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Daily Newsletter, Saturday, 3/23/2013

Table of Contents

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

Market Wrap

Cypriot Joke

by Jim Brown

Click here to email Jim Brown

What if Cyprus defaulted and withdrew from the eurozone and nobody noticed?

Market Statistics

A week ago the world economy was spiraling down the rabbit hole because Cyprus was contemplating a 10% Stability Tax on bank deposits. Cypriot banks were closed for two days. The euro was dead and the eurozone was falling apart. Markets around the globe were selling off because a country with the GDP smaller than Vermont was considering the unthinkable.

Fast forward a week and the Cypriot banks are still closed until next Tuesday at the earliest. The two largest banks with large portfolios of bad loans may be closed permanently and depositors with more than 100,000 euros could see their accounts frozen for months or possibly years and receive up to a 40% haircut courtesy of the EU and government of Cyprus. The U.S. markets closed within a few points of new highs and the Dow added +90 points. Nobody seems to care what happens in Cyprus. What a difference a week makes.

The Cypriot problems disrupting the markets early last week were overblown given the size of the country and its immediate impact on the global stage. The big fear was the potential for bank runs across the eurozone and those that did materialize were small and contained. Apparently eurozone depositors correctly thought "What happens in Cyprus stays in Cyprus." They may think differently once the eventual solution is announced next week but for now Cyprus is just a headline buried on page two of the local newspapers.

For the U.S. market the conventional wisdom would have been to sell stocks before the weekend to avoid any unpleasant surprises from the Cypriot solution on Monday. Apparently conventional wisdom was tossed out the door and the Teflon market saw investors buying the dip ahead of quarter end.

There were no economic reports of note on Friday. The Mass Layoffs for February rose from 1,328 events to 1,422 but the number of workers impacted only rose slightly from 135,026 to 135,468. Since the data is a month old and there was no material change the report was ignored.

The SEMI Book-to-Bill ratio for February declined only -0.01 to 1.10 from 1.11. It was hardly an earth shaking move. That was the second consecutive month in positive territory over 1.0 and the first time since Q3-2010 that has happened. The semiconductor industry has been in the dumps with orders falling below shipments for two years and this suggests a rebound in the making. Thank you Apple and Samsung.

The economic calendar for next week has some important events. The Richmond Fed Manufacturing Survey on Tuesday will be important after the Philly Fed Survey returned to positive territory last week. We need to see confirmation from the Richmond and Kansas surveys.

Bernanke will give a speech on Monetary Policy at 1:15 PM on Tuesday. That is always dangerous but coming so soon after his press conference last Wednesday I am not expecting any fireworks.

The Q4 GDP revision on Thursday is expected to rise from the microscopic +0.13% growth in the last revision to +0.3% growth. I can hear the oohs and aahs from the cheering crowd as you read about that stellar growth upgrade. Almost nobody expects a positive surprise and there are a few looking for a return to negative territory. The report we need to worry about is the one for Q1 after the impact of the fiscal cliff and the sequestration. That report will not appear until April 26th so the market has plenty of time to form expectations. Currently they are for growth of +0.13% in Q1. I am not holding my breath.

The ISM Chicago, formerly Chicago PMI, due out on Thursday is expected to decline despite the strong manufacturing activity in the auto sector. The Kansas Fed Manufacturing Survey is already in negative contraction territory and it could decline even more when it is reported on Thursday.

Economic Calendar

We are approaching a critical point in the economy and the economic reports in April are going to be critical. The tax hikes from the fiscal cliff in December are now fully implemented and individuals and businesses have had time to adjust their spending habits. The impact of the sequestration will have begun and we should see a decline in spending all across the economy.

The impacts of Obamacare are starting to be reported almost daily in the business news. This weekend is the third anniversary of the law's passage. Employers are cutting full and part time workers back to 29 hours a week so they won't have to pay for health care. Small businesses are cutting back to fewer than 50 total employees for the same reason. The businesses that can't cut back are raising prices to offset the higher expenses. Subway, Red Lobster, Burger King along with hundreds of other companies have already announced they are raising the price of their products to compensate for the added expenses.

A new update last week revealed a new $63 per worker surtax that was hidden in the 15,000 pages of regulations. In explaining the fee the administration said, "The fee is intended to help millions of Americans purchase affordable health insurance, reduce unreimbursed usage of hospital and other medical facilities by the uninsured and thereby lower medical expenses and premiums for all."

The United Auto Workers Medical Trust covers 806,000 workers and the trust is asking for an exemption. So is Boeing with 405,000 employees. Boeing said that fee alone will add $25 million in costs. Health and Human Services denied the request by Boeing and said "some" of the autoworkers could be exempt. So far the HHS has issued waivers for unions representing 543,812 workers. Why do they get special treatment?

The Associated Press reported this week that insurance companies are warning existing customers to expect premium hikes of +20% to +100% in January 2014. "If you like your plan you can keep your plan" if you can afford it. Also, if your annual plan payments are more than $10,200 you can be considered to be in a "premium" program and be subject to the "Cadillac Tax" starting January 1st.

As we get closer to the full implementation of the healthcare system you can bet there are going to be dozens of unexpected fees and price hikes. You can't add 40 million currently uninsured people into the healthcare system without the rates for everyone else going up accordingly. This is going to be a major drag on the U.S. economy and once into the third quarter the daily news stories are going to weigh on the market.

You may have seen the news stories on Homeland Security ordering 1.6 billion rounds of ammo, 7,000 machine guns and 2,700 armored personnel carriers for delivery later this year. At the height of the Iraq war the military was only using 5.5 million rounds a month and there were 500,000 soldiers. Those 1.6 billion rounds would fuel a war of that size for 30 years. They recently put out an "emergency order" for riot gear, body armor and "bullet proof checkpoint booths." What are they preparing to defend? Why are all the orders being placed on an "emergency" basis? Could it be they are expecting riots after the Affordable Care Act goes into effect in January?

The FAA announced on Friday it was closing 149 air traffic control towers on April 7th due to forced spending cuts in the sequestration bill that went into effect on March 1st. The FAA said it has to cut $600 million from its budget for the rest of the year as a result of sequestration. Multiply this for every government agency and there will be an impact to the economy.

In stock news BlackBerry (BBRY) fell -8% as the Z10 phone went on sale in the USA. The new touch screen BlackBerry went on sale with less than an enthusiastic response. In an AT&T store in midtown Manhattan only about 24 had been sold by late afternoon. There were no lines at any store according to technology reporters.

The Z10 phone costs $200 at AT&T with a two-year contract. Some analysts suggested most hard core BlackBerry users were waiting for the Q10 model with a real keyboard. That model is expected to be out in about two months. Unfortunately that will put it in direct competition with the new Apple phones. Today's -8% decline was a textbook buy the rumor, sell the news event.

BlackBerry financed special training for Best Buy employees from 1,400 stores so there would be a resident BlackBerry expert in every store.

BlackBerry Chart

Apple (AAPL) shares had a good week with a close over $460 after bottoming at $420 in early March. Rumors making the rounds late in the week had a June 29th announcement event by Apple. The announcement was expected to be an iPhone 5s, a new iPad and possibly the leaked iWatch. Rumors of a Samsung watch and even a Google watch are also making the rounds so Apple could announce it just to beat the crowd. Even LG is rumored to be working on a Smartwatch. LG is also working on a product similar to Google Glasses. The tech consumer will have plenty to choose from in 2014. Throw in a potential dividend upgrade by Apple and the stock is finally moving higher.

Apple Chart

AK Steel (AKS) issued guidance for Q1 and shipments are expected to be down -8% from Q4. Prices were expected to be slightly higher and would limit the loss. They are expecting a loss of 9-13 cents compared to street estimates for a loss of 9 cents.

Steel Dynamics (STLD) issued guidance earlier in the week that was flat to lower on earnings. The company said shipments to be "considerably flat sequentially" due to a wide range of problems. The company said increased shipping volumes would be offset by decreased margins.

Both companies echoed analyst comments over the last couple weeks claiming steel demand was lower and prices were falling. UBS warned that iron ore prices could return to crisis lows, a -54% decline from the current level. UBS blamed China's sluggish economy for the slowing demand. When coupled with rising ore volumes from miners the price will decline. Seaborne supplies could climb 9% in 2013. UBS said prices could decline to $70 a ton after trading between $130-$160 through June. Goldman said seaborne supply will outpace demand by 20 million tons in 2013, up from a 37 million ton shortfall in 2012.

AKS shares declined to a ten-year low.

AKS Chart

It was not a good week for earnings but the market ignored the bad news. Caterpillar (CAT) warned that sales for the three-month period ended in February declined -13% compared to the year ago period. Sales fell -26% in the Asia/Pacific region, -12% in North America, -9% in Europe, Africa and the Middle East. The big declines in Asia/Pacific (China) are particularly troubling. Caterpillar is typically considered a proxy for the global economy.

CAT Chart

Federal Express (FDX) reported earnings that disappointed despite rising volumes. The overall shipping volume rose +4% but shippers are electing to ship by ground methods rather than by air. Shippers are focused on price rather than speed and that suggests a downturn in global economy. Operating margins declined to 1.8%, down from 5.3%. FedEx expected the declining international trend to continue. The company is going to ground more planes that deliver to Asia and retire older planes. Like Caterpillar, FedEx is typically considered a proxy for the global economy.

FedEx Chart

Oracle (ORCL) reported earnings that disappointed with declines in license revenue and hardware sales. License revenue for new software and subscriptions fell -2% to $2.3 billion. Slower than expected hardware sales were blamed as more corporations move to the cloud instead of buying expensive hardware that requires ongoing maintenance. Oracle said hardware sales would plunge as much as 23% in the current quarter.

Oracle Chart

Not all earnings were bad. Nike (NKE) beat the street for an unexpected surprise. Earnings of 73 cents beat estimates of 67 cents. GAAP earnings were 95 cents and rose +58% over the comparison quarter. Revenues rose +9%. Sales in North America rose +18% and gross margin improved for the first time in ten quarters. Nike shares rallied +11%.

Nike Chart

Tiffany (TIF) posted earnings of $1.40 compared to estimates of $1.36. Revenue rose +4% to $1.24 billion. Sales in the Americas rose +2% but same store sales declined -2%. Sales in New York declined -3%. Sales in Asia-Pacific rose +13% while sales in Japan declined -6%. European sales rose +3%. It is clear that China was the growth driver here and the U.S. barely posted any gains. Tiffany warned that Q1 earnings will decline between 15-20% due to pricing pressures and higher marketing costs. Tiffany shares rallied +2% but the earnings warning will probably drag on performance in the weeks ahead.

Tiffany Chart

Darden Restaurants (DRI) posted earnings of $1.02 that beat the street by a penny on a +5% increase in revenue. However, same store sales declined -4.6%. Darden operates the Olive Garden, Red Lobster and LongHorn Steakhouse restaurants. With taxes higher in 2013 and gasoline prices at their recent highs the retail experience, especially in high end casual dining is going to be under pressure. McDonalds and lower priced fast food restaurants should do better.

Earnings expectations for Q1 are horrible. S&P is expecting earnings growth of +0.58%. With a couple more warnings like we saw last week and that estimate is going to be negative. The outlook for future quarters is bordering on fantasy. Earnings in Q2 are expected to grow +7%, Q3 +10.1% and Q4 +15.6%. Given the comments from Oracle, FedEx, Caterpillar, Tiffany, etc the earnings for the rest of the year are not going to be anywhere close to those estimates. The market seems oblivious. In just the last week we have seen earnings estimate downgrades on ARG, CSCO, JDSU, GES in addition to those companies listed above that missed earnings estimates.

One factor specifically is going to make it difficult for companies to hit estimates in Q1. That is the sharp rise in the dollar. The dollar index rallied to six month highs in March and the euro plunged an equal amount. Oracle, Caterpillar and Tiffany already used the dollar as a supplemental excuse in their poor earnings.

The dollar is due to decline as a result of QE but it will take a decent decline to really help out on earnings for companies doing business overseas and that is about 80% of the S&P-500. The euro is falling because the eurozone is in a recession. The PMI was negative for the major countries in the releases last week. Until Europe begins to recover the dollar will remain strong. Once the reversal in both currencies begins it could be a wild ride.

Dollar Index Chart

More than 88% of the S&P-500 stocks are trading over their 200-day average. Typically any number over 80% becomes problematic and investors begin to back off their bullish positions. That has not happened yet.

S&P Stocks over the 200 Day Average

Markets are being powered by the fear of missing opportunity more than the fear of losing money. However, cash balances at funds are at two-year lows at roughly 3.8%. That is very close to fully invested since they have to retain some cash for liquidity and withdrawals. Merrill Lynch said global fund managers hold a 53% underweight exposure to the bond market. That is the lowest since April 2011. More than 57% of managers were overweight equities compared to a 4% underweight in June 2012. Fund managers currently hold an 11% underweight exposure to commodities. That is the lowest since the June 2012 bottom. The Merrill survey showed expectations for further gains in the dollar were at record highs.

Despite the volatility over the past week the market outlook has not changed. We saw some ugly earnings from notable companies and the market failed to implode. We have seen the previously unthinkable occur in Cyprus where individuals may lose up to 40% of their cash on deposit and the market blinked and then ignored it.

The fear of missing out on the next move is overpowering the fear of a correction. This mindset should continue through the end of next week. Fund managers are chasing performance and trying to make up for either being late to the rally or shorting it outright throughout the quarter.

The Dow and S&P are likely to make new highs. That would be the perfect way to end the quarter with everyone fully invested and then start setting up to get out if earnings disappoint. After last week I don't expect too many upside surprises but anything is possible.

Assuming the earnings cycle does not surprise to the upside I expect the "sell in May" cycle this year to be especially painful. Investors can't look to the global economy for optimism because there isn't any. I doubt they can look to the U.S. economy for improvement because of the forced spending cuts and layoffs. Even if we continued to grow at +1% GDP it is not enough to increase hiring to the point where the economy gains traction.

There are too many headwinds in the months ahead. Until we see some real growth and some real improvement in hiring the future earnings estimates are going to continue to fade as we approach those quarters.

Eventually the Fed is going to lighten up on the QE and the market is going to react badly. A lot of analysts are expecting a change in Q3 but the economy would have to take a sudden turn higher for that to happen.

Those points above mean we are just passing time while we wait for a sign the global economy is improving. The U.S. can't really decouple from the world economy but it can be the strongest ship in a rough sea.

The S&P closed at 1,556 and about -9 points from the historic high at 1,565. Support at 1,540 held on multiple attempts and barring some unforeseen headlines we should creep higher on end of quarter window dressing. We are still in danger of a triple top correction but probably not this week.

S&P Chart - Daily

S&P Chart - Monthly

The Dow missed posting a gain for the week by -2 points. The close at 14,512 was -27 points below the historic closing high at 14,539 on March 14th. The Dow has gone sideways for seven-days as we pass time until quarter end. The support at 14,400 was tested on three days and each time there was a corresponding rebound.

The increased volatility is symptomatic of a market top and volume has been weak. Friday's total volume of 5.3 billion shares was the lowest since February 11th. Daily new highs at an average of 400 for last week are less than half of the rate from two weeks ago. The high for new highs was 1,022 on March 14th.

The Dow will probably make a new high next week. If we were to get some triple digit explosion to a new high I would be looking for weakness to short.

The trend is our friend until it ends and a big new high would attract sellers like a moth to a flame.

Dow Chart

The Nasdaq is less bullish than the S&P and Dow. The index did test support at 3200 but has settled into the middle of the prior range. The Nasdaq is still at the mercy of Apple and Google and fortunately Apple is starting to show promise. I am concerned the Nasdaq will simply run in place next week and not put in a serious breakout effort. If the Nasdaq was to move higher there is strong resistance around 3275. The semiconductors are also holding the Nasdaq back. The SOX is well off its highs.

I would not use the Nasdaq as my index of choice for long plays next week. Be selective and pick a tech stock rather than the QQQs or another ETF.

Nasdaq Chart

The Russell 2000 Index was the biggest loser last week. It was not much of a loss at -0.6% but it matters. We need to watch the Russell and the Transports for signs of a rally failure. Those are the two indexes that matter the most. The Russell tested support at 938 on Tuesday and then resistance at 950 on Wednesday. Both held and the index faded into the Friday close. That support at 938 is critical. I would short a breakdown below that level using the IWM.

Russell 2000 Chart

The Dow Transports tested support at 6100 on Thursday and rebounded +1% on Friday. That sounds good but the chart says otherwise. The Transports closed nearer to support than the other indexes. We could very easily see a retracement of the Friday gains and a break below 6100. Short the Transports using the IYT ETF if 6100 support fails.

Dow Transport Chart

As of Saturday afternoon Reuters is reporting the EU and Cypriot leaders have tentatively agreed to impose a 20% to 25% levy on accounts over 100,000 euros at the Bank of Cyprus and a 4% levy on accounts of that size at other banks. This is not final and it is not over until it is over. The second largest bank, Cyprus Popular Bank, may also fall under the 20% rule. The country has to come up with 5.8 billion euros in order to qualify for a 10 billion loan from the Troika.

The Cypriot banking system had 68 billion in deposits when the banks were closed a week ago. They are now scheduled to reopen on Tuesday. There was 38 billion euros in accounts of 100,000 euros or more. With only 1.1 million people in Cyprus that is a huge amount of money and illustrates how much money is in the system from offshore accounts. More than 20 billion is thought to be owned by Russian citizens. Cyprus got into trouble by using all this offshore money to buy Greek bonds. The banks paid a big yield because Greek bonds were high yield. When Greece imploded and the bond debt was forcibly restructured it left a gaping hole on the bank balance sheets. The principal on Greek bonds was cut by as much as 80% and the repayment terms extended for years. Now the banks can't cover the deposits.

This is one of those European situations where there is no easy answer. If the Troika refuses to give Cyprus the 10 billion loan they will be bankrupt and the banks will not be able to open without ECB support. The ECB has already said it will not support the banks unless the government gets the loan. Even then the two largest banks may have to be closed and a "bad bank" created to hold all the bad loans. Depositors could be forced to wait years to get their money back after the assets of the bad bank are sold.

The options for Cyprus are few. Suck it up and make the hard decision, tax the deposits and accept the loan or see the banks fail and be forced to withdraw from the eurozone. Cyprus is agonizing over the deposit taxation plan but it is a mute point. If they don't tax the deposits the banks can't reopen and depositors get no money back for a long time, if ever. The country is already in a crisis because cash has evaporated and businesses are shutting down. ATM lines are long and painful.

ATM Lines

If this was any other eurozone country it would be a disaster. Cyprus has a GDP of $23 billion, which is smaller than Vermont and the damage will be localized. The U.S. markets have already written the country off as nothing but a bump in the road and assumed as in all past eurozone problems that a solution will be found or the can kicked farther down the road. If the country decides to commit euro suicide and leave the eurozone it could weigh on the markets because of the unknowns related to dropping out of the euro. They would have to print their own money (pound or lira) and exchange it for the euros on deposit. You can imagine the disaster that would become in determining an exchange rate for the new lira.

The Cypriot banking system is heavily connected to Greece. A collapse in Cyprus would require emergency loans to Greek banks. Greece is already seeing depositors withdraw money on fears the Cyprus contagion could sink the Greek banks or cause a new round of deposit taxes in Greece.

Russian banks have more than 40 billion euros of loans outstanding to Cyprus based companies. If the Cypriot banking system failed or they dropped out of the euro those loans would be in serious jeopardy. That could be a 2% hit to Russian GDP.

Everything is connected to everything else. This is why there has to be a solution and Cyprus can't be allowed to fail. This is why the market ignored the problem on Friday. Cyprus can't be allowed to fail or the entire European debt crisis explodes back into the headlines. Expect an ugly solution but at least a solution. Once the banks reopen they are going to be immediately hit with massive deposit flight out of the country. This means Cyprus may have to implement some form of capital controls even though it is prohibited under eurozone rules other than under "exceptional circumstances."

Numerous analysts believe we will look back at the Cyprus tax as the pivotal event that ended the eurozone. Peter Schiff wrote that EU leaders, primarily Germany and France, were so politically arrogant, reckless, economically ignorant and emotionally callous as to violate the sanctity of bank deposits in order to fund a bailout of Cyprus. The decision was almost universally described as a historic blunder.

The next problem to rear its head is deposit taxes across the eurozone. Spain announced last week it is considering a tax on all bank deposits. If Spain is seeing the deposit tax as a way to share the pain then other countries are going to follow suit. If countries suddenly wake up to the potential to raise instant money by taxing deposits the genie will be out of the bottle and the taxes never ending. JP Morgan believes this is imminent and it will further expose the fragmentation of the European banking system and its inconsistency with a monetary union.

The chief economist of the German Commerzbank has already suggested a 15% financial asset tax on all Italians as a way to reduce the debt to less than 100% of GDP. More than 29% of Italian businesses are failing because the banks have no money or no will to lend. Pass a 15% tax and 50% of businesses will fail. Without a doubt depositors in Spain, Italy, Greece and Portugal are going to believe their funds are at risk and there will be a continued cash drain on the banks.

The markets are likely to move higher because of quarter end window dressing. That assumes the headline flow remains neutral and Cyprus is resolved.

The House and Senate both passed the continuing resolution budget bill to keep the government funded through the end of September so the March 27th budget deadline is no longer valid.

Enter passively and exit aggressively!

Jim Brown

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Index Wrap

Range Bound Trade looks like a Bullish Consolidation

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

I noted last week that further upside looked limited and that may be the case awhile longer. That said, the sideways S&P 500 (SPX) and Dow (INDU) trends look most like consolidations ahead of a further move higher.

The big cap Nasdaq 100 had more of a dip than the S&P that took NDX in the direction of support implied by the low end of its bullish uptrend channel. NDX however rebounded 3 times from the area of its key 21-day moving average, then rallied back toward the line of its recent highs. This pattern in Nasdaq keeps bullish breakout potential going in the tech-heavy indexes also.

Generally, a sideways move after a strong prior rally should be assumed (until proven otherwise) to be a consolidation ahead of a breakout above the top end of the rectangular sideways pattern. Stay tuned on the eventual outcome.

INDU looks bullish as long as it continues to hold near support at 14400. I see the Dow as the 'lead' or bellwether index currently but SPX also has a similar bullish pattern in holding above 1540. The Nasdaq should continue to merely follow or be pulled up by the S&P and Dow indexes, which look headed still higher; WHEN a possible breakout above the line of recent highs occurs is hard to predict. The longer the sideways range-bound trade goes on, a breakout move above (or below) the prior price range tends to have a bigger move relative to such a 'base' or base-building process.

The Dow 30 looks to be the linchpin of this current overall Market advance and 17 Dow stocks, over half of the 30 Industrials, remain in powerful uptrends; i.e., AXP, BAC, BA, CVX, DIS, market bellwether GE, HD, IBM, JNJ, JPM, KFT, MMM, PFE, PG, TRV, UTX and VZ. Some other Dow stocks like HPQ, KO, T, WMT and XOM could advance some or some more with the lead stocks but I am mostly pinning bullish expectations on the 17 aforementioned Dow stocks in continued strong bullish trends.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart remains bullish although trend momentum has slowed as prices drift sideways. I take the fact that support has developed in a related area after relatively minor dips, with rally attempts that follow, as possible or likely 'confirmation' of the overall uptrend.

A sideways move after a strong prior advance is often if not usually a consolidation of the prior trend and suggests a next move will be higher. How long before a possible next up leg develops is another story and unanswered question. Sideways trends also tend to 'throw off' overbought extremes such as measured by the Relative Strength Index (RSI) indicator. Moreover, pullbacks that hold at or above the key 21-day moving average, is a bullish pattern within a continued uptrend.

Key near support is seen at 1540, then at the lower end of the current uptrend channel in the 1520 area.

Resistance is apparent in the 1555-1560 area and then is assumed to lie at the upper end of SPX's uptrend channel, currently intersecting around 1590.

The RSI (Relative Strength Index) as seen above has pulled back to a more 'neutral' mid-range reading, which is a characteristic of 'time' (sideways) corrections rather than substantial retracements of the prior advance.

Trader bullish/bearish sentiment (CPRATIO), on a 5-day moving average basis, is holding in the 1.6 area, which isn't at an 'overbought' (high) extreme. When the 5-day CPRATIO gets to, near or above 1.9-2, this kind of 'extreme' suggests high risk of a downside reversal ahead.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart is bullish and my comments on the chart mirror my S&P 500 comments above just the price and indicator trends are alike. I take the sideways move, with a limited pullback so far after a strong prior advance as a bullish consolidation prior to another possible rally. The duration of a sideways move isn't easily predicted but the potential for an eventual breakout move above prior resistance is good.

OEX has seen resistance/selling pressure develop on rallies above 700 with intraday highs in the 702 area. Next resistance looks like it would come in around 713 currently, at the top end of OEX's uptrend channel.

Near support is seen in the 693-692 area or specifically ahead at the 21-day moving average. A decisive downside penetration of 692-690, especially on a Closing basis would be near-term bearish. Support in the 685 area is suggested by the current intersection of OEX's uptrend price channel. Fairly major support is suggested at the index's prior downswing low near 670.

The 13-day Relative Strength Index seen above has fallen to a more 'neutral' mid-range reading recently from an overbought extreme in the 70 area. This action suggests somewhat less potential for a sharp downside reversal, but also should be seen within the context of an extended prior advance off the November lows; i.e., a 15% gain from low to peak so far.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) continues to be in bullish pattern even though the recent trend has been sideways. In technical analysis or chart terms, sideways consolidations or a range bound trade, in this case between 14400 and 14550, is assumed to be a bullish consolidation after a strong prior advance. Simple analysis, maybe not even 'technical' analysis per se; a trend in motion tends to stay in motion, etc. Support below 14400 looks like 14200-14175. Resistance above 14540 looks like it would come in to play in the 14800 area, at the top end of the bullish uptrend price channel.

Of course tops can be built in a sideways move after a strong prior advance; e.g., an index or stock CAN'T make further upside progress after a major advance and starts topping out in the same area. Beware of this possibility of course. It's only prudent, especially when the Market gets into overbought territory at or above 70 on daily and weekly charts; e.g., RSI 'length' setting at 13 on both daily and weekly charts.

Overbought markets often tend to stay 'overbought' for lengthily periods of time so I go less with such indicators of risk (of a pullback) and more with the overall trend. However, I'm also not buying into every pause and pullback on the way up and like to buy into oversold conditions WITHIN a primary bull market; e.g., see the November low and the 13-day RSI.

The Dow as I noted already in my initial 'bottom line' commentary looks to be the key segment of this current Market advance and 17 Dow stocks, over half of the 30 Industrials, remain in powerful uptrends; i.e., AXP, BAC, BA, CVX, DIS, market bellwether GE, HD, IBM, JNJ, JPM, KFT, MMM, PFE, PG, TRV, UTX and VZ. Some other Dow stocks like HPQ, KO, T, WMT and XOM could advance some or some more with the lead stocks but I am mostly pinning bullish expectations on the 17 aforementioned Dow stocks in continued strong bullish trends.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) chart remains bullish along with the other major indexes on the S&P side. Support on recent dips held at or above the 21-day moving average which is a bullish pattern in the major indexes generally.

Near resistance comes in around 3260. A decisive upside penetration of 3260 would suggest potential for a move to 3300 or higher such as to the upper trend channel boundary, currently intersecting around 3330.

Near support comes in around 3200-3175. Next intermediate technical support comes in the low-3100 area.

The RSI (Relative Strength Index) as seen above has not hit extreme 'overbought' highs, but I would take note that a longer period ahead of a sideways trend is what would tend to bring this reading down to a more neutral 45-50 reading where I'd take on added bullish strategies more readily.

Trader bullish/bearish sentiment (CPRATIO), on a 5-day moving average basis, is holding in the 1.6 area, which isn't at an 'overbought' high extreme either. When the 5-day CPRATIO gets to or near 1.9-2, this marks a time of higher risk of a shakeout ahead.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) also appears to be in a bullish consolidation still, with prices drifting basically sideways. The most recent weakness took prices back to the area of the 21-day average, which held up as support, followed by rebounds toward recent highs, maintaining a bullish 'consolidation' pattern. Chart analysis suggests that an uptrend will continue as long as prior lows are not pierced. So far NDX has pulled back no lower than to support implied by the low end of NDX's prior upside price gap; this pattern is one that 'fills in' the prior gap and where support is expected to be found. .

Near support is seen at the 21-day moving average in the 2775 area, extending to the low end of NDX's uptrend channel at 2750. Fairly major support is then suggested in the 2700 area.

Key near resistance is suggested by the line of recent highs at 2812. This is a finely delineated or etched series of intraday highs and suggesting that a strong move above 2812 would imply a next up 'leg' was underway, perhaps one that would eventually carry to the upper end of NDX's uptrend channel around 2900. Most significant from a potential chart resistance standpoint is the cluster of prior (September) intraday and Closing highs in the 2862-2878 zone.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) remains in an overall bullish pattern. QQQ has a similar 'line' of repeated prior highs that implies resistance in the 68.9 area. QQQ had a 1-day Close below its 21-day moving average but not more. I often say that its takes a second consecutive day above or below key chart of indicator points to suggest a trend change.

I've highlighted support in the 67.5 area, at recent lows, in the area of the 50-day moving average and at the current intersection of QQQ's uptrend line.

Key resistance as noted is 68.9-69, with next resistance at prior (September) highs in the 70.5 area.

On Balance Volume or the OBV line continues to decline which is a mild bearish divergence in terms of the OBV indicator. However, this divergence is occurring in a recent sideways trend (not an uptrend). Moreover, as noted, the overall chart pattern with prices holding within its uptrend channel is bullish. Price trumps volume so to speak. Volume is a sometimes important secondary indicator.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) Index remains bullish in that RUT remains within its uptrend price channel. There is a minor recent 'line' of prior highs/resistance that needs to be overcome to continue RUT's bullish chart pattern going forward. Key near resistance is at 953. Next major resistance, implied by the top end of RUT's uptrend channel comes in around 983 currently.

Near support remains in the 940 area, with lower trendline support suggested now around 929, extending to 920. 900 offers fairly major technical chart support in the Russell 2000.



GOOD TRADING SUCCESS!


New Option Plays

Consumer 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) R, MPC, PII, AGN, FLR, MSM, CB, BAX, CREE, VRSK, FCFS, ICE, CVX, UTX, BDX, ACT, JBHT, OMC, DECK

Investors may want to check out shares of Apple Inc. (AAPL). The stock might have found a bottom. This past week traders were buying the dips near the $450 level. Friday's show of relative strength in AAPL pushed the stock above technical resistance at its simple 50-dma. After a six-month decline from its September highs, AAPL is oversold enough to see a significant rebound. The $500 level could be round-number, psychological resistance but I would not be surprised to see AAPL rally near the $525 area. Trying to place your stop loss on a high-dollar stock like AAPL can always be a challenge. I'd probably put my stop in the $447-445 area.

So if we're bullish on AAPL, why are we not listing it on the newsletter? This is probably a multi-week or possibly a multi-month trade. We looked at out of the money June or July calls but they appear to be way too expensive. Few traders are excited to pay $10 or $20 for an out of the money option.



NEW DIRECTIONAL CALL PLAYS

Ingredion Inc. - INGR - close: 70.47 change: +0.94

Stop Loss: 68.45
Target(s): 74.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
INGR is in the consumer goods sector. The company makes starch and sweeteners for ingredients in other products. The stock has continued to show relative strength with a weekly gain and a rally toward its highs set in January of this year. Shares are sitting just below resistance at the $70.50 level.

I am suggesting a trigger to buy calls at $70.65. If triggered our short-term target is $74.75. More aggressive traders could aim higher. FYI: The Point & Figure chart for INGR is bullish with an $83 target.

NOTE: INGR has a 38 cent dividend payable on April 25th to shareholders on record as of April 1st.

Trigger @ 70.65

- Suggested Positions -

buy the Apr $70 call (INGR1320D70) current ask $1.60

Annotated Chart:

Entry on March -- at $---.--
Average Daily Volume = 585 thousand
Listed on March 23, 2012


Noble Energy - NBL - close: 114.16 change: +1.16

Stop Loss: 113.25
Target(s): 119.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Cyprus has been getting a lot of press lately with the country's financial turmoil. If they can solve it without completely crashing their banking system, then NBL could benefit. It was recently announced that NBL discovered a significant natural gas field near Cyprus' southern coast. Now we are not playing NBL because of the Cyprus field but worries over Cyprus could be holding NBL back. If the Cyprus cloud clears up then NBL could accelerate higher.

NBL's stock trend is higher and this past week merely looks like a normal bout of profit taking. Traders bought the dip on Thursday, intraday, and now NBL looks poised to bounce. I am suggesting a trigger to buy calls at $115.25. If triggered our target is $119.75. More aggressive traders could aim higher.

Trigger @ 115.25

- Suggested Positions -

buy the May $120 call (NBL1318E120) current ask $1.45

Annotated Chart:

Entry on March -- at $---.--
Average Daily Volume = 1.0 million
Listed on March 23, 2012



In Play Updates and Reviews

Consolidating Sideways

by James Brown

Click here to email James Brown

Editor's Note:

The stock market has been consolidating sideways all week. Has upward momentum died? Or is the market merely catching its breath for the next move higher? There is a chance that stocks could see another move higher fueled by end of quarter window dressing.

Our SINA trade was stopped out on Friday.


Current Portfolio:


CALL Play Updates

Axiall Corp. - AXLL - close: 61.99 change: -0.49

Stop Loss: 59.90
Target(s): 69.00
Current Option Gain/Loss: Apr62.5c: -35.9% & May65c: -25.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/23/13: AXLL spent a good chunk of Friday's session churning sideways inside the $61.50-62.50 zone. Traders bought the dip near its rising 10-dma. If the market weakness continues we might see AXLL testing support near $60.00 soon. I am not suggesting new positions at this time.

- Suggested Positions -

Long Apr $62.50 call (AXLL1320D62.5) entry $3.20

- or -

Long May $65 call (AXLL1318E65) entry $2.75*

03/20/13 trade opened at trigger $63.15.
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:

Entry on March 20 at $63.15
Average Daily Volume = 1.3 million
Listed on March 19, 2012


Crane Co. - CR - close: 56.36 change: +0.01

Stop Loss: 54.40
Target(s): 58.50
Current Option Gain/Loss: +12.0%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
03/23/13: Shares of CR continued to find support near $56.00 and its 10-dma on Friday. The stock closed almost unchanged on the session. We are raising our stop loss to $54.40. More conservative traders may want to raise theirs even tighter.

Earlier Comments:
We do want to keep our position size small to limit our risk. If triggered our multi-week target is $58.50. More aggressive traders could certainly aim higher but CR doesn't move super fast.

- Suggested Positions - *Small Positions*

Long JUN $55 call (CR1322F55) entry $2.50

03/23/13 new stop loss @ 54.40
03/20/13 new stop loss @ 53.90
03/11/13 triggered at $55.25, plus we corrected the typo regarding the April versus June option. We are suggesting the June $55 call.

chart:

Entry on March 11 at $55.25
Average Daily Volume = 314 thousand
Listed on March 09, 2012


CommVault Sys. - CVLT - close: 81.92 change: +0.01

Stop Loss: 79.45
Target(s): 89.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
03/23/13: CVLT is still churning sideways on either side of the $82.00 level. The simple 10-dma has been recent support and it's rushing up to meet the stock near $82 soon. I would expect CVLT to breakout of this sideways move pretty soon. We are suggesting a trigger to buy calls at $83.25. If triggered our target is $89.00.

Trigger @ 83.25

- Suggested Positions -

buy the Apr $85 call (CVLT1320D85)

chart:

Entry on March -- at $---.--
Average Daily Volume = 627 thousand
Listed on March 20, 2012


Green Mtn Coffee Roasters - GMCR - close: 55.43 change: -0.16

Stop Loss: 53.45
Target(s): 59.75
Current Option Gain/Loss: -11.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/23/13: GMCR has spent the last three days consolidating sideways. As long as the market cooperates I would expect GMCR to test support near $55.00 and its simple 10-dma and then bounce. Readers could use a dip near $55.00 as a new bullish entry point. I am raising our stop loss to $53.45.

Earlier Comments:
If this rally continues GMCR could see a short squeeze. The most recent data listed short interest at 37% of the 129 million-share float.

- Suggested Positions -

Long Apr 57.50 call (GMCR1320D57.5) entry $1.64

03/23/13 new stop loss @ 53.45

chart:

Entry on March 19 at $55.55
Average Daily Volume = 3.4 million
Listed on March 18, 2012


Genesee & Wyoming - GWR - close: 92.84 change: +1.37

Stop Loss: 89.90
Target(s): 98.50
Current Option Gain/Loss: -28.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/23/13: Railroad stocks hit some profit taking this past week and GWR ended a three-week rally with a minor loss for the week. Shares did bounce on Friday with a +1.49% gain. Currently we have our stop loss at $89.90 because the $90.00 level should be support. Yet a drop from $93 to $90 would definitely hurt our April calls. More conservative traders may want to use a stop loss closer to the $91.00 level, which acted as support this past week.

Earlier Comments:
I would keep your position size small to limit our risk.

*Small Positions* - Suggested Positions -

Long Apr $95 call (GWR1320D95) Entry $1.40

03/19/13 new stop loss @ 89.90

chart:

Entry on March 11 at $92.35
Average Daily Volume = 407 thousand
Listed on March 09, 2012


Kansas City Southern - KSU - close: 107.56 change: +0.97

Stop Loss: 104.75
Target(s): 114.00
Current Option Gain/Loss: -20.0%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
03/23/13: The rally in KSU finally stalled. Shares posted a loss for the week, snapping a nine-week winning streak. KSU is also flirting with a breakdown below its simple 10-dma. We have our stop loss at $104.75 with the expectation that the $105.00 level and the simple 20-dma will be support. Yet this past week saw KSU find short-term support near $106.00. More conservative traders may want to raise their stop closer to the $106.00 mark. I am not suggesting new positions at this time.

Earlier Comments:
We want to keep our position size small to limit our risk since the transportation sector and KSU are arguably overbought at current levels.

- Suggested Positions -

Long Apr $110 call (KSU1320D110) entry $2.50

03/23/13 Our stop is at $104.75 but readers may want to use a stop around $105.75 instead.

chart:

Entry on March 14 at $107.50
Average Daily Volume = 984 thousand
Listed on March 13, 2012


McCormick & Co. - MKC - close: 72.19 change: +0.93

Stop Loss: 70.85
Target(s): 74.85
Current Option Gain/Loss: + 5.5%
Time Frame: Prepare to exit PRIOR to earnings on April 2nd
New Positions: see below

Comments:
03/23/13: MKC continues to outperform. The stock shot higher on Friday morning and ended the day and week at new all-time highs. The simple 10-dma has risen to $70.94. I am raising our stop loss to $70.85.

Earlier Comments:
I would keep our position size small to limit our risk. Don't forget that we plan to exit prior to the earnings report on April 2nd.

*Small Positions* - Suggested Positions -

Long Jun $70 call (MKC1322F70) current ask $2.70

03/23/13 new stop loss @ 70.85
03/20/13 triggered on gap open higher at $71.40

chart:

Entry on March 20 at $71.40
Average Daily Volume = 750 thousand
Listed on March 19, 2012


Toyota Motors - TM - close: 103.53 change: -0.75

Stop Loss: 102.35
Target(s): 108.00
Current Option Gain/Loss: -40.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/23/13: TM is still consolidating sideways. The stock is holding above technical support at the rising 30-dma but it seems to have fallen out of its rising bullish channel (see chart). It is worth noting that TM is holding up pretty well considering a two-week bounce in the yen. Granted the yen was very oversold and due for a bounce.

Overall TM's trend is still higher but we are cautious here. I am not suggesting new positions at this time.

Earlier Comments:
I do want to warn you that shares of TM tend to gap open (up or down) each day as the U.S. shares adjust for trading that occurs back home in Japan.

- Suggested Positions -

Long Apr $105 call (TM1320d105) entry $2.25

03/18/13 new stop loss @ 102.35, more conservative traders may want to exit early now
03/16/13 new stop loss @ 101.75

chart:

Entry on March 05 at $103.25
Average Daily Volume = 686 thousand
Listed on March 02, 2012


PUT Play Updates

F5 Networks - FFIV - close: 87.01 change: -2.02

Stop Loss: 90.55
Target(s): 85.25
Current Option Gain/Loss: +42.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/23/13: Our new play on FFIV is off to a good start. Shares opened at $89.11 and plunged to a new four-month low with a -2.2% decline. Our target is $85.25 but more aggressive traders may want to aim for the $82.00-81.50 zone instead. We are adjusting the stop loss down to $90.55.

- Suggested Positions -

Long Apr $85 PUT (FFIV1320P85) entry $1.40

03/23/13 new stop loss @ 90.55

chart:

Entry on March 22 at $89.11
Average Daily Volume = 1.5 million
Listed on March 21, 2012


Joy Global, Inc. - JOY - close: 58.41 change: +0.12

Stop Loss: 60.25
Target(s): 52.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
03/23/13: JOY still looks vulnerable. The stock is hovering between its 200-dma and support near $58.00. We are waiting on a breakdown to new relative lows. I am suggesting a trigger to buy puts at $57.50. Our target is $52.50 but you could aim for the $50 level.

Trigger @ 57.50

- Suggested Positions -

buy the Apr 60 PUT (JOY1320P60) current ask $2.92

chart:

Entry on March -- at $---.--
Average Daily Volume = 2.7 million
Listed on March 20, 2012


Vitamin Shoppe, Inc. - VSI - close: 50.30 change: +0.53

Stop Loss: 51.55
Target(s): 45.50
Current Option Gain/Loss: -25.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/23/13: VSI seems to be a reluctant put candidate for us. Thursday's breakdown looked bearish and shares hit our entry trigger. There was a spike lower on Friday morning but VSI quickly reversed. The close back above support at the $50.00 mark doesn't really inspire any confidence if you're a bear. Yet VSI remains below short-term technical resistance at its 10-dma for now. Currently our stop loss is $51.55. You might want to consider adjusting your stop closer to the $51.00 level instead. I am not suggesting new bearish positions with VSI above the $50.00 mark.

- Suggested Positions -

Long Apr $50 PUT (VSI1320P50) entry $2.00

chart:

Entry on March 21 at $49.75
Average Daily Volume = 736 thousand
Listed on March 11, 2012


CLOSED BEARISH PLAYS

SINA Corp. - SINA - close: 50.04 change: +0.93

Stop Loss: 50.25
Target(s): 42.50
Current Option Gain/Loss: -57.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/23/13: Our SINA trade has been stopped out. There was news out late Thursday night that SINA plans to launch a new online payment service. Traders reacted by buying the stock (covering shorts?) and SINA spiked above resistance at the $50.00 level. Our stop loss was hit at $50.25.

- Suggested Positions -

APR $47.50 PUT (SINA1320P47.5) entry $2.11 exit $0.90 (-57.3%)

03/22/13 stopped out at $50.25

chart:

Entry on March 13 at $47.75
Average Daily Volume = 2.7 million
Listed on March 12, 2012