Option Investor
Newsletter

Daily Newsletter, Saturday, 5/11/2013

Table of Contents

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

Market Wrap

No Fear This Year

by Jim Brown

Click here to email Jim Brown

Investors don't appear to be afraid of May with three consecutive weeks of strong gains and no sellers in sight.

Market Statistics

The Dow did spend most of Friday in negative territory but every dip was bought. The S&P dipped briefly into negative territory at lunch time but it was seen as a buying opportunity. The Nasdaq never traded down and ended with a strong +27 point gain to 3435 and a new 12-year high.

The equity gains were unusual with the dollar surging to six-week high and crushing commodities at the open. That selling also reversed with crude oil losing only 42 cents at the close after being down more than $3 intraday. Unfortunately for gold owners there was still pain thanks to the spike in the dollar. Gold was down over $50 intraday but recovered somewhat to lose only -$21 to close at $1447.

Gold Futures Chart

The dollar index posted its biggest two-day gain since December after the weekly jobless claims on Thursday fell to five-year lows. After the strong nonfarm payrolls last week the decline in weekly claims suggests the U.S. economy may be improving.

The dollar rose as high as 101.3 against the yen and the first time since April 2009 it has been over 100. The yen traded at 78 to the dollar as recently as October. The decline in the yen suggests the "Abenomics" QE program in Japan is working. The Japanese Nikkei spiked +2.9% to 14,607 and the highest close since January 2008. The "short the yen, buy equities" crowd is celebrating this weekend.

Dollar Index Chart

Japanese Yen Chart

The yield on the ten-year treasury rallied to a six week high at 1.9% and prompted Bill Gross to tweet the 30-year bull market in bonds ended on April 29th when prices hit their recent high. He said the amalgamation of treasuries, mortgages and corporate bonds peaked on the 29th. With the talk likely to increase about the Fed trimming QE purchases the effective interest rates in the bond market should begin to climb. Once the Fed starts down this road it will be irreversible and yields will eventually rebound to 4% or higher. If treasuries continue to sell off next week we could see the beginning of the Great Rotation as some are calling it.

Ten Year Treasury Yield Chart

The only economic report making news on Friday was the Treasury Budget for April. The budget posted a surplus of $112.9 billion. That was +$53 billion more than April 2012. The rise in income is related to the higher than expected tax receipts in April. While that sounds great that the deficit will be reduced by $112.9 billion you need to look at the bigger picture. The budget deficit in March was -$106.5 billion and -$203.5 billion in February. There was a surplus in April simply because April is tax month. The trend will revert back to monthly deficits once the late filers pay their taxes. The year to date deficit is -$488 billion. Interest payments on the federal debt rose +11.7% in April to $26.8 billion.

We had a very light economic calendar last week but next week the activity increases. The biggest report will be the Philly Fed Manufacturing Survey on Thursday. If the Philly report shows an increase in activity we could be off to the races. The weekly jobless claims will also be watched to see if they will set a new five-year low. That would also be very bullish.

The Empire Manufacturing Survey on Wednesday is not as important as the Philly Fed. However, it has only been positive for the last three months and a return to contraction territory could be market negative. The recent high was +10.0 in February and it declined to +3.1 in April.

The price indexes are not expected to show any inflation and could possible show signs of deflation. The Producer Price Index (PPI) was negative at -0.6 last month but it was due mostly to a decline in energy prices. The Consumer Price Index (CPI) also declined by -0.2% but that was also due to energy weakness.

New residential construction is expected to decline by -63,000 homes to 973,000. This is related to seasonal factors and weather. Last month the starts were 1,036,000 and the first time over one-million since mid-2008. They were +47% over the same period in 2012.

Economic Calendar

In the strange but true category the Bureau of Economic Analysis (BEA) has decided to change the way it calculates the GDP. Hey, $1 trillion a year in QE has not budged the needle so let's change the calculation. Currently when a company makes a contribution to a pension fund that contribution is counted as wages and is added to the GDP. In the future the BEA has decided to take the amount of contributions promised by corporations and call them wages even though they have not been paid and may never be paid.

For example XYZ Airlines (just an example) could have a pension fund that is under funded by $10 billion. They may have been paying $200 million a year because times are tough for the airline industry. They owe the $10 billion. That is a promise to the pension fund so the BEA suddenly decides to add that $10 billion into the wage kitty in the GDP calculation. XYZ Airlines may never pay it. If oil rockets to $125 next year and they begin hemorrhaging money again they could go out of business. Now take that example and multiply it by the thousands of corporations in the U.S. that have underfunded pension plans. We will suddenly have trillions of dollars in GDP calculated on the promises from companies who don't have the money to actually fund the pensions they owe. This is a bad idea and obviously just one more way to make it look like the economy is better off than it is.

Speaking of current economic conditions the Bloomberg Macro Index declined to its lowest level since October 2012. In the chart below the macro index is the red line. Note the solid decline starting in late March. The Macro Index measures the difference between the actual reported economic data and the consensus estimates for that data. For instance if the Philly Fed Index was expected to come in at 5 and actually came in at 3 then the difference would be subtracted from the Macro Index calculation. Over the last six weeks there have only been a handful of economic reports that have met estimates and there have been dozens that missed estimates. As you can tell by the green line that represents the S&P 500 the market has ignored the economic news.

S&P vs US Macro Index (Chart from ZeroHedge.com)

The stock news was dominated on Friday by the Carl Icahn offer to Dell's board. He took off the gloves in his fight against Michael Dell and he was not pulling any punches. He said Dell's $13.65 offer for Dell Inc was highway robbery and shareholders were "literally getting screwed." In the Icahn offer shareholders would get $12 as a dividend and retain their shares of Dell. The shares would not represent 100% of Dell but a stub amount. Icahn would take a portion of Dell private and the Dell shares would represent a fractional ownership. Basically investors would have $1.65 in their shares after the $12 dividend and Icahn thinks that would increase significantly. When Icahn did a similar deal with RJR Nabisco the $1 stub ownership went to $8 within three weeks. Personally I think it is a good deal. The difference between $12 and $13.65 in cash is minimal. I would much rather have that $1.65 share in a company Icahn is going to try and turn around. If he fails you did not lose much and if he succeeds then it could be a big win.

Icahn said the first thing he would do is replace Dell as CEO. He claims the company needs a new culture. It has been stuck behind Michael Dell's management style since inception and the business environment has changed. Icahn is going to nominate a slate of 12 directors to replace the entire board. Icahn has a 100 million share position (6%) in Dell. Hedge fund manager Jim Chanos said he reshorted Dell over the last several months because he does not believe the deal will get done. He pointed out that Dell's cash and receivables were roughly $8 billion but their liabilities were more than $13 billion. With PC prices plunging Dell's margins are shrinking. More than 18% of Dell shareholders have already said they would vote against the $13.65 offer.

Dell Chart

Tesla Motors (TSLA) continued its rocket ride higher with another +11% gain on Friday. Tesla reported earnings of 12 cents compared to estimates of 4 cents earlier in the week and the reaction to the stock has been enormous. The stock closed at $55.71 on Wednesday before earnings and it closed at $76.78 on Friday for a gain of slightly more than $20. Revenue was $562 million and crushed estimates for $492 million. Gross margin was 17% and management expects that to rise to 25% by year end. They also raised production guidance to 21,000 vehicles for the year and the company believes end user demand will exceed 30,000 vehicles.

The earnings were great but it is the shorts driving the stock price. More than 55% of the shares are held by five entities and don't trade in the market. The latest numbers show 41% of the actual float is short. I suspect short interest declined a lot this week but you never know. TSLA shares are up more than 130% for the year. I am sure many traders are expecting this bounce to fade so they may be adding new shorts at this level. That has been dangerous in 2013 and with the new guidance I don't see any reason for the stock to go down other than just being overbought.

Tesla Chart

Rare earth miner Molycorp (MCP) rallied +31% on Friday after they reported a smaller than expected loss and higher than expected revenue. The company lost 15 cents compared to estimates for a loss of 31 cents. Revenue was $146.4 million compared to estimates for $135.6 million.

The company said they were seeing signs of returning demand after two years of contraction as the global economy declined. Over those two years the company has quadrupled production but because of falling prices they had to raise more cash with offerings and debt to fund the upgrades to the mine. Molycorp had become something of a joke in the market because they had to raise money so often. That trend appears to be over now that the higher production rates are producing more cash. Customers fearing an ever increasing price for rare earths had stockpiled inventories three years ago and then demand died. Those high inventories had depressed prices. Now that demand is returning those manufacturing customers are depleting inventories and are starting to return to normal purchasing cycles according to Molycorp. Actual rare earth demand is higher than annual production so once the inventories are depleted the high prices will return.

Molycorp had been heavily shorted as it declined from $80 in 2011 to less than $5 in April.

MolyCorp Chart

Priceline (PCLN) reported earnings on Thursday of $5.76 that beat estimates by 49 cents. That was a +35% increase in earnings. Revenue rose +26% to $1.3 billion that barely beat estimates of $1.28 billion. Those metrics would appear to be good but shares declined -$45 on Thursday night. Look out below for Friday if Thursday's after hours drop was any indication. We would have been wrong on that assumption. Despite warning that revenue growth would slow to 15%-22% and earnings per share to range from $8.87-$9.45 the stock soared. Analysts were looking for a +23.3% increase in revenue and EPS of $9.58. Priceline shares spiked +$28 on Friday. Brokers all jumped on the wagon in saying positive things about Priceline's international business, which some felt would rise up to 40%. RBC Capital reiterated their $900 price target. With $30-$50 swings you have to have nerves of steel to own PCLN but the long term outlook is still good. Buy the dip, not the spike.

Priceline Chart

The S&P-500 set a new high on Friday and it is the most overbought it has been since early 2011. There are 93.8% of the S&P stocks currently trading over their 200 day average. Bespoke claims the S&P is trading more than two standard deviations away from its 200-day and that is a level that almost always results in a correction. Apparently traders either don't know or don't care because the Fed QE put is in place. Until this changes the dips will be bought.

Percentage of S&P stocks over their 200 day average - 93.8%

The Bullish Percent for the S&P is an astronomical 86.2%. That means 86.2% of the S&P is showing a bullish signal. Historically anything over 70% is considered overbought and anything under 30% is considered oversold. Clearly the S&P is overbought and at a level that has produced sell offs in the past.

S&P-500 Bullish Percent Chart

At the same time the amount of margin debt has reached and possibly exceeded the record levels of July 2007 of $381.4 billion. The debt at the end of March 2013 was $379.5 billion. When we get the month end numbers for April I believe we will have a new record.

I have nothing against buying on margin but there is a bad historical precedent when margin debt hits the highs. When a market drop begins it tends to accelerate rapidly as stops are hit and margin calls delivered. Investors buying stocks on margin tend to be "weak holders" and that means an elevator market when a decent drop appears. They say bull markets climb the stairs up and take the elevator down.

Margin Debt Chart Courtesy of WSJ

The S&P managed to close at a new high on Friday at 1633. However that was below the intraday high on Thursday of 1635. Both of those numbers are right on uptrend resistance and in normal markets we should be expecting a decline soon. This has not been a normal market.

We are so far above support at 1580 it would take a major multiday reversal to reach it. That does not mean it is not possible but given the current investor sentiment it does not seem probable.

Just remember there is seldom a visible excuse for a market decline that can be seen ahead of time. Most declines are driven by a news headline that is unexpected. If it was expected it would already be priced into the market.

An example of what could crash our market would be news of an Israeli attack on Iran with assistance from the USA. A retaliation from Iran against oil producing nations in the Persian Gulf and the Strait of Hormuz could drive oil prices to $200 and our markets would implode.

Another possibility would be sending in 500 marines to Libya to evacuate U.S. citizens. That could happen on Monday after the riots this weekend. The marine force was put on standby on Friday along with a contingent of special operations forces in Germany. The U.S. and U.K. have already withdrawn some embassy personnel as violence is increasing.

Another headline would be an unexpected announcement from the Fed they were changing the QE program. This could come in the form of an authoritative comment from a Fed president that sounded like he had knowledge of a plan. Since a change is not expected until Q4 any near term announcement would be traumatic.

We can't plan for these events. We can only keep our stops in place and limit the damage when a headline occurs. Remember the margin issue. Everyone is expecting a short dip of 2% or so. If it is worse and sell stops are hit and margin calls delivered the decline can take on a life of its own. Be prepared.

S&P Chart - Daily

The Dow eased above 15,100 but it was a struggle. The close was lower than Thursday's high of 15,144 but still an uptrend. The Dow has plenty of room to run before reaching uptrend resistance but individual Dow stocks are starting to fade. This could be just exhaustion and the need to consolidate but it is more likely a need for profit rotation. Investors currently long need to take profits and let other investors with fresh money take their place.

Like the S&P the closest meaningful support is well back at 14,700. In today's market a -400 point decline to that support level would be traumatic. It will eventually come but it may require a headline to make it happen.

Dow Table

Dow Chart - Daily

The Nasdaq is clearly in breakout mode. After a couple days fighting uptrend resistance the battle was won and the Nasdaq is surging higher. That uptrend resistance should now be support at 3425 and we need a test and rebound to prove it. Tech stocks are being led by semiconductors and biotechs and there is no weakness like that evident in the Dow.

Nasdaq Winners & Sinners

Nasdaq Chart

The Russell 2000 posted a +2.17% gain for the week and was the best performing of the broader equity averages. The Transports manages +2.5% and the semiconductor index +3.3%. These moves are very bullish. When the small caps and transports are leading the rest of the markets will follow.

The Russell closed at a new high with a respectable +9 point gain on Friday. The Russell has plenty of room to run and it is starting to look like 1,000 is the next target. That could easily be reached this week without any major change in market sentiment.

Continue to watch the Russell 2000 for market sentiment and direction.

Russell 2000 Chart

The Transports are the first worry signal for next week. Note in the chart below the rally stalled at 6400 and both Thursday and Friday were lower highs. If the Transports were to dip below 6300 it would be an early warning signal that would likely carry over into the Russell and then the big cap indexes.

Dow Transports Chart

Thursday's rumored article on how the Fed plans to exit the QE program was published in the WSJ late Friday. The article was written by Jon Hilsenrath and he sounds a lot like Dallas Fed president Richard Fisher. He claims the Fed has mapped out a strategy to reduce the amount of bonds they buy in "careful and potentially halting steps, varying their purchases as their confidence in the job market and inflation evolves." Hilsenrath said, "The timing of this program is still being debated AND it might not be a clear and steady path the market expects." The Fed wants to avoid a clear and steady path in order to keep expectations uncertain. That prevents traders from front running the Fed. If purchases can go up or down at any time then speculators don't know which way to bet.

A WSJ survey showed that 55% of economists expect the first cut in purchases to come in Q4. However, 45% still expect the Fed to wait until 2014 or later. Despite no concrete data in the article this could disrupt markets on Monday. Any discussion in print of the QE termination plan always roils the market. Hilsenrath has had his share of insightful articles on the Fed in the past that tended to come true. The whispered release date for a termination plan is the September 18th FOMC meeting announcement. That is the first meeting after the Fed's Jackson Hole conference that Bernanke has decided to attend. He normally gives the keynote speech. Analysts believe that is a sign Bernanke is leaving the Fed when his term is up in January. I don't blame him. Unwinding this mess is going to be potentially catastrophic and he does not want to be in the hot seat when it happens.

Bernanke gave a speech on Friday where he said, "In light of the current low interest rate environment, we are watching particularly closely for instances of 'reaching for yield' and other forms of excessive risk-taking, which may affect asset prices and their relationships with fundamentals." That may have been the wink and nod warning that a change is coming. The term "bubble" has been used a lot lately on multiple markets. If enough FOMC voters start believing the bubble talk they could decide to pop it before it became too large.

The equity markets are addicted to stimulus and eventually there will be withdrawal pains.

The consensus this weekend is that there will be a short decline in our immediate future and that will be followed by a new leg higher to SP 1700. Be alert for the excuse the broadcasters will blame for the next market decline.

If you want to take your mother somewhere unusual for Mothers Day you could try Hooters. They are offering to give $10 in free food to any mother accompanied by a child. If you are even remotely considering this as an option you need serious psychological help.

Enter passively and exit aggressively!

Leigh Stevens just completed two very good articles on ETFs in the Traders Corner section of the website. If you trade ETFs or are thinking about constructing an ETF portfolio you should read these articles. Link to ETFs

Jim Brown

Send Jim an email

"The only function of economic forecasting is to make astrology look respectable."
John Kenneth Galbraith


Index Wrap

Momentum Slows a Bit; Trend Still Solidly Up

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

Some facets of the S&P and Nasdaq dailyindex charts suggest those indices are at or near technical resistance. In a larger longer-term chart perspective, upside potential remains considerable.

There's potential near resistance implied by the top end of the uptrend channels highlighted on my daily charts. Quite a different or broader perspective is obtained by looking at the broad weekly chart uptrend channels in SPX, OEX, COMP and NDX that will follow the shorter-term daily charts this week.

There's considerable upside potential suggested by how high the major indexes would get before hitting the upper end of weekly chart channels. Hitting the upper end of such broad channels often is at the near the end point for that up leg; or, at least marks the point where the prior very strong upside momentum slows way down.

This market is at high risk for a shakeout but it would take significant bearish news to slow the money going into equities. Right now stocks are the most attractive current place to put money to work that's also quite liquid.

I'll be starting to comment on any noteworthy changes or projections related to the 9 component sectors of the S&P 500 represented by the SPDR Exchange Traded Fund (ETF) stocks seen below, going from the 2-year highest return ETF to lowest:

1.) Health Care Select Sector; SPDR: XLV: - e.g., JNJ, PFE, MRK

2.) Consumer Discretionary Select Sector; SPDR: XLY - e.g., DIS, MCD, AMZN

3.) Consumer Staples Select Sector; SPDR: XLP - e.g., PG, WMT, CVS

4.) Utilities Select Sector; SPDR: XLU - e.g., DUK, SO, D

5.) Financial Select Sector; SPDR: XLF - e.g., JPM, WFC, BAC, C;

6.) Technology Select Sector; SPDR: XLK: - e.g., AAPL, MSFT, GOOG;

7.) Industrial Select Sector; SPDR: XLI - e.g., GE, UTX, MMM;

8.) Energy Select Sector; SPDR: XLE -e.g., XOM, CVX, SLB

9.) Materials Select Sector; SPDR: XLF - e.g., DD, DOW, FCX;

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) continues to maintain a strong bullish pattern, but potential technical resistances would appear to come in at the top end of the daily chart uptrend channel at 1640 and extending over time to 1660 and higher.

Near support is in the 1600 area, extending to 1580-1570. SPX continues to hover just under the upper overbought 'extreme' line of the Relative Strength Index (RSI). These kind of high RSI readings have often gone on for extended periods in strong bull markets like this one. I can also say that market 'timing' on just an arbitrary crossing of a line, is mostly a losing proposition. These high RSI readings do provide a long period of the yellow light of 'caution'.

Of the S&P sector tracking stocks this past week we saw neutral to bullish performance except for XLU, the Utilities ETF which had a sharp pullback and possibly the start of a further deeper slide.

The weekly chart is seen after first chart below and the weekly chart pattern suggests considerable more upside possibilities.

S&P 500 (SPX); WEEKLY CHART:

The weekly chart uptrend channel is seen next and the reason I include here, where I don't usually, shows visually in a strong way, how much further upside potential SPX has before hitting the upper ('resistance') end of its broad uptrend channel at 1750.

SPX has gotten well into its long-term 'overbought' zone and the 13-week RSI is headed back up again showing renewed upside momentum. Corrections are to be expected but any tradable top can be far off still in terms of price and time.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) is in the same very strong bullish pattern as the broader 500 Index. OEX also has the same suggestion of an approach to resistance in that it has hit potential resistance implied by the upper end of a well-defined uptrend channel as seen with the OEX daily chart below.

Resistance/selling pressure may develop 736-740 at the upper trendline. If so, this could either start a pullback or simply be a 'pivot point' so to speak where the rally slows down; prices are still going up, just not as fast. Quite often the previous steep run up RATE isn't sustained but a slower advance continues. Important to know that an advance is at risk of slowing when holding index calls in an unhedged bullish position.

Support comes in at 720-715, extending to the lower trendline at 706. Resistance above 736-740, at the upper end of the price channel, is at 750. OEX could get to 770 and just begin touching resistance implied by its weekly chart uptrend channel line.

S&P 100 (OEX) INDEX; WEEKLY CHART

As noted already regarding MAJOR resistance, it begins from a chart perspective, at 770 currently or the top end of the broad weekly chart uptrend channel highlighted below. 700 shows up as important support, the maintaining of which, is key to keeping an UP intermediate trend.

The 13-week Relative Strength Index (RSI) has been hitting the high 'overbought' zone. I don't predict a tradable top based on high 'overbought' RSI levels unless there is a chart 'confirmation' by a bearish downside reversal, hitting a prior high, reversal at a resistance trendline, etc.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) chart continues in a strongly bullish pattern and has continued working higher within the band of its two uptrend channel lines. Unlike the two S&P indices, the upper end of INDU's uptrend channel comes in well above the Dow's most recent close; at 15330 extending to 15400 (and higher) over time.

Without any lines of apparent resistance, chart wise there's no bearish even near-term case for a pullback or rally slowdown. Not to say that a sharp 'overbought' correction won't start from out of the blue but I don't see major resistance/selling interest coming in until the Average gets to the 16000 area.

Two resistance points are assumed at the upper channel line; first at 15330 and extending over the coming week to 15400. The strongly bullish Dow stocks are still looking quite robust.

Near support is assumed at what was key prior resistance in the 14850 area, with support then extending to 14800.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) chart remains strongly bullish now with two weeks of sizable gains. COMP has broken out above resistance implied by the upper end of the prior multimonth uptrend channel and a broader channel line suggests possible, with a question mark, next technical 'resistance' coming in around 3470 in the near-term. On a weekly chart basis, as highlighted on the chart following the daily COMP chart, there's no projected resistance at the upper channel line before 3800.

I wrote last week that I didn't think COMP would jump one bullish track and have an accelerating advance but it did. I would say WRONG! on that point. I didn't project price targets last time to beyond 3400 unless working with the weekly chart, where 3600 could easily be a reasonable objective.

I anticipate support at the low end of COMP's upside price gap, in the 3350 area, but highlighted support on my first COMP chart is at 3300 at the 21-day moving average, with a next key support at the up trendline, currently intersecting just over 3200.

The 13-day RSI remains quite high as it has climbed to a level where COMP has tended to at least level off in prior rallies; or, has worked lower.

NASDAQ COMPOSITE (COMP) INDEX; WEEKLY CHART:

Important on a weekly chart basis is the well-defined broad uptrend price channel that has been traced out with the Nasdaq Composite (COMP) multiyear advance dating from early-2009. In terms of another move up to or toward the upper channel line (and implied resistance), such an intersection would come into play at 3800 or higher.

COMP is knocking at the door of the 'overbought' RSI zone on a 13-week basis but isn't yet there. Moreover, in strong bull markets overbought conditions can go on for lengthily periods before there's a sizable retracement.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) chart showed strong upside bullish acceleration after the overnight upside price gap of the week before last; a gap that would be 'filled in' at 2915, an area expected to offer technical support on a pullback.

As with the Composite chart, the NDX daily chart's uptrend price channel of recent months suggests potential resistance just overhead, at 3000. 3000 can be anticipated to be a pivotal point (as resistance or 'signaling' an upside breakout) just because of its being an even round 1000 increment.

The 13-day RSI has gotten as high as it has in months, which is how momentum indicators work, since this recent rally ran 200+ points in a short time span.

NASDAQ 100 (NDX); WEEKLY CHART:

The weekly NDX chart, with its much larger time frame and expanded uptrend channel, suggests only minor resistance around 3000 and no projected technical resistance seen before 3270, at the current top end of NDX's broad weekly uptrend channel.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 (QQQ) tracking stock is in the same accelerated uptrend as the underlying NDX. With the index (ETF) stock I'm no longer projecting an upper end of QQQ's uptrend channel as implying immediate overhead resistance beyond 73.2; a next objective and possible resistance computed by other means comes in at 75-75.3.

In terms of the weekly chart (not shown), the upper resistance end of that broad uptrend channel comes in well above current levels; i.e., at 80.3 currently.

Near technical/chart support is at the low end of QQQ's recent upside gap at 71.4; my first highlighted green support arrow comes in at 70.3, with pivotal support at the lower trendline, currently intersecting at 68.7.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) Index was last week in the approximate mid-point of its broad bullish uptrend channel. I figured, on a risk to reward basis, further upside potential was approximately equal to the downside possibilities on a next price swing. The intermediate trend was more or less 'confirmed' as UP when RUT crossed above its prior line of resistance at 953, which is noted as support by the highlighted green up arrow.

If in bullish strategies from lower levels, there was every reason to maintain positions. At 1000 it's another story. There's potential near resistance at 980, with more pivotal resistance coming to play in the 1000 area. 1006 is where RUT's upper trendline intersects currently, implying possible trendline resistance.

The Russell 2000 should have support at 940, then strong trendline support in the 920 area. 900 is an important support. A Close below 900, not reversed within a day, calls the intermediate UP trend into question but the trend only reverses to DOWN if 900 is penetrated as the last key downswing low.



GOOD TRADING SUCCESS!


New Option Plays

Retail & Healthcare

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate(s), consider these stocks as possible trading ideas and watch list candidates. Some of these stocks may need to see a break past key support or resistance:

(bullish ideas) MHK, JNJ, PG, SRCL, COST, ACE, N, GRA, NSC, KEX, SBUX, NKE, TSCO, BMRN, CBRL, CAB



NEW DIRECTIONAL CALL PLAYS

Michael Kors - KORS - close: 60.36 change: +0.95

Stop Loss: 57.65
Target(s): 64.75
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to earnings on May 29th
New Positions: Yes, see below

Company Description

Why We Like It:
High-end apparel retailer KORS is on the rise again. Shares peaked back in February near $65 a share. The stock suffered -20% correction before investors started buying it again near $52 and its 200-dma. Now KORS has broken through resistance and looks poised to make another run at $65.00.

Friday's high was $60.53. I am suggesting a trigger to buy calls at $60.65. If triggered our target is $64.75. More conservative traders may want to wait for KORS to retest its rising 10-dma and then buy a bounce off the 10-dma as an alternative entry point.

Trigger @ $60.65

- Suggested Positions -

buy the Jun $62.50 call (KORS1322F62.5) current ask $2.80

Annotated Chart:

Weekly Chart:

Entry on May -- at $---.--
Average Daily Volume = 3.5 million
Listed on May 11 2013


MEDNAX, Inc. - MD - close: 90.48 change: +1.12

Stop Loss: 88.90
Target(s): 98.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
MD is in the healthcare sector and right now healthcare is hot. MD reported earnings a few days ago. The company beat estimates by a penny but management guided Q2 estimates lower. It seems that investors don't care about the negative guidance. Traders bought the dip and now the stock is about to breakout to new all-time highs.

The early April high was $91.00. I am suggesting a trigger to buy calls at $91.15. If triggered our target is $98.50. However, I am suggesting we keep our position size small. MD doesn't trade a lot of volume and the options do not see a lot of volume either.

Trigger @ $91.15 *Small Positions*

- Suggested Positions -

buy the Jun $95 call (MD1322F95) current ask $0.85

Annotated Chart:

Entry on May -- at $---.--
Average Daily Volume = 242 thousand
Listed on May 11 2013



In Play Updates and Reviews

No Sell In May Yet!

by James Brown

Click here to email James Brown

Editor's Note:

There has been no "sell in May" effect for the stock market yet. Instead the S&P 500 is up three weeks in a row and hitting new record highs.

We want to exit our LL trade on Monday morning.

AMGN has been removed.
Both ULTA and VRTX were stopped out on Friday.


Current Portfolio:


CALL Play Updates

The Boeing Co. - BA - close: 94.24 change: -0.37

Stop Loss: 92.40
Target(s): 99.00
Current Option Gain/Loss: + 4.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/11/13: It would appear that the rally in BA has stalled a bit. The stock spent the entire week churning inside the $94-95 zone. Technical momentum oscillators are starting to look top heavy. More conservative traders may want to ratchet up their stop loss. I am not suggesting new positions at this time.

- Suggested Positions -

Long Jun $95 call (BA1322F95) entry $2.02

chart:

Entry on May 06 at $94.25
Average Daily Volume = 4.9 million
Listed on May 04 2013


HanesBrands Inc. - HBI - close: 50.53 change: +0.57

Stop Loss: 48.75
Target(s): 54.75
Current Option Gain/Loss: -17.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/11/13: As expected shares of HBI bounced from short-term support near $50.00 and its simple 10-dma. Readers can use Friday's bounce as a new bullish entry point to buy alls. More conservative traders could tighten their stop loss.

NOTE: HBI is scheduled to begin trading ex-dividend on May 16th. The quarterly cash dividend should be 20 cents.

- Suggested Positions -

Long Jun $50 call (HBI1322F50) entry $2.00

chart:

Entry on May 08 at $50.72
Average Daily Volume = 1.4 million
Listed on May 07 2013


Lumber Liquidators - LL - close: 88.96 change: +3.76

Stop Loss: 79.45
Target(s): 89.50
Current Option Gain/Loss: +56.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/11/13: LL came so close to hitting our target. Shares outperformed the market on Friday with a +4.4% gain. The intraday high was $89.34. Our bullish exit target has been $89.50. I am suggesting we go ahead and exit immediately on Monday morning at the opening bell.

Earlier Comments:
LLL had a lot of short interest prior to the company's earnings report and the good news sparked a short squeeze. The most recent data listed short interest at 27% of the small 26.2 million share float but that number may be out of date. If triggered our short-term target is $89.50. I would keep our position size small to limit our risk.

*Small Positions* - Suggested Positions -

Long Jun $85 call (LL1322F85) entry $4.10

05/11/13 prepare to exit on Monday morning (May 13th) to lock in gains
05/07/13 triggered on gap open higher

chart:

Entry on May 07 at $84.35
Average Daily Volume = 761 thousand
Listed on May 06 2013


L Brands, Inc. - LTD - close: 51.64 change: -0.44

Stop Loss: 50.40
Target(s): 54.50
Current Option Gain/Loss: + 8.4%
Time Frame: Exit PRIOR to earnings on May 22nd
New Positions: see below

Comments:
05/11/13: Profit taking in shares of LTD continued on Friday after the stock was downgraded Friday morning. Shares gapped open lower at $51.49 and slipped below short-term technical support at its 10-dma before paring its losses by the closing bell.

Aggressive traders could use Friday's intraday bounce as a new entry point to buy calls. More conservative traders may want to adjust their stop to Friday's low (50.82).

Keep in mind we that we want to exit prior to LTD's earnings report on May 22nd.

- Suggested Positions -

Long Jun $50 call (LTD1322F50) entry $2.26

05/11/13 we want to exit prior to earnings on May 22nd.
05/07/13 new stop loss $ 50.40

chart:

Entry on May 03 at $50.85
Average Daily Volume = 2.7 million
Listed on April 27 2013


Ross Stores - ROST - close: 65.85 change: +0.12

Stop Loss: 64.95
Target(s): 69.00
Current Option Gain/Loss: - 6.4%
Time Frame: exit prior to earnings in late May
New Positions: see below

Comments:
05/11/13: ROST's performance these last few days has been disappointing. Some of the technical momentum indicators are starting to look bearish. Friday's low was $65.21. I am raising our stop loss to $64.95. More conservative traders may want to consider an early exit instead. I am not suggesting new positions.

- Suggested Positions -

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

05/11/13 new stop loss @ 64.95
05/09/13 new stop loss @ 64.70
05/04/13 new stop loss @ 64.15
05/01/13 new stop loss @ 63.90

chart:

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


WellPoint Inc. - WLP - close: 75.89 change: +0.50

Stop Loss: 73.35
Target(s): 79.75
Current Option Gain/Loss: +16.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/11/13: The healthcare sector continued to show relative strength on Friday and WLP was no exception. The stock is up four days in a row. Readers may want to wait for WLP to dip back toward $75.00 before considering new bullish positions.

- Suggested Positions -

Long Jun $75 call (WLP1322F75) entry $1.91

chart:

Entry on May 08 at $75.25
Average Daily Volume = 2.0 million
Listed on May 07 2013


PUT Play Updates

Allergan Inc. - AGN - close: 104.18 change: +1.03

Stop Loss: 105.30
Target(s): 98.50
Current Option Gain/Loss: -24.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/11/13: Positive analyst comments helped AGN rebound on Friday. Shares gained +0.99%. The $105 level remains overhead resistance. Readers could watch for another failed rally near $105 as a new bearish entry point to buy puts.

Earlier Comments:
There is potential support at $100.00, at the 200-dma near $97.85, and at the May 1st low of $96.77. I am suggesting we aim for $98.50.

- Suggested Positions -

Long Jun $100 PUT (AGN1322R100) entry $1.85

chart:

Entry on May 09 at $103.46
Average Daily Volume = 2.4 million
Listed on May 08 2013


Expedia Inc. - EXPE - close: 58.87 change: +2.90

Stop Loss: 60.25
Target(s): 1st target: 55.10, 2nd target 53.00
Current Option Gain/Loss: -20.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/11/13: Ouch! EXPE surged +5.1% and we can lay the blame on PCLN. Thursday night PCLN reported a strong earnings report but issued cautious guidance. Shares of PCLN were down -$20 after hours on Thursday night. The stock reversed sharply by Friday morning and surged +3.7% to a new 52-week high thanks to multiple analysts raising their price targets on PCLN. This strength in PCLN probably sparked some short covering in EXPE. Shares of EXPE are now testing technical resistance at the simple 200-dma near 59.35. Beyond that the $60.00 level should be resistance. I am not suggesting new positions at this time.

Earlier Comments:
Please note I am listing two targets. Our conservative target is $55.10 since the $55 level has been support in the past. Our more aggressive target is $53.00. You choose which target you want to exit at. FYI: The Point & Figure chart for EXPE is bearish with a $55 target.

- Suggested Positions -

Long Jun $55 PUT (EXPE1322R55) entry $1.50

chart:

Entry on May 07 at $58.48
Average Daily Volume = 2.9 million
Listed on May 06 2013



Longer-Term Play Updates



Chicago Bridge & Iron Co. - CBI - close: 57.15 change: -0.10

Stop Loss: 51.90
Target(s): 62.50
Current Option Gain/Loss: July's: +81.8% or Jan's: +44.8%
Time Frame: 3 to 4 months
New Positions: see below

Comments:
05/11/13: CBI saw a little bit of profit taking on Friday but overall it was a good week. Shares are up three weeks in a row and arguably short-term overbought. It might be time for a pullback soon. Broken resistance at the 50-dma and near $55 could offer new support.

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*

05/08/13 new stop loss @ 51.90
*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


CLOSED BEARISH PLAYS

Amgen Inc. - AMGN - close: 106.72 change: +2.16

Stop Loss: 106.75
Target(s): 96.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/11/13: AMGN had been underperforming both the broader market and its peers in the biotech sector the last couple of weeks. Shares looked poised to break down further. That changed on Friday with a +2.0% gain and a bullish breakout over the trend of lower highs. Our trigger to buy puts was $103.65 but AMGN never hit it. I am removing AMGN as a bearish candidate.

Trade did not open.

05/11/13 removed from the newsletter

chart:

Entry on May -- at $---.--
Average Daily Volume = 1.4 million
Listed on April 30 2013


Ulta Salon - ULTA - close: 92.18 change: +2.79

Stop Loss: 92.05
Target(s): early target: $85.25, longer target: $81.00
Current Option Gain/Loss: -32.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/11/13: ULTA completely reversed Thursday's -2.09 decline with a +2.79 gain on Friday. There was no follow through lower as traders bought the dip in ULTA at its 10-dma. Shares managed to push through a crowd of potential resistance and trade above its 100-dma, 150-dma, 200-dma, 300-dma, and the $92.00 level. The stock hit our stop loss at $92.05.

- Suggested Positions -

Jun $85 PUT (ULTA1322R85) entry $2.80 exit $1.90 (-32.1%)

05/10/13 stopped out at $92.05

chart:

Entry on May 10 at $89.73
Average Daily Volume = 1.1 million
Listed on May 09 2013


Vertex Pharma. - VRTX - close: 80.43 change: +3.65

Stop Loss: 80.50
Target(s): 66.00
Current Option Gain/Loss: -43.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/11/13: Biotech stocks were a hot spot in the market on Friday with the BTK index gaining +3.3% and the IBB biotech ETF surging +2.9%. Both closed at new all-time highs. This didn't bode well for VRTX bears. Shares broke through the short-term bearish trend of lower highs. There was a late day acceleration higher. This looks like shorts racing to get out as the sector continued to climb. Our stop loss was hit at $80.50.

- Suggested Positions -

Jun $75 PUT (VRTX1322R75) entry $3.60 exit $2.05 (-43.0%)

05/10/13 stopped out

chart:

Entry on May 02 at $76.30
Average Daily Volume = 3.8 million
Listed on May 01 2013