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Newsletter

Daily Newsletter, Saturday, 3/30/2013

Table of Contents

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

Market Wrap

Record Highs, Record Quarter

by Jim Brown

Click here to email Jim Brown

The lagging S&P-500 finally closed at a new high at 1569.19 making it the last major index to exceed the 2007 highs.

Market Statistics

The S&P had been stuck below the prior high of 1565.15 for two weeks with seven attempts to reach the high with no success. Hitting the goal on the last day of a record quarter may be too much good news for the market. Next week is going to be a pivotal week for traders. The records have been broken and the quarter is over. The end of quarter window dressing was instrumental is pushing the indexes higher and with the quarter over there may be window washing in April.

The Dow gained +11.25% in Q1 and that was the best first quarter since 1998. Had it closed +3 points higher it would have been the best gain since 1987. The Dow is now up for four consecutive months.

The S&P closed at 1569.19, which now becomes the new record closing high and the point from which Q2 will be measured. The prior intraday high was 1576.09 and we are still a few points away from that level. The S&P is now up for five consecutive months.

Even the Nasdaq managed to creep up to a new high at 3267.52. That is a 12-year high on the Nasdaq. It was last at this level in November 2000. The Nasdaq is now up five consecutive months.

The Dow Transports had a very strong quarter with a +17.9% gain but they closed at 6255.33 and just shy of their record high on Thursday. That high was 6,281 set on March 14th. That is close enough to be a winner as well.

The Russell 2000 Small Cap Index gained +12.03% for the quarter to close at 951.54 and just two points shy of its record close of 953.07 on March 14th. This was a very good quarter for small caps although the momentum did fade over the last two weeks.

Clearly the million dollar question is what to expect for Q2? If I knew beyond a shadow of a doubt I could charge readers $1,000 for this edition of the newsletter and everyone would be glad to pay it. Since nobody has a crystal ball we have to examine the various factors to determine a bias.

The first and most important factor is the Fed stimulus. There is a heated debate in the financial press over when the Fed is going to lighten up on QE purchases. This is driving me crazy since the Fed continues to say in its official statements and in the Bernanke speeches they will continue at the current rate until unemployment is 6.5% or inflation over 2.5%. Neither of those conditions is likely to be satisfied until 2014.

The various Fed speakers are not doing themselves any favors. Hardly a week goes by that someone does not mention the official targets but then suggests the $85 billion monthly rate may need to be adjusted up or down depending on how the economic situation evolves. They are shooting themselves in the foot by constantly injecting doubt into the market.

On Wednesday Boston Fed President Eric Rosengren said exactly that. "We should continue our large scale asset purchases through 2013 although the amount may need to be adjusted up or down depending on economics." It is strange that the financial reporters only seem to hear half of that statement. He said "up or down" but the reporters only seem to hear the down part and that is what gets repeated in the days that follow. Rosengren is currently a voting member of the FOMC.

Chicago Fed President Charles Evans told reporters, "This is a point when we have to be patient and let our policies work" with stimulus "firing on all cylinders." There was no mention of adjusting purchases downward. "I am going to have a lot more confidence if I begin to see indications that growth is well above trend and it is going to be sustainable. (emphasis mine) "We have gone through this type of thing before where we saw improvement in the labor numbers only to watch job growth slow to unhelpful levels."

Minneapolis Fed President Narayana Kocherlakota said "Monetary policy is currently nor accommodative enough." Kocherlakota said the Fed should lower the unemployment threshold to 5.5% instead of 6.5%. Kocherlakota is not currently a voting member.

Bernanke also added to the confusion last week when he said the Fed could alter buying patterns in response to improvement in the job market but he said further gains would be needed to confirm this was not a temporary improvement.

The majority of the Fed heads don't expect unemployment under 7% until 2014 as reported in their last update. Several outliers have skewed the average expectations to a range of 6.7% to 7.0% by the end of 2014. The estimates for the end of 2013 are 7.3% to 7.5%. Of course they are still expecting the 2013 GDP to be +3.0% and that is a moon shot from here. The Q4 GDP was just revised to a gain of +0.34% or one tenth of the Fed's estimate.

Only one of the Fed's 19 members expects interest rates to rise from 0.25% in 2013. Five of the 19 expect interest rate increases in 2014.

The comments from Rosengren, Evans and Kocherlakota on Wednesday helped to push out market expectations for no change in the QE plan until the end of 2013. Something will come along next week and mess with estimates again but that is what the market is seeing today.

With the Fed likely to continue the current QE program through the end of 2013 the equity market will continue to be supported. However, the market is a forward discounting mechanism. When the market begins to see evidence of a position change in future months the upward bias could evaporate.

The challenge for the markets is the unwinding of the Fed's balance sheet. The change in the amount of the monthly QE purchases will probably not be material to the market since there is already a lower beta from the fourth QE program since the recession. Each of the recent QE programs have had a smaller impact than the prior ones. The actual real impact to the market would be the big impact to sentiment. That sentiment is a major part of the Fed's hold on the market. The reason sentiment will change dramatically is the Fed's history in unwinding stimulus. They have NEVER been successful in unwinding stimulus without a major impact to the markets and the economy. That statistic is critical since the Fed has NEVER had this much stimulus in the market. By the end of 2013 the Fed's balance sheet will be $4 trillion.

When Bernanke was asked how the Fed would unwind this QE he said the Fed could just let it run off to maturity and not impact the market by selling the securities. That is total BS and spoken to try and manage expectations. The money is in the market. If the economy begins to accelerate the Fed will have to extract the money in order to avoid inflation. With a balance sheet full of long dated securities today they can't wait 10-15 years for those securities to mature. When inflation begins they will need to move quickly and it will be ugly.

So, it is not the end of QE the market fears but the turning point in the QE process. The Fed could end QE and do nothing on rates for months to come if the economy continues to be sluggish. Once a sustainable recovery begins the Fed will become the number one priority for market watchers.

For the purpose of our short term outlook today the Fed's position is supportive of a continued rally in equities and rebound in housing. That is not likely to change over the next three months.

On a side note the Fed may continue QE longer than expected because of the impact on the Federal deficit. Once interest rates begin to rise the deficit is going to rocket higher. With Fed funds rates at 0.25% today the government is able to finance 46 cents of every dollar it spends by selling treasuries at ridiculously low interest. For every 1% increase in the interest rate the annual interest payments on the Federal debt rises by $170 billion a year. At a normal interest rate of 5% that is an increase of $765 billion a year in interest. The government only takes in $2.7 trillion in taxes and currently spends $3.6 trillion for a deficit this year of $900 billion. If you increase the annual interest payments by $765 billion that is a direct increase to the deficit of $765 billion in addition to the -$900 billion in current deficit spending. The result would see the deficit almost double. The debt would almost immediately become unsustainable and be followed by insolvency by the end of the decade.

We are living on borrowed time that has been funded by the Fed's purchase of $3.4 trillion in securities. When QE ends and they are no longer purchasing the majority of the government's new debt the rate of interest the market will demand is going to rise dramatically. The rapidly rising interest rates are going to crush the economy. Bernanke knows this and I am sure this will be a factor in how long the QE remains. The Fed is between a rock and the proverbial hard place. There is no way out of this trap but the equity markets remain blissfully ignorant. Fortunately that is not a problem we are going to face in the next quarter.

The next market hurdle will be earnings. The S&P 500 is expected to grow earnings by +0.58% for Q1. That is a very low bar and should easily be beaten but will the bulls keep buying stocks if earnings turn negative? That is a big question mark and it will probably be a cloud over the market until we get the first dozen or so reports for Q1.

For Q1 we have seen 86 S&P-500 companies issue negative guidance and 24 issue positive guidance. That means 78% of companies issuing guidance have issued negative guidance. That is the highest percentage of negative guidance since FactSet began tracking guidance data in 2006.

Red Bars = Negative Guidance, Green Bars = Positive Guidance

Meanwhile analysts are still expecting double digit earnings growth for Q3 and Q4 but the fundamentals behind those estimates are very fragile. If we see a negative Q1 the estimates for the rest of the year are going to decline as well. That will impact S&P forecasts and the house of cards could come tumbling down.

However, there is nothing in the pipeline other than the deepening recession in Europe and the rising dollar to impact those earnings estimates. Corporations are in bunker mode and still making their earnings using cost reductions. Revenue has been flat to slightly down. The QE economy is not growing at a rapid pace. Only the equity markets are growing.

Economics

The final Q4 GDP update on Thursday was revised higher from 0.13% growth to 0.38%. Hold your applause please. I know you can hardly contain your excitement. That is the slowest growth since 2011-Q1. Analysts claim the Q4 GDP benefitted from tens of billions in accelerated dividends that were pulled into Q4 from Q1 and a flurry of special dividends ahead of the potential tax hikes in the fiscal cliff. That huge increase in dividends prompted a jump in consumer spending and personal income. The savings rate rose to 4.7%. Inventory accumulation collapsed ahead of the cliff and knocked -1.5 points off the headline number. Exports fell due to the rising dollar and reduced GDP by another half point. The uncertainty over the Fiscal Cliff caused a halt in business spending.

The first look at the Q1 GDP is not until April 26th and the consensus estimate is for +2.8% growth. However, with the sequestration debate in Jan/Feb picking up where the Fiscal Cliff debate ended we could see continued economic paralysis. Once the sequestration took effect on March 1st government spending dropped sharply. Some government spending had declined earlier in the year since the government spends now and pays later. The spending was cut early in anticipation of having no funds after March 1st. This is going to be a tough quarter with the consumer spending having been pulled into Q4 by the accelerated dividend payments.

Other GDP estimates include Merrill Lynch +3.0%, Goldman Sachs +3.4%, Macro Advisers +3.5% and Nomura Securities +2.5%.

The Kansas Fed Manufacturing Survey rose slightly but remained in contraction territory for the sixth consecutive month at -5. This was an improvement over February's -10 reading but still the second lowest reading in six months. New orders rose from a horrible -25 to zero for March. Backorders rose slightly from -18 to -16. The worst component was a sharp drop in employment from +2 to -15 and back to the financial panic levels of 2008. The manufacturing trends in the Kansas region have been worsening for the last year.

Kansas Fed Chart

After a two-month bounce the Chicago ISM fell -4.4 points from 56.8 to 52.4 compared to analyst expectations for a rise to 57.1. New orders plunged from 60.2 to 53.0. Backorders fell from 50.9 into contraction territory at 45.0. Employment slipped slightly from 55.7 to 55.1. The production sub index fell to 51.8 and posted its weakest number since September 2009.

Chicago ISM Chart

Jobless Claims rose to 357,000 from 341,000 the prior week. This is the highest level in five weeks and the second weekly gain. It is the first time over 350,000 since mid February.

Consumer Sentiment on Friday was a shocker. The final reading for March spiked from 71.8 in the first half of the month to 78.6. Analysts were expecting a continued decline. Analysts believe the stock market hitting new highs over the last two weeks of March plus declining gasoline prices and the arrival of spring weather in the South were contributing factors. Let's see if it holds up for April.

Consumer Sentiment Chart

Next week is a big week for economics. We have three ISM reports and three payroll reports. The ISM reports for March are expected to decline slightly to correspond with the declines in the regional Fed reports. As long as the declines are minor they should not impact the market.

The Nonfarm Payrolls on Friday could be a market moving event. Expectations are for a decline to 190,000 after a +236,000 gain last month. There are estimates as low as +135,000 and that would be market negative. Another gain over 200,000 could also be negative if it is accompanied by another decline in the unemployment rate. That would create more worries over a quick end to QE. Most analysts believe we will remain in the 150,000-175,000 range for the next quarter as a result of the sequestration process. This would probably result in the unemployment rate rising slightly over the summer.

On Thursday we will get the rate decisions from the ECB and Bank of England. We will also find out if the Bank of Japan is going to launch an aggressive QE program to back up their tough talk over the last two months.

Economic Calendar

The economic update would not be complete without reporting that the number of people receiving food stamps rose to the most ever at 47.8 million according to the Agricultural Department. That is 15% of the population and 70% more than in 2008 during the recession. The program cost the taxpayers $74.6 billion in 2012. That was double the cost of the program in 2008. How strong is the economy when nearly 48 million people are on food stamps and the number is surging every month?

Also weighing on our markets in Q2 will be the deepening recession in Europe. The Cyprus bank robbery will weigh on all the southern countries with weak banks. The IMF said the GDP of Cyprus would decline by 20% as a result. The bank worries will migrate to Spain, Italy, Ireland, Portugal and Greece and cause a drain of deposits on those banks. The hoarding of cash will depress consumer spending and deepen the recession. The EU debt crisis is coming back. We can count on it.

The estimates for Eurozone GDP continue to fall and this has not yet taken into account the hit to the zone economy from the Cyprus bank robbery. Europe is China's biggest customer for manufactured goods. This suggests China is going to slip back into a decline towards 7% GDP. Markit said "France has overtaken Italy as having the worst performing retail sector of the three largest euro area economies. Sales fell at a record pace as did employment. Italy posted another steep decline and German sales were flat."

Euro GDP Predictions

Cyprus banks reopened on Thursday with a 300 euro withdrawal limit. Check cashing was restricted. Nobody was allowed to close an interesting bearing time deposit like a CD. There is a limit of 5,000 euros per month on transfers out of Cyprus. People traveling out of Cyprus can't take more than 1,000 euros in cash. Credit card charges were limited to 5,000 euros a month. The finance minister said the restrictions could be lifted in a month. That is far longer than the initial claims of 4-7 days when the restrictions were announced. In a similar situation in Argentina the restrictions lasted more than a year. Citizens in other EU countries are watching this carefully and planning their future banking strategy. Mario Draghi and the ECB are meeting next week and you can bet there will be a long list of weak banks on the agenda. Since the EU forced a 70% haircut on Greek debt there are hundreds of undercapitalized banks in the EU.

Smart money is going to flee the eurozone. Spain has already proposed a 0.2% tax on deposits to aid its stricken banking system. That is the camel's nose under the tent. If they get the small tax passed they will come back to the well for bigger numbers in the not too distant future. Italian depositors are now targets of a proposed 15% tax plus a one-time property tax. All of these well intentioned efforts to prop up the banking systems are only going to hasten their decline as money leaves the eurozone and heads to places like the USA. This will serve to further weaken the eurozone banks and require higher deposit taxes and more bailouts.

Treasuries have suddenly come back into favor in the USA. We are the cleanest shirt in the dirty close hamper and a safe haven for European cash. The yield on the ten-year treasury fell to 1.85% and right at a six-week low. The big increase in bond buying at the same time equities are breaking out to new highs suggests there are some underlying worries in the market along with that influx of cash from Europe.

Ten Year Treasury Yield Chart

Market Outlook

We had a great year in Q1. Fortunately, if historical trends continue we should finish even higher in Q4. Unfortunately, there are a lot of trading days between now and year end. Of the 12 years since 1950 that the Dow gained more than 8% in Q1 only two of them closed lower in Q4.

Dow Gain Table for Q1 Over 8%

New highs tend to produce more new highs. Sentiment at market highs tends to be infectious. We have watched investors buy the dips since November and every dip is bought earlier than the one before it. The dips are shallower and shorter. This has allowed the rally to continue while there has been rotation from sector to sector.

April is typically the best month of the year for the Dow. However, the first two weeks are normally down and the last two weeks are up. The decline in the first two weeks is related to a pause to reload from Q1 gains and some profit taking ahead of Q1 earnings. Investors with sizeable profits don't want to risk those profits on an earnings miss. The last two weeks of April are typically up because earnings are flowing fast and traders get caught up in the earnings cycle when it is positive.

That trend fades into May when the "sell in May and go away" cycle takes over. The Stock Trader's Almanac made this cycle famous after they pointed out that owning stocks over the May-October period generated negative returns since 1950 while buying in October and selling in May produced outsized profits far in excess of simply buying and holding stocks year round. The summer doldrums tend to suck the life out of stocks as weak Q2 earnings depress prices. The Almanac claims the Dow has risen an average of +7.5% during the best six month period and only +0.3% in the worst six months since 1950.

Proving that historical trends are fallible the first quarter after a presidential election is typically the worst quarter of the four year election cycle. I am sure glad I was not betting on that trend this year.

Stock Traders Almanac Historical Performance by Month

Thomas Bulkowski (Encyclopedia of Chart Patterns) studied the seasonality patterns over his 30+ years of trading and determined that March was the best month to sell stocks and May was the worst month of the year to buy stocks. September was the best month to buy and August the worst month to sell. April was neutral with gains and losses almost even over the 30+ years. The gains made in January-May were three times the amount of those made during June-December.

A study done in 2008 by Stephen Ciccone and Ahmad Etebari found that since 1929 a dollar invested in May through October grew to only $6.42 while the same dollar invested November through April grew to $3,892.

As I have said many times in the past "history is a guide not gospel." In theory we should be expecting the current rally to slow over the next two weeks, rebound in the last two weeks of April and then decline into summer. As Yogi Berra once said, "Theory never works in practice."

The market will make fools out of the most people possible at any given time. If the majority of analysts are calling for a correction it will never come. If those same analysts were calling for a continued rally we would see a correction instead.

The last time the market was as overbought as we are today was in October 2007, which just happens to be the prior market highs. The percentage of S&P-500 stocks over their 200 day average is 89.8% as of Friday's close. However, that is a long term average and after a four year rally most stocks should be over the 200-day. That is up from less than 50% in November.

SPX Percentage of Stocks over 200-Day Average

If we step down to a shorter average like the 50-day the percentage is still high at 79.8% but lower than the 94% in January. As recently as November when this last rally began the number was 23%.

SPX Percentage of Stocks over 50-Day Average

The point here is that the market is overbought. The goal was achieved at the close on Friday. If the market was a marathon runner it would be the equivalent of stumbling across the finish line gasping for breath. The S&P tried to reach the highs seven times over the last three weeks and came within five points without closing the deal. Using its last ounce of strength it managed to cross the finish line on Friday.

We should see the market catch its breath next week with some minor consolidation and then mount another charge towards new highs. I believe we buy the dip and stay with the trend as long as it continues. We need to be ready to bail if the earnings turn negative or when we reach May.

It is unimaginable that the market will just continue moving higher. However, stranger things have happened. New highs beget new highs. European money will be headed our direction to escape the next version of the EU stability tax. IF the S&P was able to tack on another percent or two the bears would be forced to throw in the towel and chase the market higher. That is a BIG IF.

The S&P broke out to a new historic high by +4 points. The odds of at least a minor pullback early next week are about 100% but the dip should be bought. In order for the rally to continue into the earnings cycle we need the S&P to extend its breakout and show some strength over that 1565 level. Once traders give up on the idea of a failure at this level the naysayers should diminish and the rally continue.

S&P chart - Daily

S&P Chart - Weekly

The Dow extended its closing high record by +19 points to close at 14,578.54. Adding +19 points every other day is like watching grass grow and the bears have got to be having a fit. This kind of slow melt up with intraday declines looks a lot like a failure during the decline and the shorts pile on only to be forced to cover at the close. The market just keeps getting base hits and no home runs. Fortunately they all count.

For an index of 14,500 points a +19 point gain is not relative except that it was another record close. Since the 14,382 intraday low on the 19th we have a nice pattern of higher lows on every dip.

The window dressing was successful and all the funds get to play up the record closes in their quarterly statements. However, this is window washing week and all those stocks that were marked up last week could see money flowing back out to replenish the discretionary coffers. Managers were pretty close to fully invested last week and they need cash to handle normal redemptions so expect some minor selling.

Dow Chart

Dow Chart - Daily

It was a miracle the Nasdaq closed at a new 12 year high. Apple has been in crash mode the last two days losing -$21 in the process. Interviews with Foxcon workers in China found they had nothing to do. There are no orders and very few products are being manufactured. Apple shares will likely return to $420 unless there are some positive revelations in the days ahead. Apple is not innovating fast enough or with enough products to keep up with the tsunami of new products from Samsung, LG and Motorola.

Apple Chart

The Nasdaq managed to creep over the prior high of 3258 set back on the 14th of March to close at 3267.52. Like the Dow it has been putting in higher lows since the 19th and finally overcame the Apple drag on Friday to post an +11 point gain. Like the Dow and S&P the minor new high is probably going to be tested early in the week as funds take some profits. Strong support at 3200 is likely to hold.

Nasdaq Chart

The Russell 2000 Small Cap Index could be the canary in the coal mine. The Russell did not make a new high and was barely positive on Friday. Window dressers were able to keep it pinned at the high end of the range for the last two weeks but could not push it higher. Support at 938 is now critical. If that level breaks we could easily see a drop to 895 but it would take a serious change in market sentiment. I am sure we would have several dips bought along the way.

Watch the Russell as the market sentiment indicator this week.

Russell Chart

I think it is pretty safe to expect at least a modest dip next week. How much of a dip depends on the news from Europe and the economic reports. The marathon market just crossed the finish line and the legs are going to be a little wobbly.

Once past this week we should have a better idea about what to expect for the rest of April but May remains a solid risk for the Q1 gains. That will be especially true if we continue to get earnings warnings at the rate of 3:1 over positive guidance.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt."
John Adams


Index Wrap

Breakout Up S&P as the Pattern suggested

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The anticipated upside chart breakout occurred in the shortened week. Bullish sentiment is still moderate and I remain bullish. I'm also just moved into a new office setting and have a more abbreviated commentary than usual.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart is bullish, bullish, bullish; this to emphasize how much the pattern looks like the archetypical strong bullish run up. SPX's dip to 1540 support, followed by a rebound to multiyear highs suggest more upside; currently I'd say 1600 is target and next meaningful resistance.

Key near support is bumped up to 1550 this week; next lower technical support is at 1530.

Bullish sentiment continues to hover under a 'moderate' 1.6 on a 5-day moving average basis. Trader sentiment readings at extremes above 2 makes for a very high-risk market. We're not in that area. In a way the 'best' rallies are the ones that traders don't get all that enthused about, a market that's only gradually working higher, climbing the proverbial 'wall of worry'.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index has a recent strong upward curving trend, keeping OEX comfortably above its 21-day moving average. On a trend momentum basis we can assume a continued strong advance. The chart pattern suggests an archetypical bull move with a minimum projection to the upper end of its bull channel; e.g., to 717-720 currently.

I don't 'measure' any other short to intermediate-term resistance other than the top of the channel. More will be revealed after the 3-day trading break.

Near support is noted at 697, basically following the line of the 21-day moving average. Next support is 690.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) Average has also broken out above its line of prior resistance by the strong Thursday close. If INDU continues to trade at or (mostly) above 14540 at what was resistance, this pattern suggests further rebound potential such as to/toward 14800.

More than half of the 30 Dow stocks continue to maintain very strong uptrends on a daily and weekly chart basis. The strong move that is being made in a strong seasonal time (spring rallies) suggests upside potential to the 15000 area over time; 15000 'easily' being an upside objective on longer-term charts. On the daily chart seen below, a 'maximum' next bull move to the upper channel line seen here suggests potential for the Dow to get to the 14800-14880 price zone.

My bullish fever is dampened if the Dow starts slipping below 14400; next key technical support comes in around 14260 or the low end of INDU's current uptrend channel.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) has also had the bullish action of at least so far a 1-day breakout move above a well-defined line or prior resistance at 3260. If this most recent rally packs a punch, there could be a next move to the 3300 area and above, such as to 3350 and resistance implied by the top end of COMP's uptrend channel.

On the subject of COMP's uptrend channel, a couple of closes below 3200 suggests a bearish dip below technical support and points to slowing upside momentum. I've highlighted immediate support simply at the 21-day average, currently 3230.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) has a bullish chart. The sideways move, with a pattern of rising intraday lows is most often a bullish consolidation before a further up leg. NDX has seen an initial breakout but we'll see what comes after the 3-day trading break but my expectation is for continued strength on balance.

If the most recent rally has 'legs', it's possible for NDX to now move up toward the top end of its bull channel. I've noted potential 'resistance' at 2863 and especially in the 2900 area at the top end of NDX's uptrend channel.

Near support is seen at 2775-2770. Fairly major support should develop on any decline to the 2700 area.

Bullish sentiment is moderately bullish, with 'moderately' the key word. I get alert to the potential for a sharp downside reversal after high extremes of bullish trader sentiment (the CPRATIO line below); e.g., where a "2" reading where total daily CBOE equity call volume double that of total put volume. However, we're far from that so far. The public will get much more bullish than is currently the case before this current bull market has a big reversal.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 (QQQ) tracking stock mirrors the NDX in its minor initial breakout above key near resistance at 68.9. If the Q's continue to move up from the 68.8-68.9 area, a move to the 70 and above is possible. I've highlighted anticipated resistance at 70.3, then up at 71.4 at the top end of the bullish channel. A move this much higher assumes a very strong up leg ahead. I see this as quite possible but timing of how a spring rally unfolds is tricky.

In that I consider up trendlines as very key areas of technical support, a fall for more than a day below 68-67.8 would be bearish.

On Balance Volume or the OBV line is now trending up which is a secondary bullish pattern for volume; with price action being 'first'.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) Index is bullish in its pattern as sideways moves in a major uptrend tend to be bullish consolidations, suggesting a next upside leg to come. A close below 940 not reversed the next day, suggests a deeper pullback to 920-900. Key near resistance remains 953; a decisive upside penetration of this line suggests a next up leg in RUT that could carry to 980-990. The longer a sideways move the more force to the upside generally once chart resistance is pierced.

Near support remains in the 940 area, with lower trendline support around 920. 900 continues as long-term support.



GOOD TRADING SUCCESS!


New Option Plays

Tools & Fertilizer

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Snap-on Inc. - SNA - close: 82.70 change: +1.01

Stop Loss: 80.90
Target(s): 88.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of this tool maker have been trending higher with traders buying the dips over the last few weeks. The stock managed to end the quarter at a new all-time closing high. This is also a bullish breakout past resistance in the $82.50 area.

I'd like to see a little bit more follow through. Thursday's intraday high was $82.84. I am suggesting a trigger to buy calls at $83.00. If triggered our target is $88.50.

Trigger @ 83.00

- Suggested Positions -

buy the May $85 call (SNA1318E85) current ask $1.30

Annotated Chart:

Entry on March -- at $---.--
Average Daily Volume = 288 thousand
Listed on March 30, 2013


NEW DIRECTIONAL PUT PLAYS

CF Industries - CF - close: 190.37 change: -1.39

Stop Loss: 194.05
Target(s): 176.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
CF is in the agricultural chemicals and fertilizer industry. The stock peaked in late January and early February of this year. The correction accelerated lower following CF's earnings report on February 20th where the company beat the bottom line estimate but missed the top line revenue estimate. The oversold bounce has failed and now CF sits on support near $190. You'll also notice on the weekly chart below that CF is poised to breakdown below a long-term trend line of support.

I do consider this an aggressive, higher-risk trade because CF can be a volatile stock. Tonight we're suggesting a trigger to buy puts at $188.75. If triggered our target is $176.00. More conservative traders may want to take profits early in the $181-180 zone instead. FYI: The Point & Figure chart for CF is bearish with a $144 target.

Trigger @ 188.75 *Small Positions*

- Suggested Positions -

buy the May $180 PUT (CF1318Q180) current ask $3.60

Annotated Chart:

Weekly Chart:

Entry on March -- at $---.--
Average Daily Volume = 1.1 million
Listed on March 30, 2013



In Play Updates and Reviews

A Great Exit for MKC

by James Brown

Click here to email James Brown

Editor's Note:

Our plan was to exit our MKC trade at the closing bell on Thursday. The stock cooperated with a new all-time high.

Elsewhere our TM trade was stopped out.


Current Portfolio:


CALL Play Updates

Axiall Corp. - AXLL - close: 62.16 change: +1.63

Stop Loss: 59.90
Target(s): 69.00
Current Option Gain/Loss: Apr62.5c: -43.7% & May65c: -30.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/30/13: AXLL rebounded from support near $60.00 on Thursday. Shares erased Wednesday's decline with a +2.6% gain. Readers can use this rebound from support as a new bullish entry point to buy calls.

- 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


Continental Resources – CLR – close: 86.93 change: -0.63

Stop Loss: 84.65
Target(s): 93.50
Current Option Gain/Loss: -36.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/30/13: CLR's performance on Thursday is worrisome. Oil is in rally mode but almost all of the energy stocks turned lower on Thursday and CLR was no exception. Thursday's move also looks like a failed rally at CLR's 10-dma. Odds are pretty good we'll see this stock retest its 05-dma or the $85 level soon. Wait for a bounce before considering new bullish positions.

- Suggested Positions -

Long Apr $90 call (CLR1320D90) entry $1.50

chart:

Entry on March 26 at $---.--
Average Daily Volume = 1.2 million
Listed on March 25, 2012


Crane Co. - CR - close: 55.86 change: +0.46

Stop Loss: 54.40
Target(s): 58.50
Current Option Gain/Loss: - 4.0%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
03/30/13: CR suffered a minor correction last week. Fortunately traders started buying the dip on Wednesday morning. The rebound continued on Thursday with a +0.8% gain. Traders could use Thursday's bounce as a new bullish entry point. More conservative traders may want to wait for a rally past $56.00 or its 10-dma before initiating new positions.

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: 82.00 change: -1.29

Stop Loss: 79.90
Target(s): 89.00
Current Option Gain/Loss: -37.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/30/13: Wednesday's rebound in CVLT was erased on Thursday. The lack of follow through higher and CVLT's display of relative weakness on Thursday is a potential warning sign. I am inching our stop loss up to $79.90. I am not suggesting new positions.

- Suggested Positions -

Long Apr $85 call (CVLT1320D85) entry $2.25

03/30/13 new stop loss @ 79.90

chart:

Entry on March 27 at $83.25
Average Daily Volume = 627 thousand
Listed on March 20, 2012


Green Mtn Coffee Roasters - GMCR - close: 56.76 change: +0.88

Stop Loss: 54.45
Target(s): 59.75
Current Option Gain/Loss: +7.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/30/13: GMCR displayed relative strength on Thursday with a +1.5% gain. Yet the stock failed to breakout past its mid March high near $57.00. I am raising our stop loss to $54.45.

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

03/30/13 new stop loss @ 54.45
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: 93.11 change: +0.32

Stop Loss: 89.90
Target(s): 98.50
Current Option Gain/Loss: -39.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/30/13: GWR appears to be breaking out from what almost appears to be a bull-flag consolidation pattern. The March 25th high was $93.43. Thursday's high was $93.37. Readers may want to wait for a rally past $93.50 as a new bullish entry point. If you do launch new positions I would buy the May calls.

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

03/25/13 new stop loss @ 90.70
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


The Hain Celestial Group - HAIN - close: 61.08 change: -0.50

Stop Loss: 60.95
Target(s): 65.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
03/30/13: It might be time to drop HAIN as a bullish candidate. The stock has lost about 50 cents, two days in a row. Shares are retreating while the market's major indices hit new highs. The recent action might suggest HAIN is poised to retest the $60.00 level soon.

Currently our plan is to buy calls at $62.75. If triggered our target is $65.75. More aggressive traders could aim higher.

Earlier Comments:
If shares do break out higher it could spark a short squeeze. The most recent data listed short interest at 17% of the 37.8 million share float.

Trigger @ 62.75

- Suggested Positions -

Buy the May $65 call (HAIN1318E65)

chart:

Entry on March -- at $---.--
Average Daily Volume = 821 thousand
Listed on March 26, 2012


Ingredion Inc. - INGR - close: 72.32 change: +0.05

Stop Loss: 69.75
Target(s): 74.75
Current Option Gain/Loss: +58.8%
Time Frame: 3 to 4 weeks
New Positions: , see below

Comments:
03/30/13: INGR ended the quarter at new all-time highs. Shares do look a little short-term overbought here. I would not be surprised to see a bit of a pullback. Please note our new stop loss at $69.75.

FYI: The Point & Figure chart for INGR is bullish with an $83 target.

- Suggested Positions -

Long Apr $70 call (INGR1320D70) entry $1.70

03/30/13 new stop loss @ $69.75

chart:

Entry on March 25 at $70.65
Average Daily Volume = 585 thousand
Listed on March 23, 2012


Kansas City Southern - KSU - close: 110.90 change: +3.16

Stop Loss: 105.75
Target(s): 114.00
Current Option Gain/Loss: +32.0%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
03/30/13: The transportation sector was showing relative strength on Thursday and the railroads were leading the charge. KSU managed to outperform many of its peers with a +2.9% gain. Furthermore Thursday's rally is a bullish breakout from its recent trading range. Our target is $114.00. More aggressive traders could aim higher.

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

- Suggested Positions -

Long Apr $110 call (KSU1320D110) entry $2.50

03/25/13 new stop loss @ 105.75
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


Noble Energy - NBL - close: 115.66 change: +0.43

Stop Loss: 112.65
Target(s): 119.75
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/30/13: Most of the energy sector dipped lower on Thursday but NBL managed to outperform its peers with a +0.3% gain. Shares are trading just below their March 15th high near $116.65. A breakout past the mid-March peak should signal a run toward $120.

Our target is $119.75 but more aggressive traders could aim higher.

- Suggested Positions -

Long May $120 call (NBL1318E120) entry $1.55

03/26/13 triggered @ 115.35
03/25/13 adjust entry trigger to $115.35, adjust stop to $112.65

chart:

Entry on March 26 at $115.35
Average Daily Volume = 1.0 million
Listed on March 23, 2012


PUT Play Updates

F5 Networks - FFIV - close: 89.08 change: +0.36

Stop Loss: 90.55
Target(s): 85.25
Current Option Gain/Loss: -27.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/30/13: The stock market is hitting new highs so it's tough for bearish trades to work very long. FFIV is still underperforming the market but shares are up two days in a row. The stock saw its intraday rally attempt fail at round-number resistance near $90.00 on Thursday.

Nimble traders could look for a failed rally in the $89-90 zone as a new bearish entry point. Our target is $85.25 but more aggressive traders may want to aim for the $82.00-81.50 zone instead.

- 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: 59.52 change: -0.48

Stop Loss: 60.25
Target(s): 52.50
Current Option Gain/Loss: -37.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/30/13: Thankfully there was no follow through on Wednesday's rebound in JOY. The bounce has stalled at round-number resistance near $60.00. I would be somewhat cautious on launching new positions. A new drop below $59.00 might qualify as a new bearish entry point. Or you could wait for a drop under its simple 200-dma again.

- Suggested Positions -

Long Apr 60 PUT (JOY1320P60) entry $3.05

chart:

Entry on March 25 at $57.50
Average Daily Volume = 2.7 million
Listed on March 20, 2012


Rackspace Hosting - RAX - close: 50.48 change: +0.74

Stop Loss: 50.25
Target(s): 45.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
03/30/13: RAX delivered a +1.48% bounce on Thursday. Yet overall I don't see any changes from my Wednesday night comments. The trend remains bearish. RAX is facing increasing competition. The stock looks poised to breakdown below support.

The March 15th low was $49.18. I am suggesting a trigger to buy puts at $49.00. If triggered our short-term target is $45.50. The $45.00 level does look like it could be significant support.

NOTE: I would keep our position size small. While there is growing competition in the cloud computing field there are also expectations that the industry could see consolidation and smaller companies, like RAX, could be takeover targets.

Trigger @ 49.00 *Small Positions*

- Suggested Positions -

Buy the Apr $50 PUT (RAX1320P50) current ask $1.60

chart:

Entry on March -- at $---.--
Average Daily Volume = 2.4 million
Listed on March 27, 2012


Vitamin Shoppe, Inc. - VSI - close: 48.85 change: -0.00

Stop Loss: 51.55
Target(s): 45.50
Current Option Gain/Loss: + 5.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/30/13: The last day of the first quarter was a quiet one for shares of VSI. The stock closed unchanged on the session. Shares continue to underperform the broader market.

I am not suggesting new positions at this time. More conservative traders might want to adjust their stop loss closer to the simple 10-dma.

- 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 BULLISH PLAYS

McCormick & Co. - MKC - close: 73.55 change: +0.90

Stop Loss: 70.85
Target(s): 74.85
Current Option Gain/Loss: +44.4%
Time Frame: Prepare to exit PRIOR to earnings on April 2nd
New Positions: see below

Comments:
03/30/13: Shares of MKC were kind enough to cooperate with our plans for an early exit. We had planned to exit positions on Thursday at the closing bell to avoid holding over earnings early next week (April 2nd). MKC surged +1.2% on Thursday to close at new all-time highs. The June $70 call closed with a bid/ask of $3.90/4.30.

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

*Small Positions* - Suggested Positions -

Long Jun $70 call (MKC1322F70) entry: 2.70, exit $3.90 (+44.4%)

03/28/13 scheduled exit at the close
03/26/13 prepare to exit on Thursday, March 28th, at the closing bell
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: 102.64 change: -0.46

Stop Loss: 102.35
Target(s): 108.00
Current Option Gain/Loss: -65.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/30/13: Friday, March 29th, marked the beginning of the 113th annual New York Auto Show. Yet most of the automaker stocks turned lower on Thursday. Shares of TM dipped below recent support and tagged our stop loss at $102.35. For the week, TM's slow descent has created a bearish engulfing candlestick reversal pattern on its weekly chart (not shown).

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 -

Apr $105 call (TM1320d105) entry $2.25 exit $0.77 (-65.7%)

03/28/13 stopped out at $102.35
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