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Newsletter

Daily Newsletter, Saturday, 4/20/2013

Table of Contents

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

Market Wrap

Expiration Bounce

by Jim Brown

Click here to email Jim Brown

The Nasdaq and S&P managed to rally thanks to Google but the Dow remained in the red most of the day thanks to IBM.

Market Statistics

The market was dominated by the manhunt coverage all day Friday and stocks were regulated to the background in national news coverage. Friday was option expiration and volume at 6.3 billion shares was roughly 2:1 in favor of advancers. The expiration forced traders to close positions and after the big declines over the last week that position closure forced the indexes higher.

There was very little stock news and very little in the way of economic events. The Regional Employment report for March gave us a little more input on the disappointing Nonfarm Payrolls report. In the regional report only 23 states showed any increase in employment and that was the least since July. The District of Columbia and 26 states showed a decline in employment. Employment fell by -0.3% in East North Central, -0.2% in West North Central, -0.2% in East South Central. The Mid Atlantic, Mountain and Pacific regions saw employment rise +0.1%. New England and West South Central were flat. Alaska, Florida, New Jersey, Rhode Island, Utah, Vermont and Virginia each reported a month to month decline of -0.3%.

The regional reports only show events leading up to the sequestration. The April Nonfarm report will be the first indication of the sequester mandated hiring freezes. With the hiring rate falling to an eight-month low in March there is a good chance there will be job losses in the Nonfarm report for April.

The Philly Fed Manufacturing Survey headline number declined on Thursday from 2.0 to 1.2 but the key indicators were severely negative. The employment component fell from +2.7 to -6.8 in April and a five month low. This could begin a pattern of post sequester negativity. New orders were negative at -1.0 but backorders fell another two points to -6.8. The inventory component fell to -22.2 and the lowest level in three years. The expectations component declined from 32.5 to 19.5 and a five month low.

The Risk of Recession report for March rose from 25% to 27% and the first gain since November. This gain was due to a drop in housing permits and consumer confidence. Analysts claim they are not yet worried about a recession with the GDP for Q1 expected to be in the 3% range.

The calendar for next week is busy with two regional economic reports, one national report and two home sales reports. The Richmond and Kansas Fed reports are expected to decline. The Chicago Fed National report is expected to be flat. Home sales are expected to continue rising but recent housing numbers have been erratic. New home sales fell -4.6% in February, the biggest decline in two years. Single family home starts fell -5.0% and permits fell -3.9%.

The big report for the week is the first look at the Q1 GDP on Friday. The official expectations are for a rise to +3% but there are estimates in the 2% range. The reason for the spike from the +0.38% in Q4 is seasonal with a big gain from inventory accumulation. The full year GDP is expected to be in the +1.4% to +1.9% range. Should the Q1 number come in significantly below 3% it would be market negative.

Economic Calendar

Fitch Ratings cut the UK from AAA to AA+ and that means the country can no longer claim a triple A rating. Moody's cut them as well back in February. S&P still rates them AAA but when two out of three major agencies cut the rating the majority rules. Fitch said government debt will reach 101% of GDP in 2015. They expect the UK to grow at a lackluster 2.0-2.5% for "years into the future" meaning slow growth is here to stay. The UK would be happy to see 2.5% growth in 2013. The ratings cut by 2 of the 3 agencies means some investors will be forced to sell UK debt. Investors like pension funds are required to invest in AAA rated debt. This is going to force UK interest rates to rise and raise the amount of interest it pays each year, which will increase the amount of debt outstanding. It is a vicious circle and once started down that road it will be hard to get off.

Back on March 1st Fitch had this to say about the USA. "The debt ceiling limit which comes back into force on May 19, certainly if that wasn't addressed in a timely fashion, we don't think another debt ceiling crisis like we had in August 2011 would be consistent with the U.S. retaining its AAA rating," according to David Riley, managing director of sovereign ratings. Fitch believes the debt ceiling is an ineffective and damaging mechanism for enforcing fiscal discipline because of the threat of default. We are only four-weeks from that debt ceiling fight.

In stock news the biggest gainer for the day was Vertex Pharmaceuticals (VRTX) with a whopping +62% gain after a successful drug study. The cystic fibrosis drug VX-661 promoted greater lung function than for patients on placebo. The drug was initially approved in 2012 and could now advance into late stage clinical trials. Vertex has another CF drug called Kalydeco that was approved on Jan-31st.

Citigroup said the study results were "impressive" and kept a buy rating. They raised the price target to $110 from $63. After the +$33 gain today VRTX closed at $85.48.

VRTX Chart

Chipolte Mexican Grill (CMG) reported earnings of $2.45 compared to year ago earnings of $1.97 or roughly a 24% gain. Estimates were for $2.14. Revenue rose +13% to $726.8 million. CMG opened 48 new stores in Q1 to increase their total to 1,458. They expect to open 165-180 stores in 2013. Same store sales are expected to rise low single digits for the rest of 2013. The company plans to raise prices 3% to 5% but not until later this summer. Chipolte wants to wait and see how the economy plays out over the next few months. They bought back $51 million in stock in Q1 and added $100 million to the existing share repurchase program. CMG received upgrades from five major analysts and shares rallied +11% or $38 to $366.

CMG Chart

Capital One (COF) rallied +6% on earnings of $1.79 that easily beat consensus estimates of $1.63. This was +27% above the year ago quarter at $1.41. Revenue declined -1.3% to $5.55 billion. That missed estimates of $5.62 billion. Earnings were helped by a -7% decline in operating expenses.

Capital One Chart

General Electric (GE) reported earnings of 35 cents that was in line with estimates but revenue came in slightly lower than GE had predicted. The problems in Europe caused the most distress. Sales of power generation and water treatment equipment in Europe fell -26% and profits declined -39%. CEO Immelt said they "expected Europe to be down and similar to 2012 but it was even weaker than we expected." Profits in the energy division also declined but orders rose +24% in Q1.

The divisional losses overpowered the profits in aviation, healthcare, transportation and appliances. Aviation equipment sales rose +47% thanks to a new jet engine. Sales of NBC added 8 cents per share to earnings. GE sold 49% of NBC Universal to Comcast for $16.7 billion. Negative comments by Immelt and a warning that power, water and GE Capital would see no growth in 2013 pushed the stock lower. Those divisions make up 50% of GE's revenue.

GE's earnings are normally ignored by everyone but their guidance is critical. Their warnings over Europe and projections for no growth the rest of the year in multiple divisions left analysts with a bad feeling.

GE Chart

IBM reported earnings on Thursday night and missed estimates. Shares of IBM fell -$17 on Friday and knocked -131 points off the Dow. It is a miracle the Dow finished with a gain after that kind of drag. That was the biggest one-day dollar drop for IBM since October 18th 2000 and the biggest percentage decline since April 15th 2005. More than $19 billion was erased from its market cap.

It was the first time since 2005 that IBM missed estimates. They are known for successfully managing earnings through guidance and stock buybacks. Earnings were $3.00 per share and estimates were $3.05. Revenue was also light. They blamed it on Europe, financial services and discretionary spending. The CFO said the sales force had trouble closing deals.

IBM said it was going to spend $1 billion on job cuts in the second quarter and sell its low end server business. Lenovo is expected to be the buyer for something in the $3.5 billion range. IBM spent $803 million on layoffs in 2012. They currently have 467,000 workers. IBM maintained its full year estimate of $16.70 and its target of $20 in earnings in 2015.

IBM Chart

Dow component Microsoft (MSFT) rallied a buck after posting earnings on Thursday night. Revenues rose +8% to $18.8 billion. Operating income rose +5% to $6.7 billion. Windows sales were flat at $4.61 billion thanks to a lukewarm acceptance of Windows 8. The Windows Server division saw revenue grow +11%. SQL Server revenue led the division with 16% growth.

Microsoft's earnings were not outstanding but they were solid. The minor gain in the stock helped to offset some of the impact of IBM on the Dow.

Microsoft Chart

The stocks in the Dow were actually very positive on Friday. If it were not for IBM the Dow would have been up triple digits. American Express posted earnings earlier in the week and is still rebounding from the two week low prior to the release.

Boeing (BA) was up on news the FAA had approved the revamped Dreamliner battery charging system. The approval allows Boeing to quickly begin production of the new systems for installation in the 50 grounded planes and future new construction. The grounding of the new jet has cost Boeing about $600 million. Some airlines had to lease alternate aircraft and have said they will seek compensation from Boeing. The company says it takes five days to retrofit each plane once the battery systems are available. Boeing has ten teams in place around the world to begin installing the systems. The FAA said it would lift the grounding order next week. The NTSB should have its recommendations out next week as well. Boeing said it could take five-months to retrofit all the completed planes that are parked and have not been delivered. Even with all the problems Boeing shares are only $1 from a new high.

Despite crummy earnings and lackluster guidance Intel (INTC) is pressing resistance at $22.50 and could break out soon. This is amazing since the semiconductor sector has been warning central for the last couple weeks.

JNJ, MRK, PFE and PG are all at new highs. It is hard to complain too much when 75% of the Dow stocks have bullish charts.

Dow Stocks

Despite the Dow gain on Friday the markets suffered their worst weekly loss for 2013. The Dow, S&P and Nasdaq all lost more than -2%. The Russell 2000 lost -3.2% and the Semiconductor Index -3.8%. Oil services lost more than -5%. It was not a pretty week for anything but the Dow stocks.

Google (GOOG) helped push the Nasdaq to a decent gain of +1.25% on Friday when shares spiked +$34 on positive earnings. Unfortunately those earnings were helped by an abnormally low tax rate of 8%. They reported earnings of $11.58 on $13.97 billion in revenue and analysts were expecting $10.66 on $14.09 billion in revenue. Google reported a tax expense of only $287 million on $3.35 billion in net income. A year ago they reported a tax of $655 million on profits of $2.9 billion. If it were not for the low tax rate, a onetime tax credit event, Google would have missed earnings by -33 cents according to Shaw Wu of Sterne Agee. Earnings would have been $10.36 or -$1.22 lower.

Investors either did not care about Google's skewed earnings or did not know about the onetime tax credit. Shares rallied +$34 and nobody looked back.

Google Chart

Silver lost -10% for the week and gold -4.7%. Gold bounced slightly from the intraday bottom at $1321 on Monday to close at $1407 on Friday. Silver did not bounce or at least not very far. Silver bottomed at $22 on Monday and closed at $23.23 on Friday. The lack of a bounce is troubling for multiple reasons.

The entire commodity implosion was led by gold. On April 12th more than 16 million ounces of gold were sold short or offered for sale. That equates to 500 tons. How many investors in the world could sell 500 tons of gold worth roughly $24.8 billion? It was a massive paper short where the futures contracts were sold in hopes of covering them later. How many investors could short $24.8 billion in gold even if they wanted to? I know Goldman went public with a gold short a couple days earlier but even Goldman could not short that much at one time.

The conspiracy theories are flying fast. Central banks are blamed for the massive short but the reasons are vague. What we do know is that more than 700,000 contracts traded on the 16th and the selling hysteria was halted. That was five times normal volume and represents 70 million ounces. Now everyone is waiting for the next shoe to drop. Is the dip over or is this just a resting point?

We have seen gold demand surge around the world over the last week. A record number of gold coins were ordered from the U.S. Mint. Dealers are now quoting 5-6 weeks for delivery. Physical gold is selling like hotcakes but paper gold like the GLD has failed to recover. Dealers claim buyers for gold and silver coins have been running 50 to 1 over sellers. At the Bank of Nova Scotia in Toronto the gold window has been absolutely swamped. There were people lined up in droves for multiple-hours at a time to buy gold and silver bars and coins. UBS in Zurich, Switzerland said they are experiencing exactly the same thing. People are waiting in long lines for bullion related bars and coins.

Silver is in stepchild mode. Gold declined so far the ready buyers for precious metals have jumped into the gold market thanks to the big discount. Silver has been lagging in the rebound. This is a temporary situation. I have written about silver several times in past commentaries. I am bullish on silver because of its use in manufacturing. More than 1.2 billion ounces are used each year but mine output is only 750 million ounces. The rest comes from scrap, silverware, xrays and coins returned to the market. When the global economy finds some traction we will see silver shoot higher. Gold may be a store of wealth but silver is a manufacturing commodity. It is used in circuit boards, cell phones, solar cells, photography and thousands of other electronic products. All of which are growing in numbers.

I posted the chart below at critical price points in the past. Several readers emailed me last week and requested an update. I uploaded the Excel spreadsheet to the website so readers can download it and update it at any time. Just change the silver price in the yellow box and all the individual prices will update.

http://www.optioninvestor.com/silvercoins.xls

This shows the actual silver content in any U.S. silver coin. The price in the far right column is the actual value of the silver today at the $23.23 spot price. For silver dollars and silver eagles I would expect to pay a $2-$3 premium over the actual value.

Silver Coin Table

I am always asked where I buy my coins. Believe it or not I have found Ebay to be a pretty good source. For instance this link will display Peace Silver Dollar Rolls. Just buy from a seller with a lot of positive feedback. Avoid those with any negative feedback. Don't buy the collectible ones. Just buy the common, dingy, circulated coins. You are paying for the silver value not the appearance.

You can also buy from local coin stores. CALL them first and ask their selling price for junk silver dollars or circulated eagles. "I am buying junk silver dollars today at the right price. How much for 3 rolls?" Some dealers will sell them for $1-$2 over silver value, others want $5-$7. Avoid the high ones. Gun shows and coin shows are also good. Lots of competition all in one place so the prices are cheap.

I am not going to promise you silver will be $50 this year but I believe it will be well over $50 in the years ahead. Buy a roll, put it in the safe. Repeat every month.

Earnings

The earnings parade is in full swing. So far the quarter is coming in better than expected. Two weeks ago the estimates were very close to breakeven and some were even negative. However, so far the S&P 500 companies have posted earnings growth of +3.4%. The numbers are normally high the first two weeks because the biggest of the blue chips report. Actual earnings decline as the cycle progresses.

So far 66% have beat earnings but only 57% beat on revenue. That revenue number spiked late in the week because it was 47% on Tuesday. Guidance warnings prior to the earnings cycle were running 3:1 negative.

The big earnings event next week will be Apple on Tuesday. Expectations are for $10.07 compared to $12.30 in the year ago quarter. That is a significant decline and analysts are worried it could be even worse with factories shutdown in Q1 because of a lack of orders. This is going to be the high point for tech earnings. The other big cap techs have already reported with mixed results.

Qualcomm on Wednesday will almost be an afterthought because all the mystery surrounding Apple will already be over. They are a major supplier to Apple but they also supply the other phone manufacturers as well. Estimates are for $1.16 compared to $1.01 a year ago.

This is the start of energy earnings with the big oil companies all reporting to kick off the cycle. Conoco and Exxon on Thursday and Chevron on Friday.

Several more Dow components report including CAT, TRV, UTX, PG, BA, CVX, MMM and XOM.

Earnings Calendar

This week should be the turning point for the markets if the major indexes are going to follow the same pattern as the last three years. This is the biggest week for earnings with 169 S&P 500 companies (34%) reporting earnings this week. After this week the outcome of the cycle will be known beyond a reasonable doubt.

For the last three years the economics and the markets turned down in May and the economics have already gotten a head start. I know some analysts are calling for a continued rally in May. I would be thrilled but I don't expect it. There are far too many factors against us this year. China, Europe, Sequester, Payrolls, Debt Ceiling, etc. I keep saying eventually fundamentals will matter but so far only the Fed has mattered. Investors are ignoring macro fundamentals and buying QE instead.

The S&P 500 broke through uptrend support on Thursday and then returned to that level on Friday and honored it as resistance. In theory this would be the perfect spot for a failure on Monday but the more likely path would be another attempt on 1,570 (thick red line) and a failure there.

The setup is too perfect for the bears and this is where they normally get into trouble. They see the textbook chart patterns and bet it all on the expected failure. The market rallies, shorts are forced to cover and a new high is born.

The turning point will be a dip below the 1539-1540 level. That sets up a retest of 1495-1497 and the beginning of the summer doldrums.

S&P Chart - Daily

S&P 500 Chart - Monthly

The Dow lost -317 points last week to go from setting new highs to testing strong support in only a few days. The uptrend support converged at 14,600 last week and the Dow finally broke through to the downside on Thursday. Friday's intraday dip of -94 points was the result of IBM's -$17 drop. That was worth -131 Dow points. If IBM had been flat the Dow would have ended with a +141 point gain and we would be looking at a different chart.

Several analysts are keying on the 14,500 level this weekend with the close at 14,547. I believe that the 14,400 support level is more important now that uptrend support at 14,600 has broken. If the Dow drops below 14,400 it could be terminal for this bull market.

Dow Chart

The Nasdaq was knocked around last week with alternating positive and negative days but the overall result was a decline of -2.7%. The Friday rebound BARELY recovered to close back over prior support at 3200. If that level fails again I don't expect it to recover. This is a critical make or break week and it will be up to Apple earnings on Tuesday to set the direction. If Apple misses we could easily see a retest of 3115. However, the bar is very low for Apple with expectations downright pessimistic. Initial resistance is 3260 and a massive beat by Apple could produce a significant short squeeze and push the Nasdaq to that level.

Nasdaq Chart

The Russell 2000 Small Cap Index lost -3.2% last week. Initial round number support at 900 held for three consecutive days with a nice rebound on Friday. I believe that rebound was option expiration pressures. Prior support at the 916 level is now resistance.

Fund manager sentiment appears to have weakened but we are approaching month end. We could see a rebound as they window dress but I think the beginning of May could be a definite trend change and failure of support. Even with the declines we have seen in April the index is still up +7.5% for the year. Managers could take profits now and sit out the next six months. Many times they have had to settle for gains smaller than 7% for the full year.

Russell 2000 Chart

The Dow Transports found support at 5900 but the trend is now down. We have two lower highs and lower lows and the next logical progression would be another lower low to the 5800 range.

The fall in oil prices will be favorable for the airlines but the sequester, shrinking economy and falling consumer spending will slow ticket sales. Whether investors will consider those factors is a different question.

Dow Transports Chart

I believe the market is in a topping process. That takes days or weeks rather than a single event that goes from bullish to bearish over a single day. The fundamentals don't support a continued bull market but then bull markets can remain illogical for a long time.

A bull market likes to climb a wall of worry and we have an Everest sized wall ahead of us. Global markets are declining. The global economy is shrinking. Economics in the U.S. are worsening. Earnings are flat to down. Commodities are imploding. Is May the right month to buy stocks?

Commodities lead equities and commodities as evidenced by the CRB Index are down -11.5% from the recent highs. The CRB Index fell -15% in the summer of 2010 and the S&P dropped -15%. The CRB fell -15% in 2011 and the S&P fell -19.5%. In 2012 the CRB fell again and the S&P dropped -11%. In theory the -11.5% in the CRB this year should be predicting a decline in the S&P. We had QE programs in place in those prior years so we can't count on that as support in 2013.

Goldman Sachs Commodity Index Chart

Narayana Kocherlakota president of the Minneapolis Fed said on Thursday, "Financial market conditions requiring the Federal Reserve to keep rates unusually low may persist for the next five to ten years." That would imply QE forever but later he said, "The Fed may have to confront the dilemma of whether to raise rates to reduce the risk of a financial crisis with the certainty that any tightening will lead to lower employment and prices." He also said the danger of continuous QE is significant instability, inflated asset prices, high asset return volatility and heightened merger activity.

Don't say you were not warned. Fed governor Jeremy Stein acknowledged that Cyprus is now a template not only for Europe but also for the USA. He said "if a too big to fail bank did fail I have little doubt that private investors (depositors) will in fact bear the losses." Depositors will be Cyprus'ed. He also said "Dodd-Frank is very clear in saying that the Federal Reserve and other regulators cannot use their emergency authorities to bail out an individual failing institution." If you think your money is safe in U.S. banks you might want to rethink that assumption.

Your retirement accounts are not safe either. The president's budget for 2014 included a proposal to cap retirement accounts like IRAs and 401Ks. Once you have made what the government considers is "enough money" you will no longer be able to contribute to those tax advantaged plans. Also, spouses that inherit IRAs would have to take taxable distributions over a five-year period rather than stretch it out over their remaining lifespan. Those higher forced payouts create higher tax payments. Other proposals in the budget include higher estate taxes and restrictions on putting assets into trusts to avoid taxes. His budget will not be approved but you know now which way the administration is headed.

The EU is floating a concept of imposing a 15% tax on all wages and calling it "retirement savings." Of course the EU gets to hold the money until you retire. It would be a piggybank for the EU like the Social Security trust fund is for the U.S. government. The U.S. takes out the cash and replaces it with treasuries. Do you see where this trend is headed? Governments are gearing up to take more of our money in order to take care of us and pay for larger social programs. Germany's Finance Minister is floating the idea of "global taxation" where everyone, everywhere will be forced to pay for everything. Moving money from country to country or even moving your residence will not let you escape your fair share of taxes. Are you worried yet?

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"If you put the Federal Government in charge of the Sahara Desert in five years there would be a shortage of sand." ."
Milton Friedman


Index Wrap

Fear and Loathing (& Blood) on the Street

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The pullback that was hinted at prior to this past week deepened in the week just ended. The risk in an overbought Market is that eventually the bears will get their turn to whack it down. The 'problem' in this market for the bulls is seen in the very long-term monthly chart shown for the S&P 500 (SPX).

There was a major prior double top in SPX that has morphed into a possible major 'triple top'. I don't envision the S&P topping out yet, but getting through the 1570-1600 area may be tough for a while. Moreover, the reality of a possible triple top also can't be dismissed as SPX got quite 'whippy' once the Index rallied back into its 1535-1570 long-term resistance zone.

The other factor in corrections, once we know for certain that we're in a major correction (within an overall bull market), the first decline is rarely the longest. A rally may be followed by a decline that exceeds the first sell off; e.g., the first decline was 50 S&P points, the subsequent rebound was 20-30, but the decline was 75 S&P points peak to trough, before a compelling buying opportunity set up by trading WITH the major trend.

Technically, recent highs were in a high-risk zone for the bulls as resistance implied by the prior monthly highs was accompanied by a longer-term overbought reading as suggested (see chart above) by the 8-month Relative Strength Index (RSI). I think prices can back and fill for awhile but that SPX will over time break out above prior highs.

The foregoing doesn't mean I favor bullish strategies here as in buying index calls. It's generally poor trading strategy to buy index calls with a current risk to reward equation that suggests upside potential is about equal to further downside risk. Upside might eventually be to 1900, with risk for a correction back to the 1300 area in SPX.

If SPX rallies from current levels and doesn't break under 1540, the index will have 'held' the low end of its broad uptrend price channel and could then begin to work sideways to higher. If 1540 is bested, 1500 support could be tested. A repeated daily Close below 1487 would turn the intermediate trend lower.

The Dow 30 (INDU) continues to have the best relative strength as the INDU pullback has to date has held above prior technical/chart support in the 14400 area. In the Dow it would take a repeated daily Close below 13900 to turn INDU's intermediate trend lower.

The Russell 2000 (RUT) continues to be the 'canary in the coal mine' as RUT first saw repeated highs form in the same area as the Index traced out a well-defined line of resistance and a possible top.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart is short-term bullish and with a still-bullish pattern intermediate-term if 1540 holds up as support. If instead SPX falls below its up trendline, next key support begins in the 1500 area, extending to the prior Closing low at 1487.

I've highlighted chart support at 1540, down from 1570 last week with next technical support at 1500. Near resistance is seen at 1570, then in the 1595-1608 area.

The 13-day Relative Strength Index (RSI) and my CPRATIO bullish-bearish sentiment indicator are both coming down toward an initial 'oversold' reading. With these lower readings I rate the chart as less likely to see a further substantial down leg develop.

S&P 100 (OEX) INDEX; DAILY CHART

I wrote last week that "A big difference between the bullish S&P 100 (OEX) Index chart and big brother SPX is that OEX hasn't yet cleared prior all-time highs ...". OEX was only getting close to challenging its 2007 high weekly close, unlike SPX which cleared its prior (2007) top. This divergence did supply some warning that the big-cap S&P 100 index might NOT 'confirm' the new high in the S&P 500 and warn of a pullback. I thought OEX would confirm a similar move to new highs sooner rather than later. Buzzer goes off: WRONG!

Near resistance is seen in the 710 area, with 725-727 as pivotal next resistance. Near support is highlighted at 695, with next key support in the 680 area, extending to 672-670.

There's potential for a rebound from recent lows if OEX's up trendline holds up as support. Upside potential is probably 20 points before more backing and filling, with downside risk of a correction also 20 points. Not something to go into with new bullish positions as the assessed risk to reward ratio potential is well under the favorable 1:3 (or more) risk to reward ratio.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

Last week I rated the individual Dow 30 (INDU) charts as quite bullish with 20 of the 30 Dow stocks rated as having "bullish to very bullish uptrend patterns."

This week I'd add AXP to the bullish list but take off GE and IBM which looked to have started corrections. MCD and T look questionable given the potential for double tops. Still and all not a MAJOR change in my bullish outlook for INDU.

I wrote last week: "Short-term trading wise a break of 14700-14680 is bearish; then look to the trendline for next support." Key near INDU support is now highlighted at INDU's up trendline intersecting at 14470, with support extending to 14400 and the important 50-day moving average. Major support is at 13800.

Near resistance looks like 14750, extending to 14870.

A longer-term target for the Dow remains 15000, with further upside potential to perhaps 16000. Near-term is the question for us shorter-term trader types. I'm watching for whether INDU can move back above its 21-day moving average (potentially bullish) or will deflect from this key average as resistance.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) chart which had an initial bullish Breakout move in the week coming into the one just ended, saw instead a subsequent sharp sell off that negated the earlier bullish expectation.

I've redrawn the COMP's up trendline and this lower slope, suggesting a lower rate-of-change is starting to make more 'sense' as a steeper rate of upside change that's slowed to a more moderate pace. This, still within a strong long-term bull move. [For more on a Nasdaq longer-term chart, look further on for my Nas 100 (NDX) Weekly chart.]

The short-term trend in COMP turned lower in the week just ended. The intermediate trend as I define it turns lower with multiple closes below 3170-3150. Near support is highlighted at 3170, with next support at 3100.

Near resistance is 3250-3260, with more significant chart resistance coming around 3300.

Last week I saw COMP headed to the TOP end of its uptrend channel. COMP instead ended the week at the LOW end of that channel! Is this a bullish opportunity? It looks like a short-term rally is underway or near but this in turn may be followed by a second down leg that carries farther than the first decline. At or near a bottom of a subsequent second decline can offer the best bullish trade opportunity.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) chart turned short-term bearish with the decline of this past week. The more sluggish daily chart picture is not seen so much on the weekly chart so I include this chart this week. The intermediate trend is up as long as the prior lows in the 2700 area are not exceeded.

Near resistance is highlighted in the 2800 area, with next and very pivotal resistance around 2865, the line of prior highs in that area.

Near support is down 50 points to 2750 (from 2800 last week); next and more pivotal support comes in at 2700. Multiple closes ahead below 2700 turns the intermediate chart picture bearish. As to the still-strong bullish long-term trend, the weekly NDX chart follows the daily chart here.

I thought NDX was going to exceed its prior highs but the reaction from that area, once NDX didn't pierce that level, was sharp and quick. It appears that a short-term rebound may be underway or near. If so, a second decline from there has to watched for its bearish potential.

NDX WEEKLY CHART:

Its quite clear from the Weekly close-only line chart seen below that the recent weekly Close reversed in the same area as in September.

What is even more clear or noticeable on this longer-term chart is the strong multiyear uptrend in the big cap tech stocks as represented by the Nasdaq 100 (NDX) Index.

It's hard to know on this chart where the support trendline intersects but it's in the low-2700 area. Not surprisingly of course where we see key support on the daily chart above.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 (QQQ) tracking stock was bullish in its pattern, one that then turned short-term bearish this past week. Assuming my redrawn up trendline is accurate, for now at least, support should be found in the 67.2 area. We're due for a rebound of some degree.

Near QQQ support is now well below last week's (69), at 67.2. Next lower support is in the 66.3 area. Resistance comes in at 69 (sorry, not noted on the chart I see), then with quite pivotal resistance at 70.

Last week I was projecting "another move higher, with a target to 71.5-72 at some point." A LITTLE off on my timing of when we get to 71 or above, even above 70 at this point. We could also go into a 66-70 trading range. Something more to think about but in either case a short-term rebound is due/overdue.

Daily trading volume shot up as QQQ fell through 69 support and dropped in a 3-day decline to touch 67. Volume pattern here suggests potential for at least a temporary rebound as panic selling may have dried up for now at least.

RUSSELL 2000 (RUT); DAILY CHART:

The short-term trend is bearish and the intermediate trend remains bullish only if RUT holds above 900. By redrawing the up trendline in the Russell 2000 (RUT) Index as intersecting in the area of longer-term support in the 900 area, RUT remains within its broad uptrend channel. A bearish chart picture develops if RUT starts trading below 900. I wrote last week that "...if 900 is pierced, RUT's intermediate trend turns lower."

There is also a fundamental reality that over the last three years that sales at companies with revenue of more than $50 million have grown by an average of 15.3 percent annually, compared with 8.5 percent annual growth at businesses with less than $50 million in revenue. There is a trend at work currently that doesn't favor the small to mid-cap stocks that make up the Russell 2000 relative to the S&P and big-cap tech stocks.

RUT technical support as already noted is seen in the 900 area, then at 880. Two consecutive Closes in the Russell below 900 turns the intermediate-term trend down. Resistance is seen at 940, extending to the 953 area.



GOOD TRADING SUCCESS!


New Option Plays

Consumer Goods, Internet, & Construction

by James Brown

Click here to email James Brown

Editor's Note:

Tonight we have some exciting news. The Option Investor Newsletter is going to expand its play selection. In recent years the newsletter has been publishing more short-term trades. Option traders benefit from being nimble and jumping in or jumping out of a trade to both to protect their capital and capture gains. Yet the wonderful thing about using options is the numerous ways investors can alter their strategy.

We already produce strategy-focused newsletters that cater to more advanced investing like the Option Writers newsletter, the Monthly Cash Machine newsletter, the Couch Potato newsletter. Plus we have long(er)-term investments with the LEAPStrader newsletter and Ultimate Investor. You can read more about these services by clicking here.

The Option Investor Newsletter is going to start adding trades with a longer time frame. In addition to technical analysis we will be including stocks with more fundamental stories behind their moves. Of course finding the right candidate that fits a longer-term entry will be more challenging. We scour the market every week for new ideas but sometimes a stock needs to ripen before it is ready for a trade. Thus this new category of trade will only be published when we've found a promising candidate.

We look forward to adding more content for our amazing readers and providing more choices for active investors.



NEW DIRECTIONAL CALL PLAYS

Clorox Co. - CLX - close: 89.53 change: +0.69

Stop Loss: 87.95
Target(s): 94.00
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to earnings on May 1st
New Positions: Yes, see below

Company Description

Why We Like It:
Clorox might be considered a more defensive name. Consumers continue to buy bleach and detergent even if the economy is in a recession. Given the stock's 2.9% yield CLX looks a lot more attractive than the bond market. Investors have been buying the dips for months. Currently CLX is testing round-number resistance at the $90.00 level. These are new all-time, historic highs for the stock. It's an old market maxim that stocks which hit $90 also tend to hit $100 a share.

Unfortunately this is going to be a short-term trade. We may not have time for CLX to make it to $100. The company is due to report earnings on May 1st and we do not want to hold over the announcement. There is too much risk that investors could sell the news after CLX's impressive rally.

Friday's high was $90.10. I am suggesting a trigger to buy calls at $90.25. If triggered our short-term target is $94.00.

NOTE: CLX will begin trading ex-dividend on Monday morning, April 22nd. The quarterly cash dividend is 64 cents a share. Odds are good we'll see CLX gap down by 64 cents on Monday.

Trigger @ 90.25

- Suggested Positions -

buy the May $90 call (CLX1318E90) current ask $1.35

Annotated Chart:

Entry on April -- at $---.--
Average Daily Volume = 738 thousand
Listed on April 20 2013


NEW DIRECTIONAL PUT PLAYS

SINA Corp. - SINA - close: 46.26 change: -0.28

Stop Loss: 48.25
Target(s): 42.00
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to earnings in mid-May
New Positions: Yes, see below

Company Description

Why We Like It:
SINA is a Chinese Internet-related company with online advertising, web portals and more like its Chinese version of Twitter. Although there seems to be a growing chorus of critics claiming that SINA's "Weibo" service is not Twitter. The stock seems to be suffering from investor concerns over rising competition.

Traders have been selling into strength recently and now shares of SINA are breaking down to new multi-month lows. I am suggesting we buy puts immediately at the open on Monday morning. More conservative traders might want to wait for a drop below the April 16th low of $45.68 as an alternative entry point. Our short-term target is $42.00, just above the December 2012 lows.

Investors should be aware that SINA's stock could be influenced by earnings results from its rivals. BIDU is scheduled to report earnings on April 25th. SOHU is due on April 29th. NTES should report earnings in mid-May.

- Suggested Positions -

buy the May $45 PUT (SINA1318Q45) current ask $2.23

Annotated Chart:

Entry on April -- at $---.--
Average Daily Volume = 1.7 million
Listed on April 20 2013



NEW LONGER-TERM TRADES

Chicago Bridge & Iron Co. - CBI - close: 51.38 change: +0.46

Stop Loss: 49.25
Target(s): 62.50
Current Option Gain/Loss: July's: +0.0% or Jan's: +0.0%
Time Frame: 3 to 4 months
New Positions: see below

Company Description

Why We Like It:
CB&I, as the company likes to call itself, is one of the world's largest construction companies. According to their website CBI is the "most complete provider of a wide range of services including design, engineering, construction, fabrication, maintenance, and environmental services, no project is too big for CB&I." They have graduated from building bridges over one hundred years ago to present day where they build oil refineries, LNG terminals, and nuclear power plants and a lot more. CBI is the largest storage tank construction company on the planet.

Last year the company spent $3 billion to acquire (merge) with the Shaw Group. This doubled their employee count and gave CBI a much bigger presence in the U.S. It also produced a dramatic improvement in its revenues and earnings. CBI recently held an investor day and issued 2013 guidance of the newly combined company (CBI and Shaw) forecasting revenues of $10.7 to $11.2 billion. CBI guided 2013 earnings in the $4.00-4.35 range. According to Reuters the average analyst estimate was only $4.00. Currently CBI has a trailing P/E near 17 but based on its new EPS guidance the forward P/E is closer to 11.

More importantly the company seems to be in the right place and at the right time as far as global infrastructure development. Current estimates suggest countries and businesses around the world plan on spending more than $1 trillion (with a T) on energy infrastructure projects. Right now CBI's revenues are only $11 billion (current 2013 forecast) but they have a backlog of $27 billion. This is likely to grow.

Given all of this good news the stock was marching higher from mid-November 2012 up until March this year. CBI started to pullback in early April. That pullback accelerated about two weeks ago, around April 11th, on news that one of its customers in Australia, Woodside Petroleum, was canceling its $45 billion onshore LNG project and is considering a offshore development instead.

We think the correction is done. The pullback from its 2013 high (near $62) stalled near round-number support at $50.00 and its 100-dma. Coincidentally a dip from $62 to $50 is a -20% correction. I suspect that the reversal near $62 was also some profit taking since CBI was nearing its all-time highs from back in 2007 near $63 a share. We are not the only ones who believe the sell-off is overdone. There has been a significant surge in call buying on CBI's pullback.

We are suggesting new bullish positions now at current levels. We will start with a stop loss at $49.25. More conservative traders could wait for a little confirmation of the bounce and look for a rally past $52.50 as an alternative entry point (you could also tighten your stop closer to $50.00). Our time frame is three to four months. This means that we will be holding over CBI's May 2nd earnings report. By the way, Wall Street is expecting a profit of 79 cents a share.

Our long-term target is $62.50.

- Suggested Positions -

buy the 2013 Jul $55 call (CBI1320G55) current ask $2.15

- or -

buy the 2014 Jan $60 call (CBI1418A60) current ask $2.85

Annotated Chart:

Entry on April 22 at $---.--
Average Daily Volume = 2.5 million
Listed on April 20 2013



In Play Updates and Reviews

Worst Week of 2013 for the S&P 500

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 index ended its worst week of the year with a bit of a bounce on Friday.

Our bullish candidates hit new highs. Most of our bearish candidates bounced.

We have exciting news tonight. The Option Investor Newsletter is going to expand our play selection. Check out tonight's new plays section.


Current Portfolio:


CALL Play Updates

American Tower Corp. - AMT - close: 81.05 change: +0.99

Stop Loss: 78.75
Target(s): 84.75
Current Option Gain/Loss: + 4.8%
Time Frame: Exit prior to earnings on May 1st
New Positions: see below

Comments:
04/20/13: An up day for the stock market allowed AMT to rally to a new all-time high. Traders could buy calls on this breakout but if you do consider raising your stop loss.

Our target is $84.75. More aggressive traders could aim higher. FYI: The Point & Figure chart for AMT is bullish with a $94 target.

- Suggested Positions -

Long May$80 call (AMT1318E80) entry $2.05

chart:

Entry on April 11 at $80.25
Average Daily Volume = 2.2 million
Listed on April 09 2013


Gilead Sciences - GILD - close: 53.17 change: +2.31

Stop Loss: 49.75
Target(s): 56.50
Current Option Gain/Loss: +21.1%
Time Frame: Exit PRIOR to earnings on May 2nd
New Positions: see below

Comments:
04/20/13: Positive news from Vertex Pharmaceuticals (VRTX) on a new cystic fibrosis treatment sent shares of VRTX to a +61% gain and gave the biotech sector a big boost. Shares of GILD outperformed the broader market with a +4.5% gain and a bullish breakout to new highs. Traders bought the dip this morning near the simple 10-dma.

Broken resistance in the $52.00-52.50 zone could be new support for GILD and investors might want to adjust their stop loss higher.

Earlier Comments:
I do consider this a more aggressive entry point. More conservative traders may want to wait for a pullback near the $50.50-50.00 zone as an alternative entry point. Our target is $56.50 but we'll plan on exiting prior to the May 2nd earnings report.

- Suggested Positions -

Long May $52.50 call (GILD1318e52.5) entry $1.94

chart:

Entry on April 15 at $52.25
Average Daily Volume = 11.7 million
Listed on April 13 2013


PUT Play Updates

Atlas Air Worldwide - AAWW - close: 38.07 change: -0.11

Stop Loss: 40.05
Target(s): 33.50
Current Option Gain/Loss: -17.6%
Time Frame: exit PRIOR to earnings in early May
New Positions: see below

Comments:
04/20/13: AAWW is still underperforming the market and the transportation sector. Shares failed to bounce on Friday and drifted sideways near the $38.00 level. Once again the stock found some short-term support near $37.75. Thus readers might want to wait for a drop below $37.70 before initiating new put positions.

Our target is $33.50 but more conservative traders could exit early near $35.00 instead. FYI: The Point & Figure chart for AAWW is bearish with a $29 target.

- Suggested Positions -

Long May $37.50 PUT (AAWW1318Q37.5) entry $1.70

chart:

Entry on April 17 at $38.00
Average Daily Volume = 262 thousand
Listed on April 16 2013


FedEx Corp. - FDX - close: 92.39 change: +0.52

Stop Loss: 95.25
Target(s): 86.50
Current Option Gain/Loss: + 2.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
04/20/13: After Thursday's bearish breakdown to new three-month lows FDX managed a bit of an oversold bounce on Friday. Shares failed to close back above its 300-dma. Nimble traders could watch for a failed rally near $94.00 and its 200-dma as an alternate entry point to buy puts. I am adjusting our stop loss down to $95.25.

- Suggested Positions -

Long May $92.50 PUT (FDX1318Q92.5) entry $2.12

04/20/13 new stop loss @ 95.25
04/18/13 trade opened on gap down at $93.18, trigger was $93.50

chart:

Entry on April 18 at $93.18
Average Daily Volume = 3.3 million
Listed on April 15 2013


Dow Jones Transportation ETF - IYT - close: 107.44 chg: +1.65

Stop Loss: 107.05
Target(s): 100.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
04/20/13: Surprisingly the transports were showing some relative strength on Friday. Both the railroads and the airlines were rebounding. Yet the IYT failed to rally back above its 50-dma. This sector ETF still faces the risk of a breakdown.

I am suggesting a trigger to buy puts at $104.75. If triggered our target is $100.25.

Trigger @ 104.75

- Suggested Positions -

buy the May $105 PUT (IYT1318Q105)

chart:

Entry on April -- at $---.--
Average Daily Volume = 904 thousand
Listed on April 17 2013


S&P500 ETF - SPY - close: 155.48 change: +1.34

Stop Loss: 155.65
Target(s): 149.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
04/20/13: It was the worst week of the year. The bullish momentum appeared to reverse with the S&P 500 index rolling over under the 1600 level. By Thursday's close traders were nervous seeing the S&P 500 and the SPY close below their simple 50-dma. Friday's session managed an oversold bounce with a +0.8% gain. Yet upward momentum could still be in jeopardy.

I am suggesting a trigger to buy puts at $153.40. If triggered our target is $149.00. More conservative traders may want to exit near $150.00 instead. Please note that there are several short-term options for the SPY. Make sure you pick the right option symbol. May's option expiration is May 17th.

Trigger @ 153.40

- Suggested Positions -

buy the May $150 PUT (SPY1318Q150)

chart:

Entry on April -- at $---.--
Average Daily Volume = 130 million
Listed on April 18 2013


Vulcan Materials - VMC - close: 46.05 change: +0.02

Stop Loss: 47.55
Target(s): 40.25
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to earnings in early May
New Positions: Yes, see below

Comments:
04/20/13: VMC did not see much follow through on Thursday's sell-off. Shares managed a bounce before hitting a new relative low. The stock continues to look weak and I don't see any changes from my prior comments.

Earlier Comments:
Shares of VMC are in a bearish trend of lower highs and lower lows and recently broke down below its simple 200-dma. The stock is currently testing potential support at its simple 300-dma (near today's low). Monday's low was $45.42. I am suggesting a trigger to buy puts at $44.90. If triggered our target is $40.25. However, keep in mind that VMC is scheduled to report earnings in early May (not date yet) and we will plan to exit prior to the announcement.

Trigger @ 44.90

- Suggested Positions -

buy the May $45 PUT (VMC1318Q45) current ask $1.50

chart:

Entry on April -- at $---.--
Average Daily Volume = 581 thousand
Listed on April 18 2013