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Newsletter

Daily Newsletter, Saturday, 2/16/2013

Table of Contents

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

Market Wrap

Wal-Mart Sale

by Jim Brown

Click here to email Jim Brown

Friday's markets were not all that healthy to begin with but an internal email from Wal-Mart knocked -75 points off the Dow at 2:PM.

Market Statistics

An internal Wal-Mart memo from Jerry Murray, VP of Finance and Logistics said, "In case you have not seen a sales report these days, the February MTD sales are a total disaster." The Feb 12th email also said, "This is the worst start to a month I have seen in my seven years with the company." Another Wal-Mart executive, Cameron Geiger, said about the first week of February, "Well, we just had one of those weeks here at Wal-Mart. Where are all the customers and where is their money?" Both executives cited the increased payroll taxes and delayed tax refunds. Geiger called it a "potent one-two punch." An internal Wal-Mart study estimated about $19.7 billion more in tax refunds had been sent to shoppers by the same period in 2012. Tax refunds are being held up this year by the last minute changes to taxes in the fiscal cliff negotiations.

Dow component WMT dropped -$2.60 intraday but rebounded to lose only -$1.52 at the close. Other low dollar retailers including Family Dollar (FDO), Target (TGT) and Macy's (M) declined as well.

Wal-Mart Chart

Dow Chart - 5 Min

The challenge here is the gradual realization by investors that the U.S. economy is slowly sliding lower. The tax hikes and the resumption of the payroll tax as well as the sharp rise in gasoline prices to the highest level ever for February is taking a huge bite out of blue collar discretionary income. The sequestration spending cuts scheduled for March 1st are expected to remove another 1.4 million jobs from the economy in 2013 and reduce GDP by as much as a full point.

Corporate profits may be at record highs but take home pay is at the lowest point in the last five years. Corporations have learned how to cut costs and live on lower sales but the consumer is struggling. Retail sales for January rose by only +0.1% with big declines in clothing and accessories and home furnishings.

If the sequestration begins on March 1st as scheduled, and it is almost a sure thing as of today, then the GDP for Q1 is likely to be negative as well and two consecutive quarters of negative GDP is the definition of a recession.

Speaking at the G20 meeting in Moscow, Bernanke warned the U.S. economy was "far from recovering" and he reiterated his commitment to record low monetary policy including QE. Greenspan was interviewed Friday afternoon and he warned the economy could weaken further as the sequestration cuts take hold.

With the economy getting weaker it makes you really wonder how much longer QE can keep the stock market moving higher.

Friday's economic reports were mixed and that provided further confusion for traders. Industrial Production for January fell -0.1% after the +0.4% rise in December. Manufacturing production fell -0.4% with most of that drop due to a -3.2% drop in auto manufacturing.

Production would have been much worse if it were not for a +3.5% spike in utility production as a result of the cold weather. That is why the manufacturing component is material. I don't believe the headline number that includes utility production is relative. Just because a storm blows through and consumers turn up their thermostat does not mean the economy is growing. Manufacturing production is the key.

Analysts believed some details in the soft report suggested the manufacturing sector was going to rebound in the coming months. I prefer to wait for the data.

In the case of the Empire State Manufacturing Survey the data was strong. The headline number for February rose from -7.8 to +10.0. This was the first time in positive territory since July 2012 and the strongest activity since May. New orders rose from -7.2 to +13.3. You would think they were in a revival the order numbers were so good. However, the backorders rose from -7.5 to -2.0 and did not make it into expansion territory. They were only "less bad." The "average workweek" component declined -4.0 and the sixth consecutive monthly decline. With hours worked shrinking it does not normally bode well for employment and the outlook for manufacturing. However, the employment component rose sharply from -4.3 to +8.0 and the first expansion in five months.

Analysts were at a loss as to why the Empire survey spiked so sharply. They blamed everything from Sandy rebuilding to relief over the signing of the fiscal cliff deal on Jan 2nd. However, before we get too excited the February numbers typically show a bounce and then a minor decline in March. Why this happens is anybody's guess.

Empire Manufacturing Chart

Consumer Sentiment for February rebounded slightly from 73.8 to 76.3. This was contrary to the expectations for increased taxes to weigh on consumers. It is also contrary to the comments from the Wal-Mart executives saying it was the worst start to any month in seven years. The present conditions component did all the heavy lifting with a rebound from 85.0 to 88.0. The expectations component rose only slightly from 66.6 to 68.7. All I can say is that the group surveyed over the last two weeks must have been in a higher income area where the hike in taxes and higher gasoline prices were less of a problem.

Consumer Sentiment Chart

Internet E-Commerce Sales rose from $57.0 billion in Q3 to $59.5 billion in Q4. That was a +15.6% increase over Q4-2011. This was the 16th consecutive quarter of sales growth. Online retailers are responsible for 5.4% of total retail sales in Q4.

The calendar for next week has several major events. The FOMC minutes will be the most important as analysts try to determine when the Fed is going to be forced to end its QE programs. If there was a heated discussion during the last meeting about continuing or ending stimulus the market will go crazy with declining expectations. Bernanke has gone out of his way to reiterate the need to keep QE going until unemployment hits 6.5% but analysts continue to second guess him and suggest the Fed will reduce its purchases beginning this summer. The minutes will be a key event in that analysis.

There are two major housing reports on Tuesday and Thursday. Lastly the Philly Fed Manufacturing Survey is the most important of the regional Fed surveys. This one has the most correlation to the national ISM that is reported two weeks later.

There are three critical data points from Europe on Thursday and Friday and the Italian election is on Saturday. News headlines from Europe will be increasingly heavy late in the week.

Economic Calendar

Carnival Corp (CCL) declined again to close just under $37 one day after the 3,100 passengers disembarked from the cruise ship Triumph in Alabama. The first suit has already been filed alleging fraud, failing to supply a working ship, unsafe living conditions, etc. The suit wants unspecified damages for pain and suffering saying Carnival did not supply working restrooms and there was a threat of serious injury or illness because of raw sewage and spoiled food. The suit alleged the ship was a "floating toilet, a floating Petri dish and a floating hell" in various parts of the filing.

Analysts believe passengers would be better off accepting the compensation from Carnival than suing. Unless there were actual injuries it is very hard to prove damages above what the passengers already waive liability for when they sign up for the cruise. The tickets are binding contracts that limit passenger recourse. They also require all suits to be filed in Federal court in Miami. That is extra expense for the passenger and puts all the suits in Carnival's home court where cases like this have been filed hundreds of times. The odds of winning against the stacked deck of liability limitations and a court that has seen it all are very slim. Carnival will issue everyone a full refund and has offered $500 extra, reimbursed transportation to and from the cruise plus given them 100% credit towards any future cruise.

Carnival Chart

On Valentine's Day Warren Buffet said he and partner 3G Capital were buying Heinz for $72.50 a share. That was great for shareholders of Heinz but bad for some traders using accounts in Zurich, Switzerland. Heinz normally trades about 825 calls a day. The day before the deal was announced the volume in the June 65 calls rocketed to 3400. After the announcement the value of the calls rose +1,700% and generated an unrealized profit of $1.7 million.

Fast forward to Friday and the SEC has seized the accounts making the windfall trades and sued the as yet unknown traders for insider trading. The SEC said "Irregular and highly suspicious options trading immediately in front of a merger or acquisition is a serious red flag they acted on confidential information."

That is the second 3G acquisition in recent months that involved insider trading charges. The other was the acquisition of Burger King in 2010. The SEC finally filed charges less than six months ago on the BKW acquisition. A Wells Fargo broker got inside information on the deal from a 3G client.

Heinz Chart

Herbalife (HLF) shares spiked +$7 (+17%) on Friday after news broke that Carl Icahn had acquired a 13% stake. Unfortunately that gain did not stick and shares declined to post only a 47 cent gain for the day.

Icahn and Bill Ackman are locked in a no holds barred fight over the future of Herbalife. Ackman believes it is a pyramid scheme and Icahn thinks it is a great company that would be a perfect candidate to be taken private. Icahn hates Ackman and is trying to make him pay the price for taking a 20 million share short position in Herbalife shares. Icahn thinks Herbalife will become the mother of all short squeezes. He is betting on that fact with his 13% position.

Shares lost their initial gains after another hedge fund manager, Robert Chapman, said in an interview on Bloomberg that he had sold his Herbalife position.

Daniel Loeb, founder of Third Point LLC, disclosed several weeks ago his firm had bought 8.9 million shares (8.2%) after Ackman launched his high profile short attack.

There will be a big winner in this battle. If any enforcement agency takes Ackman's challenge and announces an investigation into Herbalife the shares will decline significantly. With all the information Ackman has prepared and given to regulatory agencies there is a good chance there will be an official investigation. That does not mean Ackman will win but it would help. Those agencies also have to be careful their action does not look like they are acting on the request of Ackman and allowing him to make millions in profits. That could actually keep them from announcing an investigation. Meanwhile Icahn said he is going to talk with the company about going private or doing a Dutch auction to buyback a lot of shares. That would drive up prices and trigger the short squeeze. It would also provide windfall profit for Icahn.

The 800-pound gorillas have entered the ring but the fight is a long way from over.

Herbalife Chart

The Nasdaq (NDAQ) announced Friday it planned on starting premarket trading at 4:AM ET in mid March. The move has to be approved but they expect it to happen. The Nasdaq wants to be open for trading when Europe is open in order to capture more trading volume. Currently the Nasdaq trades about 12 million shares a day in the premarket session.

Another reason to extend the hours and increase its footprint in the world markets is the drive to increase the share price. They recently held talks with Carlyle and Hellman & Friedman about taking the company private. When the share price moved to the upper $20s the talks broke down. Apparently that was more than a private equity firm wanted to spend.

The Nasdaq operates in 23 markets. They have three clearinghouses and five central securities depositories in the U.S. and Europe. They had nearly $2 billion in revenue in 2012 but their market cap is only $5 billion. They feel they should have a larger valuation given their broad business.

I believe they are still a target for an LBO, an outright acquisition or a merger. The problem is they are running out of merger partners because of antitrust concerns. Nasdaq shares have stalled at the $31 level but the company believes they should be a lot more. As long as they are trying to make that higher valuation happen the final chapter has not been written.

Nasdaq Chart

Gold declined -$58 last week to close just over $1610. This was the biggest weekly decline in three years. Support at $1650 broke because of a sharply rising dollar and what some people believe is an improving economy picture.

It also helped to have some of the biggest billionaire investors dumping their gold holdings. George Soros and Louis Moore Bacon cut their positions in the GLD ETF but John Paulson is still holding firm. He has not given up the fight and remains the largest holder of the GLD ETF with 21.8 million shares.

Soros cut his stake by 55% to 600,000 shares as of December 31st according to a SEC filing. Soros was a gold bull so his reduction in the position was a blow to sentiment. Moore Capital Management sold its entire stake in the GLD and lowered its holdings in the Sprott Physical Gold Trust as well. Lone Pine Capital and Scout Capital Management LLC both sold their entire stake in the GLD.

UBS lowered its price target for gold by -6.8% saying the signs of economic improvement in China and the U.S. "takes the shine off defensive assets."

The expected improvement in global economics and rise in equities caused an -8.3% decline in gold bars, coins and ETPs in Q4 according to the World Gold Council. However, for the full year it was up +51%.

There are quite a few analysts and fund managers who believe differently about gold's prospects. Many think the continued decline in Europe and the potential for a recession in the U.S. plus the continued QE by the Fed and other central banks will push gold back to the forefront of desirable assets for wealth preservation.

Germany's economy contracted by -0.6% in Q4. France fell -0.4%. Japan declined -3.8% in Q3 and another -0.4% in Q4. Italy fell -3.7%, Spain -2.8% and Portugal -7.2%. The ECB is predicting zero growth for the Eurozone this year and that is optimistic. China is improving but is not yet out of the woods. If by chance China's recovery did accelerate the demand for gold would also rise. China bought 202.5 tonnes in Q4.

China has been a net buyer of gold for months along with Turkey, Kazakhstan, South Korea and Brazil. Central bank buying rose +17% in 2012 to 534.6 tonnes. That was the highest level since 1964. They purchased 145 tonnes in Q4 alone, an increase of 9% over Q4-2011. It was also the eighth consecutive quarter that central banks bought gold. Germany is trying to bring all its gold back to Germany for "safety" but the New York Fed won't give it back all at once. They want to deliver it over the next ten years in small quantities each year. I smell a conspiracy there.

Russia increased its gold holdings by +8.5% in 2012. Q4 demand in India jumped +41% to 261.9 tonnes and a six quarter high.

Investors believe equities are looking good now and they are selling their gold to buy equities. With the U.S. economy on the edge of a cliff that trade is likely to reverse very soon. Long term the dollar is going to decline. It is only a matter of time. In three years the U.S. deficit will be $20 trillion. Having a 2 as the first number is going to change the outlook on U.S. debt by a lot of foreign investors.

We could easily see a dip to $1550 now that support at $1650 has broken but that lower level is very strong support. Gold has gained every year for the last 11 years. It closed 2012 at $1,675.

Gold Chart

Dollar Index

2013 may turn out to be the Year of the Cliff. You may have noticed I added several months of Washington deadlines to the economic calendar. The preferred scenario in Washington today is to manufacture a crisis and then go to war against the other party in the press. There are multiple deadlines in the next couple months and each is going to be portrayed as the end of the world as we know it if the other side gets its way. This is not going to be conducive to a positive market over the next two months.

The Dow's average range over the last 13 days has been a very narrow 1.35%. That is the lowest range since 1986. Since the 14,007 close on February 1st the Dow has lost a whopping -30 points. When you consider all the political headlines over that period and hundreds of earnings reports you would have expected a significant move. Unfortunately the indexes have risen to their levels of extreme resistance and the momentum has faded.

This normally happens when the market runs out of new buyers. There is nobody left to pay a higher price for a share of stock. Last week more than 87% of the S&P-100 were trading over their 200-day averages. This has happened four times since 2004. Typically it lasts for several months then a significant decline appears. However, in the middle of 2012 we did see some volatility and that could have delayed the next event.

S&P-100 Stocks Over 200-Day Average

James and I both look at hundreds of stock charts each weekend and compare notes. Both of us noted what appeared to be numerous stocks rolling over last week. I am talking about previously bullish charts that topped out for a couple weeks and then began to erode over the last few days. It was not a significant amount of erosion but a solid pattern of lower highs on a daily basis.

After watching the indexes trade at resistance for three weeks with minimal gains you have to wonder what is next. With all the negative economic news coming out of Europe that has to weigh on the blue chips. Most of the S&P-100 stocks and quite a few S&P-500 stocks get a large portion of their earnings out of Europe, which is currently in a recession. That is going to weigh on the earnings of those multinationals.

The Volatility Index is holding at five year lows. This is another warning that sentiment is at extreme levels and is not likely to remain there. When the VIX is low it is time to go.

VIX Chart

The AAII Investor Sentiment Survey saw bullishness decline for the third consecutive week to 42.3%. That is only down -0.5% from the prior week but the trend has changed. Actually that is good since the extreme levels of three weeks ago were unsustainable.

The S&P closed right at 1520 and strong resistance. Back at the beginning of 2013 Bloomberg asked 15 strategists to contribute their year end targets for the S&P. While 13 of the 15 predicted a move higher the implied gain was only 4.9%. That is well below the 50-year average of +7% gains and 13-year average of +9.1%. It is also the lowest forecasted gain in eight years.

Here is the catch. The S&P is already up +6.56% for the year when the average of the 15 estimates was for a gain of only +4.9%. This means to hit the year end targets the market would have to go down.

Bloomberg Average Analyst Target S&P Growth

Clearly there are far more analysts with much higher price targets and you could stack the deck depending on who you invited into the survey. However, I am assuming Bloomberg asked the same analysts as in the past in order to keep the survey sample neutral to new analyst risk.

With the GDP expected to grow only 2% for the full year and the sequestration spending cuts likely to knock off a full point and the fiscal cliff tax deal knocking off another half point we are very close to negative territory and a recession. That will impact earnings and that impacts the market. Eventually this fundamental change is going to be felt in stocks. The current "hopefulness" disguised as bullish sentiment can't last forever if the fundamentals don't improve soon.

If this continues to be the year of the cliff then every crisis will undermine market sentiment.

With the Q4 earnings cycle almost over it turned out to be a good quarter. Currently over 70% beat on earnings with 20% missing estimates. The last number I saw on revenue beats was closer to 60% and shrinking as the smaller companies report. Earnings guidance was cautious with many companies projecting a flat quarter in Q1. That is not a market lifting outlook.

The S&P hit 1524 twice last week, once on Wednesday and again on Friday. It was instant rejection each time. I believe this is actually from traders anticipating 1525 and jumping in early with their sells/shorts. The triple top on the S&P is very strong resistance and we may have run out of positive catalysts. Earnings are over and the sequestration crisis is heating up with a March 1st deadline. What event is left to power the S&P over this major hurdle?

Initial support is 1515 followed by 1495-1500. We could sustain a decent bout of profit taking and not go below 1495. The bull is not dead but he is getting tired.

S&P Chart - Monthly

S&P Chart - Weekly

The Dow has lost -30 points since the Feb-1st close at 14,007. Even with the five big swings in February the average intraday range has been 1.35% and the lowest since 1986. The bloom has faded from this rally but the petals have yet to turn brown.

Despite what appears to be a decline in sentiment every dip has been immediately bought. Friday's Wal-Mart inspired dip knocked the Dow to a -68 point loss intraday but the buyers came right back to close it with a gain.

There has been no volume surge with the average in the 6.0 billion share range. Last Monday was 4.8 billion. Volume is a weapon of the bulls and it is clearly missing. There is a bid under the market but investors are not chasing the price. This suggests any future declines will be hard fought. The initial declines will be bought and until the bears gain enough confidence to use the volume weapon against the bulls the direction may not change.

Dow Chart - 30 Min

Dow Chart - Monthly

The game changer here is the Nasdaq. Three times last week the Nasdaq traded briefly over 3200 and at 12-year highs. If Apple would just trade up for a couple days we might see a strong breakout that could energize the other indexes as well. The Nasdaq is at a critical level where a breakout could stimulate plenty of retail traders and bring new money into the market.

Nasdaq Chart - Monthly

The Russell 2000 remains in breakout mode and is the strongest index. Until the Russell fails it remains a bullish sentiment indicator for the broader market.

Russell Chart - Weekly

I don't want to be the equivalent of a broken clock and only be right twice a day. The market is over extended. Anyone that has been trading longer than a year understands this. We are due for a decent correction. However, markets making new highs tend to keep making new highs contrary to the best predictions of the analyst community.

I believe as long as the trend is not broken we stay with the trend. However, I would tighten up your stop losses and be prepared for a decent dip that could be next week or next month but we know it is coming.

The market will pick an excuse and all of a sudden stocks will be sold and everybody will be wishing they had stop losses. Bull market corrections are normally short, sharp and scary. Be prepared and profit from it.

Don't fight the Fed and the other global central banks. Currently there are 17 central banks that are either practicing QE or some other type of stimulative monetary policy.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"It is better to be out wishing you were in, than in wishing you were out."
Albert W. Thomas

Have you tried the new Ultimate Investor newsletter? This publication focuses on "investing" not "trading." The goal is to enter lower volatility positions with strong fundamentals and sleep comfortably at night.


Index Wrap

Some Slipping Momentum

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The uptrend continues but with some slowdown in upside momentum. It's almost like the market is 'stumbling' higher. A correction is due and overdue. This doesn't mean we'll get such a correction in the coming week or this month but beware if dazzled only by the further upside potential and not the possibility of a dip.

The market is an every changing kaleidoscope of different stories. Right now merger and buy out mania have come round again and that's usually a bullish driver. So, could go up, could go down (with a suitable accent), is where we are. Slowing upside momentum and a mildly bearish price/RSI divergence definitely suggests high risk in new long side bets while conversely, there's no definite forewarning of a break and the trend remains strongly up.

The Nasdaq Composite is stuck in a narrow range between a line of resistance at 3200-3205, support around 3180. A break out above or below this narrow band is likely to carry 20-25 points at a minimum. The big cap Nas 100 (NDX) has rallied to above a prior line of resistance at 2760; if NDX starts slipping back under 2760 it could drop 40 points. Stay tuned on that.

The S&P 500 (SPX) recently has seen a stalled advance in the 1525 area; it has support at 1500. The Dow 30 (INDU) has been trading and for some time, in a relatively narrow range from 13860 up to 14000. A breakout above or below this price range could yield another 250 points in the direction of the breakout.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P chart remains bullish. There's a recent stall in the 1525 area and this becomes a key near resistance; next resistance above 1525 is in the 1550 area, at the high end of SPX's uptrend channel. I also 'assume' potential resistance or bearish selling influences due to highs from 2007 as being in the 1550-1555 area.

While SPX made a new recent high, this hasn't been followed by the Relative Strength Index (RSI) also going to a new relative high; this pattern makes for a mildly bearish price/RSI divergence.

SPX has support in the 1500 area. A couple of Closes below 1500 would look bearish for the short-term trend. A Close below 1480 would suggest further selling pressures after that.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) index has continued to work gradually higher and is maintaining a trend that keeps OEX bobbing up along the upper end of its bullish uptrend channel. Resistance may show up next around 690, extending to 695-700.

I've highlighted support in the 673 area, extending to the low end of OEX's uptrend channel at 667 in the near-term. A Close below 660 would look to me like a bearish omen short-term. The S&P index trend is still strongly up but as noted with SPX above, the S&P 500 is also nearing prior key highs at 1550-1555 from the previous decade (2007). Prior highs attract sellers, computer and otherwise, for a bear raid.

I don't like the 'looks' of the price/RSI divergence as this kind of diverse pattern makes me nervous for trader friends hanging in for one more move higher. At 695-700 OEX hits a resistance milestone at the even-100 milepost. 2007 highs occurred in the 730 area (the 2000 Market peak saw OEX highs in the 830 area).

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) has been in a trading range sideways with highs and lows forming a relatively narrow price band. With this kind of pattern you can calculate that a breakout above OR below any prolonged sideways trend suggests potential for a NEXT move equal to the distance between the previous highs and lows. So, in this case we have the Dow trading in a 250 points range for a period long enough to notice.

Old trade adage is to be positioned in the same direction of the breakout; 250 points is the point spread between recent highs around 14010 and a line of prior lows at 13860. A 'minimum' upside or downside objective becomes adding on the prior range to an upside 'breakout' point; here, suggesting a next big resistance at 14250-14300.

Conversely, a decisive downside break of 13860 that wasn't reversed within a day would set up a downside target or 'minimum' downside objective to 13600 (13860 minus 250 Dow points).

There are still Dow stocks in powerful bull moves and this could get INDU over 14000 and on to 14300 or so. On the other hand a correction back to the 13600 area looks plausible if INDU starts falling under 13900-13860.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) chart is bullish. COMP is trading just over 3180 which is now looking like a key chart support; 'key' that is in that COMP falling below 3180 for any multiday period arrests current bullish (upside) momentum and would turn the daily chart bearish near-term at a minimum.

Key technical support is seen 3180; if pierced on a slicing move through 3180, next support comes in at 3130 extending to 3100.

Two consecutive closes above 3200 could be part of a launch of a move to/toward 3250-3280 resistance. New bullish positions taken here look to have downside risk to 3100 support. New bearish positions taken at current levels look to have risk up to the top end of COMP's channel in the 3280-3300 area.

Trader sentiment numbers seen above suggest that traders are mostly confident of the upward bias in the current Market but aren't throwing caution to winds either!

The high RSI also seen above for the past month and week is without extremes in the overbought/oversold zones. The sideways high, not extreme, daily RSI reflects this index being in an ongoing sideways to higher trend. Nothing dramatic, just a lengthily base building between 2720 and 2760, followed by decisive move above 2760. RSI never gets to a real 'overbought' extreme but doesn't come down much either. The RSI indicator is of limited use in this kind of cycle.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) chart is bullish. This past week's trade kept lows ABOVE the prior trading range which is bullish and suggests potential for a next move to test resistance around 2800 and from there possibly to the 2850 area again. The foregoing assumes that NDX can advance from its base of recent lows around 2760.

Some talk of the NDX big cap tech index seeming to struggle here to stay above the recent 2760 breakout point. It is a key support technically when a 'line' of prior highs becomes subsequent support (after a breakout above those prior highs). Basing action at such a line of prior highs, having now become support, precedes and sets up so to speak a next up leg.

Below 2760-2750 NDX takes on a bearish technical outlook short-term and points back to lower prior support in the 2720 area.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) is bullish in its pattern as it of course mirrors the underlying NDX.

Near QQQ resistance is apparent in the 68.1 area. Very near support (not highlighted on my chart) is at 67.5, extending down to the up trendline currently intersecting at 66.5.

Below 66.5-66.0 QQQ looks bearish and suggests the tracking stock having downside potential to 65.2; perhaps back to 64.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) Index continues bullish as the Russell moves STILL higher within its long-standing uptrend channel. I can't argue with the Russell as an occasional market bellwether as RUT got and stayed in a strong bullish trend before the rest of the market followed suit.

Assuming the most bullish case is to project potential for RUT to move again toward/to the upper end of its uptrend channel; here suggesting upside potential for RUT to the 940 to 950 area.

Support is anticipated at 915-912 extending down to 900, then to the 880 area.

RUT is showing a high/'overbought' RSI extreme at 70.5, but the 13-day Relative Strength Index is down from an even higher reading (78.5) when RUT was at a lower level (907). In other words, in this kind of market, one having a strong directional trend, overbought/oversold type indicators are of limited use as a trading input.



GOOD TRADING SUCCESS!


New Option Plays

Consumer Goods & Biotech

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Kimberly-Clark Corp. - KMB - close: 91.20 change: +1.01

Stop Loss: 89.25
Target(s): 94.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
KMB is in the consumer goods sector. The stock could be viewed as a "safe haven" trade since consumers continue to buy diapers and paper towels even in a bad economy. Plus, KMB currently has a 3.3% dividend yield. The last few weeks have seen the stock breakout from a significant, multi-month consolidation pattern. Now KMB is hitting new all-time highs.

I am suggesting new bullish positions now at the open on Monday morning. However, we do want to keep our position size small because the overall market's momentum seems to be slowing a bit. We'll start with a stop loss under last week's low. Our target is $94.75. More aggressive traders could aim higher.

- Suggested Positions -

buy the Mar $90 call (KMB1316c90) current ask $1.75

- or -

buy the Apr $92.50 call (KMB1320c92.5) current ask $1.00

Annotated Chart:

Weekly Chart:

Entry on February 18 at $---.--
Average Daily Volume = 2.2 million
Listed on February 16, 2012


NEW DIRECTIONAL PUT PLAYS

Alexion Pharma. - ALXN - close: 86.01 change: -1.62

Stop Loss: 87.55
Target(s): 80.25 and 76.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
ALXN is down on good news. The company reported earnings on Feb. 14th before the opening bell. Analysts were expecting a profit of 52 cents a share. ALXN delivered 60 cents with revenues surging +40% to $320.5 million for the quarter. Management even raised their 2013 guidance. The stock should have rallied on this bullish earnings report and guidance. Instead the initial pop was sold at the $95 level and the 50-dma on Thursday morning. Now ALXN has broken support at $90 and broken below its November lows near $86 when it bounced off its rising 300-dma.

The stock looks broken on both the daily and the weekly chart (see below). Aggressive traders could buy puts on ALXN now. Alternatively you could wait for a bounce and another failed rally near what should be new resistance at the $90.00 level. I am suggesting we wait for ALXN to trade below its Thursday afternoon low. Therefore we'll use a trigger to buy puts at $84.50. I am setting two targets. Our first target is $80.25. Our second, more aggressive target is $76.00.

Trigger @ 84.50

- Suggested Positions -

buy the Mar $80 PUT (ALXN1316o80) current ask $0.95

Annotated Chart:

Weekly Chart:

Entry on February -- at $---.--
Average Daily Volume = 2.2 million
Listed on February 16, 2012



In Play Updates and Reviews

S&P 500 Ekes Out a 7th Weekly Gain

by James Brown

Click here to email James Brown

Editor's Note:

The stock market's upward momentum seems to be slowing down yet the S&P 500 posted its seventh weekly gain in a row.

We are growing more cautious on the market and have adjusted several stop losses tonight.

I am suggesting we exit our LL trade at the open on Tuesday morning.
Our NILE trade was stopped out on Friday.


Current Portfolio:


CALL Play Updates

AMC Networks Inc. - AMCX - close: 59.68 change: +0.24

Stop Loss: 57.90
Target(s): 64.75
Current Option Gain/Loss: Unopened
Time Frame: Exit prior to earnings on Feb. 26th
New Positions: Yes, see below

Comments:
02/16/13: AMCX spent Friday's session consolidating sideways below resistance at the $60.00 level. We are still waiting for a bullish breakout higher. I am suggesting a trigger to buy calls at $60.25. More conservative traders may want to wait for a rally past $61.00 before initiating positions because twice in January AMCX found resistance near the $61.00 level.

Please note this is a short-term trade. We do not want to hold over the company's earnings report on Feb. 26th. FYI: The Point & Figure chart for AMCX is bullish with an $86 target.

Trigger @ 60.25

- Suggested Positions -

buy the Mar $60 call (AMCX1316c60)

chart:

Entry on February -- at $---.--
Average Daily Volume = 486 thousand
Listed on February 13, 2012


BP Prudhoe Bay Royalty Trust - BPT - close: 79.57 change: -1.11

Stop Loss: 78.25
Target(s): 87.50
Current Option Gain/Loss: -30.0%
Time Frame: Exit prior to earnings in early March
New Positions: see below

Comments:
02/16/13: Shares of BPT saw some profit taking on Friday, likely due to the weakness in crude oil prices Friday morning. The lack of follow through on BPT's recent breakout above resistance at $80.00 is a potential warning sign for traders. I am not suggesting new positions at this time. Friday's low was $78.96. More conservative investors might want to tighten their stop loss.

FYI: The Point & Figure chart for BPT is bullish with a $110 target.

*Small Positions* - Suggested Positions -

Long Mar $80 call (BPT1316c80) entry $2.00

chart:

Entry on February 13 at $80.25
Average Daily Volume = 131 thousand
Listed on February 07, 2012


Cameron Intl. - CAM - close: 64.58 change: -0.91

Stop Loss: 64.75
Target(s): 69.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
02/16/13: CAM reversed on Friday. Shares pulled back from resistance at $66.00 but the stock remains inside its recent sideways trading range. We're not giving up yet. I am suggesting a trigger to buy calls at $66.25. If triggered our short-term target is $69.75. More aggressive traders could definitely aim higher.

Trigger @ 66.25

- Suggested Positions -

buy the MAR $65 call (CAM1316c65)

chart:

Entry on February -- at $---.--
Average Daily Volume = 3.0 million
Listed on February 14, 2012


Check Point Software Tech. - CHKP - close: 51.36 change: +0.09

Stop Loss: 49.90
Target(s): 54.50
Current Option Gain/Loss: + 5.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/16/13: I am suggesting caution here. The rally in CHKP stalled at resistance near $52.00. The stock is currently sitting on short-term technical support at the 10-dma. Yet I suspect this level will fail and we will see CHKP dip back toward the next level of support near $50.00. More conservative traders may want to abandon ship now and consider launching new positions on the next bounce off the $50.00 mark. I am not suggesting new positions at this time.

*Small Positions* - Suggested Positions -

Long Mar $50 call (CHKP1316c50) entry $1.90

02/16/13 CHKP looks poised to dip back toward support at $50.00
02/13/13 new stop loss @ 49.90
02/06/13 new stop loss @ 49.40

chart:

Entry on February 01 at $50.25
Average Daily Volume = 2.7 million
Listed on January 31, 2012


The Cooper Companies - COO - close: 104.01 change: +0.22

Stop Loss: 101.75
Target(s): 107.50
Current Option Gain/Loss: - 3.7%
Time Frame: Exit prior to earnings on Mar. 7th
New Positions: see below

Comments:
02/16/13: Aside from the spike higher on Wednesday morning shares of COO spent most of the week inside the $103.50-104.50 zone. I suspect we could see COO dip back toward the $102.50-102.00 zone. I am raising our stop loss up to $101.75.

Earlier Comments:
Please note that we do want to keep our position size small because the option spreads are a little bit wide. COO is scheduled to report earnings on March 7th. We do not want to hold over the report. FYI: The Point & Figure chart for COO is bullish with a $125 target.

*Small Positions* - Suggested Positions -

Long Mar $105 call (COO1316c105) entry $2.70

02/16/13 new stop loss @ 101.75

chart:

Entry on February 06 at $102.60
Average Daily Volume = 303 thousand
Listed on February 02, 2012


The Home Depot - HD - close: 67.52 change: +0.18

Stop Loss: 66.40
Target(s): 69.90
Current Option Gain/Loss: -16.6%
Time Frame: Exit prior to earnings on Feb. 26th
New Positions: see below

Comments:
02/16/13: Shares of HD saw a little bit of volatility on Friday. The stock was challenging resistance at the $68.00 level then around 2:00 p.m. HD spiked sharply lower. Traders did buy the dip near technical support at its 10 and 20-dma but I couldn't find any news to explain the sudden weakness.

I am raising our stop loss up to $66.40.

Earlier Comments:
We plan to exit prior to the company's earnings report on Feb. 26th.

- Suggested Positions -

Long Mar $70 call (HD1316c70) entry $0.66

02/16/13 new stop loss @ 66.40

chart:

Entry on February 13 at $67.52
Average Daily Volume = 5.9 million
Listed on February 12, 2012


Lumber Liquidators - LL - close: 62.19 change: -1.77

Stop Loss: 59.45
Target(s): 64.85
Current Option Gain/Loss: - 3.2%
Time Frame: Exit PRIOR to earnings on Feb. 20th
New Positions: see below

Comments:
02/16/13: Ouch! LL erased about two days of gains with Friday's -2.7% reversal lower. We set our target at $64.85 because I expected potential resistance at $65.00. Friday's high was $64.64 and the move does look like a bearish reversal under the $65.00 level. Furthermore Friday's session has also created a bearish engulfing candlestick reversal pattern. We only have two days left on this trade.

If we had more time I would leave the stop loss below the $60.00 level, which should be support. Unfortunately we want to exit prior to the company's earnings report on Feb. 20th. Therefore, I am suggesting we exit immediately on Tuesday morning (the market is closed on Monday). More nimble traders could try and ride out Tuesday's session instead. Currently the bid on our option is at $1.50.

- Suggested Positions -

Long Mar $65 call (LL1316c65) entry $1.55

02/16/13 prepare to exit on Tuesday morning
02/14/13 adjust exit down to $64.85
02/13/13 new stop loss @ 59.45

chart:

Entry on February 12 at $61.36
Average Daily Volume = 568 thousand
Listed on February 11, 2012


Mohawk Industries - MHK - close: 107.80 change: +0.75

Stop Loss: 104.75
Target(s): 109.75
Current Option Gain/Loss: +28.7%
Time Frame: Exit PRIOR to earnings on Feb. 21st
New Positions: see below

Comments:
02/16/13: MHK continues to show relative strength. Keep in mind that we only have a few days left for this trade. MHK reports earnings on the 21st and we do not want to hold over the announcement. I am raising our stop loss to $104.75.

- Suggested Positions -

Long Mar $105 call (MHK1316c105) entry $3.65

02/16/13 new stop loss @ 104.75

chart:

Entry on February 12 at $105.35
Average Daily Volume = 588 thousand
Listed on February 11, 2012


3M Company - MMM - close: 103.23 change: +0.45

Stop Loss: 101.30
Target(s): 106.50
Current Option Gain/Loss: +23.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
02/16/13: MMM continues to rally, now up seven weeks in a row. Traders bought the dip at technical support on its 10-dma Thursday. I am inching up our stop loss to $101.30 so it's just below the simple 20-dma. I am not suggesting new positions at this time.

Earlier Comments:
I am suggesting we keep our position size small to limit our risk.

- Suggested Positions -

long Mar $100 call (MMM1316c100) entry $2.95

02/16/13 new stop loss @ 101.30

chart:

Entry on February 06 at $102.25
Average Daily Volume = 3.0 million
Listed on February 05, 2012


Rock-Tenn Company - RKT - close: 83.69 change: +0.75

Stop Loss: 80.75
Target(s): 84.75
Current Option Gain/Loss: +37.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
02/16/13: The rally in RKT continues with another gain and another new all-time high on Friday. I am adjusting our exit target down just a bit to $84.75. We will raise our stop loss to $80.75.

Earlier Comments:
FYI: The Point & Figure chart for RKT is bullish with a long-term $117 target.

- Suggested Positions -

Long Mar $80 call (RKT1316c80) entry $3.05

02/16/13 new stop loss @ 80.75, adjust target to $84.75.

chart:

Entry on February 06 at $81.05
Average Daily Volume = 743 thousand
Listed on February 02, 2012


CBOE Volatility Index - VIX - close: 12.46 change: -0.20

Stop Loss: 11.45
Target(s): 22.00-25.00 range
Current Option Gain/Loss: -21.0%
Time Frame: 8 to 9 weeks
New Positions: see below

Comments:
02/16/13: The stock market's slow melt up higher is still pushing the volatility index lower. Any veteran trader will tell you that the market will correct eventually. It's only a matter of time. Right now bullish sentiment and complacency are reaching extremes, hence the multi-year low on the VIX.

I would still buy calls on the VIX now at current levels or you could choose a different entry point like waiting for the S&P 500 to close under its simple 10-dma as your signal.

- Suggested Positions -

Long Apr $16 call (VIX1317D16) entry $1.90

chart:

Entry on February -- at $---.--
Average Daily Volume = n/a
Listed on February 09, 2012


WESCO Intl. Inc. - WCC - close: 76.16 change: +0.24

Stop Loss: 73.25
Target(s): 79.75
Current Option Gain/Loss: + 6.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/16/13: WCC pushed to a new multi-year high on Friday. The trend is up and shares could see a short squeeze. The next level of resistance should be the $80 mark.

Earlier Comments:
The breakout past resistance could also spark some short covering. The most recent data listed short interest at 20% of the 41 million-share float.

- Suggested Positions -

Long Mar $75 call (WCC1316c75) entry $2.40

chart:

Entry on February 14 at $75.06
Average Daily Volume = 918 thousand
Listed on February 13, 2012


Zimmer Holdings - ZMH - close: 75.90 change: -0.44

Stop Loss: 74.40
Target(s): 79.50
Current Option Gain/Loss: + 9.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/16/13: This past week saw ZMH breakout past resistance at $76.00 and hit new multi-year highs. Yet profit taking on Friday morning pulled the stock back to $75.35 before paring its losses. I am not suggesting new positions. We will raise our stop loss to $74.40.

Earlier Comments:
I am suggesting we keep our position size small to limit our risk. FYI: The Point & Figure chart for ZMH is bullish with a long-term $89 target.

- Suggested Positions - *small positions*

Long Mar $75 call (ZMH1316c75) entry $1.60

02/16/13 new stop loss @ 74.40
02/09/13 new stop loss @ 73.40

chart:

Entry on February 07 at $75.24
Average Daily Volume = 1.2 million
Listed on February 06, 2012


PUT Play Updates

EV Energy Partners - EVEP - close: 54.17 change: -1.01

Stop Loss: 57.25
Target(s): 50.50
Current Option Gain/Loss: - 4.1%
Time Frame: exit prior to earnings on Feb. 27
New Positions: see below

Comments:
02/16/13: The relative weakness in EVEP continues. The stock underperformed the market on Friday with a -1.8% decline and fell to a new multi-month low. Readers could use Friday's move as a new bearish entry point.

- Suggested Positions -

Long Mar $55 put (EVEP1316o55) entry $3.65

chart:

Entry on February 11 at $54.75
Average Daily Volume = 300 thousand
Listed on February 09, 2012


SBA Communications - SBAC - close: 68.69 change: +0.58

Stop Loss: 70.05
Target(s): 63.50
Current Option Gain/Loss: -41.6%
Time Frame: Exit prior to earnings on Feb. 21
New Positions: see below

Comments:
02/16/13: The oversold bounce in SBAC continued on Friday with a second day of gains. Yet the rebound stalled right where it should have at technical resistance on the simple 10-dma. More conservative traders may want to lower their stops toward Friday's high (69.21). I would still consider new bearish positions right here at current levels. Keep in mind we only have a few days left.

Earlier Comments:
Our target is $63.50 although more conservative traders may want to exit near $65.00. Bear in mind that we will exit before the company's earnings report on Feb. 21st if SBAC has not hit our exit by then.

- Suggested Positions -

Long Mar $65 PUT (SBAC1316o65) entry $0.60

chart:

Entry on February 13 at $68.21
Average Daily Volume = 131 thousand
Listed on February 12, 2012


CLOSED BEARISH PLAYS

Blue Nile Inc. - NILE - close: 31.94 change: +0.63

Stop Loss: 32.15
Target(s): 27.00
Current Option Gain/Loss: -72.9%
Time Frame: To be determined (see below)
New Positions: see below

Comments:
02/16/13: The oversold bounce, post-earnings rebound in shares of NILE continued on Friday. The stock broke through what should have been resistance in the $32.00 area and hit our stop loss at $32.15.

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

*Small Positions* - Suggested Positions -

Mar $30 PUT (NILE1316o30) entry $1.85 exit $0.50 (-72.9%)

02/15/13 stopped out
02/13/13 new stop loss @ 32.15
02/11/13 more conservative traders will want to exit prior to the earnings announcement tomorrow after the closing bell. We have decided to hold the position over the report. Please note our new stop loss at $33.05 and our target at $27.00.

chart:

Entry on February 07 at $31.45
Average Daily Volume = 319 thousand
Listed on February 06, 2012