Option Investor
Newsletter

Daily Newsletter, Saturday, 6/29/2013

Table of Contents

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

Market Wrap

Spin Control Working

by Jim Brown

Click here to email Jim Brown

Despite the Dow's loss on Friday the spin control by a large number of Fed presidents succeeded in creating a market rebound.

Market Statistics

The market started off in the dumps on Friday with the Dow down -132 points but it returned to positive territory intraday before succumbing to the negativity of the Russell rebalance to lose -114 at the close. The Nasdaq closed slightly higher with a +1 point gain.

The historical negative bias for the week ahead of the Russell rebalance failed to appear due to an abundance of window dressing and a barrage of positive comments from multiple Fed officials. The Fed speakers were unanimous in saying the FOMC was not going to be tapering QE purchases until it is justified by the economic numbers. This is the same thing Bernanke said but the market heard it differently. The flurry of comments this week stressed the requirement for economic justification and the potential for no QE reductions until 2014. If the Fed did make a change it would be because the economy was improving and the market should embrace that potential.

The combined markets traded 9.7 billion shares on Friday as a result of the Russell rebalance and the biggest volume was at the close. The rebalance will produce a positive bias for next week as the fund managers complete their purchases of those stocks added to the Russell indexes. The first week of July is typically bullish as quarter end retirement contributions hit a market with very light volume.

The pivotal event is going to be the Nonfarm Payrolls next Friday. Coming the day after July 4th and right in the middle of the long weekend the volume is going to be extremely low and the volatility will be huge at the open and quickly dwindle to nothing after the first couple hours.

The payroll report will set the trend for the month since the numbers will be very Fed centric. The consensus estimate is for a gain of +165,000 jobs in June compared to a gain of +175,000 for May. The Fed wants to see an average gain of +200,000 before reducing QE and there has only been one month of more than 200,000 new jobs this year.

Any number lower than 165,000 is going to see the market assuming no end to QE in the near future and equities are likely to go higher. It is back to "bad news is good news" again. If jobs are higher than 165,000 and closer to 200,000 then worries over an early end to QE will immediately return. Bonds will be sold and equities will be sold. I know it is not logical but the stock market is rarely logical. Just look at the chart for the prior Wednesday and see the proof.

Dow Chart - June

If traders would just focus on the current economics they would see the recovery is still struggling. The Fed is not going to reduce QE purchases until there is a positive trend in the monthly economic reports.

The ISM Chicago, formerly Chicago PMI, dropped sharply from 58.7 in May to 51.6 in June. That is just a fraction over contraction territory and the biggest monthly drop in more than four years. New orders fell -4 points to 54.6 and the order backlog positively imploded from 53.1 to 38.4 and deep into contraction territory. The backorders are the window into future production activity. When backorders decline the new orders are processed faster and the plants will begin to run out of work.

ISM Chicago

On Thursday we saw the Kansas Fed Manufacturing Survey for June and it fell back into contraction territory. The headline number declined from +2 to -5 and contraction territory. New orders declined from +6 to -10. The production component declined from +5 to -17. The gap between new orders and inventories declined from +8 to -16. Clearly the manufacturing sector is slowing and that could be reflected in next week's reports.

Kansas Fed Manufacturing Chart

On Monday we will get the national ISM Manufacturing and it may not be positive. The May headline number was 49.0 representing contraction in the sector and estimates for June are for a minor rebound to 50.5. Given the drop in the Chicago ISM and Kansas Manufacturing we could see a downside surprise.

The final headline number on Consumer Sentiment for June declined slightly from 84.5 to 84.1 but it is still a five-year high. The present conditions component declined from 98.0 to 93.8. The expectations component rose from 75.8 to 77.8.

Consumer Sentiment Chart

Other events on the economic calendar for next week include China's manufacturing PMI on Monday. It is expected to decline from 50.8 in May to contraction territory at 49.7. That will be the first time in nine-months for a negative reading. Multiple supporting reports have declined in recent weeks and the initial HSBC Flash PMI was negative at 48.3. New orders are at a ten-month low.

Adding to the gloom over China was weakening exports. China's exports only grew by +1% in May and the slowest rate in a year.

A disappointing PMI number will cause further weakness in commodities including coal. It will also suggest no real improvement in Europe or the USA since the majority of China's manufactured products are shipped to those geographies.

Economic Calendar

Fed officials normally have a one-week blackout period before and after an FOMC meeting in order to avoid saying something that is contrary to the official statement. You can't have a bunch of people spouting forecasts based on their own opinion. The FOMC is supposed to maintain a united front to avoid unexpected market volatility.

That black out concept fell apart last week when every Fed head with a microphone tried to walk back the Bernanke comments. One Fed president even released his own competing press release. To say there was division in the Fed would be an understatement.

The latest in the parade of speakers was San Francisco Fed President John Williams who spoke Friday afternoon. Williams rocked the boat several months ago when he said the Fed could cut back on QE purchases as early as this summer. He has clearly undergone a conversion experience because on Friday he was repeating the new party line. Now he claims the Fed will not cut back on purchases unless the economic targets are met. "It is too early to slow bond buying." Thank you John for helping to clarify the new Fed communication standards.

Maybe we should petition the FOMC to go back to the Greenspan era methods of no communication and the confusing Greenspeak when Greenspan was pressed for answers in congressional testimony. He admitted after his term ended that he gave long winded confusing answers using words he knew lawmakers were unfamiliar with in order to avoid having to give a truthful response.

All our communication in the Greenspan era came from the FOMC statements. Bernanke's new version of an open Fed has let us see the sausage making behind the scenes and sometimes it is not pretty.

Random comments from this week include Jeffery Lacker, "Not only is the Fed leaving the punch bowl in place it will continue to spike the punch."

William Dudley said the markets were "out of sync" with the Fed. The "reaction of the futures markets for short term rates appears out of keeping with my assessment of the committee's intentions." An increase in interest rates is "very likely a long way off." Bond purchases could be prolonged if economic performance fails to meet Fed forecasts. "I would expect that the asset purchases would continue at a higher pace for longer."

Fed governor Jerome Powell said "I want to emphasize the importance of data over date." And, "In all likelihood, the current" large scale asset purchases "will continue for some time."

Dallas Fed President Richard Fisher had the best quote of the week. He said he still favors a reduction in stimulus but "I am not in favor of going from wild turkey to cold turkey overnight." Fisher said investors overreacted to the Bernanke comments. He also said I agree "we should dial back stimulus" but only if the economy continues to grow as the Fed economic targets are reached.

I suspect the barrage of counterattacks on the Bernanke comments are over. After the holiday the Fed heads will go back to work and try not to ruffle the markets. The next Fed induced headline problem will be the Bernanke testimony on July 17th. Because of the recent market volatility lawmakers are sure to press him in hopes of getting 30 seconds of TV time if they can get him to say something that roils the markets again. It is not what is best for the U.S. but what they think will get them on TV.

The confusion over the end of QE crushed the bond market. TrimTabs.com said a record $61.7 billion was withdrawn from bond funds and ETFs during June.

Mortgage rates surged at the fastest weekly rate in 26 years.

Ten Year Treasury Yield Chart

Dollar Index Chart

Even if the Fed continues QE4 for another six months the program is not working the way it was intended. Stocks are going higher. Interest rates were low until recently. Unfortunately the economy is still struggling. The Q1 GDP was revised down from +2.4% to +1.78% last week. The odds are good the Q2 GDP will be even less as a result of the Sequestration. The chart below shows the rolling six-month GDP average. This smoothes out some of the seasonal spikes and gives a truer picture of the economic trend. For Q1 that average reached a five year low. If Q2 comes in at less than 1% growth the Fed should be really nervous. The risk of another recession is growing.

GDP - Six-Month Average Chart - Source: MSN Money

The entire taper caper was a serious error on the part of the Fed that I believe was rushed because of Bernanke's impending exit. With the economy so weak I don't understand why the committee would open up this can of worms at this time. They may have wanted to slow the equity market gains but they definitely did not want to see mortgage rates spike the most in 26 years. They effectively gave back three months of QE benefits in only a week and made the committee look like a bunch of amateurs. They have decades of history and experience to draw from and Bernanke himself is a student of the Great Depression. With inflation, as evidenced by the PCE, at 0.7% and falling the risk of deflation is growing not receding. The Fed wants inflation in the 2-2.5% range.

PCE Inflation Chart

In the official outlook that accompanied the FOMC statement the Fed actually cut its growth expectations. If QE is to be reduced based on the health in the economy then tapering should not even be a topic until the growth targets are reached. That could be several quarters from now if not later. Fed President Bullard said, "Policy actions should be undertaken to meet policy objectives, not calendar objectives." I believe that is the crux of the matter. Bernanke wanted to get the taper underway before his term expires in January so his legacy would be protected. Secondly, with the Fed's balance sheet approaching $4 trillion the committee is becoming increasingly aware that exiting this overly accommodative policy without a disaster is going to be an impossible task. The longer they let QE continue the harder it will be to exit. This reminds me of the line in the Twilight Zone movie. "Do you want to see something really scary?" Stay tuned. The climax to the QE movie is still ahead. When it arrives the taper tantrum we saw last week will look like a walk in the park.

Just the potential for the Fed to taper caused investors to withdraw $13 billion from equity ETFs in June. That was a record and the first monthly outflow since December 2011. You can imagine what will happen when the Fed actually begins to really end QE. For reference YTD inflows are just short of $71 billion and less than the $76 billion in the first half of 2012. ETFs saw inflows of $188 billion for all of 2012. Total funds invested in ETFs are $1.437 trillion. As much as 70% of trading on the NYSE is in ETFs and high frequency trading.

The combination of Fed events, rising equities, falling treasuries and the feeling of impending doom in China helped push gold to its worst quarterly loss in 45 years. Gold ended the first quarter at $1596 and closed Q2 at $1227 for a -23% decline. At one point on Friday the yellow metal traded as low as $1179.40. The $1200 level is seen as serious psychological support and coin and bullion buying around the world soared as the price dropped.

At $1200 it is below the cost to produce it at many mines and production from those mines will be halted until prices rise. Newmont (NEM) said it was cutting 33% of its staff in an effort to lower production costs. Barrick (ABX) said it was considering a $5 billion write down on the Pascua-Lama mine because of the decline in asset value. Newcrest Mining (NCM) is writing down the value of its mines by $5.5 billion and be the biggest one-time charge in gold mining history. Gold Fields (GFI) CEO Nick Holland said "The industry is not sustainable at $1230 an ounce. We need at least $1500 to sustain the industry in any reasonable form." With marginal mines being shutdown and major projects being written down the gold miners are still not a buy. Once the write downs occur I would not hesitate to speculate on a major miner like Newmont. Gold supplies are going to dwindle as production slows and the miners will recover.

Gold Chart - Weekly

Gold is not the only commodity falling. The Commodity Index (CRB) is at a 52-week low and were it not for the same decline in June 2012 it would be at a three-year low. Precious metals, grains, coffee, coal, iron, lumber, etc are dropping although gold is getting all the attention. This is another warning sign we could be heading closer to a depression.

Commodity Index Chart

In stock news rare earth miner Molycorp (MCP) rallied +10% after the SEC completed an investigation into their public disclosures and accounting and recommended no enforcement action against the company. The SEC announced the probe last August and that weighed on the stock along with the decline in rare earth prices.

Molycorp Chart

BlackBerry (BBRY) fell -28% to close at $10.45 after reporting earnings that were a disappointment. BlackBerry said it lost 16 cents per share on revenue of $3.1 billion. This compares to a loss of -99 cents on revenue of $2.8 billion in the year ago quarter. It was a decent improvement but analysts were expecting a profit of +5 cents on revenue of $3.37 billion.

The company said it shipped 6.8 million phones compared to 7.8 million in the year ago quarter. More than 2.7 million of those were BB10 models. The Z10 was late into the U.S. market and that slowed sales early in the quarter. The Q10 went on sale in the U.S. in early June.

BBRY said it was going to halt development on new versions of the slow selling Playbook tablet. The company said total users declined by 4 million to 72 million.

Many investors had expected this to be a turnaround quarter for Blackberry but this is a very competitive space. The smartphone market is very crowded but Blackberry has a diehard following. The company is not in danger. CEO Thorsten Hines reminded analysts that "turnarounds take time."

Revenue in North America rose +30%, Asia Pacific +35% and EMEA +9%. Revenue in Latin America declined -9% due to a currency devaluation in Venezuela cutting into sales.

Blackberry is worth more than $10 because of the sum of their parts. Did you know every Ford has Blackberry software? The enterprise technology portion of the business is worth nearly as much as the entire company at $5 billion today. Also, 50% of their market cap is in cash. This company is either going to be split up or acquired.

Short interest is 41% and quite a few will be covering those shorts if there is no further decline.

BlackBerry Chart

Accenture (ACN) was a market killer on Friday. The company posted adjusted earnings of $1.14 and analysts were expecting $1.13 so where is the beef? Revenue was $7.2 billion compared to expectations of $7.43 billion. The company also projected revenue for the current quarter to be $6.7-$7.0 billion compared to analyst estimates of $7.36 billion. Accenture said customers were putting off decisions on short term projects but continuing to plan for longer term business. This results in higher bookings for Accenture but lower revenue in the short term. The weakness in the European economy is also forcing companies to postpone projects and that delays sales.

Accenture is the second largest consulting company behind IBM. The -10% drop in Accenture shares was followed by a -2.3% drop in IBM shares. The $4.50 drop in IBM knocked -35 points off the Dow.

Accenture Chart

IBM Chart

The first half of the year is over and the Dow gained +13.78%, S&P +12.62% and Nasdaq +12.71%. Gold lost -26% and silver 35%. Brokers were the big winners at +33%, biotech +26% and semiconductors +22%. It was a good year that lasted only six months. With the consensus estimates for the year end S&P at 1654 and Friday's close at 1606 there is some room for movement.

It was the best yearly percentage start for the Dow since 1999 and best since 1998 for the S&P. As any sports fan knows it is not how you start but how you finish that counts and there are six more months of volatility ahead.

The general consensus for the rest of the summer is a retest of 1540-1555 and then a rebound as the economy improves later this year. Of course that is a flawed assumption since the economy is struggling just to stay afloat rather than accelerate. The Fed expects the full year GDP to be in the range of 2.5%. That would require Q3 and Q4 to average 3.3% growth. With the Sequestration expected to remove -1.5% to 1.9% that suggests the Fed's targets are not going to be hit. Whether the market continues to see the bad news of a weak economy as good news for QE remains to be seen.

Earnings begin in two weeks and the growth estimate for Q2 is +3.3% with a revenue increase of +0.5%. The majority of those earnings are going to come from the financial sector and everyone else is going to be fighting to reach their estimates. In January the S&P was expected to see earnings growth of +9% in Q2. Somewhere along the way the expectations eroded. Q2 earnings warnings have been 7:1 over positive guidance. That is the worst since 2009.

The expectations for Q3 are currently +6.9% earnings growth followed by +11.1% in Q4. The odds are very good those estimates are going to erode as well.

If the Q2 earnings surprise to the upside then we could be looking at something closer to 1700 on the S&P by year end. However, if the earnings play out as the warnings project we could see the markets fade into August/September while investors wait for Q3 guidance.

For next week the bias "should" be bullish due to money flows, rebalance leftovers and general relief that the Fed is back on hold. The following week should be slightly bullish as investors come back from the holiday and launch their earnings positions. Once the earnings begin to flow all bets are off. We will be in the summer doldrums period where volume is light and interest is low. Depressing earnings could prompt traders to close up shop and head for the beach to escape the heat.

The S&P is in a dangerous position. The rebound from 1560 screeched to a halt at the 50-day average at 1620. This was strong support over the last six months and should now be strong resistance. That level also held on Friday but given the Russell rebalance at the close there was little interest in buying the market. I am surprised the S&P did as well as it did and only lost -7 points.

If we were to push higher the next material resistance would be the June high at 1650.

S&P Chart

The Dow has the same resistance problems. The 50-day is now resistance at 15,040 followed by the early June resistance at 15,300. The Dow is likely to retest 14,400 at some point later this summer before moving higher later in the year.

Dow Chart

The Nasdaq squeaked out a small gain on Friday but remained stuck to the resistance at 3400 and downtrend resistance from May. I was encouraged by the Nasdaq performance since Accenture and IBM were down so hard. The semiconductor index was also positive. Intel had some bullish comments about the future of chips and that helped the sector. Support is now 3300 and the 100-day average at 3310.

In the winners list below we actually see Apple on the left side of the board. That is unusual and at 11.1% of the Nasdaq those +3.32 points do count. Google was also mildly positive along with ISRG, PCLN and BIIB. All of those big caps being positive on the same day make it tough for the Nasdaq to be negative.

Winners and Sinners

Nasdaq Chart

The Russell rebalance is history except for the cleanup next week. When the index following funds have to buy and sell hundreds of stocks at the close on Friday they rarely get it exactly right. There is always some position shuffling in the days that follow as they attempt to get the weightings correct. At the same time they have large inflows of new money from the quarter end. This produces a slight upward bias over the next several days. These position adjustments are small but there are thousands of funds making them. Russell claims there is more than $7 trillion indexed to their funds so that is a lot of money sloshing around in the system when these changes take place.

The Russell 2000 traded to a draw on Friday with a loss of only -2.45. That was based on the indexes with the old stocks. On Monday they will be valued including all the new additions. The Russell 2000 gained +20 points in the first two days of last July during the adjustment period. If that were to happen this year it would put the Russell 2000 right at 1,000 and the historic closing high. I would short that event.

The Russell 2000 has support at 950 with the 100-day average. Resistance is 980 and 1000.

Russell 2000 Chart

In theory the Russell rebalance cleanup plus the $61 billion that came out of bond funds should give the markets a positive bias next week. However, funds that window dressed into the quarter end may be thinking about capturing some of the big profits so far this year and looking to get back in on the late summer dip.

Predicting market direction is impossible with any degree of accuracy. There are simply too many variables. We can pick a general direction based on the factors that are known but as Donald Rumsfeld said "There are known knowns; there are things we know that we know. There are known unknowns; that is to say, there are things that we now know we don't know. But there are also unknown unknowns – there are things we do not know we don't know." Market direction for the rest of July is a one of those things we do not know.

I personally expect a short bounce followed by extreme volatility surrounding next Friday's Nonfarm Payrolls and then a direction should appear.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"IF YOU CAN'T FIX IT WITH A HAMMER, YOU'VE GOT AN ELECTRICAL PROBLEM."
Anonymous


Index Wrap

Oversold Rebound Falters at Key Technical Resistances

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The recent rebound was predictable in that the leading S&P 500 (SPX) index got 'fully' oversold (see the 13-day Relative Strength Index/RSI on the daily SPX chart) and the Dow and Nasdaq rallied from their still (mostly) intact up trendlines.

SPX eventually faltered on its rally once the Index neared its previously broken up trendline, as well as when SPX, the Dow (INDU) and Nasdaq Composite (COMP) got at or near resistance suggested by the 21-day and 50-day moving averages. These key trading averages in the major indexes, once pierced, often then 'act as' resistance later on. Technical support in the major indexes, including support implied by key moving averages, once pierced, tends to 'become' at least initial resistance on a subsequent rebound.

The Russell 2000 (RUT) was an exception as RUT closed back above its 50-day average and within a hair's breath of its 21-day simple moving average. Sometimes we've seen RUT act as a bellwether for the rest of the market but I'm not reading this much into our current stock index chart picture until or unless I see SPX, the Dow and the Nasdaq Composite close and stay above their pivotal 21 and 50-day averages. Absent that I anticipate that stocks will be trending sideways to lower again.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) rallied from what I consider to be a 'fully' oversold condition; i.e., the 13-day Relative Strength Index dips into (or below) the 30-35 zone. I was seeing likely support/buying interest in the 1580 area and of course SPX overshot that level some. 1540 however still looks like fairly major support.

SPX's rebound faltered at technical resistance implied by the 21 and 50-day moving averages, which is a common pattern. Support implied by a previous low, support trendline or with such indicators of technical support implied by the pivotal 21 and 50-day moving averages, once pierced, will tend to become resistance on a subsequent rebound.

Repeating again this week, 1540 should offer fairly major support. A close below 1540 is bearish but SPX would still be within what is a correction pattern, rather than a trend reversal, even if 1500 was touched briefly. A weekly close below 1500 puts the bull market in question however.

A move back above 1619-1625 would be a bullish breakout above the 21 and 50-day moving averages that have currently converged. A couple of back to back closes back above the prior up trendline would put the S&P back into its prior rate of upside rate of (price) change, which is what trend momentum is basically. Next key resistance is in the 1650-1655 area.

S&P 100 (OEX) INDEX; DAILY CHART

Even with a decent-sized rebound, the S&P 100 (OEX) remains below its long-standing broad uptrend channel. Selling pressure came on OEX's approach to resistance implied by a return to the previously broken up trendline and to near the 21 and 50-day moving averages that have converged at 730.

The Index needs to climb back above 730-732 and stay above the trendline and the two key moving averages to suggest that the bullish prior trend is back on track. If so, next resistance is at 740-743. Absent a move back into OEX's uptrend channel OEX is likely to drift lower again.

Support is highlighted in the 710 area, extending to 700. Per my comments of last week, I anticipate OEX holding above 700, although the last downswing low was in the 694-692 area which could get tested again.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 Average (INDU), as I've anticipated for a couple of weeks now based on my 'bottoms up' study of the 30 charts involved, didn't have enough collective strength to hold above 15000 support; or, enough strength in the Average to climb back ABOVE 15000 during the recent rebound.

On the bullish side, with the exception of the early week spike lower, INDU has to date held above its multimonth up trendline. On the basis of this trendline, I've pegged near support at 14747 where the trendline currently intersects. Next technical support is 14600-14550. Major support is at 14500 even extending to 14400.

On a bearish take of the technical aspects of the chart, the recent rebound couldn't make headway above the 21 and 50-day averages. Resistance at the two moving averages is noted at 15039, with next overhanging resistance at 15200, extending to just over 15300.

The pattern looks like another test of trendline support could be in the offing and potentially another test of the recent lows or a fall to the 14400 area even. Conversely, a couple of closes above the two key moving averages would suggest that the recent low might have formed at least an interim bottom.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) Index chart presents a mixed chart picture. COMP rebounded from support implied by its up trendline, which is bullish, but the rally hasn't cleared resistance implied by the two key moving averages, the 21 and 50-day, that are worth paying attention to.

COMP has seen descending relative highs at the tops of rally attempts which is a bearish pattern. To get back on a more bullish track, the Nasdaq Composite should first clear 3418-3420 and then 3465, at the minor down trendline (red dashed line). Next resistance is then seen at 3485.

It looks like COMP could start drifting or falling lower again. Depending on the stopping point of any such next pullback, should tell the story on whether COMP would then be in a position for a sustained advance.

Support is highlighted at COMP's up trendline, currently intersecting at 3323 with further support around 3300. Fairly major support should come in at 3200, extending to 3170-3150.

Note the single day 'sentiment' reading at the lower 'oversold' line just prior to the rebound of this past week. This Index may again reach what I consider a 'fully' oversold condition in terms of both RSI and my CPRATIO indicator before the current bearish correction has run its course.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) rebound this past week from its up trendline, albeit with minor intraday 'slippage' below this line of support, which is keeps the Index within its bullish uptrend channel.

Not so bullish is the limited rally that followed Monday's rebound with NDX yet to test resistance at 2940, at the juncture of the 21 and 50-day averages. If there's a decisive upside penetration of 2940-2950, next key resistance is at the well-defined line of resistance at 3000.

If the Nas 100 again starts drifting (or galloping) lower, key near support is at the trendline intersection at 2955, with support extending to 2825, at the recent intraday low. NDX is in a declining trend until there's a rally that carries above the prior upswing peak. That would be at 3000.

2750 is major support, with a weekly Close below this level turning NDX bearish on an intermediate-term basis.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 (QQQ) remains within its broad bullish uptrend price channel given the recent rebound from the low end of this channel. I don't think that this successful test of trendline support is yet conclusive until or unless QQQ can get back above 72. Next resistance is then at 72.6.

Support at the up trendline comes in at 69.6, with next lower support beginning at 68, extending to what should be 'major' support at 67. If the trendline continues to hold up as a technical support then it may just be a matter of further consolidation before there's a move higher that would test the last rally peak (at 73.7). Right now I don't see that happening anytime soon.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) chart is bullish in that prices have remained within its broad multimonth uptrend price channel. I'm not sure based on the pattern I'm seeing that the lower trendline won't be tested again.

Resistance is anticipated at the recent rebound peak or a bit higher once the prior downside price gap has been 'filled in', specifically by a move to 985 resistance. More pivotal resistance then comes in at 1000 which has stopped several rally attempts to date.

Near support implied by RUT's up trendline is seen at 956, with next potential support at the recent 942 intraday low. 900 continues to be a key major support. It wouldn't be surprising to see another test of 900, with a trading range setting up between 900 and 1000. I'm getting ahead of myself in that RUT's up trendline has held as a recent support, with the exception of a 1-day (only) Close under the trendline. Stay tuned!



GOOD TRADING SUCCESS!


New Option Plays

Financials & Technology

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) HD, NEE, V, CLB, VPRT

(bearish ideas) PCYC, CERN, PH, SNA, ASH, SHW, RLGY



NEW DIRECTIONAL CALL PLAYS

Prudential Financial - PRU - close: 73.03 change: +0.62

Stop Loss: 70.99
Target(s): 79.50
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
PRU is in the financial sector. The company provides a wide range of financial services including insurance and investment management. Rising interest rates and bond yields, especially government bond yields, should boost profits for companies like PRU who hold a significant amount of fixed income assets.

Shares of PRU have been showing relative strength and broke out past major resistance in the $67-70 zone in the last several weeks. Currently shares are consolidating beneath resistance in the $73.50 area. I am suggesting a trigger to buy calls at $73.65. However, more conservative investors may want to wait for PRU to actually close above $74.00 before initiating new bullish positions.

If triggered our multi-week target is $79.50.

Trigger @ 73.65

- Suggested Positions -

buy the Aug $75 call (PRU1317H75) current ask $2.12

Annotated Chart:

Entry on June -- at $---.--
Average Daily Volume = 3.1 million
Listed on June 29, 2013


NEW DIRECTIONAL PUT PLAYS

F5 Networks Inc. - FFIV - close: 68.80 change: -1.25

Stop Loss: 70.25
Target(s): 61.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of FFIV were upgraded on Friday morning but that didn't stop traders from selling the rally. Shares popped higher but reversed at short-term resistance near the 10-dma. FFIV underperformed the market on Friday with a -1.78% decline.

Bulls could argue that FFIV is oversold with shares down four weeks in a row and down more than $15 in that time period. Yet bears can argue that FFIV has broken below significant support near $70.00 and its 2011 lows. That means FFIV is at multi-year lows and the next clear support level should be the $60 mark.

We are suggesting a trigger to buy puts at $67.40. That means waiting for shares to breakdown below last week's low near $67.50. If we are triggered our target is $61.00.

Trigger @ 67.40

- Suggested Positions -

Buy the AUG $65 PUT (FFIV1317T65) current ask $2.90

Annotated Chart:

Entry on June -- at $---.--
Average Daily Volume = 1.7 million
Listed on June 29, 2013



In Play Updates and Reviews

Stalled Oversold Bounce?

by James Brown

Click here to email James Brown

Editor's Note:

After a three-day rally the S&P 500 index is retreating from resistance near 1620 and its 50-dma.

GMCR was closed on Friday morning.
We want to exit both the CME and XOP trades on Monday morning.


Current Portfolio:


CALL Play Updates

Automatic Data Processing - ADP - close: 68.86 change: -0.51

Stop Loss: 67.90
Target(s): 74.00
Current Option Gain/Loss: -36.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/29/13: After failing at resistance near $70.00 on Thursday ADP continued to pullback on Friday with a -0.7% decline. Friday's move followed the action in the S&P 500. Shares still have a bullish trend of higher lows for now but momentum seems to be waning. We raised our stop to $67.90 on Thursday night. I'm not suggesting new positions.

- Suggested Positions -

Long Aug $70 call (ADP1317H70) entry $1.65

06/27/13 new stop loss @ 67.90

chart:

Entry on June 18 at $69.25
Average Daily Volume = 1.8 million
Listed on June 17, 2013


Cigna Corp. - CI - close: 72.49 change: -0.07

Stop Loss: 69.75
Target(s): 74.85
Current Option Gain/Loss: + 8.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/29/13: The managed healthcare names are still holding up pretty well. CI only lost seven cents on Friday. I would not be surprised to see shares dip back toward their 10-dma or what should be support near $70.00.

FYI: The Point & Figure chart for CI is bullish with an $82 target.

- Suggested Positions -

Long Oct $75 call (CI1319J75) entry $2.40

06/25/13 correction: use the October $75 call (CI1319j75)

chart:

Entry on June 27 at $72.05
Average Daily Volume = 1.8 million
Listed on June 24, 2013


CME Group Inc. - CME - close: 75.95 change: -0.57

Stop Loss: 74.95
Target(s): 84.00
Current Option Gain/Loss: -65.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/29/13: CME has failed to perform all week long. We've grown progressively more cautious on it. Friday's session saw shares close below their 10-dma for the first time in weeks. There is still potential support at the $75.00 mark but we are suggesting an immediate exit on Monday morning.

*small positions* - Suggested Positions -

Long Jul $80 call (CME1320G80) entry $1.30

06/29/13 prepare to exit immediately on Monday morning
06/27/13 Reiterating the idea to just exit early now
06/26/13 new stop loss @ 74.95, readers may want to exit early now since CME is not participating in the market's rally.

chart:

Entry on June 25 at $77.85
Average Daily Volume = 3.0 million
Listed on June 22, 2013


Starbucks Corp. - SBUX - close: 65.51 change: -0.18

Stop Loss: 62.75
Target(s): 69.50
Current Option Gain/Loss: Jul$65c: +11.1% & Aug65c: +10.4%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
06/29/13: Profit taking in SBUX was relatively mild on Friday but shares did close near their lows for the session. I suspect we'll see this stock retest the 30-dma and possibly the $64.00 level again. More conservative traders may want to adjust their stop loss higher.

There was an interesting story out about SBUX on Friday. Its U.K. business did not pay any taxes last year. That's because SBUX's U.K. division has posted an annual loss for the 15th year in a row. I'll leave it up to you to decide if the U.K. business is in trouble or if it's some sort of tax avoidance issue.

- Suggested Positions -

Long Jul $65 call (SBUX1320G65) entry $1.35

- or -

Long Aug $65 call (SBUX1317H65) entry $2.30

06/27/13 new stop loss @ 62.75
06/21/13 triggered at $64.25.

chart:

Entry on June 21 at $64.25
Average Daily Volume = 4.6 million
Listed on June 20, 2013


Shutterfly, Inc. - SFLY - close: 55.91 change: -0.20

Stop Loss: 52.75
Target(s): 59.75
Current Option Gain/Loss: Jul55c: -14.5% & Aug60c: - 7.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/29/13: SFLY ended another bullish week with some minor profit taking. This stock is up six out of the last eight weeks. Shares ended the month at new 18-month highs. I would not be surprised to see a dip back toward its 10-dma (near 54.00). We are raising the stop loss up to $52.75.

Earlier Comments:
The $55.00 level is significant resistance and a breakout here could spark a short squeeze. The most recent data listed short interest at 19% of the small 34 million share float. FYI: The Point & Figure chart for SFLY is bullish with an $84 target.

- Suggested Positions -

Long Jul $55 call (SFLY1320G55) entry $2.40*

- or -

Long Aug $60 call (SFLY1317H60) entry $2.00*

06/29/13 new stop loss @ 52.75
06/26/13 triggered on gap open higher at $55.43. Trigger was $55.25
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:

Entry on June 26 at $55.43
Average Daily Volume = 628 thousand
Listed on June 25, 2013


SodaStream Intl. - SODA - close: 72.65 change: +0.30

Stop Loss: 68.65
Target(s): 79.00
Current Option Gain/Loss: - 4.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/29/13: Shares of SODA managed to buck the market's drift lower on Friday and shares posted a gain. Yet that does not mean the stock is immune to weakness and if the market dips again this week we could see SODA retest the $70.00 level. Readers may want to consider raising their stop loss closer to the $70 mark.

Earlier Comments:
The stock struggled with resistance at $80.00 back in 2011 so the $80 level could still be trouble. SODA can be a volatile stock so traders may want to limit their position size to reduce risk.

- Suggested Positions -

Long Jul $75 call (SODA1320G75) entry $2.45

chart:

Entry on June 27 at $72.50
Average Daily Volume = 1.5 million
Listed on June 22, 2013


S&P500 SPDR ETF - SPY - close: 160.42 change: -0.66

Stop Loss: 158.75
Target(s): 164.75
Current Option Gain/Loss: +15.0%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
06/29/13: We have multiple reasons to be cautious about our SPY trade and more conservative traders may want to take profits now.

The S&P 500 index has stalled and looks like it's about to reverse lower after testing resistance near 1620 and its simple 50-dma. It's quite common to see prior support act as new resistance and that's what we are witnessing now.

Another technical issue that does not favor the bulls is how the oversold bounce has stalled at the 61.8% Fibonacci retracement of the sell-off two weeks ago (see chart below).

We did raise the stop loss on Thursday night t $158.75 but you may want to raise yours higher.

On a positive note the first week or two of July usually has a bullish bias but it's not a guarantee. I am not suggesting new positions.

- Suggested Positions -

Long Aug $162 call (SPY1317H162) entry $2.40

06/29/13 The S&P 500 and the SPY has stalled at resistance. Be careful!
06/27/13 new stop loss @ 158.75, adjust target to $164.75
06/22/13 adjust stop loss to $152.90
06/21/13 triggered on dip at $158.00

chart:

chart:

Entry on June 21 at $158.00
Average Daily Volume = 162 million
Listed on June 20, 2013


SPDR S&P Oil & Gas Exploration - XOP - close: 58.18 change: -0.18

Stop Loss: 55.90
Target(s): 62.50
Current Option Gain/Loss: -15.3%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
06/29/13: We just added XOP as a call play a few days ago. Big picture this ETF is little changed and still has a longer-term trend of higher lows, which is bullish. Yet short-term XOP is not cooperating and has failed twice near resistance. I am suggesting we abandon ship immediately and exit on Monday morning.

The plan was to keep our position size small to limit our risk.

*small positions* - Suggested Positions -

Long Sep $60 call (XOP1321i60) entry $2.35*

06/29/13 prepare to exit on Monday morning
06/27/13 Warning! The action in the XOP looked bearish today
06/26/13 triggered on gap higher at $58.80. Trigger was $58.60
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:

Entry on June 26 at $58.80
Average Daily Volume = 4.2 million
Listed on June 25, 2013


PUT Play Updates

CH Robinson Worldwide - CHRW - close: 56.31 change: +0.58

Stop Loss: 56.65
Target(s): 50.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
06/29/13: I could find no explanation for CHRW's show of relative strength on Friday. The transportation sector lost -0.4%, which was in-line with the S&P 500 index. Yet shares of CHRW outperformed the market with a +1.0% gain. The close above $56.00 is arguably short-term bullish.

Currently we are on the sidelines waiting for the bounce to reverse. There is no change from my Thursday night, new play comments.

I am suggesting a trigger to buy puts at $55.45. If triggered our target is $50.50 but we might adjust it down the road. The 2012 low was $50.81 and could be support. FYI: The Point & Figure chart for CHRW is bearish with a $48 target.

Trigger @ 55.45

- Suggested Positions -

Buy the Aug $55 PUT (CHRW1317T55) current ask $1.60

chart:

Entry on June -- at $---.--
Average Daily Volume = 1.5 million
Listed on June 26, 2013


Joy Global, Inc. - JOY - close: 48.53 change: -0.91

Stop Loss: 50.25
Target(s): 41.00
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
06/29/13: JOY tried to bounce on Friday morning but shares failed at round-number resistance near the $50.00 mark. Shares underperformed the market with a -1.8% decline. There is no change from my Wednesday night new play comments.

Earlier Comments:
The stock has been underperforming and shares hit new lows for the year this week. JOY did not participate in the market bounce. It might be tempting to buy puts now but JOY does appear to have what could be significant support in the $47.50-48.00 zone dating back to summer of 2012. Therefore, I am suggesting a trigger to buy puts at $47.40. If triggered our multi-week target is $41.00.

Trigger @ 47.40

- Suggested Positions -

Buy the Aug $45 PUT (JOY1317T45) current ask $1.03

chart:

Entry on June -- at $---.--
Average Daily Volume = 2.1 million
Listed on June 26, 2013



Longer-Term Play Updates



Chicago Bridge & Iron - CBI - close: 59.66 change: -0.06

Stop Loss: 53.75
Target(s): 74.50
Current Option Gain/Loss: +33.3%
Time Frame: 4 to 6 months
New Positions: see below

Comments:
06/29/13: The last few days have been quiet for CBI. Shares have been stuck under resistance near the $60.00 level. That means the one-month trend of lower highs is still in place. While CBI did post a gain for the week the intermediate trend is still down. We may see shares retest the $57-55 zone again. Nimble traders could buy the dip or better yet watch for the dip and buy calls on the bounce.

Earlier Comments:
Last time we added CBI we successfully caught the bounce from mid April back toward its March highs. You can read the background details and bullish fundamentals for CBI in our original play description
here, since it still applies. Just scroll down to the "longer-term trades" section of the page.

*Small Positions* - Suggested Positions -

Long 2014 Jan $65 call (CBI1418A65) entry $2.55

06/29/13 CBI might be poised to dip into the $57-55 zone again.
06/24/13 triggered @ 56.75
06/22/13 adjust entry trigger to $56.75
06/15/13 entry strategy change: change the breakout trigger at $65.25 to a buy-the-dip trigger at $56.50. Adjust the stop loss to $53.75.
Adjust the option strike to the 2014 Jan. $65 call

chart:

Entry on June 24 at $56.75
Average Daily Volume = 1.8 million
Listed on June 01, 2013


CLOSED BULLISH PLAYS

Green Mtn Coffee Roasters - GMCR - close: 75.22 change: +0.38

Stop Loss: 67.75
Target(s): 95.00
Current Option Gain/Loss: Jul80c: -35.8% & Aug85c: -20.0%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
06/29/13: GMCR has not been cooperating and shares created what appeared to be a bearish reversal pattern on Thursday. We decided the best move was to exit positions on Friday morning. GMCR opened Friday at $73.87.

Earlier Comments:
GMCR can be a volatile stock so we do want to keep our position size small to limit risk.

- Suggested Positions -

Jul $80 call (GMCR1320G80) entry $1.45 exit $0.93 (-35.8%)

- or -

Aug $85 call (GMCR1317H85) entry $3.20 exit $2.56 (-20.0%)

06/28/13 planned exit this morning
06/27/13 suggest an early exit immediately (at the open tomorrow)
06/26/13 triggered at $76.00
06/24/13 Strategy Update: Move the trigger to buy calls down to $76.00. Also add a second buy-the-dip trigger at $70.50. Adjust the stop loss down to $67.75. Adjust the options to July $80 or August $85 calls

chart:

Entry on June 26 at $76.00
Average Daily Volume = 3.3 million
Listed on June 19, 2013