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Newsletter

Daily Newsletter, Saturday, 12/22/2012

Table of Contents

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

Market Wrap

Plan B Fails

by Jim Brown

Click here to email Jim Brown

Speaker Boehner failed to garner enough votes for the Plan B tax bill to even bring it to the floor for a vote and Friday's market reaction was immediate and dramatic.

Market Statistics

S&P futures declined -52 points overnight from Thursday's close at 1446. There was significant pressure from declines overseas after Speaker Boehner failed to get enough republican support to pass the Plan B tax bill. There was an immediate rebound to 1425 where it held through the open when the futures expired.

In regular trading the Dow lost -121 after being down -189 at the open. The Nasdaq lost -29 and the S&P -13. Even with the declines the major indexes still finished with a gain for the week.

The market fell as a result of the cancelled vote because of the implications for an even bigger vote next week. If the Speaker could not get enough votes for a "show vote" on a republican sponsored bill then how will he get enough votes when the there are real issues on the line and bigger tax cuts in the mix?

The outlook for a grand bargain with the President and democrats is weakening every day. The president is going to get his wish for a tax hike if we go over the cliff on Dec 31st. That is his ace in the hole. He can use that looming tax hike to possibly do a small deal with Boehner next week that will extend the cuts and the rest of the cliff issues for 60-90 days and remove the immediate pressure on the market.

Boehner still holds the bigger trump card of the debt ceiling that will shut down the government by the end of February if it is not raised. Boehner can play that card next week as a bargaining chip on the tax hike. If the president and Boehner can't agree on an extension next week and we go over the cliff then the debt ceiling card will become even more important as we move into January and closer to the ceiling.

We saw the potential for a small deal late Friday when president Obama announced he had talked to Reid and Boehner and thought there was common ground for a deal to extend the tax cuts, extend unemployment insurance on two million workers and "structure a framework" for the rest of the cliff issues that would allow "cooler heads" to work out the details in 2013.

This offer to kick the cliff can well into 2013 has been expected. I have written about the possibility several times. Nobody wants to take on the big issues under the glaring light of the press. Lawmakers would rather kick the issues into 2013 and then work on details in committee where the press can't see the back room bargains being made.

The tradeoff Obama wants to allow the can kicking is to raise taxes on everyone making more than $250,000 and extend unemployment insurance benefits on two million people for another year. With the republican rebellion in the House it is going to be tough to get this done. House democrats will have to come to Boehner's rescue.

Institutional investors understand the growing risk of a bigger market disruption if negotiations breakdown completely. Next week is going to be very rocky if the headlines turn negative. The carrot Obama offered Friday night could keep the markets from selling off on Monday. The Senate and House have left town for the holidays so cliff headlines on Monday should be minimal. The urgency will increase after Christmas.

Friday was a busy day economically with several high profile reports that surprised to the upside. The Q3 GDP was revised up from +2.67% to +3.11% growth. The initial reading was +2.0% and it was revised higher in the prior report to +2.7%. This compares to only +1.25% growth in Q2.

The big gains came from strong nonfarm inventory investment and the largest contribution from government spending. A drag on growth came from lower farm inventories as a result of the drought.

Government spending rose by +3.9% and the fastest rate in more than three years. Exports rose +1.9% and investment in residential structures rose by 13.5%. Consumer spending, the biggest component in the GDP, rose by +1.6%. Corporate profits rose by +2.4% but below estimates of +3.5% growth.

On a trailing 12 month basis the headline GDP has risen by +2.6%. This is decent but not enough to improve employment and insulate the economy from fiscal shocks. Real GDP income only rose +1.4% but that was twice the +0.7% rate in Q2.

The impact of Sandy at the end of October was not seen in the Q3 GDP but will be reflected in the Q4 numbers. While it would have depressed GDP in the early weeks it should have been positive for GDP once the rebuilding effort began.

GDP Chart

The headline number on the Kansas Fed Manufacturing Survey rose from -6.0 to -2.0. While still in negative territory it was an improvement. New orders improved from -14 to -8 but have been negative for four months. Back orders also improved slightly from -25 to -19 but have also been negative for four months.

Obviously it is hard to be positive about a manufacturing report with all the components still in negative territory but it is still an improvement. Unfortunately capital expenditure plans remain at two-year lows so a boom in activity is not expected by manufacturers. Survey respondents cited uncertainty over taxes and rising healthcare costs as the main factors depressing sentiment.

Kansas Fed Manufacturing Survey Chart

Durable goods orders for November rose +0.7% compared to expectations for a -0.1% decline. This compares to zero movement in October. Excluding transportation, new orders rose by +1.6%. Core capital goods rose +2.7% and shipments rose +1.8%.

Nondefense aircraft orders declined -13.9% but this is a very volatile number since orders are random and they total billions of dollars when they arrive.

This was a very good report given the weakness in other reports like the Kansas Fed survey above. The Philly Fed Manufacturing Survey the day before surged from -10.7 to +8.1 so there are strong spots in the economy.

On the negative side the final Consumer Sentiment report for December declined to 72.9 from the first reading of 74.5. That is the lowest level since July. That was also down from the November headline number of 82.7. The -9.8 point decline was significantly more than analysts expected and shows how the fiscal cliff headlines are impacting sentiment.

The current conditions component only declined -3.7 points to 87.0 but the expectations component imploded with a decline of -13.8 points from 77.6 to 63.8. That is the lowest level since last December.

Moody's said the implied decline for the second half of December was 70.5 suggesting the next Sentiment number could be even lower.

Low gasoline prices were actually a benefit to sentiment or the numbers would have been a lot worse.

Consumer Sentiment Chart

Mass layoffs spiked unexpectedly to 1,759 from 1,360 for November and that was the highest number since late 2009. The number of workers impacted rose to 173,558 from 131,173 in October. Analysts claim the numbers were impacted by Sandy and the increase will be temporary. However, California had the largest number of new layoffs and there was no storm on the West Coast. The next three states were NY, NJ and PA and those were storm driven.

Moody's Mass Layoff Chart

Next week will be a short week with the markets closing at 1:PM on Monday and closed for Christmas on Tuesday. That squeezes many of the normal reports into the final three days but it is still a very light calendar.

The Richmond Fed Survey on Wednesday should be positive but it will probably be ignored as the fiscal cliff headlines heat up again. The Chicago ISM on Friday is also expected to improve but it should also be ignored since Friday is the last full trading day ahead of the cliff deadline.

Next week is the "last minute" for cliff negotiations. The urgency is going to increase and that means it will be accompanied by a headline frenzy that will be pushing the market all over the map.

Volume will be very low and that can either produce a dull market or a one that looks like an EKG. Economics will not matter next week.

Economic Calendar

In stock news, Electronic Arts (EA) and Gamestop (GME) continued to decline on fears the government will step in and restrict violence in games like Grand Theft Auto and Call of Duty. There is a growing unrest about these violent games where people shoot other soldiers, people, cops, kids, etc randomly without consequence. Some analysts are claiming the games desensitize the player to violence in the real world.

The NRA held a press conference on Friday and pointed out there is even an online game called Kindergarten Killer where the shooter (you) wanders through a school killing principals, teachers and kids at random. You get points for the number of kids you kill. Link to Game   Alan Lanza reportedly played 40-50 hours of violent video games like Call of Duty every week.

Investors are selling shares of game providers because the odds are good there will be stricter rules on who can buy these games in the future. There will probably be tighter parental controls as the topic winds its way through the press and congress.

GME lost -10% since the shooting, EA -13%, ATVI -10%, RGR -17% but has rebounded slightly and SWHC -18%. Semi-auto rifle prices have tripled and a check of multiple distributors shows they are all sold out.

I reported on Tuesday that the Colorado Bureau of Investigations (CBI), the agency that handles the background checks for firearms sales in Colorado, was reporting record volumes. On the day of the shooting the normal wait time for an "instant check" was 23 minutes in the morning and had increased to 4 hours by day's end. They processed a record 4,154 checks the day after the shooting. I checked again on Saturday and the instant check was now 4-5 days behind and there were more than 9,200 applications backlogged in the system. This would actually be more but all the gun dealers in the Denver area are sold out. I have a friend that runs a sporting goods store and he said all the firearm distributors are out of inventory. I checked online at GalleryofGuns.com, a website run by Davidsons, one of the largest gun wholesalers, and they were out of stock on all semi-auto rifles. I checked several other online supply houses with the same result. Several had messages on their website saying they were no longer accepting orders.

This story is far from over. Manufacturers are going to report record profits for Q4 and Q1 but any gains in the share price will be short lived as future sales dry up. We need to watch for shorting opportunities after the Q4 earnings.

Electronic Arts Chart

Cabelas Chart

Smith & Wesson Chart

Micron (MU) reported a loss of -27 cents for Q3 compared to a -19 cent loss in the year ago quarter. Revenue fell -12% to $1.83 billion. Analysts were expecting a loss of -20 cents on revenue of $2.0 billion. Shares fell -10% after Micron said chip prices fell -11% on average and PC shipments for 2012 had declined for the first time in more than ten years. Makers of PCs, servers and network equipment had overstocked and cut orders as a result.

Micron has agreed to acquire bankrupt Elpida Memory for $2.37 billion and has received approvals from Japan, the U.S., Czech Republic and Korea. Several other countries still need to approve it but the acquisition is expected to be completed in the first half of 2013. Micron has reported losses for six quarters and analysts expect that to continue for another two quarters until cutbacks in the industry reduce the supply of chips.

Micron Chart

Research in Motion (RIMM) declined -23% after reporting earnings Thursday after the close. This was the largest percentage drop in RIMM since Sept 2008. The company also reported that subscribers declined from 80 million to 79 million. Relatively speaking that does not seem that bad given the tens of millions of phones being sold by Apple and Samsung.

RIMM announced a fee change along with earnings with the new fee structure to be introduced with the BlackBerry 10 in late January. However, when an analyst on the conference call asked how service fees paid by consumers and businesses would be impacted by the release of the BB10 devices in January VP Paul Carpino, said "We are not providing that info at this time. You will have to wait." Shares had rallied in afterhours trading after the better than expected earnings but they immediately crashed on that comment. Service charges now account for 35% of RIMM's revenue. If those charges were to change with the new OS and phones then RIMM's revenue would drop.

RIMM said some subscribers would continue to pay for enhanced services like advanced security but under the new structure some other services would account for less revenue or even none at all.

The company also said the BB10 launch at the end of January could burn up to one third of the company's cash, now at $2.9 billion.

RIMM Chart

Shares of Herbalife (HLF) continued to plunge after Pershing Square Capital Management's CEO William Ackman called the company a pyramid scheme and announced he was shorting the stock. Ackman claims he has been shorting the stock for several months and it now represents a major position for his company. He called it "enormous."

Ackman and associates showed several hundred slides during a presentation at the Sohn Conference Foundation meeting in New York. See presentation PDF here   He has been widely assailed for his position against the 32-year-old company. The Herbalife CEO has been extremely hostile in several recent interviews claiming this kind of attack represents stock manipulation and should be researched by the SEC.

On Friday Ackman launched a website named www.FactsAboutHerbalife.com with the source data used to create the Sohn Conference presentation. Ackman claims Herbalife is misrepresenting financial information and disguising information to hide the true pyramid nature of the organization. I read the presentation I listed above and it is pretty convincing. Ackman said Herbalife shares are going to zero once regulators understand the fact he is presenting. After reading his research I would not be surprised if HLF did go to zero or close to it.

Herbalife has announced an analyst meeting for Jan 7th to rebut the Ackman claims.

Herbalife has more than three million distributors in more than 80 countries. Unfortunately, it is not too big to fail.

Herbalife Chart

Nu Skin (NUS) is suffering the same fate as Herbalife even though they are not under direct attack by Ackman and Einhorn. Also a multilevel, shareholders are fleeing now rather than wait for somebody to put the dreaded pyramid tag on them as well.

NuSkin Chart

Yum Brands (YUM) fell -4% after China said it was investigating the company for using chickens treated with unapproved levels of antibiotics at its KFC stores. The Shanghai FDA said tests conducted by a third party agency found eight batches of chickens supplied by Liuhe Group had levels of antibiotics that were higher than allowed.

Shares declined on the news. Late in the day YUM said it is cooperating with the government probe and review of its suppliers and doesn't anticipate a shortage of product. YUM said it quit buying from the two suppliers in question in August. YUM received 44% of its revenue from China in 2011. The company has 4,900 locations in China.

YUM Chart

The Dow Transports have broken through eight-month resistance at 5200 and are approaching 52-week resistance at 5360. The motive power behind this is the airlines. Delta (DAL), United Continental (UAL), Sky West (SKYW) and Jet Blu (JBLU) are all sitting at multi-month highs. Occupancy is high and fuel costs are falling. The railroads are not doing nearly as well but rising volumes of oil are helping keep them in the black. Even UPS and FDX are at multi-week highs.

In Dow Theory the Dow should now confirm the rally by surpassing its October high of 13,610. Failure to do so would trigger a sell signal.

Dow Theory watcher Richard Russell said in a note to clients "for the good of the country and for the health and safety of my subscribers and family, I certainly hope the Dow confirms the transports." That sounds rather ominous since a failure of the Dow to confirm would trigger that sell signal in his mind.

Richard Moroney, editor of Dow Theory Forecasts, said a failure to confirm would be "discouraging" since "it would set the table for a bear-market signal."

Jack Schannep of TheDowTheory.com was not as bearish about the possible non-confirmation because he believes Dow Theory is already on a sell signal.

Dow Transports Chart

The S&P rallied to nearly 1450 on Tuesday and held that level for three days. The Boehner Plan B Blunder on Thursday along with December option expirations and the Russell index rebalancing knocked it back to prior resistance at 1430 at the close.

Spending a lot of time talking about the technical merits of the S&P at this level would be pointless. Resistance is 1450 followed by 1465 and support is 1425 followed by 1400. However, the direction and speed of movement will be determined by the political theater in Washington after Christmas. There is likely to be very little movement on Monday unless we are hit with a new headline.

Market movement the rest of 2012 is going to be strictly headline based. Typically the market is up between Christmas and New Years about 70% of the time. This is not a typical year so normal rules do not apply.

S&P Chart

The Dow fell back below prior resistance at 13,279 but remains close enough to retry that level on any positive news about the cliff negotiations. A further decline below 13,125 and the low on December 14th would be negative and bring the 12900-13000 level back into play.

Dow Chart

The Nasdaq dipped to support at 3,000 at the open and rebounded immediately. That level was tested again at 11:30 and another rebound ensued to push the index to close at the high of the day. Apple, Google, Amazon and Priceline were all negative so the Nasdaq did not have a chance for a positive close.

Nasdaq Chart

The Russell 2000 also closed near the high of the day and managed a loss of only -4 points. The Russell gained +2.9% for the week and more than double the other major indexes. Some would say this is the January effect where fund managers buy small caps for the new year.

I believe it is a truer picture of fund manager sentiment and a break over resistance at 860 by year end would be very bullish.

Russell 2000 Chart

The market will be hostage to the headlines for the rest of the year. Fundamentals and technicals will have little to do with market direction. It will be purely sentiment driven based on the fiscal cliff headlines.

There will more than likely be some window dressing as we approach year end. The tax selling by funds is over and they will be using any available cash to dress up their portfolios in lieu of a market dip.

I was reading an article this weekend by Pimco's El-Erian. He reminded me how we got to the fiscal cliff. When the debt ceiling debate in the summer of 2011 was going nowhere Speaker Boehner and President Obama agreed to agree on future spending cuts instead of current cuts. This got them both past the election without having to face the voters and be responsible for their decisions. They kicked the can down the road in typical political fashion. However, in order to keep both players honest they created a very big stick or set of circumstances that both thought the other would never be able to accept in January 2013. This was the "default" option. It would force them to deal later. With 16 months to work out a compromise they both thought the default option would never be enacted.

Since can kicking in an election year is a political art neither party wanted to tackle taxes or spending ahead of the election. Surely, once the election is over we can solve this problem quickly. Obviously Boehner was hoping Romney would win and the problem solved. When Obama won and no longer faces reelection the choices for the republicans suddenly took a turn for the worse. The unlikely default option that everyone thought was too ugly to ever come to pass is now only a week away and Obama and Boehner are right back at the same impasse they had in August 2011.

The fiscal cliff is a self inflicted wound. They never believed it would be allowed to come to pass so they were willing to agree to unrealistic cuts because they could change it later. Unfortunately later never came.

Now we are again facing the 11th hour deadline and the choices are worse today than they were in 2011 only this time the president has nothing to lose. Boehner is finding his caucus to be unrelenting in terms of tax hikes and offsetting spending cuts and the president is proving to be just as unrelenting in his demands.

It will be interesting to see if they can structure yet another can kick deep into 2013 and do it before the December 31st deadline. With the president in Hawaii and the House and Senate adjourned until Thursday the time to act is quickly fading.

Even if the worst cliff outcome arrives, don't fight the Fed. Peter Cook from Bloomberg TV asked Bernanke at the post FOMC press conference: "if lawmakers were not to agree to some sort of deficit deal by the end of this year and we were to go over the fiscal cliff, could the size of these asset purchases grow in response to that?"

Bernanke's response: "We would perhaps increase a bit."
(paraphrased)

Definitely, enter passively and exit aggressively over the next week!

Jim Brown

Send Jim an email

The most bullish thing the stock market can do is go up.
Old market saying

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Index Wrap

Market Still Trending Higher; Slowly, Like the Economy

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The Major Indexes are still trending higher and were up on the week. It appears that the expectation is a deal will be made but like most past hard-fought political battles involving critical decisions, it's two steps forward and one back and not just once or twice. Just as there are similar price patterns that repeat from time to time, past tough political negotiations have often unfolded in a similar way without agreements until an ultimate compromise comes in the midnight hour.

The Russell 2000 (RUT) once in a while is a Market bellwether and moves ahead of the pack. RUT looks to be on track to at least test if not exceed its mid-September high at 868; Friday's RUT Close was 826.

To date technical support levels have held on the way up and no prior downswing low of significance has been penetrated. I have not other grand generalities except to look at each index for specific outlooks.

Lastly, have a nice holiday and enjoy at least the one-day trading break. As to a break from political drama, the House of Representatives has no definite date to return until the Speaker calls his members back into session.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart continues to also take two steps forward and at least one back (like the political arena) but is churning gradually higher nevertheless. 1420 in key near support, with 1400 as a sort of must-hold support for the bulls; at least a Close below 1400 for more than a single session would represent a definite loss of upside momentum.

Resistance is apparent at the recent two-day high in the 1448 area and then even more key chart/technical resistance comes in at 1460, extending to 1470.

On a near to intermediate-term basis, SPX is moving toward a minor 'overbought' condition, assuming the Index continues to trend higher versus moving sideways. Given the still-bullish chart, a sideways move (which would also 'throw off' any overbought condition) while the politics get further defined, looks to be more likely than a plunge in prices, at least before the end of the year and the deadline ahead of the automatic tax hikes and spending cuts kicking in.

Bullish trader sentiment spiked at the beginning of this past week and it was too much too soon as traders got 'too' optimistic. A dangerous business with our politics currently!

S&P 100 (OEX) INDEX; DAILY CHART

As I noted last week, the S&P 100 (OEX) chart is in a bullish pattern above 640. A move above 655-657 would be a further bullish push. From 660 to 675-677 is the zone of resistance that needs to be overcome in order that OEX could test the prior top. Given some relief on the 'cliff' front, I look for the Index to at least test the cluster of prior highs made in Sept-early-Oct.

A key question would then be whether a double top forms or not. Long-term weekly charts suggest OEX could eventually get to the 700-725 area before hitting the top end of its long-term uptrend channel (not shown here).

Key near support is in the 640-637 area, extending to 632-630. A Close below 630 for more than a single day would suggest a possible test of the prior lows around 611-612. 600 begins fairly major support.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) Average has a bullish chart but is hitting resistance/selling pressure above 13300. I've noted specific near resistance at 13350. Resistance then extends to 13600, which begins a well-defined line of resistance as seen in cluster of prior intraday highs in that area. It's pretty clear.

Near support is highlighted at 13120, which also where the 21 and 50-day moving averages are converging. Support/buying interest should be found next in the 13050-13000 area. If there was a couple of back to back Closes in the Dow below 13000, the Average would look vulnerable for a pullback to the 12800 area again. I'm not expecting it but the current bullish chart starts looking less so on a fall below 13000.

In terms of the 30 Dow stocks, AA is in a bullish-improving trend, as is BAC, CAT and DD. CVX and DIS are bullish, probably GE still although correcting off its highs; HD is still looking like it could continue to power higher. HPQ is at least having a 'dead cat' bounce. IBM is correcting some, but not given back much. JPM could continue higher; certainly KFT looks bullish still. JNJ looks to be in a strong bullish pattern and INTC looks to have bottomed. KO is going sideways but could work a bit higher. TRV and XOM are looking a little toppy but could also break out to new highs.

All in all, there are enough of the 30 stocks in INDU in bullishg patterns to power a move to, and probably above, 13600 in Q1. All the above assumes the US doesn't fall off the cliff beyond at least the new Congress coming in come January.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) chart is bullish. The Index this past week rallied above its 'external' down trendline, which is a trendline that's drawn down through the highest 2-3 or more intraday highs (as opposed to the GREATEST number of highs of an 'internal' down trendline). By Friday COMP dipped to below this same trendline but closed at its intraday high and held above the trendline, which keeps its bullish pattern intact.

Moreover, support was found at the 21-day moving average, which is often a key support; e.g., note COMP's gap higher to above this average in late-November (11/23) followed by a strong further advance.

Initial COMP resistance is now up a bit from last week, at 3060 (versus 3030), with a next key resistance in the 3100 area. Near support is at 3000, extending to the 2970-2950 price zone.

COMP was getting near to an overbought reading in terms of the 13-day RSI but the minor correction caused a dip in the Relative Strength Index. Another type 'extreme' was seen in another of my key technical indicators, that of trader sentiment which hit what I consider also to be a type of bullish 'overbought' extreme early on this past week. It wasn't surprising that the rally faltered after that. High CPRATIO numbers show traders collectively getting high bullish expectations versus what is/was realistic in terms of our (US) political impasse. Higher than normal levels of bullish sentiment often occur ahead of either stumbles in the market or, when PROLONGED, ahead of a significant top.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) Index looks to be in a sideways consolidation after an initial first leg higher, suggesting that another substantial and sustained advance will develop at some point. So far such a breakout move has been stymied by stubborn resistance/selling pressure in the 2700 area.

Near-term it's hard to gauge how long NDX will remain in what is essentially a trading range between support at 2605-2620 and resistance at 2700-2713, mostly at 2700. To suggest a bullish breakout, the Nas 100 needs to Close above 2700 for more than day, rally, and then (typically) find support back near 2700 on any subsequent pullbacks. 2750 is next resistance, extending to the 2775-2780 area.

I mentioned support at 2600-2605; next lower support is seen in the 2560-2550 area.

Repeating from my Index Wrap of last week I rate NDX as maintaining a bullish consolidation by holding at or above 2600.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) has the same mixed pattern as the underlying NDX Index. 'Mixed' in the sense that QQQ hasn't continued its bullish move after its initial advance. However, the past 3 weeks sideways movement between 66.3-66.7 on the upside and 64-64.1/64.2 on the downside looks most like a bullish 'consolidation' of the initial advance or rebound from lows in the 61.8-61.3 area. The ideal of a bullish consolidation suggests that there will be a second up leg, such as one that carries to the 67 area and higher, such as to 68-68.3 resistance.

If instead of the bullish scenario outlined there's a sustained decline to below 64.5, then and especially to below 64 even, the idea of a next up leg becomes more 'iffy' and a test of support at 63-62.5 may loom instead.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) chart remains bullish and is in fact the most bullish of the major index charts. There's been less of a pause or pullback and in fact the Russell appears to be IN a 2nd LEG higher. After only a relatively brief pause/consolidation in the 820 area, RUT then rallied strongly to recent intraday highs at 852. A further move higher is suggested, such as to a test of prior highs in the 860-868 zone.

The recent rally faltered some over 3 days with intraday highs at 852 after the RSI hit its 'typical' overbought in the 70-75 zone. RUT may now go into a sideways to lower trend as a necessity to 'throw off' its overbought condition. It's too much to fast so to speak in terms of RUT moving too far ahead of the rest of the market.

I've highlighted near support at 830, then at 820. A Close below 820 for more than a day would be a bearish development. Support below 820 is at 813, extending to 800 even.



GOOD TRADING SUCCESS!


New Option Plays

Internet & Technology

by James Brown

Click here to email James Brown

Editor's Note:

FYI: The market is only open half a day on Monday (closes at 1:00 p.m. ET) and the U.S. markets are closed on Tuesday for the Christmas holiday. We will not be publishing any updates on Monday or Tuesday.

From our family to yours, we wish you a Merry Christmas.
See you on Wednesday, December 26th.



NEW DIRECTIONAL CALL PLAYS

Akamai Tech. - AKAM - close: 41.76 change: -0.10

Stop Loss: 39.95
Target(s): 44.90
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
It was a bullish week for shares of AKAM. The stock broke out past major resistance near the $40.00 level. Traders bought the dip near the $40 level, now new support, on Friday morning. Readers may want to launch positions now. I am suggesting we wait for a little follow through and use a trigger to buy calls at $42.05. If triggered our target is $44.90. More aggressive traders could aim higher. FYI: The Point & Figure chart for AKAM is bullish with a $54 target.

Trigger @ 42.05

- Suggested Positions -

buy the 2013 Jan $45 call (AKAM1319a45) current ask $0.38

Annotated Chart:

Entry on December xx at $ xx.xx
Average Daily Volume = 3.1 million
Listed on December 22, 2012


3D Systems - DDD - close: 51.92 change: +0.41

Stop Loss: 48.95
Target(s): 58.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Looking back over 2012 I can recall reading multiple articles suggesting that we are at the dawn of a new age of 3-D computer printing. The cost of printers has already fallen toward the $1,500 level (last time I looked), which is not costly and opens the door for a much larger market of potential buyers for this technology. I did just check and the basic starter printer is around $1,500 with nicer printers in the $4K to $5K range. I'm sure they go up from there.

Looking at DDD's stock price it would seem that investors have a bullish outlook for the industry as well. The stock has rallied to new record highs. Traders just bought the dip on Friday morning. I am suggesting we wait for a little confirmation and use a trigger to buy calls at $52.25. If triggered our target is $58.50. FYI: The Point & Figure chart for DDD is bullish with a $74 target.

Trigger @ 52.25

- Suggested Positions -

buy the FEB $55 call (DDD1316b55) current ask $2.60

Annotated Chart:

Entry on December xx at $ xx.xx
Average Daily Volume = 1.9 million
Listed on December 22, 2012



In Play Updates and Reviews

Markets Shudder On Lack of Cliff Deal

by James Brown

Click here to email James Brown

Editor's Note:

The global markets shuddered and quaked on Friday morning thanks to the lack of progress in Washington. Fortunately the selling really wasn't that bad but it may not be over yet.

We did see our CELG trade get stopped out.

FYI: The market is only open half a day on Monday (closes at 1:00 p.m. ET) and the U.S. markets are closed on Tuesday for the Christmas holiday. We will not be publishing any updates on Monday or Tuesday.

From our family to yours, we wish you a Merry Christmas. See you on Wednesday, December 26th.

Current Portfolio:


CALL Play Updates

Affiliated Managers Group - AMG - close: 131.38 change: -0.92

Stop Loss: 128.95
Target(s): 139.00
Current Option Gain/Loss: +61.9%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
12/22/12: I checked three different quote feeds and they all said that the intraday low on AMG was $129.78. That means our new trade has not been stopped out. Shares gapped opened lower this morning with the market's widespread weakness, spiked lower and then recovered. The option gapped down significantly providing a much better entry point. The stock's recovery limited weakness to a -0.69% loss. If both the S&P 500 and AMG opened positive on Monday I would still consider new positions here. Due to the gap down, we got a better entry point so I am adjusting our stop loss to $128.95. FYI: The Point & Figure chart for AMG is bullish with a $147 target.

- Suggested *SMALL* Positions -

Long March $135 call (AMG1316c135) entry $2.10

12/22/12 adjust stop loss to $128.95
12/21/12 trade opened on gap down at $130.54

chart:

Entry on December 21 at $13.54
Average Daily Volume = 271 thousand
Listed on December 20, 2012


American Tower Corp. - AMT - close: 76.77 change: -0.49

Stop Loss: 75.40
Target(s): 79.85 & 82.00
Current Option Gain/Loss: -23.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/22/12: The stock market's decline on Friday morning seemed to short circuit AMT's rally. Fortunately traders bought the dip and pared its losses. Readers may want to look for a new rally above $77.00 before initiating positions.

We have two targets. Our first target to take profits is at $79.85. Our second, more aggressive target is $82.00 but AMT will have to rally past potential resistance at $80.00 first. FYI: The Point & Figure chart for AMT is bullish with a triple-top breakout buy signal and an $88 target.

- Suggested Positions -

Long 2013 Jan $77.50 call (AMT1319a77.5) entry $1.30*

*option entry price is an estimate since the option did not trade at the time our play was closed.

chart:

Entry on December 18 at $77.05
Average Daily Volume = 1.7 million
Listed on December 15, 2012


Abercombie & Fitch - ANF - close: 47.37 change: -1.18

Stop Loss: 45.85
Target(s): 49.85
Current Option Gain/Loss: -28.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/22/12: Hmm... ANF has broken down from its inside day pattern. That is short-term bearish but it looks like traders were buying the dip near its rising 10-dma, which has been support in recent weeks. I wouldn't panic yet.

- Suggested Positions -

Long 2013 Jan $50 call (ANF1319a50) entry $1.58

12/18/12 new stop loss @ 45.85

chart:

Entry on December 10 at $47.48
Average Daily Volume = 5.4 million
Listed on December 08, 2012


Canadian Pacific Railway - CP - close: 101.72 change: -0.91

Stop Loss: 99.40
Target(s): 109.00
Current Option Gain/Loss: - 28.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/22/12: Like many stocks on Friday shares of CP gapped open lower. The stock spent the rest of the session consolidating sideways. Readers can choose to look for a dip back into the $101-100 zone as an entry point or look for a new relative high.

Our plan was to use small positions to limit our risk.

NOTE: CP will begin trading ex-dividend on Dec. 26, 2012. The quarterly cash dividend should be about 35.5 cents.

- Suggested *SMALL* Positions -

Long Jan $105 call (CP1319a105) entry $1.25

12/21/12 trade opened on gap down at $101.46

chart:

Entry on December 21 at $101.46
Average Daily Volume = 961 thousand
Listed on December 20, 2012


Energizer Holdings - ENR - close: 80.71 change: -0.40

Stop Loss: 79.40
Target(s): 84.50
Current Option Gain/Loss: -61.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/22/12: ENR fell toward its recent lows in the $79.60 area but shares managed to trim its losses and close back above round-number support/resistance at the $80.00 mark. The simple 10-dma has become new short-term resistance so readers may want to wait for a rally past this moving average before launching new positions.

- Suggested Positions -

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

12/15/12 new stop loss @ 79.40

chart:

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


Flowserve Corp. - FLS - close: 144.25 change: -2.04

Stop Loss: 141.85
Target(s): 148.50
Current Option Gain/Loss: + 1.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/22/12: Traders were in a mood to sell stocks on Friday morning. Given FLS' gains over the last several weeks the profit taking could have been a lot worse. Fortunately traders bought the dip near FLS' rising 10-dma. I am not suggesting new positions at current levels. FYI: The Point & Figure chart for FLS is bullish with a $153 target.

NOTE: FLS should begin trading ex-dividend on Dec. 27th. The quarterly cash dividend should be about 36 cents.

- Suggested Positions -

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

12/20/12 new stop loss @ 141.85
12/18/12 new stop loss @ 139.95

chart:

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


Green Mountain Coffee Roasters - GMCR - close: 41.11 change: -1.48

Stop Loss: 39.20
Target(s): 47.50
Current Option Gain/Loss: -19.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/22/12: After three days of strong gains GMCR hit some profit taking on Friday. The stock gapped open lower and closed with a -3.4% decline. Shares could see a dip toward likely short-term support at the 10-dma or the $40.00 level. Readers may want to wait for a bounce before considering new bullish positions.

Earlier Comments:
GMCR could see a short squeeze. The most recent data listed short interest at 43% of GMCR's 120 million share float. The $45.00 could be round-number resistance but we will target a move to $47.50. GMCR can be a very volatile stock. I do consider this a more aggressive, higher-risk trade. Let's keep our position size small to limit our risk.

(small positions) - Suggested Positions -

Long 2013 Jan $45 call (GMCR1319a45) entry $1.18

chart:

Entry on December 19 at $41.35
Average Daily Volume = 8.3 million
Listed on December 18, 2012


iShares Russell 2000 - IWM - close: 84.19 change: -0.35

Stop Loss: 81.95
Target(s): 86.00
Current Option Gain/Loss: +46.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/22/12: The IWM gapped open lower but managed a pretty decent rebound off the $83.00 level (near the 10-dma). The big bounce was encouraging. Yet I am not suggesting new positions at this time.

- Suggested Positions -

buy the 2013 Jan $84 call (IWM1319a84) current ask $1.17

12/18/12 new stop loss @ 81.95
12/11/12 triggered on the gap open higher at $83.11 (trigger was 82.85)

chart:

Entry on December 11 at $83.11
Average Daily Volume = 38 million
Listed on December 10, 2012


Linkedin Corp. - LNKD - close: 114.11 change: -1.55

Stop Loss: 111.40
Target(s): 119.00
Current Option Gain/Loss: +19.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/22/12: LNKD held up pretty well. Shares briefly traded beneath their simple 10-dma but managed to recover by day's end. The pullback may not be over yet. LNKD is facing a couple of levels of overhead resistance. I am not suggesting new positions at current levels.

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

*Small Positions* - Suggested Positions -

Long Jan $115 call (LNKD1319a115) Entry $3.10

12/18/12 new stop loss @ 111.40
12/17/12 adjust exit target to $119.00
12/15/12 new stop loss @ $109.00

chart:

Entry on December 10 at $110.25
Average Daily Volume = 1.8 million
Listed on December 08, 2012


Lululemon Athletica - LULU - close: 75.71 change: -1.44

Stop Loss: 73.75
Target(s): 79.85
Current Option Gain/Loss: + 9.0%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
12/22/12: No surprise but LULU gapped open lower on Friday thanks to the market's big decline that morning. Shares of LULU are still holding above what should be short-term support near $75.00 and its 10-dma. More conservative traders might want to raise their stop loss. I am not suggesting new positions at this time.

Earlier Comments:
LULU could see a short squeeze that lifts it toward $80.00. The most recent data listed short interest at 20% of the 101 million share float. FYI: The Point & Figure chart for LULU is bullish with an $88 target.

- Suggested Positions -

Long 2013 Jan $75 call (LULU1319a75) entry $3.30

12/20/12 new stop loss @ 73.75
12/17/12 new stop loss @ 72.95, adjust exit to $79.85

chart:

Entry on December 12 at $74.25
Average Daily Volume = 2.1 million
Listed on December 11, 2012


Monsanto Co. - MON - close: 92.55 change: +0.01

Stop Loss: 89.95
Target(s): 99.50
Current Option Gain/Loss: Unopened
Time Frame: exit prior to Jan 8th.
New Positions: Yes, see below

Comments:
12/22/12: MON managed to weather the market's storm on Friday pretty well. The stock managed to close virtually unchanged and almost hit new highs intraday. I don't see any changes from my prior comments.

The Nov. 29th high was $93.00. I suspect that if MON can breakout we could see it run to round-number resistance at the $100.00 mark. I am suggesting we use small positions and buy calls when MON hits $93.05. If triggered our target is $99.50.

NOTE: This is a short-term trade. We do not want to hold over the January 8th earnings report.

Trigger @ $93.05 *Small Positions*

- Suggested Positions -

buy the 2013 Jan $95 call (MON1319a95) current ask $1.19

chart:

Entry on December xx at $ xx.xx
Average Daily Volume = 2.2 million
Listed on December 19, 2012


Netflix, Inc. - NFLX - close: 91.34 change: -2.16

Stop Loss: 89.45
Target(s): 99.75
Current Option Gain/Loss: -48.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/22/12: NFLX continues to disappoint. I warned readers about the bearish reversal pattern created on Wednesday. NFLX has continued to pullback. I suspect Friday's -2.3% decline was exacerbated by the market's widespread weakness. A pullback to the simple 10-dma is pretty normal for many stocks in a bullish up trend. The selling in NFLX stalled near its 10-dma. The short-term trend is down. The larger trend is still up. NFLX should have support at $90.00. I am not suggesting new positions at this time.

Earlier Comments:
NFLX can be a volatile stock so I do consider this a more aggressive, higher-risk trade and we will want to keep our position size small. Target is $99.75.

- Suggested Positions - *Small Positions*

Long 2013 Jan $100 call (NFLX1319a100) entry $3.88

chart:

Entry on December 14 at $92.67
Average Daily Volume = 1.1 million
Listed on December 13, 2012


Vulcan Materials - VMC - close: 52.26 change: -0.99

Stop Loss: 50.85
Target(s): 58.50
Current Option Gain/Loss: -47.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/22/12: VMC hit some profit taking on Friday with a -1.8% decline. The selling did seem to pause when VMC hit its 20-dma. Yet the pullback may not be over yet. I am not suggesting new positions at current levels. Look for the next level of support at the $51.00 mark.

Earlier Comments:
Our target is $58.50. The $60.00 level looks like resistance. FYI: The Point & Figure chart for VMC is bullish with a long-term $70 target.

- Suggested Positions -

Long 2013 Jan $55 call (VMC1319a55) entry $1.15

chart:

Entry on December 18 at $53.00
Average Daily Volume = 870 thousand
Listed on December 17, 2012


Watson Pharma. - WPI - close: 90.85 change: +0.65

Stop Loss: 88.20
Target(s): 94.85
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/22/12: WPI was showing relative strength on Friday. Traders quickly bought the dip on Friday morning near $89.00, near its simple 10-dma, and the stock reversed higher. Shares managed to breakout and close at new all-time, record highs. This move looks like a new bullish entry point to buy calls.

- Suggested Positions -

Long 2013 Jan $90 call (WPI1319a90) entry $2.00*
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:

Entry on December 19 at $90.50
Average Daily Volume = 730 thousand
Listed on December 18, 2012


PUT Play Updates

Currently we do not have any active put trades.


CLOSED BULLISH PLAYS

Celgene Corp. - CELG - close: 79.70 change: -0.32

Stop Loss: 78.45
Target(s): 84.50 & 87.50
Current Option Gain/Loss: - 65.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/22/12: The stock market's sharp decline on Friday was too much for shares of CELG. The stock spiked lower and hit our stop loss at $78.45 before trimming its losses. I would remain cautious on CELG with the stock underneath the $81 level.

- Suggested Positions -

2013 Jan $82.50 call (CELG1319a82.5) entry $2.03 exit $0.70 (-65.5%)

12/21/12 stopped out at $78.45
12/18/12 new stop loss @ 78.45
12/15/12 traders should be defensive. The action this past week looks like a failed rally or bull trap pattern.

chart:

Entry on December 11 at $81.46
Average Daily Volume = 3.0 million
Listed on December 10, 2012