Option Investor
Newsletter

Daily Newsletter, Saturday, 12/29/2012

Table of Contents

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

Market Wrap

Preparing for the Worst

by Jim Brown

Click here to email Jim Brown

The Dow lost -158 as investors moved to the sidelines ahead of the fiscal cliff deadline.

Market Statistics

The markets opened lower and recovered only briefly at 10:30 when the White House announced there would be a meeting with congressional leaders at 3:00. The markets traded sideways on low volume ahead of that meeting. When news broke that the president was not making any new offers in the meeting but only repeating his prior position the bottom fell out of the market. The Dow closed down -158 at 12,938 but the news kept coming. When the meeting broke up and nobody stepped in front of the cameras to announce a plan the futures imploded in afterhours trading.

The Dow futures sank to 12,773 in afterhours, an additional -90 point decline, and the S&P futures fell to 1382, an additional loss of -14 points. There will be new headlines over the weekend but without a dramatic change in posture the market will open significantly lower on Monday.

Dow Futures Chart

S&P Futures Chart

The president reiterated his call for a tax hike on anyone making over $250,000. He also demanded another extension of unemployment insurance benefits for two million people. Those extended benefits from the last deal expire on January 1st. He wants to structure a framework for talks on spending and postpone the fiscal cliff spending cuts for 90 days until a compromise can be reached. Basically that is another can kicking exercise to get us past the December 31st deadline. He also wants the debt ceiling to be extended another year until a comprehensive balance between new taxes and spending can be reached. Since they have had more than a year to work on that since the last debt ceiling battle and nothing has happened I would be very doubtful it would happen in the next year.

The market wants to see the current tax cuts extended and some progress on spending cuts. Claiming a cut in spending for 2013 because the Iraqi war ended for us a year ago does not fly. Investors are smart enough to see that is just smoke to cloud the process.

The House has been told to be ready to vote on something at 6:30 Sunday night but as of Saturday afternoon there are no new proposals to vote on. The president asked congress to put his proposal to a vote but that was rejected by House leaders.

Without a miraculous turn of events over the weekend it appears we are going over the cliff on at least a technical basis. I am sure there will eventually be a resolution but nobody can predict a timeframe.

Treasury Secretary Tim Geithner warned congress on Wednesday the government would hit the debt ceiling on Monday. That means the Treasury Dept will have to start cutting back on payments to non critical things like retirement funds and state grants. They can come up with about $200 billion in petty cash from these "extraordinary measures" but that will only fund the remaining government operations until late February.

That means any fiscal cliff deal may now involve a debt ceiling component. Since the House is the only legislative branch that can raise the debt ceiling the leverage has shifted somewhat back in favor of Speaker Boehner and the republicans. The Speaker can use that trump card to offset the positions held by the president BUT the president has the bully pulpit. You can bet he will immediately begin blasting the republicans for threatening to shutdown the government.

The president started its barrage late Friday when he held a press conference at the White House saying "The American people are not going to have any patience for a politically self-inflicted wound to our economy." The rest of the press conference was spent dumping on Congress for allowing this stalemate to happen.

He also said, "The time for immediate action has come." Since nothing ever gets done until the last minute that means we could see a flurry of activity and a cobbled together stop-gap measure on Sunday that extends the tax cuts, puts more time on the clock and extends the cliff another few weeks.

The White House also said the president will be on "Meet the Press" on NBC on Sunday morning. You can bet he will be dumping on Congress and trying to increase the urgency of the moment.

The only thing we know for sure is that without a compromise deal sometime this weekend the tone of the debate will escalate sharply next week. This will be seriously market negative as we saw late Friday.

The economic reports on Friday were positive but not strong enough to overcome the fiscal cliff cloud over the market. The ISM Chicago, formerly the PMI, rose to 51.6 in December. That is up from 50.4 in November. This is the highest level since August but still only barely above the contraction territory below 50.

The new orders component rose from 45.3 to 54.0 and a decent rebound out of contraction territory. Order backlogs did not show the same improvement with a further decline from 49.6 to 46.9. Employment declined sharply from 55.2 to 45.9 and the first time under 50 in more than six months.

The improvement in the Chicago area is due mostly to the surge in auto production. Hurricane Sandy destroyed 250,000 cars and production is being accelerated to cover those replacements.

Chicago ISM Chart

The Pending Home Sales Index rose +1.7% from 104.6 to 106.4 for November. That is a new two-year high. Home sales for the entire nation are up +9.8% over the last 12 months and +30% over the recession lows. The gains in November came mostly from the Northeast (+5.2%) and the West (+4.2%). The South showed no gains and the Midwest squeaked out only a +0.1% gain.

The economic calendar for next week is headlined by the national ISM Manufacturing and the various payroll reports. The ISM is expected to come in at 50.0 and possibly move fractionally into expansion territory over 50. Without a major upside surprise the ISM report could be market negative because it is not showing a positive trend.

The ISM Nonmanufacturing Index is due out on Friday and the headline number is expected to decline slightly from 54.7 to 54.0.

The payroll reports are going to be of interest because they should show a rebound from Hurricane Sandy. If that rebound does not appear new jobs decline it would suggest the economy slowed ahead of the fiscal cliff deadline. The ADP report is expected to show a gain of +125,000 private sector jobs compared to +118,000 for November.

The Nonfarm payroll report is expected to show a gain of +143,000 jobs compared to a gain of +146,000 in November. Clearly neither if these reports is telegraphing any economic strength. If the result of the cliff negotiations is less than satisfactory the economy could quickly slip back into recession.

The FOMC minutes on Thursday are not expected to be earthshaking since Bernanke held a press conference after the FOMC meeting.

Economic Calendar

Another problem facing the economy is the Dairy Cliff. Milk now costs an average of $3.65 per gallon. If Congress does not act quickly and pass the Farm Bill we could see milk prices rocket to between $6 and $8 per gallon. The problem is the way the farm bill is constructed. In 1949 the government established some guidelines for farm product pricing. The Dept of Agriculture committed to buying milk and cheese from farmers if prices decline too far. This keeps a bottom under prices. The bill also contains subsidies for producers to insure a profit and keep dairy products flowing. If farmers can't make a profit they will sell their cows and milk production slows.

It seems like a contradiction of efforts with subsidies to keep prices low and guarantees to keep them from going too low. The Farm Bill renews every five years. If the bill was allowed to expire the laws governing farms, commodities and subsidies revert back to those in existence in 1949. Clearly farming and the economy has changed over the last 60 years.

Congress does not want to deal with the Farm Bill because of the subsidies. That is money paid out to guarantee farmers grow enough of the right kind of crops. The entire Farm Bill needs to be rewritten to fit the current environment but that would involve killing off some of the sacred cows in the subsidy program. The farm lobby is a powerful lobby and when you add to it the milk lobby, beef lobby, etc, it is tough for lawmakers to actually change the laws without making a lot of people mad.

Lawmakers also don't want to be seen voting for billions in new subsidies when every headline is screaming spending cuts. However, if they let milk prices rise to $7 a gallon there will be millions of mothers burning up the congressional switchboard.

There was one cliff averted on Friday. The container cliff as it is being called was postponed until February 6th. Dockworkers were poised to go on strike for the first time in 35 years at ports from Maine to Texas. A strike would have closed ports handling about 45% of the country's commerce. Talks had collapsed last week after a deadlock on container royalty fees. Those fees were instituted in 1960 when containers began shipping in volume. They were to offset job losses by dock workers no longer needed to unload ships. Containers are now almost exclusively the only method of shipping and dock workers are few. However, those royalty payments continue to rise and amounted to $211 million in November alone. The International Longshoremen Association gets 10% and their union members get the rest.

The average payment to ILA members is $15,500 and very few of those receiving the payments today were even alive in 1960 or at least not of working age back then. Only 168 of the 3,281 ILA workers in NY and NJ were working at the port in 1968 and the first year of payment. In the Savannah area members got $36,000 per worker in 2011. Royalty payments continue to increase but the number of union members continues to decrease. The contract deadlock is because those subject to container royalties are objecting to the constant increase in royalties. They want to cap them. These workers are already some of the highest paid union members in the country.

Moving from cliffs to mountains Bloomberg reported that corporations have sold a record amount of bonds in 2012. They raised a mountain of nearly $4 trillion in cash at record low interest rates. Corporate borrowing costs fell to a record 3.27% last week thanks to the Fed's QE programs. Corporations sold $1.19 trillion in debt in Q1, $721 billion in Q2, $996.8 billion in Q3 and $981.4 billion in Q4 for a total of $3.98 trillion.

Investors poured $475.3 billion into bond funds while U.S. equity mutual funds saw outflows of $154 billion YTD in 2012. These are astounding numbers and eventually the trends will reverse to some extent. The decline in mutual funds was brought about by the financial crisis, flash crash, etc. Baby boomers facing retirement can no longer risk another 50% drop in the equity market and corresponding 50% decline in their retirement accounts. As the boomers retire there will be an influx of new workers and new retirement accounts started. Unfortunately that is going to be a long process.

Fund Flow Chart

When all this money starts rotating out of bonds and back into equities there is going to be a monster rally. Some would say a "generational" rally. It may not be anytime soon but once the global economy begins accelerating the race back into stocks is going to be very strong. The key of course is picking the turning point where investors decide stocks are suddenly a buy again.

There was no stock news on Friday. It was a holiday week and volume was running at about 50% of normal until the afternoon crash. Everyone reporting stock news was on vacation and companies were not putting out press releases.

Next week that should change. We will get the last flurry of earnings warnings ahead of the Q4 earnings cycle that begins with Dow component Alcoa (AA) on January 8th. Earnings before Alcoa include Family Dollar (FDO) and Sonic (SONC) on the 3rd and Mosaic (MOS) and Finish Line (FINL) on the 4th.

We have officially entered the silly season where all the major analysts publish their price targets for the coming year. As of Friday's close only one target is below the S&P close at 1403. Quite a few are well above the current level and that suggests the market is too bullish about 2013. I am assuming everyone is expecting the cliff to be resolved and our economic growth to continue.

The economic growth part may not be a valid assumption. The U.S. typically falls back into recession every 3-5 years. That means we could be close to another dip and that makes a positive resolution to the fiscal cliff even more important. On the bright side another recession now would be the normal kind that is typically followed by a strong rebound.

2013 S&P Forecasts

I updated the 2012 forecast table using Friday's close at 1403 to show how far away each analyst was for 2012. These were the year end targets as of March 1st, 2012.

2012 S&P Forecasts

I could spend a lot of time dissecting charts but we are still hostage to the headlines and whatever happens next week will be related to what happens in Washington over the next two days. Monday is the deadline for the tax cuts and they have to do something or taxes will go up on everyone. The Alternative Minimum Tax or AMT will hit an additional 20-25 million people if they don't extend the tax cuts and include the AMT. The AMT alone will remove around $80 billion from the economy AND it is retroactive. It will be for 2012 taxes and due in the first quarter. Nobody withheld for this increase in AMT so it will be a very painful cliff result.

This is one reason the market will be so reactive on Monday and Wednesday to what happens over the next couple of days. The impact could be traumatic to individuals and the economy.

There is also the potential impact of tax selling on January 2nd. Investors that exhausted deductions or refrained from selling until the new tax year arrives will be free to do that in January.

Couple that with the potential for a post cliff sell the news event and the market could remain very volatile. Most investors have been pricing in a post cliff rally for the last two months. If that rally does not appear we could see a rush to the exits.

Determining market direction in this environment is a fool's errand.

The S&P closed just above 1400 with critical support at the 200-day at 1390 and the November 28th low at 1385. A break under those levels would be very bearish. Resistance is 1450 and that would require several days of strong gains to reach.

Remember, the S&P futures dipped to 1382 after the close on Friday. Unless something positive happens in Washington on Sunday night that decline could continue.

S&P Chart

The Dow sank to close at a three week low and right on light support at 12,935. This level has no specific significance and but any further decline suggests a target of 12,500.

The chart has little bearing on market direction for next week. It is all dependent on the fiscal cliff headlines. However, because the blue chips have been used as a safe deposit box for cash heading into yearend we could see a dip late in the week unless a favorable resolution is achieved.

Dow Chart

The Nasdaq clung to the last thread of support with the 2960 close on Friday. That was a four week low and the internals are terrible. Apple is on the verge of breaking below $500 and Google missed closing under $700 by only two cents. Amazon closed at a four week low after retail sales for the holiday period came in weak.

It is very possible there are a large number of investors clinging to hope in these stocks and just waiting for a new tax year to take profits.

If the Nasdaq moves below 2960 the next target would be 2900 and then 2800.

Apple Chart

Google Chart

Nasdaq Chart

The Russell 2000 remains the best performing index. Apparently fund managers are still betting on the January Effect even though that rally started back around Thanksgiving. That is where fund managers shift into small caps at the beginning of the year in hopes of getting a better return on their investment dollar. A $10 gain in a $50 stock is +20% but a $10 gain in a $10 stock is 100%. Many investors try to front run the funds by purchasing small caps after Thanksgiving.

Unless the Russell breaks below support at 820 I would still be in buy the dip mode.

Russell 2000 Chart

Tis the season for window dressing. Actually that season ended last week but you can bet there will be a few stocks that get bought on Monday to dress up portfolios. Normally funds receive large inflows of retirement cash at the end of December and the first few days of January. For those funds that get money this year I would expect them to hold the cash until the fiscal cliff resolution appears. I can't see them rushing to put that cash in the market ahead of what could be extreme volatility. I do expect them to buy the dip.

As an example of the uncertainty surrounding the cliff negotiations and deadline Jon Najarian, a major market maker in the options market and frequent quest commentator on CNBC said he was totally in cash. "For the first time in 31 years in the market, I am completely out of everything. I see no reason to stick with longs and no reason to get short either."

That sums up my feelings as well. The potential for some strong volatility is nearing a 100% probability. Even if they get a fiscal cliff deal the debt ceiling is next in the hopper and it will prove to be much more disastrous to the markets than the fiscal cliff. We will be just trading one problem for another.

Conversely there would also be a good chance of a rally if they suddenly announced a solution that kicked that can down the road along with the fiscal cliff. The trouble is we just don't know how to position our trades. When in doubt, stay out.

Informed investors know that an opportunity lost is far less damaging than money lost. You can miss a good trade and feel bad but making a bad trade will make you feel worse.

I think we are very close to a tradable period in the markets once the cliff headlines fade and the focus returns to Q4 earnings. Wait for the opportunity.

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Only one successful trade will pay for the entire year's subscription. Even if you are not an active trader there are always ideas in the newsletters that can lead you to a successful investment.

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

Jim Brown

Send Jim an email


Index Wrap

Chart Action Finally Showing a Break in Confidence

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The market technically had continued to maintain a bullish trend and in terms of the S&P 500 (SPX) ability to hold above 1400 or close to it could suggest that the Market expects that January and a new Congress will make it easier to find agreements. The 'technicals' here are hostage to the likelihood that what our policy makers do or don't do will send the U.S. back into recession. It wouldn't take much. We're holding in a recovery mode by a rope if not a thread.

It's always been the case that the charts forecast what's going to happen best of all in my opinion, which has been borne out most of the time over the many market cycles I've followed.

However and of course, trend direction can get hitched to the complete unknown, especially when it comes to key government policy on spending and taxes. When that happens, it gets difficult if not impossible to forecast the trend reliably using either fundamental OR technical analysis. Outcomes become 'gambling' and I almost always resist novice types who say the market and stocks are 'gambling' (not if you learn and know what you're doing!) Once in a while even usually Market-ignorant folks may get it right!!

The key technical indicators I use were suggesting that the RISK of a correction was growing, especially the approach of the 13-day Relative Strength Index or RSI to what I consider to be an overbought extreme. You can see that on the charts that follow. The RSI wasn't in the exact 'typical' danger zone but it was closing in and we knew that there was the definite possibility of risks coming out of Washington. The other of my key indicators HAD flashed a 1-day warning of a different type of 'overbought' situation, that of extreme bullishness as suggested by my call to put ratio (CPRATIO) indicator which showed one day of such an extreme AT the recent top. You'll see this indicator (just) on the SPX and Nasdaq Composite charts below.

What these two key technical indicators suggested was RISK of a correction, not a sell 'signal' such as would be suggested by a definite bearish chart patterns (e.g., a double top, reversals at a prior line of resistance, etc.) PLUS a definite RSI extreme PLUS a definite bullish sentiment extreme.

I go through all this as a teaching moment of a situation suggesting 'standing aside' from any heavy directional trade(s). The Subscribers I've heard from mostly did that or were lightly into bullish strategies only. If you adopted bearish strategies, I myself can't concur there as what went down on the lack of an GOP/DEM agreement, can go up sharply overnight ON such an agreement. Yes, dear readers, it's a crap shoot!

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart has turned mixed but has to date only pulled back to support suggested by a return to the previously penetrated down trendline. So, near support is indicated and highlighted (green up arrow) in the 1400 area currently. Next support looks like 1375 and then at the prior (down) swing low at 1350. Major support begins at 1300.

Near resistance is at 1420, then back up at the recent highs at 1450.

When SPX got to 1450 there was a 1-day 'extreme' in bullishness suggested by my sentiment indictor; as seen at the bottom of the SPX chart. I wondered at the time about this. The two day churn at the same intraday high, plus heavy equity call activity relative to puts, did seem to be suggesting getting out of calls and onto the sidelines. Without an actual agreement, rather than hopes of one, what was the probability of new highs above 1450? Low, at best.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart looked most bullish when it was trading above 640 as I wrote last week. However, only progress "on the 'cliff' front" as I noted last week would have suggested a test of the cluster of prior highs made in Sept-early-Oct. Instead, stubborn resistance on the approach to the 660 area, resistance implied by the low end of the mid-September to mid-October trading range, was the stopper.

Near resistance at 650 is suggested, extending to 658-660. I've highlighted support in the 633 area, on the return to the prior down trendline, with next support suggested at 620, extending to the prior 611 intraday low.

If support is found in OEX in the low-630 area, especially on a Closing basis, this current pullback looks fairly nominal and 'normal'. We could see a 630-650 trading set up in the near term. It's impossible to tell at what level (630 to 600?) that OEX 'discounts' failure to reach a GOP/DEM agreement THIS year.

I've come to view of letting current tax rates expire; then fixing them in 2013 would be a tax CUT, which seems to be the only thing acceptable to the no tax increase forces in Congress. Makes sense if you believe what they SAY (I do), just please fix this in January!

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) Average has retreated to a minor prior low at 12930, breaking a key near support at 13000. 12800 is next support in my estimation.

Surveying the 30 individual Dow stocks, we've seen them all slipping a little and no group of the 30 maintaining or regaining a strong uptrend, which is not a good prescription for another strong rebound based on what the 30 charts are suggesting. Small recovery rallies in most to all based on favorable political news could get INDU back up to 13200 again, which is a key resistance. 13100 looks like immediate overhead resistance. 13350 is key resistance based on recent highs.

I have no trading suggestions. Per my initial 'bottom line' comments, it's a crap shoot. If you know what the political players will do, write me! I can generally get a fix on the trend when the trend is solely or mostly influenced by 'normal' market influences like the economy, earnings prospects, etc.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) chart has fallen back below its down trendline which is bearish. The intermediate-term trend reverses to down if the prior downswing low Close is exceeded; that prior closing low is at 2836.9; call it 2837.

I've highlighted near support at 2950, with next support beginning at 2880 extending to 2860. Near resistance is at what was prior key support at 3000; actually I'd say near resistance is at 3000-3020, with next resistance at 3035, extending to the 3060 area.

COMP looks to be headed lower, but it could hold support at 2950 and rebound to 3000 even. Again, I'm out of my league some here but from the charts in general I've surmised that the professional money is more on WHEN an agreement is reached, not IF one is; January is still a strong expectation.

Friday saw an emotional reaction that things are worst than they probably are in terms of there still being time for action. Bearish 'sentiment' has not jumped all that much in terms of any big pick up in total stock put volume relative to calls.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) Index has turned near-term bearish along with the Composite, but I suggest a focus on whether NDX holds key near support around 2600. Next chart/technical support is in the 2550 area, with fairly major support beginning at 2500.

Near resistance is now back at the prior down trendline which really only got bested over a 3-day period so it was only a quite limited but un-sustained upside 'breakout'. NDX's resistance trendline intersects at 2654 currently. Next resistance is at 2700-2715.

NDX tech bellwether Apple Computer (AAPL) isn't performing too badly by bullish lights. This to me is that the stock hasn't yet fallen below its long-term weekly up trendline support, which is at $500 currently; AAPL closed the past week at 509.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) Index has turned near-term bearish along with the Composite, but I suggest a focus on whether NDX holds key near support around 2600. Next chart/technical support is in the 2550 area, with fairly major support beginning at 2500.

Near resistance is now back at the prior down trendline which really only got bested over a 3-day period so it was only a quite limited but un-sustained upside 'breakout'. NDX's resistance trendline intersects at 2654 currently. Next resistance is at 2700-2715.

NDX tech bellwether Apple Computer (AAPL) isn't performing too badly by bullish lights. This to me is that the stock hasn't yet fallen below its long-term weekly up trendline support, which is at $500 currently; AAPL closed the past week at 509.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) chart remains bullish in the face of a minor recent pullback, so far at least, unlike the mixed S&P and near-term bearish patterns of the Nasdaq. RUT stocks often are on buy lists for January and may be reflecting this seasonal tendency.

The Russell hasn't yet closed below its 21-day moving average at 832 and is above its 50-day average. 820 is near support, extending to 813, then even more so at 800.

Near resistance is highlighted at 840, with next key resistance at prior recent intraday highs at 852.

RUT continues to look like it could challenge prior highs above 860 if the Market gets good news on some aversion of the fiscal cliff situation. RUT acts like there will be some bullish news ahead. Wishful thinking? Stay tuned!



GOOD TRADING SUCCESS!


New Option Plays

Precious Metals & Energy

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate(s), consider these stocks as possible trading ideas and watch list candidates. Many of these need to see a break past key support or resistance:

(bullish ideas) RAX

(bearish ideas) WMT, MJN, DVN



NEW DIRECTIONAL CALL PLAYS

iShares Silver ETF - SLV - close: 29.10 change: -0.14

Stop Loss: 27.45
Target(s): 33.50
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
If you asked a hundred traders, investors, or analysts on gold and silver you'd probably get a hundred different opinions. The precious metals were hammered a couple of weeks ago on the combination of a better than expected U.S. GDP number and what many believe has been end of year and end of quarter tax selling and profit taking. You'll notice that the selling in the SLV silver ETF stalled following the Dec. 20th drop. Since then the SLV has been consolidating sideways in what looks like a new short-term bottom.

We are expecting SLV to rebound in January and we're suggesting traders buy calls now with a stop loss at $27.45. Our multi-week target is $33.50. More conservative traders could wait for a rally back above what is short-term resistance at $30.00 as an alternative entry point to buy calls on the SLV. We are starting this trade with a stop at $27.45. You may want to use a tighter stop.

- Suggested Positions -

buy the March $30 call (SLV1316c30) current ask $0.97

Annotated Chart:

Weekly Chart:

Entry on December xx at $ xx.xx
Average Daily Volume = 11.6 million
Listed on December 29, 2012


NEW DIRECTIONAL PUT PLAYS

Range Resources - RRC - close: 62.02 change: -0.95

Stop Loss: 64.25
Target(s): 55.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The energy sector underperformed this past week and appears to have reversed. Meanwhile RRC was already in a bearish trend of lower highs and lower lows. The stock just produced a failed rally near resistance on Wednesday.

More aggressive traders may want to buy puts right now. I am suggesting a trigger to open positions at $61.65. If triggered our target is $55.50. Readers may want to keep their position size small. There has been rumors this past year that RRC might be a takeover candidate.

Trigger @ 61.65 *Small Positions*

- Suggested Positions -

buy the Feb $60 PUT (RRC1316n60) current ask $2.25

Annotated Chart:

Entry on December xx at $ xx.xx
Average Daily Volume = 1.5 million
Listed on December 29, 2012



In Play Updates and Reviews

Accelerating Toward the Close

by James Brown

Click here to email James Brown

Editor's Note:

Investors expectations for a resolution to the fiscal cliff took a turn for the worse on Friday and stocks were accelerating lower toward the closing bell.

Our VMC trade has been stopped out.

Current Portfolio:


CALL Play Updates

Akamai Tech. - AKAM - close: 40.40 change: -0.63

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

Comments:
12/29/12: AKAM is still fading slowing toward what should be support near $40.00 and I am still tempted to buy calls on a dip there with a tight stop loss (maybe $39.50ish) but officially the newsletter is suggesting 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)

chart:

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


Canadian Pacific Railway - CP - close: 100.78 change: -0.88

Stop Loss: 99.40
Target(s): 109.00
Current Option Gain/Loss: - 56.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/29/12: CP erased Thursday's bounce with an 88-cent decline on Friday. Shares have closed beneath short-term technical support at the 10-dma for the first time in weeks. That's a troubling sign but I am still expecting likely support at the $100.00 mark for now. Readers may want to wait for a bounce off the $100 level before considering new positions.

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

- 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


Flowserve Corp. - FLS - close: 142.86 change: -2.24

Stop Loss: 141.85
Target(s): 148.50
Current Option Gain/Loss: -22.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/29/12: FLS also erased Thursday's gain with a decline on Friday. The Friday morning rally reversed under the $145 level and shares closed near their 20-dma. If there is any follow through on Monday we will likely see FLS hit our stop loss at $141.85. I am not suggesting new positions at current levels. FYI: The Point & Figure chart for FLS is bullish with a $153 target.

- 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: 40.35 change: -1.05

Stop Loss: 39.70
Target(s): 47.50
Current Option Gain/Loss: -58.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/29/12: Friday was not a good day for GMCR. The stock broke down from a sideways consolidation and closed under its 10-dma with a -2.5% drop on the session. The next level of support is $40.00. I am concerned and we're raising our stop loss to $39.70. I am not suggesting new positions at this time.

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

12/29/12 new stop loss @ 39.70

chart:

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


iShares Russell 2000 - IWM - close: 82.53 change: -0.59

Stop Loss: 81.95
Target(s): 86.00
Current Option Gain/Loss: -26.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/29/12: The small cap IWM ETF spent most of Friday churning sideways beneath its 10-dma and closed on its lows. Many of its short-term oscillators have clearly turned bearish. Readers will want to seriously consider an early exit now. I am not suggesting new positions at this time.

- Suggested Positions -

buy the 2013 Jan $84 call (IWM1319a84) entry $1.17

12/29/12 the IWM is starting to look bearish!
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: 112.89 change: -1.14

Stop Loss: 111.40
Target(s): 119.00
Current Option Gain/Loss: -14.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/29/12: Friday's action in LNKD does not bode well for the bulls. Shares broke down to a new two-week low and almost hit our stop loss. I am worried that if the market is negative on Monday we will see LNKD hit our stop. More aggressive traders willing to give LNKD more room to maneuver may want to readjust their stop loss so it is under likely support near $110.00 instead. 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


Monsanto Co. - MON - close: 93.08 change: -0.91

Stop Loss: 89.95
Target(s): 99.50
Current Option Gain/Loss: + 6.4%
Time Frame: exit prior to Jan 8th.
New Positions: see below

Comments:
12/29/12: The stock market's widespread weakness on Friday helped knock about -1% off of MON. Shares are still near their highs but we are running out of time and only have a few days left. We do not want to hold over the January 8th earnings report.

Readers may want to start raising their stop loss!

Earlier Comments:
Our plan was to keep our position size small.

*Small Positions*

- Suggested Positions -

Long 2013 Jan $95 call (MON1319a95) entry $1.25

12/24/12 triggered @ 93.05

chart:

Entry on December 24 at $93.05
Average Daily Volume = 2.2 million
Listed on December 19, 2012


Sohu.com - SOHU - close: 46.47 change: +1.31

Stop Loss: 43.45
Target(s): 49.75
Current Option Gain/Loss: +21.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/29/12: Chinese Internet stock SOHU continues to rally and hit new multi-month highs with Friday's +2.9% gain. The stock stalled right at its 300-dma. If the markets are weak on Monday we can look for SOHU to pullback toward the $45.00 level. I am raising our stop loss to $43.45.

Earlier Comments:
SOHU can be a volatile stock so we want to limit our position size to reduce our risk. If triggered our target is $49.75. More aggressive traders may want to aim higher since SOHU seems to have built a decent bottom over the last several months. With enough time you could aim for the $55-60 zone. FYI: The Point & Figure chart for SOHU is bullish with a $66 target.

- Suggested Positions -

Long Feb $47.50 call (SOHU1316b47.5) entry $2.05

12/29/12 new stop loss @ 43.45

chart:

Entry on December 27 at $45.20
Average Daily Volume = 606 thousand
Listed on December 26, 2012


PUT Play Updates

Tiffany & Co - TIF - close: 56.44 change: -0.59

Stop Loss: 58.75
Target(s): 52.00
Current Option Gain/Loss: + 8.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/29/12: The intraday bounce in TIF on Friday reversed and shares gave up -1.0%. The stock looks poised to hit new relative lows. I would use Friday's move as a new bearish entry point to buy puts.

- Suggested Positions -

Long 2013Jan $55 PUT (TIF1319m55) entry $1.08

chart:

Entry on December 27 at $56.67
Average Daily Volume = 2.4 million
Listed on December 26, 2012


CLOSED BULLISH PLAYS

Vulcan Materials - VMC - close: 51.20 change: -0.50

Stop Loss: 50.85
Target(s): 58.50
Current Option Gain/Loss: -86.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/29/12: The sell-off from Thursday continued into Friday's session for VMC. The stock gapped open lower on Friday at $51.29 and fell to $50.68 intraday. Our stop was hit at $50.85.

I remain longer-term bullish on the stock. Readers may want to keep VMC on their watch list for a new bullish entry point down the road.

- Suggested Positions -

Long 2013 Jan $55 call (VMC1319a55) entry $1.15 exit $0.15 (-86.9%)

12/28/12 stopped out at $50.85

chart:

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