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Daily Newsletter, Saturday, 1/12/2013

Table of Contents

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

Market Wrap

57 Point Range

by Jim Brown

Click here to email Jim Brown

The Dow traded in the smallest range in more than five months as volume and volatility both left the market.

Market Statistics

The VIX sank to the lowest close since June 2007 at 13.36 suggesting all the bears have left the market. The AAII Investor Sentiment Survey showed 47% of respondents were bullish on the market. That is an 11-month high. The normal range is 39%. Volume fell to 5.8 billion shares and nearly a two week low. The major indexes closed mixed after rebounding from minor losses at the open. The S&P lost 7-cents and the Russell 2000 47-cents while the Dow gained a lackluster +17 and the Nasdaq +3.

There was no interest in the market despite what I considered was good earnings from Wells Fargo and better than expected economic news from multiple sources.

The indexes were trapped in the pre earnings zone where expectations are for a mildly positive earnings cycle. The bets have been placed and traders are now waiting for the big reveal.

One analyst had a perfect analogy for what is ahead. He called it the report card market. Many of the major companies had notes sent home from the teacher in the middle of the semester saying they were in danger of flunking the quarter. More than 73% of the S&P guided lower on revenue for Q4.

We are approaching the release of the report cards with a bunch of D- students. Expectations are low, very low. However, the potential for an upside surprise is very strong. ANY grade a D- student brings home that is better than a D- is a pleasant surprise for the parents. There is only one grade worse, an F, and a lot of room for improvement. The analyst claimed this could be a C+ quarter. Nothing to get excited about but definitely better than a D- or an F.

Of the 27 S&P companies that have already reported, 67% have beaten estimates. Only 19% missed estimates and 15% reported as expected. Earnings growth averaged +4% and revenue growth +1%. As bleak as those numbers would appear on the surface they are still better than Q3.

With 473 companies still to report it is hard to call it a trend. However, if that trend continues it would mean Q3 was the trough in earnings and estimates and stocks would begin to rise in anticipation of a better 2013.

That is a lot of assumptions and the actual outlook is very cloudy. That is why the markets struggled to close fractionally positive on Friday.

The other factor weighing on the market was the coming debt threat but lawmakers have gone into quiet mode and there was very little in the way of sound bites to worry traders. They have not forgotten about the debt threat but it is more like "out of sight, out of mind." As long as the politicians stay away from the microphone the market should creep slowly higher. If earnings continue to beat estimates we could see some decent moves.

Eventually the debt debate will come back to the forefront and we are going down but that is a story for another day.

There was nothing really exciting on the economic front with budget and trade data leading the list. The trade deficit increased from -$42.2 billion to -$48.7 billion for November. That was the biggest deficit in seven months. If oil prices had not declined it would have been worse. Exports grew in all categories except for food and beverages with automotive exports rising by 6.4%. However, a surge in imports across all categories overpowered the decent export numbers. Imports of consumer goods rose by +11.2% with automotive and beverages up by +6.3% each.

To be fair this was for November. Companies were still importing products for holiday sales so the numbers should have been strong. Also, hurricane Sandy disrupted October shipping and closed harbors and some of that pushed imports into November that would normally have been in the October period. This was also a lagging report for November and considered old news.

Moody's Trade Balance Chart

The Treasury budget for December only went into the red by -$300 million compared to the -$292 billion deficit year to date. The U.S. budget begins on Oct 1st so December is the third month of the year. The -$300 million for the month versus -$292 billion for the first two months was simply a timing issue.

Worries over the fiscal cliff forced taxpayers to move taxable events into 2012 and that resulted in a +12% increase in total receipts in December. That was an increase of $30 billion. Individual income tax payments were +19.8% higher than December 2011.

This acceleration of taxable events into 2012 will obviously mean a larger deficit in early 2013 since the tax payments, which would have been made in the first quarter, are no longer there. Normally this would mean a larger deficit in the Q1 months but the current hold on spending will push those expenses into March and after the debt debate has ended.

The economic calendar for next week is crowded with reports that matter. The NY Empire Manufacturing Survey is well down the list critical reports but still important. The consensus is for a rebound from a -8.1 headline number in December to at least zero for January.

The Producer Price Index and Consumer Price Index are important because of the impact of the Fed's QE programs on the economy and inflation. As long as price inflation remains low they will continue the programs. Nobody is expecting any gains and the Fed is more worried about deflation than inflation.

The Housing Market Index is a major indicator for the housing sector and we need to see a continued improvement to keep the gains in the housing stocks. The New Residential Construction on Thursday is expected to show a strong spike in new housing starts to 890,000.

The Beige Book on Wednesday is a look at the economic conditions in all 12 Fed regions. This should show a continued but slow improvement.

The biggest manufacturing report is the Philly Fed Survey on Thursday. That has a high correlation to the national ISM two weeks from now so it is seen as an advance look at the national data. Analysts are actually expecting a decline in the headline number as a result of Sandy.

Economic Calendar

The more important calendar is the earnings for the financial sector. Nearly every major bank in the sector reports. Wednesday we will see GS, JPM and USB. Thursday is BAC and COF and Friday is MS.

The three biggest non-financials are Ebay on Wednesday, Intel on Thursday and GE on Friday. We will also get the first look at the energy sector with SLB on Friday.

Because Q4 is the last quarter of the fiscal year for most S&P companies the real flood of earnings does not begin until the next week. However, we have enough diversity in the coming week to know how the entire earnings cycle is going to end. That could be good news or bad news depending on how it plays out.

Earnings Calendar

On Friday Wells Fargo (WFC) was the first major bank to report earnings and I thought they were great. Revenues rose +7% to $21.9 billion. Fully year profits rose +19% to $18.98 billion.

This was a record quarter for WFC with profits of $5.1 billion. It was the 12th quarter of earnings growth and the seventh consecutive quarter of record earnings. Earnings per share rose by +26% to 92 cents and that beat the 89 cent estimate.

Shares of WFC declined slightly because the Net Interest Margin or NIM fell by ten basis points. That is nothing. How many angels can dance on the head of a pin? That is how insignificant that number is. The NIM is the interest earned on customers deposited cash minus the interest WFC pays out. If they pay 0.25% and earn 0.50% then the difference is their profit or NIM.

The problem with WFC in Q4 was too much money. Deposits rose by $30 billion in Q4. That must be a nice problem to have but it was far more than Wells expected. They had so much money they could not find a home for it and had to buy short term treasuries or the equivalent and the very low interest on the treasuries brought down the average NIM.

The CEO blamed the Fed's QE programs that are keeping interest rates near zero. The 3-year note is yielding 0.38% today. There is no way for Wells to keep NIM up until the Fed lets rates rise. He said "we are not going to turn away deposits from customers just because the NIM might decline."

Personally I would rather have a bank that is raking in $30 billion in new cash and turning out profits of $5 billion every quarter instead of one that is ultra conservative and growing at a snail's pace.

The CEO said there were $81 billion in home loan applications pending at the end of the quarter. That was down from $97 billion at the end of Q3. Wells did write $125 billion in mortgages in Q4 compared to $139 billion in Q3.

Wells kept $9.7 billion in mortgages in house and did not sell them to Fannie or Freddie simply because the interest rate was far better than anything else Wells could do with the money. Total loans increased to $799.6 billion.

The bank repurchased 42 million shares in the quarter.

Wells Fargo Chart

American Express (AXP) reported preliminary earnings a week before the scheduled report and caught many traders off guard. Earnings were $1.09 compared to estimates of $1.05. The company reported a restructuring charge of $400 million related to the expected termination of 5,400 workers in 2013. AXP said the job cuts were mostly in the travel services division as the digital age had cut into the dynamics of business travel. They currently employ 63,500. Revenue was $8.1 billion, up +5% from the year ago quarter. The company said cardholders increased spending +8% with charge offs at a historic low of 2%. The full earnings will be on January 17th. The premiminary release was a surprise after they formerly announced the Jan 17th date just last week.

AXP shares gained 50 cents on the news.

AXP Chart

Infosys (INFY) spiked $8 after reporting earnings of 76 cents compared to estimates of 73 cents. Revenue rose +6% to $1.91 billion. The spark for the big gain came after the company raised revenue guidance for the full year to $7.45 billion, up from $7.3 billion. Earnings forecast of $2.97 did not change and was in line with analyst estimates.

The company said it added roughly 50 new clients during the quarter and won eight business and information technology deals. They also said they were beginning to see stability in pricing.

Infosys Chart

Best Buy (BBY) does not report earnings until Feb 28th but shares rallied +16% after the company reported U.S. same store sales that declined -1.4% for the nine weeks ended Jan 5th. International sales fell -6.4%. Yes, you read that correctly. Shares spiked after same store sales declined. Analysts had expected an even bigger decline and shorts had loaded up in anticipation. Also, the better than expected sales paves the way for the Richard Schulze buyout offer in February. If results had been worse the offer would have been lower. Better sales suggests a better offer.

The company said sales were strong in cell phones, tablets, electronic readers and appliances but sales fell in televisions, entertainment devices and computer related items. Best Buy is trying to compete with Amazon and others by improving its online offerings so customers can "showroom" at the BBY store then buy online at BBY instead of Amazon.

BBY Chart

Research in Motion (RIMM) came back from the dead on Friday after the company said it was going to launch at least six BlackBerry 10 phones this year and target multiple price points and market layers. Only two devices will be announced at the end of January, one with a touch screen and the other a QWERTY keypad. RIMM will launch BB10 with all four major carriers in the U.S. and more than 150 carriers globally. RIMM has 80 million current subscribers and they are hoping to keep those 80 and add news ones in the weeks ahead. The iPhone and Android models have been steadily eroding RIMM's base but there are still plenty of faithful devotees. RIMM only shipped 6.9 million phones in Q4. That is a 50% decline year over year. Unfortunately the BB10 OS is not supported by existing enterprise servers and that makes the upgrade process more risky. The BB10 devices will require an upgrade to the new Blackberry Device Service, which will manage the new range of mobile devices including the Playbook tablets.

RIMM Chart

NetFlix (NFLX) rallied another $3 after the president signed the Video Privacy Protection Act (VPPA) into law on Thursday. The law changes a 1988 restriction that prohibited a "video provider" from revealing customer information without customer's written consent. Now users on sites like Facebook and Netflix can allow their history to be shared if they opt-in to sharing. The original law was spawned after a reporter, researching Robert Bork during his nomination to the Supreme Court, convinced a video store clerk to give him Bork's rental history. Lawmakers panicked over the implications and the law was born. In today's digital Internet world where everything is shared on places like Facebook that law was outdated.

NetFlix Chart

Apple (AAPL) shares declined again and moved closer to support at $500 after the Chinese newspaper that reported earlier in the week that marketing chief Phil Schiller said "Apple will never make a cheap iPhone" retracted its claims. The paper now says the better translation for the Schiller comment is "Apple has always focused on providing the best products for its consumers, we've never blindly chased market share."

The Wall Street Journal had said earlier in the week that Apple was working on a lower priced iPhone. That would by necessity mean lower margins and the potential to cannibalize sales from the more profitable full price model. The model was rumored to be made with a plastic body and use components from older iPhone models. Apple's market share has fallen from 23% in Q4-2011 to 14.6% in Q4-2012. The Android operating system phones are surging and Samsung is projected to increase market share to 35% by year end. They currently have 31.3%, up +8% from the end of 2010. Under Steve Jobs Apple focused on selling only one, top of the line product, for a premium price rather than a broad offering of multiple models. Of course the playing field has changed since the Steve Jobs era.

Apple Chart

Herbalife (HLF) held a shareholder meeting on Thursday to rebut the clams by Ackman. The volatility surrounding the meeting was huge but there was little movement in the stock. The Ackman position is being hurt by multiple high profile hedge funds coming out in support of Herbalife. Unfortunately the CEO was interviewed on CNBC after the meeting and the stock weakened after he was unable to answer certain questions with convincing answers. Unprepared or caught off guard by some pointed questions? Investors were not sure and shares declined. They recovered some of that decline on Friday to end at $40.

Herbalife Chart

The dollar fell to a two-week low on the weak trade data and that helped to lift commodities and probably had a positive influence on stocks. The euro rallied to a nine-month high despite some negative data out of Germany. Greece, Spain and Italy did not fall off the map and the eurozone debt crisis appears to be old news.

The dollar index is only 60 cents above strong support at 79.00 and a break below that level could power a strong commodity rally.

Dollar Index Chart

Euro Chart

There were some interesting numbers on fund flows out last week. For background the net inflows to stock funds in 2012 was $3 billion. That is miniscule. Fast forward to 2013 and for the week ended Jan 9th there were inflows of $18.1 billion or six times the total for all of 2012. That is the biggest inflows since June 2008 and the fourth largest since 2000. It is not just the USA. EPFR Global reported that $22 billion flowed into equity funds in the global markets for the biggest inflow since data was started in 1996.

Funds are starting to come out of the bond market. The yield on the ten-year treasury rose to 1.95% on January 4th and has not declined much with a 1.875% close on Friday. Those are six month high yields and represent selling in treasuries. The 30-year has a similar pattern with yields rising to 3.17% before declining to 3.05% on Friday. Those are also six month highs.

The fear is twofold. Investors are afraid the stock market is going to breakout to new highs and begin a new leg to the current bull market. They don't want to be left behind in treasuries and minimal yields. Even worse the FOMC minutes suggested the Fed could halt its QE purchases before the end of 2013 and that would cause a major sell off in treasuries and a sharp hike in interest rates.

Neither outlook is bullish for bonds. With the U.S. economy slowly recovering and China in rebound mode the market for equities is improving daily at least on the surface. The S&P hit a five year high on Friday along with the Russell 2000 and the NYSE Composite. That is a siren call for investors to dump treasuries and rush into equities.

The rotation out of treasuries is still in the infant stage and will probably remain there until after the debt debate in February. Once that debate is "successfully" concluded there could be a stampede into equities. The fear factor of a government meltdown would have passed and expectations for a stronger second half of 2013 would take its place.

However, until the Fed actually begins to pullback on the bond buying the rates will have trouble rising. The Fed is currently buying about 50% of the monthly issuance of government debt and they are close to 90% of the mortgage backed security debt. As long as they keep pouring $85 billion into the bond/treasury market the bond bubble bursting will only be a slow leak and not an actual burst.

Art Cashin believes the actual bursting of the bond bubble will be easily recognized by the stampede of investors into the equity markets and interest rates rising over key levels. Until then it is only a stealth leak.

Earnings have been better than expected but then there have only been a few reports. The big news will come from the financial sector this week and then the tech sector the following week. If those reports continue to beat estimates the markets should continue to creep higher in anticipation of a successful debt conclusion.

Remember the market rallied into the fiscal cliff deadline because investors "knew" lawmakers would eventually get something done. The markets could rally into early February for the same reason but once the rhetoric increases there could be a repeat of the August 2011 market crash. Earnings will be mostly over and profits will need to be taken to avoid a loss if the debate does not go well.

Another reason for the sudden influx of cash could be related to the fiscal cliff. Many investors may have cashed out profitable positions in November and December in order to receive favorable tax treatments since they were unsure what taxes would be in 2013. They had to wait for the fiscal cliff resolution on Jan 1st and then they put that cash back to work. The early December sell off ahead of the cliff negotiations was far more than $20 billion so putting some of that money back to work in 2013 could have been the reason behind the surge.

The market has become numb to the political headlines. Since every intelligent investor already knows there is going to be a headline war in February they have been vaccinated against catching the debt debate virus. However, we all know that getting a flu vaccination may make us feel protected there is still a 38% chance we will catch the flu. Just knowing there is going to be a monster battle in the middle of February does not protect us against the irrationality of the market. It may allow us to capture profits from both sides. We can profit as the market rises during the earnings cycle and then profit from the eventual decline during the debate and then the rebound when a deal is announced. If only life was that easy.

There are multiple reasons for a long term bull market but there are always potholes along the way. Don't fight the Fed is the number one reason to focus on equities. China has bottomed and the German DAX is only 2% from an all time high. That is good news for Europe despite their current recession. Market breadth is expanding and volume is increasing. The U.S. economy is growing although at a snail's pace. It is expected to accelerate in the second half of 2013.

In investing you can't wait for the all clear signal to go long. You have to anticipate future conditions and take a chance. If you wait for the all clear you may always find yourself buying the top of the market.

Speaking of tops, I keep seeing the monthly chart of the S&P with warnings over the impending triple top and corresponding sell off. While that is entirely possible anyone worrying over that today could miss a good rally before that top actually occurs. The stated "top" that everyone is worried about is 1550 and the S&P closed at 1471 on Friday. That would be a +79 point gain in a perfect world. There is no guarantee the market is going to roll over at that level and just the fact that so many people are worried about it gives us a strong chance it won't happen. The herd is normally wrong. However, with so many people expecting it there will be a boatload of shorts at that level.

In his book Bulkowski warns that nearly 50% of all triple tops fail to meet the target price on the third top because of speculative anticipation of the top. Murphy warns that triple top failures "more often than not" tend to reverse and breakout to new highs. There is an initial sell off but the dip is bought with new eagerness. Bulkowski also cautions that rallies after a triple top are common. Technicians Edwards and Magee advice not "jumping the gun" on a triple top (shorting/selling early) because the pattern can fail to complete and just as easily recommence as an upwards trend. Just because there may be a triple top in our future does not mean the market is going to crash. I will revisit this triple top discussion if we gain another 75 points.

S&P Chart - Monthly

The S&P closed within pennies of the high of the week on Friday after a breakout over strong resistance. When you think about it there should have been profit taking at the close but instead there were reluctant buyers. With positive news from overseas and a decent start to earnings we did not see a lot of traders throwing in the towel. They were buying the dips all week.

Support is 1450 but it would take a major surprise to knock us back to that level. The financial earnings next week could be the spark that powers the next stage for the rally. The decline in Wells Fargo after good earnings was NORMAL. Typically the financial stocks rally ahead of earnings and then investors take profits after the first big report to avoid the risk of negative surprises. I don't see any major negatives in the financial sector. The Basel III change last week to a less strict set of rules was a positive. The various settlements over the subprime loans and the foreclosure process are also a positive. The banks are getting their affairs in order and should be guiding higher. That will lead the S&P higher as well.

S&P Chart - Daily

The Dow is a little more than 100 points away from the September resistance highs. That equates to a couple of positive earnings surprises and a day when Boeing does not have 787 problems in the news. The Boeing losses last week hurt the Dow's momentum.

Every day last week had an intraday dip and every dip was bought to see the Dow close at a two month high. You can't complain about gains. The glass half empty analysts are whining about a double top at 13,625 and a crash into summer. That seems a little extreme to me. If IBM, MMM, CAT and companies like that post positive earnings we are not going to crash but there could be some hesitancy at that strong resistance. Support is now 13,300.

Dow Chart

The Dow Transports closed over multiyear resistance for the last three days. The transports were only 1.43 points away from a new historic high, which was set on Thursday. This chart is on the verge of a major breakout if we can get just a couple more pieces of good economic news. The Dow needs to move over 13,625 and confirm the Transport rally to really light a fire under the market.

Dow Transport Chart

The Nasdaq shook off an early decline to close right at resistance at 3125. Apple was slightly negative but the weakness came from the biotech sector with several names in the top ten losers list. If the Nasdaq can move over that resistance we could see sentiment improve. Ebay and Intel report earnings this week. The Intel report on Thursday will be the highlight for the tech sector and the inflection point for traders.

Nasdaq Top 20 Lists

Nasdaq Chart

The Russell 2000 small caps made a new historic high on Thursday and almost a new high on Friday. This is a bullish chart with the Friday close at the highs. Fund managers are clearly not dumping their yearend positions and there is no fear of an impending market correction. The small caps telegraph fund manager sentiment and this is bullish.

Russell 2000 Chart

The NYSE Composite closed at a four year high on improving market breadth. The NYSE Composite is an index of 3,211 stocks from the very smallest to the very largest and is very indicative of broad market sentiment. This is bullish.

NYSE Composite Chart

The market appears to be poised for a breakout on any decent earnings news next week. Nothing prevents us from taking profits but the indicators are pointing higher. Japan and China are sparring with jet fighters over the disputed islands but so far no war has broken out. U.S. politicians are fighting a war of words but the volume has been turned down ahead of the inauguration. Lawmakers may try to kindle a new fire in the press but investors appear to be immune to the attack and counter attack.

At this point I think it would take some spectacular earnings misses to seriously derail the market. Dips are being bought on a daily basis and the trend is definitely higher. Until that trend changes there is no reason not to follow suit.

If the earnings reports next week are positive we could be off to the races. A continued series of new highs in January will set us up for a strong bout of profit taking when the debt debate begins to weigh on investors once again. We will cross that bridge when we get to February.

Enter passively and exit aggressively!

Jim Brown

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Index Wrap

Market Holding Prior Advance

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The Dow Transports (TRAN) went to a new weekly Closing high, topping its July 2011 weekly closing peak and finally 'confirming' the Dow 30 Industrials (INDU) in its new highs since that period. Such action between the two key Dow Averages, here where BOTH Averages have now gotten to new highs, is thought to confirm the primary up trend in terms of Dow Theory.

The recent consolidation near prior week's highs is bullish chart-wise. The S&P 500 (SPX) is showing continued upside momentum and is nearing its prior top, as is the Dow. The Nasdaq Composite (COMP) is within striking distance of its prior highs but the big cap Nas 100 (NDX) is lagging these gains, suggesting that the biggest tech stocks may be seen as fairly valued.

The Russell 2000 (RUT) continues to have the steepest uptrend, dating from its mid-November low. The small to mid-cap RUT sector tends to have a seasonal bump in January and overall in Q1.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P chart is bullish; the Index didn't retrace much of the prior week's spurt higher into its brief sinking spell on Tuesday, which is a bullish sign of more upside to come. After the Index traced out a bull flag pattern, 'true' to a move out of and after a bull flag, saw another spurt higher.

I'm tracking one expected 'pathway' for the S&P to work still higher, by highlighting SPX's current uptrend channel. Suggested resistance implied by the upper channel line comes in at 1485, extending to 1500.

Near support looks to come in around 1450; next support is in the 1420 area, extending to 1400.

I pay attention to times when SPX nears an overbought RSI extreme such as seen above. As this indicator climbs again it suggests increasing risk of a shake out such as stemming from unrealistic bullishness on stocks.

If buyers retreat to the sidelines when stocks get pricey it doesn't take much selling to drive prices down again. And why they say that "bull markets die of their own 'weight'"! On that theme I have to note that no high level of SUSTAINED bullishness has been suggested by my trader sentiment model (CPRATIO).

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart is bullish but some near-term technical resistance is implied by the Index's approach to the upper end of the uptrend channel I've highlighted below. If the current upside momentum continues at its recent pace, OEX is poised to start closing above prior highs in the 675 area.

Near support is at 660, then at 650; such a dip would carry the Index back closer to the middle of its bullish uptrend channel. Near resistance begins around 670 to 673, extending to 677-680.

If long don't be wrong during the next correction as the best part of the current move is likely to be behind us. There's still the possibility for a large double top to form which would in turn imply that there's a sizable 'supply' overhang. A good time to exit bullish positions before that happens. If there's a decisive move to new highs and the 13-day RSI hits its typical overbought zone, consider exiting calls as I assume a reaction follows a move to new highs.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

I see the Dow 30 (INDU) as in gear for a move to test a next technical resistance as suggested at the upper end of the price channel that the Average has traced out in recent weeks and suggests key near resistance at 13600-13650.

Near support comes in at 13300, extending to 13200. By the end of the coming week fairly major support is suggested at the lower channel boundary intersecting at 13100 by week's end.

A pullback to the middle of the current uptrend channel is something I think we can anticipate or should not be surprising. Aside from more minor pullbacks along the way, I continue to think that over time the Dow can get to the 14000 area.

Based on what I see with the 30 individual Dow stocks, enough of the 2012 laggards (the 'dogs of the Dow') that have been out of favor are seeing some buying interest. Just relatively small gains among those that have been correcting or lagging PLUS continued strength in stocks like AXP, CSCO, CVX, DIS, HD, JNJ, KFT, PFE and TRV could be enough to pull INDU to the 14000 area again, which was last seen at the October 2007 top.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite saw a jump through prior technical resistance in the 3050 area, maintaining a strong bullish chart. COMP is of course also nearing its fall peak and a major technical milestone or test ahead.

A decisive upside penetration of the prior highs is bullish but after a spurt above prior highs, sometimes driven mostly by short-covering, there's often profit-taking selling and if looking to take profits consider it on a move to new highs above 3200 and sell on the upswing. If the Index stalls at CURRENT recent highs, the long-term weekly chart (not shown) starts to look like a big Head and Shoulder's top formation.

Besides looking at prior highs if there are ones, another means of indentifying potential technical resistance in a strong uptrend is to see where an upper channel line (if one exists) comes in. Next technical resistance suggested by the upper end of COMP's current uptrend channel is suggested at 3150-3175.

It appears unlikely to me that having come this close to testing the last big top that formed near 3200, that COMP won't hit this level again. Exceeding the prior high looks possible, but we have both a possible technical (the prior top) resistance and a big fundamental unknown with the next round coming up in the ongoing fiscal fight in Congress.

Near support/buying interest should be found in the 3075 to 3050 zone, extending to trendline support at the end of the coming week at 3025.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) index remains in a bullish pattern and could be headed next to the upper end of the below-highlighted upper channel line which also implies potential resistance at 2800-2815. As well of course, there are obvious milestone highs in the 2875 area that marked the September top.

I don't anticipate NDX climbing above pivotal resistance in the 2850 area, such as where 2850 'becomes' a new level of support in a new up leg, without some stumbles before moving well above the September top. As NDX gets toward prior highs, there's potential for increased selling pressures; maybe only enough to carry the market sideways but not much lower. A sideways to only slightly lower move after a strong move higher also fairly quickly 'throws off' an overbought condition. I've mostly regretted not being out of winning positions after the 13-day RSI reaches its 'typical' upper extreme around 70 and the risk of a reversal grows. Tops will tend to see 'overbought' RSI readings for longer periods than will oversold conditions persist.

Near support begins in the 2700 area, extending to the low end of the prior upside gap at 2665. Technical support implied by the low end of NDX's current uptrend channel comes in around 2650.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) looks like it could be headed to a test of potential resistance in the 68 area, extending toward 69 by the end of the coming week. Ultimately the prior top made in the 70-70.5 area seems more likely to get retested than not in my opinion. Whether there's a big move above 70 coming anytime in coming weeks. I can foresee some backing and filling as we approach the deadline to raise our (US) debt ceiling.

Near support is at 66-66.3, extending to the 65 area and the low end the Q's uptrend channel.

Daily trading volume fell off recently as QQQ has gone sideways to higher which I see as a slightly bullish volume/price pattern.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) Index remains in a strong bullish pattern, especially highlighted by RUT's fairly steep uptrend channel.

Potential 'resistance' implied by the upper end of the aforementioned bullish uptrend channel comes in at 894-900. The probability of a correction grows significantly the longer we see RSI readings in its 'overbought' zone. This doesn't mean that RUT can't get to 900.

Near support looks like 860, extending to 852. Next support then looks like it will be found between 830 and 820. Repeating a note from last week: 820 is 'must-hold' support for the bulls if RUT is to maintain a bullish chart.



GOOD TRADING SUCCESS!


New Option Plays

Industrial Goods & 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) CPA, CVX, PII, MJN, ACE, GRA, CHE, SNI, CRM, WTW, VAL, QCOM, CHRW, ITW



NEW DIRECTIONAL CALL PLAYS

Ingersoll-Rand - IR - close: 49.60 change: -0.02

Stop Loss: 48.25
Target(s): 54.00
Current Option Gain/Loss: Unopened
Time Frame: Exit prior to earnings on Feb. 1st!
New Positions: Yes, see below

Company Description

Why We Like It:
IR is in the industrial goods sector. The stock has been slowly making its way higher with a series of higher highs and higher lows over the last few months. Yet now IR is testing round-number, psychological resistance at the $50.00 level. A bullish breakout here should inspire additional buying.

We are suggesting a trigger to buy calls at $50.25 with a stop loss at $48.25. Our target is $54.00 but we will plan on exiting prior to the earnings in early February.

Trigger @ 50.25

- Suggested Positions -

buy the Feb $50 call (IR1316B50) current ask $1.30

Annotated Chart:

Entry on January xx at $ xx.xx
Average Daily Volume = 1.8 million
Listed on January 12, 2012


Noble Energy - NBL - close: 105.57 change: +0.98

Stop Loss: 101.75
Target(s): 114.00
Current Option Gain/Loss: Unopened
Time Frame: Exit prior to earnings on Feb. 7th!
New Positions: Yes, see below

Company Description

Why We Like It:
Energy stock NBL has broken out to new all-time, record highs. Traders have consistently bought the dips. Now it's in blue-sky territory. I am suggesting bullish positions at the open on Monday. We'll aim for $114.00 but plan on exiting prior to the earnings report on February 7th. I am suggesting a stop loss at $101.75 but more aggressive traders may want to start with a stop just below the $100.00 mark instead. FYI: The Point & Figure chart for NBL is bullish with a $112 target.

- Suggested Positions -

buy the Feb $110 call (NBL1316B110) current ask $1.15

Annotated Chart:

Entry on January xx at $ xx.xx
Average Daily Volume = 820 thousand
Listed on January 12, 2012



In Play Updates and Reviews

Another Up Week For Stocks

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 index has risen to a five-year (closing) high and is poised to rally past its 2012 intraday highs.

Our DE and EOG trades have been triggered.


Current Portfolio:


CALL Play Updates

Concur Technologies - CNQR - close: 71.97 change: +0.02

Stop Loss: 69.40
Target(s): 74.85
Current Option Gain/Loss: +15.1%
Time Frame: exit prior to the late January earnings report
New Positions: see below

Comments:
01/12/13: CNQR has spent the last couple of days consolidating sideways underneath the $72.00 level. The way shares are coiling more tightly the stock looks poised to breakout higher past this level. I am raising our stop loss up to $69.40. I am not suggesting new positions at current levels but nimble traders could buy calls on a bounce off the $70 area.

NOTE: I am adjusting our exit target to $74.85. More aggressive traders could aim for the 2012 highs near $76.00 instead. We do not want to hold over the late January earnings report. FYI: The Point & Figure chart for CNQR is bullish with an $81 target.

- Suggested Positions -

Long Feb $70 call (CNQR1316B70) entry $3.30

01/11/13 new stop loss @ 69.40, adjust exit target to $74.85

chart:

Entry on January 07 at $70.25
Average Daily Volume = 462 thousand
Listed on January 05, 2012


Deere & Co - DE - close: 89.62 change: -0.29

Stop Loss: 88.25
Target(s): 99.00
Current Option Gain/Loss: -16.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/12/13: Our new play on DE has been triggered. Unfortunately Friday's rally suddenly looks like a potential top or bearish reversal at resistance. The plan was to wait for shares to breakout past resistance at $90.00 and buy calls when DE hit $90.25. DE did breakout to new 52-week highs on Friday but reversed at $90.64 and closed back below resistance at $90.00 again. Our trigger was hit so the play is open but I would not launch new positions at this time. Wait for a new rally back above $90.25 again.

On a short-term basis DE looks poised to dip toward $89.00. If it dips much farther we could see it hit our stop loss at $88.25. More aggressive traders may want to adjust their stop loss so that it is below the simple 10-dma.

We do not want to hold over its mid February earnings report (still unconfirmed). FYI: The Point & Figure chart for DE is bullish with a $104 target.

- Suggested Positions -

Long Feb $90 call (DE1316B90) entry $2.35

chart:

Entry on January 11 at $90.25
Average Daily Volume = 2.3 million
Listed on January 09, 2012


EOG Resources - EOG - close: 125.63 change: -0.47

Stop Loss: 123.40
Target(s): 134.00
Current Option Gain/Loss: - 12.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/12/13: EOG also rallied to new highs only to give it all back. Granted EOG didn't actually move that much on Friday but our trigger to buy calls was hit at $126.30. Nimble traders could buy a dip or a bounce off the simple 10-dma near $124.00 but I would prefer to wait for a new high above Friday's intraday high at $126.45 as our next entry point.

FYI: EOG is due to begin trading ex-dividend on January 15th. The quarterly cash dividend is 17 cents.

Earlier Comments:
We do not want to hold positions over the earnings report in February.

- Suggested Positions -

Long Feb $130 call (EOG1316B130) entry $2.45

chart:

Entry on January 11 at $126.30
Average Daily Volume = 1.4 million
Listed on January 10, 2012


Fiserv, Inc. - FISV - close: 82.98 change: -0.22

Stop Loss: 79.75
Target(s): 88.00
Current Option Gain/Loss: + 16.6%
Time Frame: exit prior to earnings on Feb. 5th
New Positions: see below

Comments:
01/12/13: FISV was downgraded on Friday morning, which helps explain the sharp spike lower at the open. Fortunately FISV pared its losses. More conservative traders may want to raise their stop loss. I am not suggesting new positions at current levels.

Our target is $88.00 but we will plan on exiting positions prior to FISV's next earnings report on February 5th. FYI: The Point & Figure chart for FISV is bullish with a $93 target.

- Suggested Positions -

Long Feb $80 call (FISV1316B80) entry $3.00

01/10/13 do not hold over the earnings report on Feb. 5th

chart:

Entry on January 08 at $81.60
Average Daily Volume = 864 thousand
Listed on January 07, 2012


iShares Russell 2000 (ETF) - IWM - close: 87.34 change: -0.13

Stop Loss: 85.90
Target(s): 94.50
Current Option Gain/Loss: Unopened
Time Frame: 6 to 9 weeks
New Positions: Yes, see below

Comments:
01/12/13: The rally in the small caps stalled a little bit on Friday. The overall trend remains very bullish with the $RUT's breakout to new all-time highs. There is no change from my earlier comments.

Earlier Comments:
Thursday's high was $87.69. I am suggesting a trigger to buy calls at $87.85. If triggered our multi-week target is $94.50.

Trigger @ 87.85

- Suggested Positions -

buy the Mar $90 call (IWM1316c90) current ask $1.30

chart:

Entry on January xx at $ xx.xx
Average Daily Volume = 41.2 million
Listed on January 10, 2012


Mohawk Industries - MHK - close: 94.23 change: -0.20

Stop Loss: 91.25
Target(s): 99.00
Current Option Gain/Loss: - 21.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/12/13: Hmm... MHK garnered some bullish analyst comments on Friday but they really didn't help much. Shares spiked to a new 52-week high at the open but gains faded. Nimble traders could buy a bounce off the rising 10-dma. Otherwise I would probably wait for a rally past $95.00 again.

- Suggested Positions - *Small Positions*

buy the Feb $95 call (MHK1316B95) entry $3.30

chart:

Entry on January 10 at $95.00
Average Daily Volume = 787 thousand
Listed on January 09, 2012


OpenTable, Inc. - OPEN - close: 53.53 change: +1.17

Stop Loss: 49.90
Target(s): 58.00
Current Option Gain/Loss: + 4.3%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
01/12/13: OPEN started showing some relative strength on Friday with a +2.2% gain. That's nice to see after its pullback earlier in the week. I am raising our stop loss to $49.90. More conservative traders may want to raise their stop loss closer to the $51.50 level instead (near this week's low). I would be tempted to use Friday's advance as a new bullish entry point.

Earlier Comments:
OPEN could see a short squeeze. The most recent data listed short interest at 42% of the very small 19.4 million share float. FYI: The Point & Figure chart for OPEN is bullish with a $73 target.

- Suggested Positions -

Long Feb $55 call (OPEN1316B55) entry $2.54

01/12/13 new stop loss @ 49.90

chart:

Entry on January 04 at $52.23
Average Daily Volume = 361 thousand
Listed on January 03, 2012


Sherwin-Williams Company - SHW - close: 161.28 change: -1.08

Stop Loss: 154.65
Target(s): 169.00
Current Option Gain/Loss: - 9.6%
Time Frame: Exit prior to earnings on Jan. 31st!
New Positions: see below

Comments:
01/12/13: After a multi-day rally shares of SHW saw some profit taking on Friday. The gap down on Friday morning was probably due to an analyst downgrade before the bell. Overall the dip wasn't that bad. I would still consider new positions now or you could wait for a new rise above $162.00 as an entry point.

Earlier Comments:
We keep our position size small to limit our risk. Plus, this is a shorter-term trade. We do not want to hold over the January 31st earnings report. FYI: The Point & Figure chart for SHW is bullish with a $196 target.

- Suggested Positions - *Small Positions*

Long Feb $165 call (SHW1316B165) entry $3.10

chart:

Entry on January 09 at $161.28
Average Daily Volume = 928 thousand
Listed on January 08, 2012


iShares Silver ETF - SLV - close: 29.48 change: -0.30

Stop Loss: 27.45
Target(s): 33.50
Current Option Gain/Loss: - 2.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
01/12/13: Outside of the early January volatility the SLV has been churning sideways for about three weeks. We still expect silver and gold to rally but readers may want to wait for a close above $30.00 on the SLV before initiating new bullish positions.

Food for thought: If the U.S. does the unthinkable and mints a $1 trillion dollar platinum coin to get around the debt-ceiling issue what will that do for the U.S. dollar and how will that impact commodity prices? (hint, I think it's bullish for gold and silver)

Earlier Comments:
More cautious traders might want to raise their stop loss.

- Suggested Positions -

Long March $30 call (SLV1316c30) entry $0.95

chart:

Entry on December 31 at $29.07
Average Daily Volume = 11.6 million
Listed on December 29, 2012


Sohu.com - SOHU - close: 48.22 change: +0.28

Stop Loss: 45.75
Target(s): 49.25
Current Option Gain/Loss: +36.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
01/12/13: Traders have continued to buy the dips near SOHU's rising 10-dma. Now shares look poised to re-challenge resistance at the $50.00 level. Our exit target is $49.25 but more aggressive traders could aim higher.

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

01/05/13 new stop loss @ 45.75
01/02/13 adjust exit down to $49.25
SOHU almost hit our target at $49.75 but the high today was only $49.70. We don't want that to happen again.
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


Trimble Navigation - TRMB - close: 62.08 change: +0.04

Stop Loss: 59.75
Target(s): 64.75
Current Option Gain/Loss: -12.5%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
01/12/13: Friday's move in TRMB really didn't help us any. The stock churned sideways in a narrow range, hugging the $62 level. Thursday's session still looks like a bearish reversal candlestick pattern. While Friday's session did not confirm the reversal it really didn't negate it either.

TRMB's larger trend is still up and if the stock does see some profit taking the $60.00 level should offer some short-term support. I am not suggesting new bullish positions at this time.

Part of our problem now is the lack of time left on our January options, which expire after five more trading days. More conservative traders may want to abandon ship now.

Earlier Comments:
We do want to keep our position size small to limit our risk.

- Suggested Positions - (Keep positions small)

Long Jan $60 call (TRMB1319a60) entry $2.25

01/10/13 we only have six trading days left for our January options. More conservative traders may want to exit early now

chart:

Entry on January 03 at $61.32
Average Daily Volume = 750 thousand
Listed on January 02, 2012


PUT Play Updates

Green Mtn Coffee Roasters - GMCR - close: 41.23 change: +1.60

Stop Loss: 41.20
Target(s): 35.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
01/12/13: GMCR garnered some bullish analyst comments on Friday and that sparked some short covering. The stock surged +4% and is now back above what should have been resistance near $40.00 and its 10 and 20-dma(s). If this bounce continues then we will likely drop GMCR as a bearish candidate. At moment we are waiting for a breakdown under support.

Earlier Comments:
Thursday's low was $38.83. I am suggesting a trigger to buy puts at $38.45. If triggered our target is $35.25. More aggressive traders might want to aim for a drop near $31.00 instead.

NOTE: GMCR can be a volatile stock. We want to keep our position size small.

Trigger @ 38.45 *Small Positions*

- Suggested Positions -

buy the Feb $35 PUT (GMCR1316n35)

chart:

Entry on January xx at $ xx.xx
Average Daily Volume = 4.2 million
Listed on January 10, 2012