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Newsletter

Daily Newsletter, Saturday, 7/6/2013

Table of Contents

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

Market Wrap

Inflection Point?

by Jim Brown

Click here to email Jim Brown

If you were at the beach on Friday you missed it. Some believe we just witnessed a serious change in investor sentiment.

Market Statistics

At 8:30 the government announced a higher than expected Nonfarm Payroll number and the Dow rallied +116 points at the open. Within 30 minutes the opening spike was sold hard after it became clear that the Fed would be cutting QE sooner rather than later. The Dow returned to negative territory for the next two hours. At exactly noon a buy program hit the tape that added +85 points and that triggered follow on buying and short covering and the Dow ended at the high of the day with a +147 point gain. The Dow had a 166 point range with a triple digit intraday decline before closing at the high of the day. That is remarkable considering the implications of the payroll report. What changed investor sentiment or did it really change?

The headline number on the June payroll report showed a gain of +195,000 jobs compared to expectations for a gain of +165,000 with some whisper numbers a lot lower. While the headline number was a big beat there was more good news. May jobs were revised higher from 175,000 to 195,000. April jobs were revised up from 149,000 to 195,000. The Fed heads have said they wanted to see "several months of job gains of 200,000 or higher." Don't look now but suddenly the last three months have averaged 196,333 jobs and Q1 averaged +207,000 pushing the average to +198,600 for the first six months and that is enough for the Fed to act. This realization is why the market sold off after the open.

I understand the sell off but why the rebound? First it was a low volume day with only 4.7 billion shares traded. Most of that traded in the first hour when the Dow spiked +116 then dove -125. The tape went quiet for a couple hours before the buy program hit at noon. That low volume, low volatility period was what I expected for the rest of the day. The buy program at noon overwhelmed the shorts from the morning. Clearly the conventional wisdom trade was to short the opening spike on expectations for the Fed to taper. When the buy program triggered the stops on those short trades it forced prices higher and suddenly traders were faced with a runaway market. When the S&P and Dow broke through the resistance of the 50-day averages the race was on to cover shorts. Traders had been shorting the 50-day for the prior five-days. Suddenly that trade was broken and buy stops were getting hit to the upside.

This was a low volume day and the buy program took advantage of that low volume to trigger stops and push the market higher. Were Bernanke and crew buying S&P futures on Friday? If not they should thank whoever launched that buy program.

The real question will obviously be "Will there be any follow through on Monday?" If there is any follow through there will be more short covering and probably a push to retest resistance at 1650. More on this later.

Going back to the Nonfarm Payrolls for a minute there were challenges under the headlines. There were +360,000 new part time jobs created but -240,000 full time jobs lost. More than 52,000 of those part-time jobs were in food service and we know how much waitresses make. Retail sales added 37,000 and those are not high paying jobs either just ask anyone working at Wal-Mart. The labor force increased by +177,000 and that held the unemployment rate at 7.6%. Manufacturers lost jobs for the fourth consecutive month. Overall manufacturers have lost more jobs than created for more than a year.

The number of people forced to work part-time involuntary and the number of discouraged workers rose significantly. Involuntary part-timers rose by +352,000 to just over eight million and discouraged workers rose +247,000 to 1.027 million. Those are huge increases and contain "seasonal adjustments." The unadjusted number for involuntary part-timers rose by more than 800,000. That is a heck of an adjustment. More than 37 million people now work 34 hours or less. Only 47% of adults have a full time job.

The broader U6 unemployment rate spiked from 13.8% to 14.3% or 22.3 million people.

The economy lost -9.1 million jobs in the financial crisis. Since the recession it has added +6.1 million jobs. However, the working age population has grown by roughly +7.1 million people in the last four years. Do the math on that and suddenly a +195,000 job gain is not so good. Those not working are increasing as fast as those working so we are winning the monthly battles but losing the overall employment war.

On the bright side the White House has cancelled implementation of Obamacare for corporations until January 2015 and after the 2014 elections. Apparently the feedback about the impending changes was so negative they had to push it back or risk losing all the elections in 2014. They are blaming it on "still undefined regulations" and the lack of manpower to implement the new law. Corporations are breathing a sigh of relief because that means they can hire full time workers now and not worry about the healthcare requirement until January 2015. If the workers turn out to be good employees then they get healthcare. If they turn out to be mediocre they will see their hours cut back to part time and join the ranks of the U6 involuntary workers. It is a win-win for everybody today but the selection and refining process will restart in 2014-Q4.

Payroll Chart

On the surface it would appear that traders applauded the higher jobs numbers and the near confirmation the Fed would announce a taper for QE at the September meeting. I believe we would be wrong making that assumption. I think volume was so low and the morning announcement so heavily shorted that the afternoon buy program simply forced the shorts to cover while other retail traders with just enough technical knowledge to be dangerous bought the breakout over the 50-day average. I don't believe the prospect for tapering QE has changed that much for investors since the middle of June.

Obviously if the economy was suddenly accelerating and jobs growth was moving well over 200,000 we would have a reason to buy stocks. However, the market rarely moves higher when the Fed is moving "into" tightening mode. Once the tightening trend is established the markets will recover on expectations for stronger earnings and economic growth. We are not seeing that growth today.

This will probably require an entirely new round of spin control by the Fed heads to convince us the Fed is still on the fence about cutting back on QE. I expect a flurry of headlines next week from Fed presidents telling us the sudden improvement in jobs is gratifying but not yet conclusive.

CNBC did a snap poll of 45 analysts after 10:AM on Friday. They found the consensus estimate for the first cut in QE was October. The September FOMC meeting is September 18th so that makes sense the first cut would be in purchases for the following month. The survey also showed analysts expect the cuts to be in roughly $20 billion increments with QE ending in July 2014. That means a cut in QE roughly every other month of $20 billion with no purchases in July.

The Fed will tell us that slowing down on purchases is not the same as tightening but they are wrong. Slowing the pace of stimulus is the same as tightening monetary policy.

Personally I will be glad when this QE program is over. We will still be a year away from any tightening of rates if it ends in July. Raising rates IS tightening policy and that means the economy should be accelerating if that is to happen.

We will have our first look at the economy through the prism of corporate earnings beginning next week. Estimates are for a meager +3.3% earnings growth and +0.5% revenue growth. The revenue growth is the key. If sales are not increasing the economy is not growing. That may be a simplistic view but I think you will find it is true. Companies can only cut costs so far before they run out of ways to increase earnings if revenue is not increasing.

The big earnings news for the week will be YUM on Wednesday and JPM and WFC on Friday. Alcoa is normally portrayed as the start of the earnings season on Monday but their earnings are only relative for the forecast for Asia. They are also somewhat of a barometer for manufacturing. With the stock under $8 the expectations are for another weak report. Falling commodity prices are a significant weight on their earnings.

The FOMC minutes on Wednesday are going to be critical since they will give us a better understanding of the politics in the meeting prior to Bernanke's press conference where he spelled out the taper expectations. He said he was "deputized" to give the bad news but that may not play out in the minutes.

The Producer Price Index (PPI) on Friday will address the deflation fears but it will be overshadowed by the JPM and WFC earnings.

Economic Calendar

The jobs report did a number on interest rates. The yield on the ten-year treasury rocketed +8% higher to close at 2.715% and a two year high. If the bond rotation was not fully underway with -$80 billion withdrawn from bond funds in June, it is definitely underway now. An 8% move in the yield (21 bps) is huge. Anyone still in fixed income investments is going to be running for the exits next week.

Ten-Year Yield Chart

The Dollar Index spiked +1.46% to a new three-year high on the assumption the jobs numbers meant the economy was recovering. Apparently the sequester has not been as damaging as analysts thought and the dollar is surging as a result. A stronger economy with less stimulus means a stronger dollar.

Dollar Index Chart

The ECB and BOE both announced last week they were going to keep rates low and that was good for the European markets but bad for the currencies. The pound fell to an eight-month low and the euro fell to a two-month low. These declines coupled with the strong dollar are going to cause earnings problems at multinational corporations.

FXB Chart

FXE Chart

Gold gave back -$29 of its early week gains to close at $1213. Stronger dollars and jobs means the fear trade is easing and money is shifting from commodities to equities. Copper gave back -3% to close at $3.07 and very close to collapse after German economics came in weak with a sharp drop in new manufacturing orders.

Gold Chart

Copper Chart

Oil did not drop and actually exploded to a new 52-week high on the unrest in Egypt. Past president Morsi and 12 aides were being kept under house arrest in a Cairo suburb but thousands of Morsi supporters rioted in the streets and attacked police and Morsi opponents with rocks, bottles, fireworks and Molotov cocktails. Reportedly 17 people have died and hundreds injured. The military moved tanks and armored personnel carriers to strategic points and launched clouds of teargas to dissipate the crowds with little to show for their efforts.

Morsi supporters vowed to turn themselves into suicide bombers and destroy Egypt from the inside if Morsi was not returned to the presidency. Video: Supporters vowing suicide (english)

There were quite a few signs in the crowds blaming Obama for the current situation because he backed Morsi as the democratically elected candidate and then Morsi turned into an Islamist dictator instead. President Obama called on Egyptians and the military to not target the Muslim Brotherhood or its supporters.

The military put out a wanted list of 100 top Muslim Brotherhood leaders. The new Islamist leaning constitution was suspended and the Islamist dominated legislative Shura Council was dissolved as well. The courts dissolved the lower house of parliament last summer after it was ruled invalid. The Council had managed most of the legislative duties since then.

The African Union has suspended Egypt for the "unconstitutional" ouster of Morsi.

Oil company, BP, said it was pulling staff from Egypt as a "precautionary measure" and that suggests the civil unrest is spreading. The military announced a state of emergency for the Sinai and the Suez Canal. More than four million barrels of oil move through the canal every day. Spokesmen claimed everything was operating normally and there was a very large troop presence to insure operations remained calm.

However, BDP International, a partner for Egypt Sea & Air Intl Shipping and Forwarding, said international cargo activity has been curtailed in Egypt since June 20th. Cargo operations at seaports and airports along with offices of transportation authorities and government ministries have been closed since July 3rd. Commerce in Egypt is slowing to a halt because of the riots. Tourism is nonexistent.

With riots in Egypt, civil war in Syria, protests in Turkey and surrounding countries taking firm defensive postures there is a strong potential for oil shipments to be interrupted. This powered crude oil to $103.63 on Friday and a gain of +$2.39. Nobody wanted to be short oil over the weekend. Once the Egyptian riots begin to fade I expect those prices to fade as well. Brent crude rallied +$2 to $107.58 and narrowing the spread between WTI and Brent to roughly $4 and the lowest level since the recession.

WTI Crude Oil Chart

I have written about the potential for fraud in the Chinese economic reports several times over the last couple years. Reputable analysts rely only on reports put out by companies like HSBC rather than the official government data. After Friday they have yet another reason to believe the government reports are fictitious.

China suspended the release of industry-specific data from the monthly survey of manufacturing purchasing managers or PMI. The Chinese official said there was simply not enough time to analyze the large volume of responses from more than 3,000 companies in the monthly survey. The details of the PMI reports were previously made available to analysts but even then there were claims of fraud. Previously companies created phony invoices for raw materials and product sales. This practice was reportedly demanded by the government in order to show continuously improving economic data. When private companies began surveying the companies outside the government channel the discrepancies were discovered. Analysts started surveying electricity generated (demand) as a track on economic activity. The government told the power plants not to report any drop in demand below a certain threshold to keep up the illusion of a strong economy. That voided the electricity surveys as a valid research tool.

The new practice of hiding the details behind the PMI headline number means China can claim any number it wants and nobody will be able to prove anything different. Without knowing which companies were "supposedly" surveyed by the government there is no way to try and validate the number. The PMI number has been dropping like a rock with the private HSBC number well into contraction territory while the government number continues to hold in expansion territory above 50. Earlier last week the PMI report for the steel industry was suspended after a person involved said the government wanted to change the way the number was calculated to be more favorable. Previously the steel PMI for May was quoted at 46.8, up from 45.1 in April. Those represent strong contraction in the steel industry. China accounted for 49.18% of worldwide steel production in May.

China's economic numbers have been a source of confusion for years. Now that the Chinese economy is rapidly declining I can understand why China does not want to let the world know the true state of the economy. Recently Bloomberg surveyed several dozen analysts regarding the January-April export growth numbers. The economists felt the official numbers were overstated by 4 to 13 percentage points. Bank of America estimated the actual trade surplus for that period was only one-tenth the official figures.

Hiding the supporting detail behind the PMI numbers only causes analysts to project an even lower number. For China to be so openly dishonest in their economic reporting suggests conditions are far worse than they appear.

There was very little stock news on Friday because of the holiday weekend. World Acceptance (WRLD) took the opportunity to issue a press release at 6:15 Wednesday evening saying they had not been able to file their annual report for the fiscal year ended on March 31st but they hoped to do so by the end of July. They also said they "may" report a material weakness in its internal control over financial reporting related to the allowance for loan losses. To put this in English, they have loan losses, probably a lot, and they have inadequate controls to monitor and report those losses. Sometimes filing a confession after hours on a holiday can help you avoid some of the pain but shares declined -12% on Friday because not everyone was at the beach.

World Acceptance Chart

Priceline (PCLN) and Google (GOOG) have something in common. They are both trying to be the first to see their shares hit $1000. I guess they think it is a status symbol to have a high dollar stock but surely they know more investors would buy shares if they announced a reasonable stock split. With shares in the mid $800s they could do a 10:1 split and still have a $100 stock by the time the split occurred. At this point I would bet on Priceline to win the race but Google has a market cap six times that of Priceline. Both have a PE around 27.

Priceline Chart

Google Chart

The index charts are really tough this weekend. After five days of failure the S&P finally broke through the 50-day average on low volume short covering. Technically a breakout is a breakout but there are other factors in play. The downtrend resistance from May 22nd is 1632 and the S&P closed at 1631.89. Uptrend resistance from November is 1640. Resistance from mid June is 1650. Support is 1605-1610. The chart looks like a road map and every direction has a potential detour.

If Egypt does not meltdown over the weekend and the U.S. markets open higher, the SP should see some additional short covering. If something happens to knock the S&P back below the 50-day at 1626 the shorts would gain confidence and lead to another test of initial support.

About the only thing for certain for next week is that volatility will reign. There are too many cross currents and volume should be light. The month end and quarter end fund flows will end on Monday when funds open their holiday mail.

In theory the S&P should be weak with QE tapering ahead but investor sentiment could begin to improve because of the rise in jobs.

We simply have to play the hand we are dealt and try not to fall into the bias trap. If we are convinced the market is headed in a single direction and we are wrong the normal thing to do is come up with reasons why the market is wrong and why it will reverse. Unfortunately the market never listens and we just cause ourselves pain while we wait to be proven right.

We need to trade in the direction of the trend. As of Friday's close the short term trend (8-days) was up and the intermediate term trend (6-weeks) is down. It could change at a moment's notice but until it does we follow the trend.

S&P Chart - Daily

The Dow has a similar chart with resistance at 15,150, 15,300 and support at 14,900. The Dow also broke through the 50-day but until last week that was not really a factor in the Dow's trajectory. The 50-day was 15,072 on Friday and the Dow closed at 15,135.

Overhead resistance is crowded but not impossible to overcome. The right headlines could cause further short covering and we could be looking at new highs before the week is out. Likewise new tapering headlines could have us retesting the lows by next weekend. There is no consensus opinion.

Pent up buying was released after the dip to 14,550 the prior week and it may not have been completely satisfied.

Remember the historical pattern I discussed the last two weeks. The first week of July is normally positive and then the markets tend to fall off in late July and August. Just because we break through a couple resistance bands does not mean we are going to stay there.

Dow Chart

The Nasdaq is no longer lagging the big caps. The Nasdaq has been leading or at least following closely to the Russell 2000. The resistance at 3485 is likely to be broken at the open on Monday with any kind of a positive market. The Nasdaq has been up 7 of the last 8 days. It is only about 135 points from the 12 year closing high at 3512. Apple has not been contributing so the gains have been broad based.

Nasdaq Chart

The Russell 2000 was the star last week with a gain of almost +3%. Much of this was related to the Russell index rebalance. Fund managers late to the rebalance exercise spent much of the week squaring up positions. Every stock added to the index on the prior Friday helped to push the index higher as fund managers added to their positions in those stocks.

The Russell 2000 broke out to a historic high at 1005 on Friday. It has traded over 1000 several times intraday but never closed there. If it were not for the influence of the index rebalance I would be pounding the table on this breakout. However, it is not what it seems. This was an artificial rally powered by the index rebalance. Regardless we have to stick with the trend until it ends.

Russell 2000 Chart

I am conflicted this weekend. My head sees the technical overhead resistance and the potential for failure on the Dow and S&P ahead of new QE headlines. My gut tells me to stick with the trend because "this time it is different." At some point in the future investor sentiment is going to change from bad news is good news to good news is actually good news. Things like the payroll report will be seen in a positive light. Are we there yet? I don't think so but the market will tell us.

I would like to sit back all knowing and tell you to wait for a lower low in August/September to go long but I can't because I am not all knowing. Nobody is. I can tell you that 83% of the time the market sets lows in the late-summer period but every year is different in thousands of ways as we are seeing in headlines from Europe, Asia and the Middle East today. This year may be part of the 17% that moves higher over the late summer. Only time will tell but if we trade with the trend we should have a better result than trying to anticipate a trend change.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"Our greatest weakness lies in giving up. The most certain way to succeed is always to try just one more time."
Thomas A. Edison


Index Wrap

Breakout Above Moving Average Resistances; Nasdaq and RUT lead the pack

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

Key resistances I was looking at suggested by the 21 and 50-day moving averages were pierced this past week, which is bullish for more upside. I still am cautious on jumping into this bull run. The S&P indices fell under their multimonth up trendlines and haven't gotten back above these trendlines, while the Dow 30 (INDU), the Nasdaq indices (COMP and NDX) and the Russell 2000 (RUT) held their support trendlines, suggesting that investors were willing to buy those dips and are looking more to growth now and less to the economic mainstay stocks.

While recent lows now look to have formed important bottoms, the current rally could still falter, especially in the S&P as the 500 (SPX) and big cap 100 (OEX) haven't gotten back within their prior bullish uptrend channels. It's a hot summer but the bulls aren't quite on fire again.

Recent lows completed measured move objectives as each of the two down legs from the late-May top 'measured' out to be very close to equal and is favorable for completion of a correction. Often in stocks and the stock indexes, the second downswing in a correction goes farther than the first decline but sometimes the point distance of a second decline just duplicates the extend of the first downswing.

If the lows are in for the overall correction, does this mean new highs are certain to follow without more chopping around? Of this I'm not convinced based on S&P trendline resistance just overhead, less than big turnaround retracements to date and based on how the patterns look. However, I'm more cautious about the further upside than I am a bear who can't wait to short this thing.

The technical outlook always reflects the underlying fundamentals of the economy and on earnings trends and it's not surprising that the rally would look hesitant at times and the S&P and the tech-heavy Nasdaq indexes swap Market leadership. The charts reflect cross-currents with anemic global growth, versus relatively strong earnings trends in the U.S.

Then, there's the Fed and when do they put up interest rates. Actually the Bond Market has done that for them to some extent. One Exchange Traded Fund (ETF's) greatly underperforming other ETFs this past week was the Mortgage REIT Income ETF (MORT), down about 7.5% on the week. Prices go down on bonds and high-income funds as yields go up. XLU, the SPDR utility index and a dividend yield play, was down on the week again versus a weekly gain, albeit modest, in SPY.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) is mixed like the big cap S&P 100. Overhead trendline resistance comes in at 1638. This is the key near resistance 'test' with resistance then extending to 1650-1654. Major resistance comes in at 1685-1687, which I don't expect to be tested near-term. But, stay tuned.

Deflection from resistance implied by the previously broken up trendline might mean a dip to the 1605-1600 area support. Next support then is seen at 1575, extending to 1560.

I'm more or less 'neutral' on the S&P. I don't have a strong conviction that there's a big follow though move that will carry SPX higher. Nor do I see 1600 support giving way near-term.

A decisive upside penetration above 1650 is bullish. 1700 is then a next possible target for July unless everyone stays at the shore which the heat waves around would suggest as a better move than trading the cross currents of summer!

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart is mixed. Yes, there's been a good sized rebound off the recent bottom near 700 AND the Index has cleared resistances at the 21 and 50-day moving averages. The next important test is whether OEX can pierce the 'kiss of death' trendline at 735. Michael Jenkins, an insightful analyst of years gone by, used to say that a long-standing trendline, once pierced, would often then prove to be a killer stopper on a subsequent rebound TO the trendline. We should find out on this soon.

Next resistance is seen not too far above the broken trendline, in the 743 area. Resistance then comes in at 750, extending to the 757 intraday high.

Near support comes in around 720, with support then extending to the 710 area.

I'm somewhat neutral on this chart as there's a lot of overhead resistance I'm seeing. The recent rally has been decent but now there's a lot of 'congestion' above current levels as they say. Sort of like heavy traffic I'm experiencing on the Pacific coastal highway where I try to stay out of the tourist bumper to bumper coastal caravan.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 Average (INDU), unlike the broader S&P indices, HELD technical support implied by its up trendline. Price action after that was mostly bullish and Friday's Close saw INDU clear the moving averages shown nicely.

I can see resistance at 15200-15300 being reached, maybe a bit higher. I've pegged next higher resistance at 15400 and haven't noted the obvious next resistance at prior 15500-15550 price peaks. I see little likelihood of those highs being overshot in the coming week. A move to 15400 would be impressive enough in the coming week but a close above this level seems doubtful based on the 30 Dow stocks, where I rate only 6 of the Dow Average as in very strong bull trends currently.

A line of near support comes in around 14875, extending to 14800 and a somewhat must hold support, although holding above the prior low around 14550 is a bigger deal chart wise.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) Index chart is highlighted with some chart/price aspects worth noting. COMP lead the way in its upside penetration of the two converging moving averages as seen on the COMP daily chart below. Important 'confirming' price action came from the subsequent rebound from the averages. Moreover, COMP broke out above the minor down trendline connecting the declining relative highs from the May top. Next up is key technical resistance at 3500, extending to the prior 3532 intraday high.

Near support is at 3420 and that should hold as support, especially on a Closing basis if this rally is going to keep chugging higher. Next support and a key one is at the well-defined long-standing up trendline, currently intersecting around 3340.

I anticipate COMP at least re-testing its highs in the 3530 area. Depending on this outcome, we could see COMP work up toward resistance implied by its upper channel line coming in at 3630 currently. Stay tuned on that.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) is bullish in that the Index rebounded from its multimonth up trendline AND has cleared resistance implied by the 21 and 50-day moving averages. Tally ho.

There is a minor down trendline coming up just overhead. Odds to me favor a further move through this trendline rather than a deflection from it. A decisive upside penetration of 2965 would show continued upside momentum. Pivotal resistance then comes in at 3000, with fairly major resistance at the prior high in the 3050 area.

A first level of support is highlighted at 2912 and extends to 2900 even, with trendline support then coming in at 2870.

NDX should work higher based on the advance above the moving averages but bulls beware of NDX slipping back under these two key averages. More of sideways move might follow if that was the case. I suspect NDX will re-test 3000 at a minimum but that may prove to be stubborn resistance/selling pressure in the near term or next 1-2 weeks.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 (QQQ) is bullish. QQQ held technical support at its up trendline and now has pierced the two key moving averages of 21 and 50-days. This type action is bullish for a move still higher. But, watch that that the moving averages now 'act as' or define support on pullbacks.

QQQ has not yet pierced a minor down trendline that can be visualized by drawing a line through the highs dating from the late-May top. You can see this minor down trendline on the NDX chart above. In the Q's a decisive upside penetration of 72.7 is needed to clear this minor but still-significant down trendline. I've highlighted first resistance based on prior highs at 73.6, with a next level of potential resistance extending to 74.6.

Support is seen at 71.3, then at QQQ's up trendline, intersecting at 69.8 currently.

The On Balance Volume (OBV) line is going up strongly with the recent rally, which suggests buying is coming in on the rally although as usual not in a big way unlike a regular (company) stock which tends to see 'confirming' volume spurts on rallies.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) chart is bullish as RUT has pushed to a new closing daily and weekly closing high above 1000. RUT has at times this past year been a reliable market bellwether and may be here. Certainly, the Index is back in the center of its uptrend channel and has had a tendency to work back and forth between the high and low ends of its uptrend channel.

I don't see resistance coming in until RUT closes in on the upper end of its channel around 1030, then at 1050 which is the current intersection of the upper channel line.

Near support is at 980, at the 21-day moving average RUT recently pieced on the upside. Next support at the multimonth up trendline comes in around 963 currently. There's no reason I see based on the chart not to anticipate still higher levels ahead for RUT.



GOOD TRADING SUCCESS!


New Option Plays

Defense, Industrials, Energy

by James Brown

Click here to email James Brown

Editor's Note:

Traders should be cautious here. Friday's breakout in the S&P 500 index past its 50-dma is technically bullish. Yet it was done on a very low-volume, post-holiday session. Furthermore the S&P 500 remains below the six-week trend of lower highs (from its May peak) and below its multi-month trend line of higher lows that it broke on June 20th.

Essentially, I am very concerned that the S&P 500's bounce has been just that, nothing more than a bounce and it could kiss these overhead trend lines of resistance and reverse sharply lower. Seeing the S&P 500 stall right at the convergence of two different trend lines of resistance does not inspire confidence in the market even though stocks were up on Friday.

What I'm trying to communicate is you don't have to trade every day. We are publishing new trade set ups tonight because the market might continue to climb. A breakout higher could spark some short covering. Yet sometimes the better trade might be to just step back and watch the market for a couple of more days.



NEW DIRECTIONAL CALL PLAYS

The Boeing Co. - BA - close: 104.20 change: +1.31

Stop Loss: 102.45
Target(s): 107.00
Current Option Gain/Loss: Unopened
Time Frame: Exit prior to option expiration on July 19th
New Positions: Yes, see below

Company Description

Why We Like It:
The defense industry stocks have been showing relative strength and BA is no exception. The stock ended the week near multi-year highs. Odds are good we're gong to see BA breakout past its June 2013 highs and rallied toward its 2007 highs near $107.00.

This should be a very short-term trade. I am suggesting a trigger to buy calls at $104.35. If triggered our short-term target is $107.00. More aggressive traders could definitely aim higher but I am expecting the $107.00-107.50 zone to be resistance. Since this is a short-term trade I'm using the July calls that only have two weeks left. If you are going to aim higher I would suggest a different month.

NOTE: You might see BA's name in the headlines this weekend. On Saturday a Boeing 777 model plane with Asiana Airlines, Flight 214m flying from Seoul, S. Korea, crash-landed at the San Francisco airport. Initial accounts report two dead and between 65 to 100 people injured but most of the injuries were minor and most people were walking away from the crash. I am not expecting this event to have any impact on BA's stock price. Thus far there has been no mention of what caused the crash.

Trigger @ 104.35 *small positions, short-term trade*

- Suggested Positions -

Buy the Jul $105 call (BA1320G105) current ask $0.88

Annotated Chart:

Entry on July -- at $---.--
Average Daily Volume = 4.7 million
Listed on July 06, 2013


Flowserve Corp. - FLS - close: 55.36 change: +1.16

Stop Loss: 53.95
Target(s): 59.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
FLS is in the industrial goods sector. The stock recently had a 3-for-1 stock split in late June. Since then shares have rebounded and this past week has produced a bullish breakout past multiple levels of resistance.

Friday's high was $55.41. I am suggesting a trigger to buy calls at $55.60. If triggered our multi-week target is $59.00 but we will plan on exiting prior to the earnings report.

Trigger @ 55.60

- Suggested Positions -

Buy the Oct $60 call (FLS1319J60) current ask $1.10

Annotated Chart:

Entry on July -- at $---.--
Average Daily Volume = 665 thousand
Listed on July 06, 2013


Noble Energy - NBL - close: 62.71 change: +1.08

Stop Loss: 60.95
Target(s): 68.50
Current Option Gain/Loss: Unopened
Time Frame: Exit PRIOR to earnings on July 25th
New Positions: Yes, see below

Company Description

Why We Like It:
NBL is an oil and natural gas company. The stock has been showing relative strength. This past week shares produced another bullish breakout to new all-time highs. Friday's high was $62.76. I am suggesting a trigger to buy calls at $63.05. If triggered our target is $68.50. However, we will plan on exiting positions prior to NBL's earnings report on July 25th.

More aggressive traders may want to aim higher. This past week has generated a new triple-top breakout buy signal on the point & figure chart with a $74.00 target.

Trigger @ 63.05

- Suggested Positions -

Buy the Aug $65 call (NBl1317H65) current ask $1.30

Annotated Chart:

Entry on July -- at $---.--
Average Daily Volume = 1.9 million
Listed on July 06, 2013



In Play Updates and Reviews

Low-Volume, Jobs Data Rally

by James Brown

Click here to email James Brown

Editor's Note:

Few people were paying attention to the markets on Friday and stocks rallied on the headline jobs number in a low-volume environment.


Current Portfolio:


CALL Play Updates

Automatic Data Processing - ADP - close: 70.75 change: +0.51

Stop Loss: 68.40
Target(s): 74.00
Current Option Gain/Loss: +15.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
07/06/13: Traders bought the dip in ADP midday on Friday at round-number support near the $70.00 level. It was a bullish week for ADP with the breakout past $70.00. Shares are now up three weeks in a row.

I am raising the stop loss to $68.40.

- Suggested Positions -

Long Aug $70 call (ADP1317H70) entry $1.65

07/06/13 new stop loss @ 68.40
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


Energizer Holdings - ENR - close: 101.95 change: +1.01

Stop Loss: 99.85
Target(s): 109.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
07/06/13: ENR is still bouncing from its recent test of round-number support at the $100.00 mark. Shares are nearing resistance at $103.00 again. We are suggesting a trigger to buy calls at $103.25. If triggered our target is $109.75. More aggressive traders may want to aim higher. The Point & Figure chart for ENR is bullish with a $121 target.

Trigger @ 103.25

- Suggested Positions -

Buy the Aug $105 call (ENR1317H105)

chart:

Entry on July -- at $---.--
Average Daily Volume = 497 thousand
Listed on July 01, 2013


Prudential Financial - PRU - close: 75.60 change: +1.76

Stop Loss: 72.40
Target(s): 79.50
Current Option Gain/Loss: +27.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
07/06/13: The financial sector displayed relative strength on Friday and shares of PRU was out front leading the pack with a +2.38% gain. Friday is a bullish breakout to new multi-year highs. I would not chase it here. If you're looking for an entry point consider waiting for a dip.

- Suggested Positions -

Long Aug $75 call (PRU1317H75) entry $2.40

07/02/13 new stop loss @ 72.40

chart:

Entry on July 01 at $73.65
Average Daily Volume = 3.1 million
Listed on June 29, 2013


Starbucks Corp. - SBUX - close: 67.72 change: +0.42

Stop Loss: 64.90
Target(s): 69.00
Current Option Gain/Loss: Jul$65c: +115.5% & Aug65c: +63.0%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
07/06/13: SBUX continues to show strength and closed at a new all-time high on Friday after testing the $68.00 level Friday morning. We have two weeks left on our July calls. Readers may want to exit the July calls now to lock in gains. I am adjusting our exit target down to $69.00 although more aggressive or more patient traders could aim higher.

- Suggested Positions -

Long Jul $65 call (SBUX1320G65) entry $1.35

- or -

Long Aug $65 call (SBUX1317H65) entry $2.30

07/06/13 adjust exit target to $69.00, consider exiting the July calls now with two weeks until expiration
07/02/13 new stop loss @ 64.90
07/01/13 new stop loss @ 63.40
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: 57.44 change: +0.52

Stop Loss: 54.75
Target(s): 59.75
Current Option Gain/Loss: Jul55c: +25.0% & Aug60c: +15.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
07/06/13: SFLY tagged a new 52-week high at $58.00 on Friday before paring its gains. Look for short-term support at $56.00 and the $55.00 level. I am not suggesting new positions.

Don't forget that we have just two weeks left on July options.

Earlier Comments:
A breakout higher 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*

07/02/13 new stop loss @ 54.75
07/01/13 new stop loss @ 53.25
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


Toyota Motor Corp. - TM - close: 125.27 change: +0.75

Stop Loss: 118.90
Target(s): 130.00
Current Option Gain/Loss: - 1.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
07/06/13: A strong dollar and weaker yen is continuing to help the Japanese market. TM hit new six-week highs. More conservative traders may want to start adjusting their stop loss higher. Readers may want to wait for a dip before considering new positions now.

- Suggested Positions -

Long Aug $130 call (TM1317H130) entry $2.80

07/02/13 trade opened on gap higher at $124.70, trigger was 123.65

chart:

Entry on July 02 at $124.70
Average Daily Volume = 694 thousand
Listed on July 01, 2013


PUT Play Updates

F5 Networks Inc. - FFIV - close: 69.19 change: -0.13

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

Comments:
07/06/13: FFIV tried to rally with the market on Friday morning but shares failed at resistance near $70.00. Currently we are waiting on a breakdown to new relative lows.

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)

chart:

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


Joy Global, Inc. - JOY - close: 48.82 change: +0.48

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:
07/06/13: Friday's session was an interesting day for JOY as the stock seemed to disconnect from the drop in commodities. Granted, JOY is not actually a miner but makes mining equipment but a slowing Chinese economy is not good for commodity demand. Combine that with a rising dollar and precious metals were sinking on Friday. Yet JOY bounced from the $48.00 level.

We're not giving up yet. There is no change from my earlier 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)

chart:

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


Marathon Petroleum - MPC - close: 68.99 change: -1.74

Stop Loss: 72.25
Target(s): 62.00
Current Option Gain/Loss: - 7.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
07/06/13: MPC delivered another volatile session on Friday but shares also erased Wednesday's gain. MPC has resistance directly overhead at its simple 200-dma. Shares have also found short-term support at $67.60. I suggest traders wait for a new drop below $67.60 before initiating new bearish positions.

- Suggested Positions -

Long Aug $65 PUT (MPC1317T65) entry $2.05

07/06/13 MPC has been volatile the last couple of trading days. Wait for a new low under $67.60 to launch new positions

chart:

Entry on July 03 at $68.25
Average Daily Volume = 3.2 million
Listed on July 02, 2013



Longer-Term Play Updates



Chicago Bridge & Iron - CBI - close: 60.28 change: +0.35

Stop Loss: 53.75
Target(s): 74.50
Current Option Gain/Loss: +37.2%
Time Frame: 4 to 6 months
New Positions: see below

Comments:
07/06/13: CBI managed a bounce off its simple 50-dma on Friday. Yet the rebound couldn't make it past short-term resistance at its simple 30-dma. The July 2nd high was $60.82 and I would be tempted to buy calls on a rally past this level. However, if the S&P 500 is still trading under its old trend line of higher lows I'd probably hesitate to launch new bullish positions. As a longer-term play we can afford to be patient when it comes to entry points.

*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