gain/Loss: -25.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/08/12: RRC broke down through significant support to hit new three-month lows on Tuesday. Then the stock, like many in the energy sector, surged on Wednesday thanks to M&A news in the sector. RRC has spent the last couple of days churning sideways. I am not suggesting new positions at this time.

Earlier Comments:
I do consider this an aggressive, higher-risk trade. RRC can be volatile and there has been takeover chatter in the past. We want to keep our position size small to limit our risk.

- Suggested *Small* Positions -

buy the 2013 Jan $60 PUT (RRC1319m60) entry $1.20*

*option entry price is an estimate since the option did not trade at the time our play was closed. The first trade on Dec. 5th was at $1.00.

chart:

Entry on December 05 at $63.72
Average Daily Volume = 1.5 million
Listed on December 04, 2012


Teradata Corp. - TDC - close: 58.19 change: -0.51

Stop Loss: 62.10
Target(s): 55.15
Current Option Gain/Loss: +39.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/08/12: It looks like the oversold bounce in TDC might already be running out of steam. Shares quickly reversed following the Friday morning attempt to rally. More conservative traders may want to adjust their stop loss lower. I am not suggesting new positions at this time.

Our target is $55.15. More aggressive traders could aim a lot lower. The Point & Figure chart for TDC is bearish with a $44 target.

- Suggested Positions -

Long 2013 Jan $55 PUT (TDC1319m55) entry $0.86

chart:

Entry on December 03 at $60.00
Average Daily Volume = 2.2 million
Listed on December 01, 2012


CLOSED BEARISH PLAYS

Humana Inc. - HUM - close: 66.65 change: +1.46

Stop Loss: 66.51
Target(s): 60.25
Current Option Gain/Loss: -74.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/08/12: The healthcare sector was showing relative strength on Friday. HUM outperformed many of its peers with a +2.2% gain. I didn't see any specific news to account for this rally. Shares of HUM broke through resistance near $66 and its 10-dma. Our stop was hit at $66.51.

- Suggested Positions -

DEC $65 PUT (HUM1222x65) entry $1.98 exit $0.50 (-74.7%)

12/07/12 stopped out at $66.51

chart:

Entry on November 28 at $64.20
Average Daily Volume = 3.0 million
Listed on November 27, 2012