Option Investor
Newsletter

Daily Newsletter, Saturday, 4/27/2013

Table of Contents

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

Market Wrap

Sell in May?

by Jim Brown

Click here to email Jim Brown

Thanks to gains in Chevron and Boeing the Dow finished positive on Friday while other indexes were negative.

Market Statistics

Friday started off negative after the GDP report came in weaker than expected but the bad news bulls nearly succeeded in pushing all the indexes into positive territory before the close. There is no fear in the markets despite an outflow of cash from mutual funds. Month end window dressing is supporting the markets but that clock is rapidly winding down.

The economic calendar was light on Friday but the one major report was a disappointment. The first estimate of GDP for the first quarter came in at +2.5% growth. That was below the consensus estimate of 3.2%. This was well above Q4 growth of +0.38% but mostly due to a higher rate of inventory accumulation. Here is the catch. More than 80% of the rise in inventories was farm related. Farmers were building up seed, fertilizer and equipment in hopes of a rebound in 2013 after the drought of 2012 nearly wiped them out. It was the biggest jump in farm inventory in 13 years. This inventory buildup is not really a factor in the consumer driven economy.

Growth was also lifted by a spike in consumer spending of +3.2%. This is most likely a result of the surge in dividends and accelerated bonuses late in Q4 that helped push the Q4 savings rate to 4.7%. That savings rate declined in Q1 to 2.6% and the lowest level since early 2007 as that Q4 cash was spent. The spike in consumer spending was also due to the record high fuel prices in February. That is not a reason we want to see for higher consumer spending.

Utility spending due to the abnormally cold weather also added to the GDP. Hopefully that won't be repeated in Q2. Also, a rise in imports helped push GDP higher but the rise in imports was due to higher prices for oil. I hope you see this thread. The spike in GDP was due to onetime events that will not repeat.

Government spending fell -4.4% in Q1 after a -7.0% decline in Q4. Defense spending fell -11.5% in Q1 after a -22.1% drop in Q4. That was the two biggest quarterly drops since the end of the Korean War and is not likely to continue.

Analysts believe the initial Q1 estimate could be revised down to 1.4% to 1.9% with the next two revisions. The consensus estimate for Q2 GDP is currently +1.5% but falling. As Q1 numbers are revised lower the estimate for Q2 will also decline.

GDP Chart

The final reading for April Consumer Sentiment rebounded from 72.3 to 76.4. That is still a three month low. Analysts credited the decline in fuel prices over the last eight-weeks for the improvement in sentiment. The present conditions component declined from 90.7 to 89.9 and the expectations component fell from 70.8 to 67.8.

The uptick in the sentiment reading late in the month suggests worry over the mid month decline in the stock market faded as the rebound began. However, the daily Rasmussen index declined to 92.6 on Friday and the lowest reading of the month. The high was 103.4 on April 1st. In the Rasmussen survey only 16% of adult consumers rate the economy as good or better, while 42% rate it poorly.

Sentiment may not be in a sharp downtrend but with the equity markets within 1% of their recent highs you would expect sentiment to be improving not declining.

Consumer Sentiment Chart

The calendar for next week is extremely busy. There are three payroll reports, three ISM reports and the FOMC meeting. The ISM reports are not expected to improve but nobody is expecting a sharp decline either. Expectations are for business activity to be flat to down slightly. However, the farther we get into the summer the more impact we are going to see from the sequester.

The payroll reports are garnering estimates that vary widely. The ADP report on Wednesday is expected to show a gain of +170,000 jobs compared to 158,000 in March. This is highly optimistic. The Nonfarm Payrolls on Friday are expected to show a gain of +150,000 jobs compared to only 88,000 in March. I think investors are going to be very disappointed. Nearly every one of the regional Fed reports have shown declines in the employment component. However, the weekly jobless claims have not been that bad with a drop to only 339,000 this week from 355,000 the prior week. On March 30th they had spiked to 388,000.

April is the month we are expecting to see a bigger hit to employment from the sequester. The required 30 day notice period of a layoff has now expired and workers should be headed out the door.

The FOMC meeting is not likely to produce any fireworks. Over the last week we have seen several Fed heads actually claim the Fed may have to ramp up QE purchases to combat the growing economic weakness. That increase in worry by Fed members should soften the talk by others about shrinking purchases later this year. The FOMC statement should be neutral and claim "growth is continuing at a moderate pace" and restate the benchmarks for ending QE. Unemployment at 6.5% and inflation at 2.5% are not likely to happen in 2013 or even 2014 so any talk about slowing purchases in 2013 is wasted breath.

If I had to pick a turning point for the market it would be either the FOMC announcement or the Nonfarm Payrolls. The week ahead is typically the inflection point where market direction changes.

There are several overseas events that are sure to gain attention. Those are the Eurozone PMI, ECB announcement and China's PMI, both versions.

Economic Calendar

There were only a few stock stories on Friday. Chevron (CVX) reported earnings that declined -4.5% on lower prices received for oil and gas. Chevron said it earned $6.18 billion or $3.18 per share on revenue of $56.82 billion. Analysts were expecting $3.09. The company did raise output from 2.63 mbpd to 2.65 mbpd. However, the average price received for the oil fell from $102 to $94 in the USA and from $110 to $102 overseas.

Chevron expects to increase production by 25% to 3.3 mbpd by 2017. They have more than 50 projects underway that cost more than $250 million each and 16 that cost more than $1 billion. The LNG projects in Australia are more than $40 billion. Chevron rallied +$1.53 on the earnings report.

Chevron Chart

DR Horton (DHI) rallied +9% on Friday and +20% for the week after reporting profits of 32 cents on revenue of $1.39 billion. Profits beat estimates by 13 cents. The average selling price of a Horton home rose +13%. The company said "The first half of fiscal year 2013 was nothing short of phenomenal. We expect the second half to be even better." That energized buyers all across the homebuilding sector.

DR Horton has an inventory of 16,000 homes and is better positioned for the spring selling season than competitors according to analysts. DHI builds homes between $100,000 and $600,000. Orders in Q1 rose +34% to 7,879 homes with a value of more than $2 billion.

DR Horton Chart

Amazon (AMZN) fell -$20 on Friday and was a major drag on the Nasdaq. Amazon beat the street on earnings but lowered its outlook as a result of the recession in Europe. Earnings were 18 cents compared to estimates of 8 cents. Amazon guided for Q2 revenue in the range of $14.5-$16.2 billion and analysts were expecting $15.92 billion.

The company's gross profit margin rose from 24% to 26.6% but growth slowed slightly. Amazon is growing at roughly twice the rate of ecommerce in general. That is down from 3x a year ago. Amazon is benefitting from its ever increasing scale in reducing costs and improving margins. However, that rapidly rising scale is working against it in the multiples of growth. You can't keep growing at 25% a year. The bigger you get the harder it is to maintain that growth rate. Amazon is benefitting from its addition of regional shipping centers with freight costs declining from 5.1% to 4.7% of sales. Unit sales growth rose +30% in Q1 and that would be dynamite for anyone else. For Amazon that was a decline from the 49% growth in Q1-2012. The law of large numbers is going to haunt them from now on.

Amazon Chart

This earnings cycle has been better than expected on an earnings basis but significantly weaker than expected on a revenue basis. A month ago the expectations for Q1 earnings were from a loss of -1.9% to a slight gain of +1%. More than 50% of S&P-500 companies have reported and earnings are showing growth of +3.1%. Typically actual earnings beat the consensus estimate at the beginning of the reporting cycle. Analysts are cautious. They would rather be blamed for understating than being too optimistic.

As of Friday 56.9% of companies have beaten on earnings. That is slightly below the averages but not a disaster. However, the majority of earnings beats came on cost cutting rather than increasing sales. That is the LOWEST beat ratio since the recession.

Only 44.1% have beaten on revenue. That is well below the average of 62% and very close to a 13 year low. The recession quarters saw revenue beats in the 40% range. Are sales that weak that we are nearing recession levels of revenue growth? That is a very disturbing percentage.

For those companies giving guidance with their earnings the negative guidance is 14 times larger than those raising guidance. Since April 1st the consensus estimate for Q2 earnings growth has declined from 7.2% to 3.0% and still falling. This is NOT a bullish environment for stocks.

Bespoke Earnings Beat Chart

Bespoke Revenue Beat Chart

Birinyi and Associates reported the announced share repurchases in the first quarter were the largest since they began tracking the information in 1985. Share buyback announcements through March totaled $208 billion. There are multiple reasons a company does buybacks. One would be when they think the shares are cheap. That is clearly not the case today with most stocks at cyclical highs. Another is to buy back shares in lieu of a dividend. That could be the case today because buybacks are easier than dividends and they don't repeat.

If a company pays a 25 cent dividend today and they increase it to 35 cents because they have extra cash then it haunts them for every dividend cycle in the future. Most companies would rather leave their dividends at a manageable level for cash flow and use extra cash for random buybacks. Most buybacks are random. They are announced for a period of time, say over the next two years, but there is rarely a specific schedule. Companies can elect when they want to spend the money.

Another reason companies buy back stock is to cheat on earnings. If you have 10 million shares outstanding and you buyback a million then the earnings per share jumps sharply because there are fewer shares outstanding. IBM is the poster child for this method of earnings management but it failed them last quarter. They were missing so badly they could not buy back enough shares to compensate.

Lastly, companies buy back shares when they have no other use for the money. According to S&P Capital IQ the S&P-500 companies have more than $2 trillion in cash on their balance sheet. The economy is lagging, revenue is slowing and the outlook is for more of the same. If companies don't see an acquisition that makes sense they can throw some money at buybacks in an effort to appear shareholder friendly. They also benefit by bringing shares back in house to use for stock based compensation.

Company executives are often compensated based on the stock price. Buying back large amounts of stock will raise the stock price and improve their compensation packages even though they are not building the company in the process. Their millions in stock options will eventually vest in the money and they are rewarded for buying back stock using the company funds.

Since stocks are not bargain basement cheap today it suggests companies are announcing buybacks because there is no better use of their money. That is not a bullish conclusion. All investors would much rather see companies invest that money into something that would increase profits and raise the future stock price. Aggressive buybacks are an admission business is slow and the outlook is flat. This was a record quarter for buybacks so what message should we get from this trend? The outlook for business is not rosy. It may not be gloomy but it is not rosy.

Top Ten Share Buybacks in Q1

As if we did not have enough clouds over the market, China's Politburo Standing Committee warned last week the country needed to boost consumption and guard against financial risks amid signs the economic recovery is faltering. In a special session on the economy the committee warned the macro-economic policies should be stabilized and micro controls in some sectors should be loosened. The full context of the warning suggested the financial risks were to the point where the government was no longer going to be able to use stimulus to boost growth at the expense of structural reform. Translated this means no further stimulus from the new government and a push to boost internal consumption rather than massive building of roads, railroads, apartments and cities. China's consumer credit increased by more than $1 trillion in Q1 in an $8 trillion economy. Bubble anyone?

In response Nomura, JP Morgan and Goldman Sachs all cut their growth estimates for China in 2013. Nomura's China Stress index, which monitors the risk of a hard landing, recorded its highest reading ever, driven by credit and property market booms. Based on the index there is a 33% chance of that by 2014. Nomura is predicting a 7.2% GDP by Q4 and the weakest growth in more than 13 years.

Sell in May? We are at that time of year when investors have to decide if they want to take profits and move to cash for the summer or risk losing those profits in the next correction. The Stock Trader's Almanac has made the "Sell in May and go away" trade one of the most visible trends in the market. Because the markets normally decline in the summer they came up with the best six months trading system. If you had invested $10,000 in the Dow in 1950 and only kept the money in stocks from November through April you would have $684,073 as of the end of 2011. If you reversed the strategy and invested for the May-October period you would have lost -$1,024 over the same 61 year period. That is a pretty telling statistic and the cycle rarely fails to produce.

It is rare that the market does not set its lows for the year over the summer months. Go back and look at charts of the Dow or S&P and see how many times the summer doldrums push the indexes below the levels in the first quarter.

I seriously doubt very few people close all their positions for the summer. However, it never hurts to take profits in the high flyers and set stop losses on those you decide to keep. The high flyers are the stocks that will be hurt the worst when the correction comes.

A correction is coming. Like night follows day there is always a correction in our future. It could be next week or next month or several weeks in our future but it is coming. Corrections are necessary to force investors out of positions and allow new investors to take their place.

To compound the sell in May reasons for 2013 the first year of a presidential cycle is typically the weakest of the four year period. Add in the declining U.S. economics, European recession and slowing growth in China and there are a number of reasons to move to cash for the summer. That also frees you from worrying about the market while you are at the beach with your kids or enjoying a road trip with your wife. There is a lot to be said about not waking up every morning in the summer and checking to see what crisis has appeared in the market to cost you money.

Bonds up, equities up, what's up? The equity markets rallied last week to within 1% of their recent highs. At the same time treasuries rallied to five month highs. Treasuries and equities rarely trade in tandem and normally trade in opposite directions. This suggests the smart money is looking at the economic picture and heading to safety in treasuries ahead of the sell in May cycle. Treasuries have been strong for the last six-weeks and the weak GDP report on Friday strengthened that position. Treasury strength is just one more reason to worry about a summer decline in equities.

Ten Year Yield Chart

Signs of a top? When predictions seem to suddenly rocket to levels not previously considered it is sometimes seen as signs of a top in the market. Bullishness is seen to be off the scale and calmer heads begin to take profits. Price targets for Apple of $1000 or more back when Apple was trading for $700 would be an example. Having the NYSE bull appear on the cover of Newsweek with some lofty Dow target would be another. How about Barron's predicting Dow 16,000? Does that qualify?

On the other side of the coin the AAII Investor Sentiment Survey showed respondents were 28.3% bullish and 38.8% bearish last week. Another 32.9% were neutral. That would seem to indicate the bullishness has faded. Maybe it is simply reality taking hold as we near May.

However, margin debt is very close to exceeding the all time highs from 2007. That could happen in the next report.

Barron's Cover

A friend of mine works for Edward Jones. He claimed the EJ offices had their best month in years in March and April was going to beat that. Investors are coming out of the woodwork and putting cash into the market. He could not say enough positive things about the amount of business flooding into their offices. Obviously the conventional wisdom suggests when the retail investor goes all in the game is over.

The internals of the market suggest there is distribution in progress. The new 52-week highs have been less than half the number from just three weeks ago. On Friday there were 310 new highs compared to 942 on April 11th. Volume is declining almost daily with only 5.6 billion shares traded on Friday.

The S&P traded up to 1592.64 on Thursday. That was only 1 point below the historic closing high. That occurred at 2:PM just before the market rolled over. I am not going to claim that was a market top because nobody really knows until we can look back at it after a couple weeks of trading and then know for sure. It is still troubling for the bulls.

Trading on Friday failed at resistance at 1585 early in the day thanks to the weak GDP report. After drifting lower all morning the S&P rebounded from weak support at 1577 and again failed at 1585 just before the close.

I will be the first to tell you we can't make any market direction decisions based on any market action on a Friday. Counter trend moves are the norm. Profits are taken from a week of gains. Shorts are covered. Dips are bought after a week of declines. Traders are more cautious on Friday's because of potential news events over the weekend. Where existing trends are continued on a Friday we can predict those trends to continue the following week. Everything else is a guess.

I have been expecting window dressing from funds until month end but we are basically at month end now. Also, there was an outflow of cash from stock funds last week. That is the first outflow in a long time. That would also suggest cyclical investors are starting to implement the sell in May strategy. We are close enough to month end that sellers should begin to appear early next week. With the heavy economic calendar and the FOMC announcement on Wednesday the risk is to the bullish case and favors the bears.

S&P-500 Chart - 15 min

S&P-500 Chart - Daily

S&P-500 Chart - Monthly

Many Dow components reported last week and that created a lot of cross currents that prevented the Dow from capitalizing on the Tuesday gains. The Dow spiked up to 14720 on Tuesday and that is roughly where it closed on Friday. The intraday range on Friday was only 59 points and one of the lowest for the year.

The Thursday spike to 14760 failed in the morning and again in the afternoon with seller volume picking up in the afternoon. The weak GDP on Friday prevented the industrials from extending their gains but Boeing and Chevron managed to close the Dow in the green with gains over $1 each.

Critical support is now 14670 and the bottom of the range last week. Critical resistance is now 14760 and then 14865.

Dow Chart - 15 Min

Dow Chart - daily

The Nasdaq actually had the most bullish chart of the big three with a return to 3300 although that level was rock solid on Thursday. The return to the 12 year highs was bullish but the gains did not hold. The -21 point drop by Amazon and -8 by Google and Baidu was too much baggage to haul up the hill. Apple tried to help with an $8 gain but there were too many losers from disappointing earnings reports.

The volatility in the Nasdaq continues to be a problem. Every day is a gap open in some form that forces either bulls or bears to cover in a rush. There is little investing in progress with the action mostly from trading. Decliners outpaced advancers nearly 2:1 on Friday.

Winners and Sinners

Nasdaq Chart - 15 min

Nasdaq Chart - Daily

The Russell 2000 surprised traders with a strong bounce off the 900 level but the rebound failed with another lower high. The Dow was handicapped by the various earnings disappointments by the Dow components. Since there are only 30 stocks in the Dow a single stock can hold the index back. Meanwhile the Russell is 2000 stocks and it is more representative of the broader market.

I view the Russell rebound from short term oversold as short covering from strong support and possible window dressing by funds. They would love to see the Russell close at its highs next Tuesday.

The Russell has not made a new high since March 14th at 953.07 and the range of movement has been widening. The broader range translates as increased volatility and less conviction by either side. Watch 953 for a breakout and 895-900 for a breakdown.

Russell 2000 Chart - Daily

The Dow Transports rallied on Boeing ending its battery challenge, the vote on ending the FAA employee furloughs and some positive earnings by airlines. In reality I would have expected a little stronger bounce. The gains began to fade on Wednesday and Friday's narrow range suggested the bloom was gone off the rose.

Dow Transport Chart - Daily

I would be cautious of the market next week because of the calendar impact and the number of major economic events. If the bulls are going to climb a wall of worry they are going to need a truckload of Red Bull to keep their energy up. It could be a tough climb. However, as I stated earlier, when everyone is expecting a direction change it rarely appears. Once historical trends are clearly visible the contrarians bet against them. The path of least resistance may be down but I am sure the dip buyers are still looking for their entry point.

Friday was the 40th anniversary of the options market. On April 26th 1973 the CBOE began trading options on 16 stocks. A total of 911 contracts of calls were traded, no puts. Marty Kearny, Social Media editor for the CBOE, said more than four billion contracts traded in 2012 on 3,500 securities. The CBOE put out a video to celebrate the anniversary. CBOE Video

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world’s greatest civilizations has been 200 years."
Alexis de Toqueville


Index Wrap

Rebound

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The S&P 500 (SPX) and the Nasdaq Composite (COMP) both held support implied by the low end of their long-standing uptrend price channels and rallied from there. Both major indexes are above (SPX) or well above (COMP) their 2007 weekly Closing highs. SPX has found repeated support at 1540, with COMP holding above 3160-3200 for the most part.

If the S&P 500 ends April at or above 1582 (Friday's Close), this would constitute a decisive breakout above any possible huge triple top formation relative to SPX's very long-term monthly chart. A 1580 close or higher on Tuesday, 4/30 (the April monthly Close) would allay concern of another third major top forming in the 1570 area in SPX.

The tech-heavy Nasdaq indices, which had been lagging the S&P and Dow, are again within striking distance of their prior recent highs; at 3300 in COMP and the 2865-2877 zone in the Nas 100.

The Dow 30 (INDU) is lagging a bit here but to keep INDU in perspective, the Average is holding well above its prior 2007 peak in the 14200 area. Even the small to mid-cap sector as represented by the Russell 2000 (RUT) is holding up ok and finding support at 900.

All in all, the uptrend is alive and well even through bouts of volatility and the recent sharp but short-lived (downside) correction. I'm assuming the bullish intermediate and long-term trends will continue.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart remains bullish with the Index's ability to hold 1540 support both in terms of its up trendline and prior recent intraday lows. Support is this week seen at 1560, extending to 1550, support implied by SPX's up trendline.

Key resistance is apparent in the 1596-1600 area, then at the upper end of SPX's uptrend channel line, currently intersecting around 1620. If SPX ends April at or above 1582 (Friday's Close), this would constitute a decisive upside penetration of the triple top seen on SPX's very long-term monthly chart. Stay tuned on that!

I anticipate the S&P to continue to move higher on balance. On a short-term basis SPX is pulling back from an hourly overbought situation and could dip again to 1560-1555 but which would likely offer a bullish play for short-term traders.

The 13-day Relative Strength Index (RSI) seen above is showing sideways to slightly downward momentum and wouldn't dip to an oversold reading absent a substantial further dip.

My CPRATIO bullish-bearish sentiment indicator, also seen above, registered a 1-day bullish reading at the last low and that level of bearishness was telling for the prospects of a rebound.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX), unlike the S&P 500, hasn't yet cleared its prior all-time highs. The October 2007 weekly closing high at 727 remains a pivotal area of potential resistance on a longer-term chart basis. Judging by prior intraday highs I'd say that the key resistance zone is 727-733.

OEX's remains within its bullish uptrend channel and the Index looks to be consolidating at and above 710 near support, with the Index seemingly likely to challenge prior recent highs in the 715 area and then march toward a retest of 727-733 resistance. A daily and especially a weekly chart close above 730 in the next 1-2 weeks would extend the current bullish pattern.

While there looked to be support/buying interest in the 710 area most recently, I've noted lower trendline support as coming in around 700-698, with technical support extending to 693.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) is bullish as the INDU Average continues to work higher within its uptrend channel.

Not too long ago I rated 2/3rds of the individual INDU charts as being in bullish to very bullish uptrend patterns. However, of the 30 Dow stocks we're back down to around 18 (AXP, BAC, BA, CVX, DD, DIS, HD, JNJ, JPM, KFT, MCD, MRK, MSFT, PFE, TRV, UTX, VZ, WMT) in clear cut bullish trends, with the addition of AA and INTC as having further upside potential. GE, IBM, PG and T have been or are faltering recently and in possible corrective patterns.

Near resistance in the Dow is at 14750, then at 14870. Longer term potential remains for a move to the 15000-15200 area.

Near support is highlighted at 14555, then at 14435. Any daily Close, at least one not reversed the next trading day, below 14400 would be a bearish development.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) chart remains bullish in its pattern after holding support implied by the low end of its uptrend channel. The fact that the most recent low was above the prior downswing low was also bullish.

It looks like COMP has the potential to pierce key 3300 resistance and perhaps pop up again to the UPPER end of its uptrend channel at 3350-3370.

Near support is 3250, next at 3200, extending to the 3185 area.

COMP is at the midpoint of its uptrend channel and risk to reward doesn't favor putting on further bullish strategies. Buying a dip to 3200 area probably another story.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) remains within its bullish uptrend channel but doesn't have much further to go to touch its top end resistance area again. Risk to reward considerations suggest selling into rallies, especially to the upper trendline.

Resistance implied by the upper end of the aforementioned channel is at 2900-2910 currently.

Support is at 2810-2800, extending to 2750 at the low end of NDX's uptrend channel.

NDX has important resistance in the 2865 area near-term so a decisive upside penetration here would suggest further upside potential to 2900-2910. If current resistance is again not overcome, downside risk on another dip looks like at least back to 2800 if not back to the 2750-2770 area.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 (QQQ) tracking stock has a bullish chart. QQQ remains within its broad uptrend channel so the trend suggests further upside potential but probably only equal further upside potential, from current levels, relative to downside. QQQ is at the midpoint of the uptrend channel I'm working with. Downside potential on another dip is back to 67.5-66.9 or so.

Upside potential, assuming that key resistance at 70 is pierced, looks to be to the 71.6 area, the current top end of QQQ's uptrend channel.

RUSSELL 2000 (RUT); DAILY CHART:

I wrote last time (4/20) that the intermediate trend would remain bullish if RUT held above 900 and bullish it remains. I redrew RUT's up trendline on the last sell off and this lower sloping trendline then intersected in the 900 area, support also implied by the late-February lows.

Over the last 3 years earnings growth of smaller companies have been lagging those with revenues greater than $50 million. Nevertheless, this sector is still in some favor for investors; possibly more so with smaller investors.

RUT technical support is at 920, then at 906-900. A couple of daily closes below 900, certainly so on a weekly chart basis, would be bearish.

There is a well-defined line of resistance at 953 in RUT; next resistance then is assumed for the upper end of RUT's uptrend channel, currently intersecting around 993 and extending to 1000 over the next few trading sessions or by May 7th.



GOOD TRADING SUCCESS!


New Option Plays

Lingerie, Postage & The Cloud

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

L Brands, Inc. - LTD - close: 50.49 change: +0.20

Stop Loss: 49.40
Target(s): 54.50
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:
Formerly known as "Limited Brands", L Brands operates a number of specialty stores including Bath & Body Works and Victoria's Secret. The stock surged a couple of weeks ago and broke out to new record highs following better than expected same-store sales growth. Since then LTD has corrected and almost filled the gap. Now shares are on the rise again.

We want to be ready to catch the next move higher. Thursday's high was $50.83. I am suggesting a trigger to buy calls at $50.85. If triggered our target is $54.50 but we do not want to hold over the mid-May earnings report. This trade may only last a couple of weeks. FYI: The Point & Figure chart for LTD is bullish with a $68 target.

Trigger @ 50.85

- Suggested Positions -

buy the Jun $50 call (LTD1322F50) current ask $2.10

Annotated Chart:

Entry on April -- at $---.--
Average Daily Volume = 2.7 million
Listed on April 27 2013


NEW DIRECTIONAL PUT PLAYS

Stamps.com Inc. - STMP - close: 33.14 change: +0.52

Stop Loss: 34.05
Target(s): 30.00
Current Option Gain/Loss: Unopened
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
STMP is an Internet company that provides online postage. The company reported earnings a couple of days ago and blew away the estimates. Wall Street was expecting 39 cents a share. STMP delivered 57 cents. Revenues soared +13.8% to $32.1 million, better than the $30.4 million estimate. Management then raised their 2013 revenue and earnings guidance.

Naturally the stock rallied on such strong results and positive guidance. Yet investors may not have expected a rally from $25.65 to $32.60 on Thursday. The stock is up +41% in just the last four days and the rally is slowing down near its old highs and likely resistance near $34.00.

We agree that the earnings news and guidance is bullish. However, STMP has simply gone too far too fast. Odds are good the stock will see a pullback. I do consider this a higher-risk trade so keep position size small. We are suggesting a trigger to buy puts at $32.50. If triggered our target is $30.00. I'm listing our initial stop loss at $34.05 but readers could use a stop loss just above today's high (33.62) instead.

Trigger @ 32.50 *Small Positions*

- Suggested Positions -

buy the May $35 PUT (STMP1318Q35) current ask $2.55

Annotated Chart:

Weekly Chart:

Entry on April -- at $---.--
Average Daily Volume = 235 thousand
Listed on April 27 2013


VMware, Inc. - VMW - close: 71.46 change: -0.61

Stop Loss: 72.85
Target(s): 62.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
VMW is in the cloud computing industry. The company reported earnings a few days ago and beat estimates by four cents. Yet VMW lowered its Q2 guidance. Shares gapped down the next day on the news and since then VMW has garnered a couple of analyst downgrades.

Traders have been selling the rallies and VMW's bearish trend of lower highs has pushed the stock to major support at $70.00. A breakdown here would look very bearish. I am suggesting a trigger to buy puts at $69.75. If triggered our target is $62.50. More aggressive traders could aim lower. The Point & Figure chart for VMW is bearish with a $42 target.

Trigger @ 69.75

- Suggested Positions -

buy the Jun $67.50 PUT (VMW1322R67.5) current ask $2.15

Annotated Chart:

Entry on April -- at $---.--
Average Daily Volume = 2.5 million
Listed on April 27 2013



In Play Updates and Reviews

Has The Rally Stalled?

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 index seems like it's losing speed as it nears resistance at the 1600 level. Meanwhile the NASDAQ composite has stopped near resistance at the 3300 level.

Our ROST trade was triggered on Friday.

We want to exit our AMT trade on Monday. See play update for details.


Current Portfolio:


CALL Play Updates

American Tower Corp. - AMT - close: 83.84 change: +2.84

Stop Loss: 80.95
Target(s): 84.50
Current Option Gain/Loss: + 65.8%
Time Frame: Exit prior to earnings on May 1st
New Positions: see below

Comments:
04/27/13: After surging to new highs on Thursday shares of AMT hit some profit taking on Friday with a -1.0% decline. The trend is up but our time here is almost over. AMT is due to report earnings on May 1st, before the opening bell. I am suggesting we plan on closing positions on Monday, April 29th, at the closing bell. That's assuming AMT does not hit our exit target or stop first. Speaking of targets and stops I am moving our target down to $84.50 and moving our stop loss to $80.95.

- Suggested Positions -

Long May$80 call (AMT1318E80) entry $2.05

04/27/13 new stop loss @ 80.95, new target at $84.50
prepare to exit on Monday, April 29th, at the closing bell
04/25/13 new stop loss @ 80.40, readers may want to exit now since our option has doubled (+100%).

chart:

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


Conns Inc. - CONN - close: 44.35 change: -0.51

Stop Loss: 43.45
Target(s): 49.50
Current Option Gain/Loss: -28.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
04/27/13: CONN pulled back -1.1% on Friday. Shares are still hovering just below resistance at the $45.00 level. Thursday's high was $45.18. I would wait for a rally past $45.20 before initiating new positions.

Earlier Comments:
CONN has a high amount of short interest and a small float. A breakout past resistance could spark another short squeeze.

- Suggested Positions -

Long May $45 call (CONN1318E45) open $1.95

chart:

Entry on April 25 at $45.10
Average Daily Volume = 758 thousand
Listed on April 24 2013


Gilead Sciences - GILD - close: 51.38 change: -0.05

Stop Loss: 49.95
Target(s): 56.50
Current Option Gain/Loss: -32.4%
Time Frame: Exit PRIOR to earnings on May 2nd
New Positions: see below

Comments:
04/27/13: Prior to the rally on April 19th shares of GILD were struggling with resistance near the $52.00 level. Shares are once again struggling with resistance near the $52.00 level. Unfortunately we are almost out of time with this trade. We've only got a couple of days left. GILD is scheduled to report earnings on May 2nd. We will plan on exiting positions on April 30th at the closing bell assuming our trade lasts that long. I am inching our stop loss up to $49.95.

Earlier Comments:
I do consider this a more aggressive entry point.

- Suggested Positions -

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

04/27/13 new stop loss @ 49.95
Prepare to exit on April 30th at the closing bell

chart:

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


Ross Stores - ROST - close: 65.12 change: +0.09

Stop Loss: 63.45
Target(s): 69.00
Current Option Gain/Loss: - 9.6%
Time Frame: exit prior to earnings in late May
New Positions: see below

Comments:
04/27/13: Our new trade on ROST has been opened. Shares managed to outperform the broader market with a small gain on Friday. ROST hit our entry trigger at $65.25. The high was $65.40. Depending on your style of trading you could wait for a new relative high ($65.50) or a dip toward the simple 10-dma (near $63.60) as alternative entry points.

- Suggested Positions -

Long Jun $67.50 call (ROST1322F67.5) entry $1.55

chart:

Entry on April 26 at $65.25
Average Daily Volume = 2.3 million
Listed on April 25 2013


PUT Play Updates

Atlas Air Worldwide - AAWW - close: 37.65 change: -1.06

Stop Loss: 39.25
Target(s): 33.50
Current Option Gain/Loss: -20.5%
Time Frame: exit PRIOR to earnings on May 2nd
New Positions: see below

Comments:
04/27/13: AAWW reaffirmed the down trend with a -2.7% sell-off on Friday. The stock looks poised to slide past last week's low. Unfortunately we are almost out of time. AAWW is now scheduled to report earnings on May 2nd, before the opening bell. We do not want to hold over the announcement. I am suggesting we plan on closing positions on April 30th (Tuesday) at the closing bell. I am not suggesting new positions at this time.

- Suggested Positions -

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

04/27/13 only a couple of days left!
prepare to exit on April 30th at the closing bell
04/24/13 new stop loss @ 39.25

chart:

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


Agrium Inc. - AGU - close: 91.13 change: -1.21

Stop Loss: 92.05
Target(s): 85.25
Current Option Gain/Loss: Unopened
Time Frame: Exit prior to earnings on May 9th
New Positions: Yes, see below

Comments:
04/27/13: The recent bounce in the agricultural chemical names is reversing. Shares of AGU underperformed the wider market with a -1.3% decline on Friday. Shares look poised to test and break down below support near $90.00 soon.

Earlier Comments:
I am suggesting a trigger to buy AGU puts at $89.75. If triggered our target is $85.25. More aggressive traders could certainly aim lower. The Point & Figure chart for AGU is bearish with an $82 target.

NOTE: AGU could see some volatility when investors react to earnings from its rivals. POT is due to report earnings on April 25th. CF reports in early May.

Trigger @ 89.75

- Suggested Positions -

buy the May $90 PUT (AGU1318Q90)

chart:

Entry on April -- at $---.--
Average Daily Volume = 1.5 million
Listed on April 23 2013


S&P500 ETF - SPY - close: 158.24 change: -0.28

Stop Loss: 160.50
Target(s): 150.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
04/27/13: The stock market's recent rebound could be in trouble. The S&P 500 looks like it might be losing momentum as it nears resistance at the 1,600 level (160 on the SPY). A failure here would look like a short-term bearish double top pattern.

Currently the plan is to use a trigger at $157.00 to buy put options on the SPY. Use a stop loss at $160.50. The target is $150.25.

This is a much more aggressive entry point since the S&P 500's trend is still higher. Traders will want to strongly consider limiting your position size to reduce your exposure.

Trigger @ 157.00

- Suggested Positions -

buy the May $155 PUT (SPY1318Q155)

04/23/13 adjust strategy: new trigger @ $157.00,
new stop loss @ 160.50, new target @ 150.25
adjust option strike to 2013 May $155 put

chart:

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



Longer-Term Play Updates



Chicago Bridge & Iron Co. - CBI - close: 53.28 change: -0.22

Stop Loss: 49.25
Target(s): 62.50
Current Option Gain/Loss: July's: + 9.0% or Jan's: +3.4%
Time Frame: 3 to 4 months
New Positions: see below

Comments:
04/27/13: CBI built a nice bounce off technical support at its rising 100-dma this past week. Shares rallied more than $2.00 for the week before paring gains on Friday.

This coming week could be volatile for CBI. If the S&P 500 reverses at 1600 it could put downward pressure across the entire market. More importantly CBI is scheduled to report earnings on May 2nd, after the closing bell. Wall Street expects a profit of 77 cents a share. Shares of CBI could see big moves on Friday morning as investors react to earnings news.

Look for short-term technical support at the 100-dma. The $55-56 zone and its 50-dma is short-term resistance.

Please review our original play description on this page here.

- Suggested Positions -

Long 2013 Jul $55 call (CBI1320G55) Entry $2.20*

- or -

Long 2014 Jan $60 call (CBI1418A60) Entry $2.90*

*option entry price is an estimate since the option did not trade at the time our play opened.

chart:

Entry on April 22 at $51.53
Average Daily Volume = 2.5 million
Listed on April 20 2013