Option Investor
Newsletter

Daily Newsletter, Saturday, 12/7/2013

Table of Contents

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

Market Wrap

Sell the Rumor, Buy the News

by Jim Brown

Click here to email Jim Brown

The market sold off the first four days of December on fear of a strong Nonfarm number. The fear was misplaced.

Market Statistics

Last week was a perfect example of a sell the rumor, buy the news event. Investors and fund managers were hit with several better than expected economic numbers and as the week progressed the conventional wisdom was to expect a QE taper in December. The stronger than expected ISM started the ball rolling on Monday and the New Home Sales and ADP Employment on Wednesday fueled the fire. Then the weekly Jobless Claims came in under 300,000 for only the second time this year. The GDP was a blowout at +3.6% growth and the stage was set for a whopper of a Nonfarm Payroll number on Friday.

The official estimate had been for a gain of +185,000 jobs but after the strong economics earlier in the week there were whisper numbers over 300,000. That would have been almost a guarantee of a December QE taper announcement. Equities sold off the first four days of the week as various Fed speakers implied there could be a December taper as a result of the economics. The stage was set for a Friday disaster.

Traders breathed a sigh of relief on Friday when the Nonfarm Payroll headline number came in with a gain of +203,000 jobs. That was slightly above estimates but right in the Goldilocks zone where it was not too hot and not too cold. Revisions to prior months were also minor with October revised down -4,000 and September revised up +12,000. With the revisions it bought the past three month average to +193,000 and three of the last four months were over 200,000. Various Fed members had said they wanted to see sustained employment over 200,000 per month before they cut QE. With some volatile Washington events scheduled for January and February the +193,000 average was not hot enough to convince the Fed that the economic recovery was accelerating. The target date for tapering is still March according to most analysts. The Fed will have to consider possible economic disruption from the January fiscal follies in Washington when they meet in December. The current funding resolution expires on January 15th and the debt ceiling comes back to haunt us in early February.

The unemployment rate ticked down from 7.3% to 7.0% and not because of the shrinking labor force participation rate (LFPR). That actually rose +0.2% from the 35 year low in October to 63.0% in November. The labor force declined -720,000 in October and rose +455,000 in November. Household employment declined -735,000 in October and rose +818,000 in November. Analysts claim these distortions were the result of the government shutdown in October and the rebound in November removed that bit of volatility. There was also a change in the reference week for the survey due to the holiday calendar.

I could drone on for several more paragraphs on this but the key was the lack of a major upside surprise for jobs. This was a Goldilocks report and shorts were forced to cover and traders waiting on the sidelines jumped back into the market.

There was some difference of opinion on when the Fed would taper with some now thinking December, some January and the majority in March. The quote I keep coming back to was Yellen's "We should not be in a rush to end QE" until there is a clearly sustainable economic recovery in place. We are not in a "clearly sustainable" recovery. Even with the strong reports there were an equal number of reports that showed declining conditions. When asked if the jobs number put the taper on the table for December Chicago Fed President Charles Evans said he was "open minded" but he would rather see several more months of job growth over 200,000 before taking action. Evans is a voting member of the FOMC. Translated that means only a minor chance of a taper in December.

Far too much importance is applied to the Nonfarm Payrolls and we should believe the Fed heads when they say a taper announcement will be data dependent.

I believe the market attaches too much significance to the flawed Nonfarm Payrolls numbers. The Nonfarm Payrolls are setup to put the best spin on the numbers submitted. Consider this.

Establishment Survey, Nonfarm Numbers: If you work one hour a week that counts as a job. There is no difference between 1 hours and 50 hours. If you work two jobs you are counted twice. There is no check for duplicate social security numbers. If your full time employer cut you back to 30 hours and you were forced to get a part time job for 10 hours to make up for the pay cut you are counted twice. By your employer cutting your hours the BLS actually gained a job.

Household Survey, unemployment rate, labor force participation rate: if you work 1 hour or 80 hours a week you are employed. If you work 35 hours a week you are considered full time. If you work 20 hours for one company and 15 hours for another you are considered a full time employee with one job.

This is why the data from the two reports never matches. The Establishment Survey (Nonfarm) mechanics and definitions have been changed by nearly every president for the last 30 years to reflect a more positive outcome.

According to the Household Survey over the last year the number of people not in the labor force rose by +2,418,000 while the number of people employed only rose +1,109,000. Twice as many people dropped out than those who found jobs.


The Q3-GDP was revised from +2.85% growth to +3.6% growth. On the surface that appears to be a blowout number. However, 1.68 of that was due to inventory gains. This is severely negative for Q4. Inventories can rise for two reasons. The first would be rising demand and manufacturers accelerating production to increase inventory levels to handle that demand. The second reason could be lack of demand. Inventories rise unexpectedly because demand unexpectedly declines and manufacturers are left with unsold goods. Given the various economic reports over the last month and the very weak retail sales for Q4 I would bet it is due to the second reason. Demand weakened significantly and resulted in excess inventories.

A Bloomberg article put it this way. "Q3 GDP rose faster than initially projected as unsold merchandise piled up at the fastest rate since 1998, setting the stage for a possible slowdown in Q4." Also, "Household spending, which accounts for 70% of GDP rose only +1.4% and the slowest rate since Q4-2009."

Analysts were quick to lower their GDP estimates for Q4. The general range of estimates vary from flat to a gain of as little as +1.0%. The government shutdown also reduced Q4 GDP by about $20 billion or half a percentage point. They have another chance to cause economic harm if they don't agree on the budget by next Friday's deadline. While nobody believes there will be another government shutdown you never can tell what will result from the political maneuvering in Washington.

Another major surprise on Friday was the major rebound in Consumer Sentiment. The headline number spiked from 75.1 to 82.5 and the highest level since July. Expectations were for a minor decline to 74.2. The present conditions component surged from 88.0 to 97.9 and the highest level since July. The expectations component rose from 66.8 to 72.7 and the highest reading since August. The drop as a result of the government shutdown has been erased and consumers appear to be charging full speed into the holiday shopping season.

Unfortunately that is not the case. Of the 112 commonly followed retail stocks 49 have warned for Q4 and that number is growing daily. The holiday shopping season may be setting records for Walmart and Amazon but the brick and mortar retailers are struggling. I would discount this sentiment report as the result of a rebound from the government shutdown and not a clean read on current sentiment.


The economic calendar for next week is devoid of material reports. The retail sales for November could be volatile since that includes the Black Friday weekend. Post weekend anecdotal reports have suggested it was lackluster for many companies so the sales numbers could be disappointing.

Monday is speech day with four speeches by Fed members, actually Fisher speaks twice.

Friday is the soft budget deadline. When the House, Senate and President Obama ended the government shutdown in October they agreed to turn the budget over to a bipartisan committee with instructions to come up with a budget solution by December 13th that could be passed by both the House and Senate. The concept was to satisfy the Republican desire to cut spending, the Democrat desire to raise more revenue so they can add spending and the desire to cancel the annual sequestration cuts.

As part of the negotiation process the bipartisan committee is supposed to come up with a package that will eliminate the $100 billion a year in sequestration cuts and replace it with targeted declines in spending. The sequestration cuts are the equivalent of chopping at the budget with a dull machete and lawmakers are trying to replace that with targeted cuts made with a scalpel. I am not holding my breath.

On Friday a spokesman for the committee said "No budget deal yet" and conference leaders have left Washington for their home states. Reportedly they are working on a two year deal that sets spending levels and tries to handle those critical items that are deal killers. One of those is the end of extended unemployment benefits for 1.3 million workers at the end of December. Nancy Pelosi said the democrats would not support any budget deal that does not extend those benefits once again. After this was called a poison pill by committee members Pelosi backed off to some extent and said if it was not included in the budget deal they would bring it up as a separate item in regular business in January.

The targeted spending for 2014 is slightly over $1 trillion but less than the $1.058 trillion sought by democrats. Both numbers are well above the $967 billion level mandated by the Budget Control Act of 2011, which included the sequestration.


The bond market was just as confusing as the equity market on Friday. You would have thought that a strong payroll report would have pushed yields higher as we move closer to an eventual QE taper. Yields did spike to 2.93% at the open but then fell to 2.84% by midday as bonds were bought. Since buying bonds ahead of a taper announcement would be the equivalent of financial suicide the midday buying was very confusing. Several analysts pointed out that the Fed had a scheduled buy of $5 billion in treasuries for Friday. They speculated the Fed jumped into the market after the payroll report in an effort to blunt the rise in interest rates. If that was the case it worked for a couple hours. Starting around noon the yields began to rise again as sellers overcame buyers and yields closed the day at 2.88%.

It is already a given that we will see ten-year yields over 3% in the coming weeks. Numerous analysts believe we will see 4% once the taper has begun and that is just the start of the rise in rates over the next several years. If the economy is really going to grow and the Fed is going to stop buying $85 billion a month in securities then rates are going to rise and rise a lot despite the Fed's promise to keep the Fed Funds rate at zero until 2016. Bond owners beware! Remember ten-year yields were 5.25% in 2007 before the financial crisis hit. If the economy is going back to normal over the next couple of years then expect rates to return to normal as well.

The high print for the year was 2.99% in September when it was assumed Bernanke was going to announce the taper in September. The closer we get to the taper the higher the yields are going to be.


The payroll numbers and the market response pretty much overshadowed any stock news on Friday. However, there were some standouts. Big Lots (BIG) reported a loss of 16 cents on $1.15 billion in revenue. Analysts were expecting a loss of 8 cents and $1.16 in revenue. Same store sales declined -2.5%. If the earnings miss was not bad enough the company said it was shutting down its Canadian operations in the first quarter. They currently have 73 Liquidation World stores, five Big Lot stores, two distribution centers and an office. That is a major change in posture and it is going to happen rapidly. BIG said they had been unable to gain the necessary traction in Canada and throwing more money at the problem would not be beneficial and they are going to cut their losses and just leave.

They guided to Q4 earnings of $1.48 and full year earnings of $2.48. This compared to analyst expectations of $2.11 and $2.94. They projected same store sales in the U.S. to decline -7%. Shares declined -13% on the news. The chart for BIG shows how volatile earnings have been in the past.


Ulta Salon Cosmetics & Fragrance (ULTA) reported earnings of 70 cents compared to estimates of 74 cents. The guidance was even worse with Q4 now projected to be $1.07-$1.10 and analysts were expecting $1.24. The company said it planned to maintain its market share gains during a "highly competitive and promotional holiday selling season." That suggests they are going to cut prices and launch promotions of their own that will lower margins and profits. Investors raced to the exits faster than a customer with a bad perm and shares fell -20%.


JC Penny (JCP) fell for a third day after a major hedge fund manager said he exited his position and the company said the SEC is looking into the surprise stock offering in September. Hedge fund manager Kyle Bass said in a Bloomberg interview he exited his entire position in JCP. When investors throw in the towel on a position it creates a lot of follow on sellers.

In a SEC filing on Thursday Penny said the SEC had launched an inquiry into the company's share offering, details of the company's liquidity, cash position and debt and equity financing. Back in September the company told a group of analysts they saw no reason to raise money through an equity sale and then the very next day reported they sold $800 million in shares. This riled the analyst community and caused a selloff in the shares. You don't tell analysts one thing in a meeting and then do the opposite the next day.

JCP shares have fallen from $10.30 to $8.09 in three days as these scenarios play out in the market.


Bitcoin has had a rough couple of weeks. After soaring to a high of $1,226 on Thursday it fell to $576 on Saturday after China said it was prohibiting its banks from dealing in the electronic currency. China said the fluctuations made it impossible for the banks to protect their users from significant losses. If you had some bitcoins in your electronic wallet their value was just cut in half. Holding bitcoins for investment is going to be a risky proposition. If you want to speculate in the currency I would put in bids at ridiculously low prices and then hope there is a bounce after you are filled. You can't short them so going long is the only play. There is a physical limit of 21 million bitcoins because the complicated electronic signature of each is limited to 21 million combinations. That means it is a pure supply and demand market and eventually demand will outstrip supply and prices could rise a lot. That assumes the currency is not outlawed. BIDU suspended bitcoins as a form of payment for services on Saturday.


Maybe hedge funds should start investing in Bitcoins. Their returns would be better. The $2.5 trillion hedge fund industry is about to turn in its worst performance since 2005. Through November the industry was returning about 7.1% compared to the +29.1% gain in the S&P when adding in dividends. Bloomberg claims the hedge fund industry is underperforming for the fifth consecutive year. The industry earns more than $50 billion in management fees per year. This is why many analysts are expecting a strong December. Funds are desperate to produce profits and will likely chase stocks higher for the rest of December.

Is good news actually good news now? Over the last two years every economic headline was weighed against the potential to impact the Fed's QE stance. Good news was bad news when it had the potential to accelerate tapering. Has that trend finally ended? Is good news really good news or was Friday's rally just a onetime event?

I personally believe it was a onetime event. The market had pulled back from very overextended conditions as a result of profit taking and some fear of improving economics. However, like in nearly every market event traders tend to go too far too fast as they sell the rumor. When the news was not as good as expected the shorts were forced to cover and we saw a giant short squeeze.

The odds of that continuing are slim. The Fed meets on the 17th and there will be plenty of hand wringing ahead of that meeting. This week there is a distinct lack of any material economic reports so the market should be free to move higher if it so wishes.

However, the market breadth is still declining. The number of S&P stocks above their 200-day average is declining and has been since May. The deterioration is not dramatic but it does exist. With the markets setting new highs you would expect the 200 day numbers to be climbing.


Historically the first few days of December are typically weak as a result of tax loss selling and portfolio restructuring. The Stock Trader's Almanac has documented the last 21 years and they show weakness in the first two weeks with strength in the last two weeks. The last trading day of December is normally down.

While historical seasonality is interesting to study, every year is different. This year we have the budget battle starting next Friday. If a miracle occurs and a two-year deal is actually reached the markets should rejoice. If they come down to the wire and don't get a deal done the threats and accusations will begin to fly and the market will probably react negatively.

The S&P closed down less than 1 point for the week and hardly in correction territory. At this point it was just a bout of routine profit taking. The index dipped to decent support at 1,780 and then rebounded but not immediately. The initial dip was lightly bought ahead of the payroll report. It was only after the report that the shorts were forced to cover and the rally began.

The S&P is still facing major resistance at the 1810-1812 level and we could test that next week. The talking heads on CNBC were completely mixed on the outlook although most expected the markets to be higher by yearend. You could gather 20 of the guest analysts together in a room and still not come to a conclusion.

Next week is likely to be choppy. I have no reason to believe the rally will continue at its Friday pace but stranger things have happened. I expect a choppy week with an upward bias. The resistance at 1810-1812 is the key level. If we break above that level then hitch up the sleigh because we could be in for a nice ride. If that resistance holds then the amount of the decline will be the determining factor. If we only drop back a few points it sets up another retest. If we drop back to 1,780 it would be a strong warning.



The Dow fell exactly to support at 15,800 and was rock solid. The rebound of nearly +200 points did close it back over 16,000 but there is strong resistance at 16,100. This is going to be a major test and with retail sales tanking it could sour sentiment.

The Dow range last week gave us some clear levels to watch with 16,100 and 15,800 the outside fence posts that must be honored.


The Nasdaq finished positive for the week at 4,062 and a new 13-year high. The Nasdaq and the Russell 2000 are normally the strongest indexes in December so a new high close by the Nasdaq suggests continued gains ahead.

The Nasdaq never really sold off and the support at 4,000 never tested. It would appear the Nasdaq is going to lead us out of last week's darkness and that should be fine for everyone.

It was interesting that most of the big cap techs and momentum stocks did not participate in Friday's rally. That suggests bargain hunting by fund managers as they look for new horses to lead the sectors in 2014.


The Russell 2000 was not that strong on Friday and that gives me a little reason to worry. The Russell gained +9 points but finished the week with a loss of -11. The recent closing high at 1,142 is about 12 points over Friday's close. It is not out of reach but it is also strong resistance. Watch the strength in the Russell as a sentiment tell for the big cap indexes.


There are no major events next week other than the Fed speakers on Monday and the budget deadline on Friday. The retail sales on Thursday could be a sentiment killer. I expect a choppy weak with a bias to the upside. However, fear of the Fed could come back to haunt us after Monday's parade of speakers. The FOMC meets the following week so be prepared for some worried traders.

Annual End of Year Renewal Special

It is that time of year again when we offer the best prices of the year on a package of our top newsletters. If you have been a subscriber for several years you know this is the best price and best deal of the year.

Please follow the link below to see for yourself the EOY subscription special for 2014. You will not be disappointed!

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"I was in search of a one-armed economist so that the guy could never make a statement and then say: “on the other hand."
Harry S Truman

 


Index Wrap

Correction Over

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The Nasdaq Composite (COMP) had previously rallied strongly above what had looked to be tough resistance at the pivotal 4000 level, then barely got back to that area before rebounding strongly. The tech bellwether SOX semiconductor index also led the way higher.

I wrote last week about the pattern of the S&P, then the Composite, alternatively rallying then laying back in a 'rotational' type correction, common in strong bull moves.

The S&P 500 and 100 (OEX) came down to its 21-day moving average and rebounded strongly and in a major bull move that's often all the dip we get. There was one Close in SPX and OEX below the key 21-day trading average, but this activated my '1-day rule' so to speak, where there's often a single close only below technical support, but not two such Closes. This in a strong bull move like the one we are in. The Dow 30 (INDU) did close below its 21-day moving average but as I keep noting, this average (not a capitalization weighted index) is only 30 stocks and tends to have some wider price swings. It's still true, also as I pointed out last time, that there are approximately 2/3rds of the 30 Dow stocks in still strong major uptrends.

I noted last week my expectation to see early weakness (in the week) and I was thinking into, at most, Wednesday, but buying didn't come in strongly until after the non-farm employment numbers. When finally, 'good news' was in fact GOOD news as opposed to the view that bullish economic news is bad because the Fed might take the stimulus punchbowl away. However, a more realistic view seems to have taken root and there's expectation that 1.) the Fed is not going to be hasty in its actions and 2.) if the economy is in fact REALLY strengthening, it's inevitable that the Federal Reserve will not keep printing money to keep long rates as low as possible.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart traded above the key 1800 level into this past week. The dip below 1800 was over by week's end as SPX strong rebounded back above this key chart level on Friday on bullish employment bump. Technically, it was prefaces with SPX rebounding from the area of its 21-day moving average. I tend to 'define' the shorter term trend by whether prices are, for the most part, trading above or below this key average for the major indices.

It looks like SPX can pierce the prior intraday high in the 1813 area and then challenge what may be somewhat tougher resistance in the 1835 area at the current top end of SPX's uptrend price channel. A well-defined upper channel line like seen below is often an area where the advance will at least slow somewhat; e.g., prices continue to move gradually higher but 'hug' the upper line rather than break out into a new up leg. Still, stay tuned on that! Some common rules of thumb won't necessarily apply to a strong bull market going into the end of the year and end of the current quarter. 'Window' dressing isn't just for department store windows!

I wrote last week, as a strategy guide: "A couple of back to back closes below 1800 support would suggest declining momentum and a next key test would be an ability for SPX to mostly Close above its 21-day average at 1782, with support extending to 1775."

Support is again pegged at 1780-1775, with more major support in the 1750 area.

Bullish sentiment as seen above suggests traders are maintaining a very bullish outlook, with not much of a fear factor. Normally, I'm anxious when traders are not, but this indicator isn't of much use for 'timing' a next top or downside reversal. The current strong bull move will be over when it's over. We're likely going to have to rely on price action, such as in a reversal type pattern for trading guidance, rather than whether everyone and their brother is bullish.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) rebounded strongly from the key 800 area, keeping a bullish pattern going. Near resistance is implied by the prior intraday high at 810, with next 'resistance' implied by the upper end of OEX's broad and well-defined, uptrend channel.

I thought last week that OEX would 'test' 800 as it just such a common pattern; i.e., a big above a key big round number like this one, then a pullback that sets up a test of what buying interest is now to found in this same area. What was resistance, once penetrated, tends to 'become' subsequent support. One of my little trading 'mantras'!

Near support is suggested in the 795 area, extending to 790. More major support should be found next around 780.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) found support on its recent pullback exactly where it could be expected chart-wise, at 15800. Next support is seen in the 15600 area.

INDU can be a picture perfect technical/chart bellwether for either the overall market or more confined to the NYSE stocks predominating in the big cap S&P indexes. Thought I never met any of the group at Dow Jones, my old employer, who determine the Dow 30 make up and INDU changes made from time to time, they seem to know how to pick the 'right' stocks that best reflect the overall economy.

It's still true that approximately 2/3rds of the 30 Dow Industrial stocks are in strong uptrends. My bullish list still includes: AXP, BA, DD (pausing some), DIS, INDU bellwether GE, GS, HD, JNJ, JPM, MMM (maybe starting a correction however), MRK, MSFT, NKE, PFE, PG, TRV, UTX, V, and WMT. UNH has traced out a line of resistance at 75 but may still break out above this level. XOM looks like it could break out above resistance in the 95 area; stay tuned on that. This is a quite bullish picture given 2/3rds of the 30 Dow Stocks in strong advances.

Overhead resistance is highlighted at 16200-16175 and next around 16400.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) continues in a strong bullish pattern as COMP has gone on to a new closing high; not by a lot by a new high is a new high. Strong support is seen in the 4000 area, with fairly major support around 3900.

Resistance is seen in the 4100 area next, with next resistance 50 points higher at 4150.

I anticipate higher levels ahead. COMP is again nearing near-term overbought levels as seen below with the 13-day Relative Strength Index (RSI) and is quite 'overbought' on a longer-term weekly chart basis (not shown). An overbought condition means less in a very strong bull move and that's what we are. Know where you are, a higher-risk situation, and be wary of giving back big profits if there's a sharp downside reversal for some reason or event unanticipated now.

A couple of back to back closes below 4000 (more so on a weekly chart basis) would be bearish and arrest current upside momentum. Absent that COMP could be headed to the 4200 area by the end of the month.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) chart is strongly bullish given the recent break out above expected next resistance at 3500. Next resistance could come in around 3536, then at 3570, with NDX possible on the way to 3600 ahead.

Near support is suggested in the 3450 area, extending to 3400.

I don't want to be 'complacent' and caught up in a bullish bubble here but going by the strong uptrend, the chart pattern continues to point to higher levels ahead with the path or least 'resistance' still up.

NDX is in overbought territory again in terms of the daily chart, but this looks to mostly warn of the possibility of herd selling to 'take' profits at the same time based on some bearish development we don't see coming now.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 (QQQ) tracking stock is strongly bullish. Almost scary to me now is the volume JUMP on the recent rebound, which tends to be rare with QQQ. The On Balance Volume (OBV) line isn't pointing strongly up any longer so a cautionary stance is suggested on/in continuing to take on more bullish positions.

Possible next resistance or more like a next potential upside target is to 86.7, extending to around 88 even.

Near support is suggested at 84.8 but I've only noted pivotal chart support at 84, with major support beginning in the 82 area.

I have to go with the strong uptrend in terms of anticipating still higher levels but I don't see upside potential beyond 88 just yet. Maybe QQQ will reach 90 by month end. Stay tuned. I'm always tempted to take the money an run but I tend to buy when most are bearish and exit when most are strongly bullish.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) chart is bullish but RUT is lagging relative to the Nasdaq which is somewhat unusual in terms of how RUT has tracked tech higher for weeks. If RUT fails to pierce prior highs around 1147, this could be a harbinger for Nasdaq taking at least a pause if not a pullback.

If 1147-1150 is pierced potential next resistance is seen at the top end of RUT's broad uptrend price channel, currently intersecting in the 1170 area. If 1170 is seen, 1200 is a possible next target over the next 2-3 weeks.

Near support is suggested around 1116, with support extending to the 1100 area. Support implied by RUT's prior downswing low comes in at 1080.

'Going for' the bulls in a minor way is that RUT's last pullback to support implied by the 21-day average did 'throw off' the index's overbought condition. RUT seems to have a pattern of downside reversals once the Index gets into the overbought zone of 70-75 in terms of the 13-day RSI.



GOOD TRADING SUCCESS!




New Option Plays

Consumer Goods, Tech, & Railroads

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Nike Inc. - NKE - close: 79.86 change: +0.91

Stop Loss: 78.45
Target(s): 84.75
Current Option Gain/Loss: Unopened
Time Frame: Exit PRIOR to earnings on Dec. 19th
New Positions: Yes, see below

Company Description

Why We Like It:
NKE is in the consumer goods sector. The company runs a massive sports apparel and footwear business. The rally in NKE continues with the stock hitting new all-time highs this past week. Shares actually appear to have been consolidating sideways the last couple of weeks. After this resting period the stock is poised for a bullish breakout past resistance near the $80.00 level.

This is a short-term trade. NKE is due to report earnings on December 19th and we do not want to hold over the announcement. Plan to exit prior to the report.

The December 2nd high was $80.14. I am suggesting a trigger to buy calls at $80.25. If triggered our target is $84.75.

FYI: NKE will begin trading ex-dividend on December 12th. The quarterly cash dividend should be 24 cents.

Trigger @ 80.25

- Suggested Positions -

buy the 2014 Jan $80 call (NKE1418a80) current ask $2.45

Annotated Chart:

Entry on December -- at $---.--
Average Daily Volume = 2.6 million
Listed on December 07, 2013


QUALCOMM Inc. - QCOM - close: 73.76 change: +0.53

Stop Loss: 71.75
Target(s): 79.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
QCOM is in the technology sector. They manufacture digital communication equipment and a lot of it is used in today's smartphones, including Apple's iPhones. There is a risk that if Apple (AAPL) has bad news it could rub off on shares of QCOM.

Currently QCOM has been consolidating sideways and actually weathered the market's recent five-day decline pretty well. Shares are now poised to breakout past resistance at $74.00. I am suggesting a trigger to buy calls at $74.25. If triggered our target is $79.50. More aggressive traders may want to aim higher since the Point & Figure chart for QCOM is bullish with a $93 target.

Trigger @ 74.25

- Suggested Positions -

Buy the 2014 Jan $75 call (QCOM1418a75) current ask $1.21

- or -

Buy the 2014 Feb $75 call (QCOM1422b75) current ask $2.30

Annotated Chart:

Weekly Chart:

Entry on December -- at $---.--
Average Daily Volume = 11.5 million
Listed on December 07, 2013


NEW DIRECTIONAL PUT PLAYS

Kansas City Southern - KSU - close: 118.15 change: +0.06

Stop Loss: 120.50
Target(s): 114.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
KSU is in the services sector. The company runs a freight railroad business through much of the U.S. and into Mexico. The stock peaked in mid November at the $126.00 level. Since then shares have started to underperform the market and that underperformance is accelerating. Not only is KSU underperforming the S&P 500 but it's underperforming the Dow Jones transportation average and it's definitely underperforming its peers in the railroad industry. The DJUSRR railroad index just hit a new all-time high on Friday. This weakness could be a reaction to falling coal volumes in KSU's business. The company sais coal volumes plunged -37% in October.

KSU tried to bounce on Friday but it failed near the $120 level. Now it's sitting on short-term support at $118.00 and poised to drop. I am suggesting a trigger to buy puts at $117.75. If triggered our target is $114.00. More aggressive traders may want to aim lower for the simple 200-dma instead.

Trigger @ 117.75

- Suggested Positions -

buy the 2014 Jan $115 PUT (KSU1418m115) current ask $2.20

Annotated Chart:

Entry on December -- at $---.--
Average Daily Volume = 486 thousand
Listed on December 07, 2013



In Play Updates and Reviews

Almost Nine In A Row

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 index almost made it nine winning weeks in a row but the index missed that feat by less than one point.

Stocks recovered a lot of lost ground thanks to a big bounce on Friday morning.

AGN, IWM, and UHS all hit our entry triggers.

FLT was stopped out. CTRP was closed. SBUX has been removed.

We want to exit our ENDP trade on Monday morning.


Current Portfolio:


CALL Play Updates

Allergan, Inc. - AGN - close: 98.20 change: +1.70

Stop Loss: 94.95
Target(s): 102.50
Current Option Gain/Loss: - 7.5%
Time Frame: Exit prior to January option expiration
New Positions: see below

Comments:
12/07/13: Our new play on AGN has been opened. The combination of a bullish market open and new bullish analyst comments on AGN produced a gap higher in this stock. Our plan was to buy calls at $97.00 but AGN opened at $98.02. There is a chance that AGN could fill the gap and that would mean a dip back toward the $96.50-96.75 area. Nimble traders might want to consider waiting for a dip to launch new positions.

Our multi-week target is $102.50. More aggressive traders could aim higher. The Point & Figure chart for AGN is bullish with a $110 target.

- Suggested Positions -

Long 2014 Jan $100 call (AGN1418a100) entry $2.00

12/06/13 triggered on gap higher at $98.02, suggested trigger was $97.00

chart:

Entry on December 06 at $98.02
Average Daily Volume = 1.9 million
Listed on December 05, 2013


Aon Plc. - AON - close: 82.75 change: +1.29

Stop Loss: 80.75
Target(s): 85.00
Current Option Gain/Loss: +11.7%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
12/07/13: The market's big rally on Friday helped AON gap open higher and surge to a new all-time high. I am raising our stop loss to $80.75.

- Suggested Positions -

Long 2014 Jan $82.50 call (AON1418a82.5) entry $1.70

12/07/13 new stop loss @ 80.75
11/23/13 new stop loss @ 79.85
11/18/13 new stop loss @ 79.45
11/13/13 new stop loss @ 78.75

chart:

Entry on November 08 at $80.50
Average Daily Volume = 2.3 million
Listed on November 06, 2013


The Walt Disney Co. - DIS - close: 71.46 change: +1.23

Stop Loss: 68.95
Target(s): 77.50
Current Option Gain/Loss: +29.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
12/07/13: DIS shares began bouncing on Wednesday. The stock continued to outperform on Friday with a +1.75% gain and a new all-time closing high. Tonight we are moving our stop loss to $68.95.

Our multi-week target is $77.50. More aggressive investors could aim higher. The Point & Figure chart for DIS is bullish with an $83 target.

- Suggested Positions -

Long 2014 Jan $70 call (DIS1418a70) entry $1.66

12/07/13 new stop loss @ 68.95
11/30/13 new stop loss @ 68.45
11/26/13 new stop loss @ 67.95

chart:

Entry on November 22 at $70.25
Average Daily Volume = 6.6 million
Listed on November 14, 2013


Endo Health Solutions - ENDP - close: 65.94 change: -0.01

Stop Loss: 64.75
Target(s): 74.00
Current Option Gain/Loss: -39.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/07/13: Uh-oh! ENDP failed to participate in the market's rally on Friday. Shares did gap open higher on Friday morning but the gains faded and shares closed virtually unchanged on the day.

This could be a warning signal. Tonight we are suggesting an immediate exit on Monday morning.

- Suggested Positions -

Long 2014 Jan $70 call (ENDP1418a70) entry $2.40

12/07/13 prepare to exit on Monday morning, Dec. 9th
12/05/13 new stop loss @ 64.75

chart:

Entry on November 27 at $67.35
Average Daily Volume = 4.6 million
Listed on November 26, 2013


Russell 2000 ETF - IWM - close: 112.48 change: +0.87

Stop Loss: 109.95
Target(s): 116.00
Current Option Gain/Loss: - 7.2%
Time Frame: exit prior to January option expiration
New Positions: see below

Comments:
12/07/13: Our IWM trade has opened. The plan was to buy calls at $112.55 but the market's bullish reaction to the jobs data on Friday morning produced a gap open higher. The IWM opened at $112.62. I would still consider new positions now.

- Suggested Positions -

Long 2014 Jan $112 call (IWM1418a112) entry $2.62

12/06/13 trade opened on gap higher at $112.62, suggested trigger was $112.55

chart:

Entry on December 06 at $112.62
Average Daily Volume = 40.6 million
Listed on December 04, 2013


Michael Kors - KORS - close: 79.68 change: -1.08

Stop Loss: 78.49
Target(s): 89.00
Current Option Gain/Loss: -43.2%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
12/07/13: Investors can't seem to make up their mind about retail-related stocks. On Friday morning KORS underperformed the market with a sharp drop to a new two-week low before paring its losses. More conservative traders will want to seriously consider an immediate exit right now, especially considering KORS' relative weakness during the market rally on Friday. I am not suggesting new positions. Tonight we're moving our stop loss to $78.49.

- Suggested Positions -

Long 2014 Jan $85 call (KORS1418a85) entry $1.85

12/07/13 new stop loss @ 78.49, readers may want to consider an early exit right here
11/22/13 trigger hit at $81.05
11/21/13 adjust entry strategy. Instead of buying a dip at $76.50, move the entry trigger to $81.05. Adjust the stop loss to $77.75. Adjust the option strike to 2014 Jan. $85 call.

chart:

Entry on November 22 at $81.05
Average Daily Volume = 7.2 million
Listed on November 20, 2013


Constellation Brands Inc. - STZ - close: 70.65 change: +0.57

Stop Loss: 69.40
Target(s): 74.75
Current Option Gain/Loss: -11.4%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
12/07/13: STZ poured a +0.8% gain on Friday. The fact that shares did not confirm Thursday's bearish reversal pattern is a good sign. However, Friday's move is an "inside day" (inside the prior day's range) and that can mean indecision. I am not suggesting new positions at this time. STZ could still disappoint us and move lower from here.

Earlier Comments:
Our plan was to limit our risk by using small positions.

*small positions* - Suggested Positions -

Long 2014 Jan $72.50 call (STZ1418a72.5) entry $1.75

12/03/13 new stop loss at $69.40

chart:

Entry on November 25 at $70.55
Average Daily Volume = 1.3 million
Listed on November 23, 2013



Universal Health Services - UHS - close: 82.91 change: +0.70

Stop Loss: 80.75
Target(s): 88.50
Current Option Gain/Loss: -19.1%
Time Frame: 4 to 5 weeks
New Positions: see below

Comments:
12/07/13: The stock market's strength on Friday morning helped UHS spike to a new high. Shares opened at $83.03 and hit $83.83 before paring its gains. Our suggested entry point was hit at $83.60. At the moment I would wait for a new rise above $83.35 before initiating new positions. More conservative traders might want to consider a stop loss closer to the $81.50-82.00 area.

- Suggested Positions -

Long 2014 Jan $85 call (UHS1418a85) entry $1.67*

12/06/13 triggered at $83.60
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:

Entry on December 06 at $83.60
Average Daily Volume = 912 thousand
Listed on December 03, 2013


United Parcel Service - UPS - close: 102.43 change: +0.80

Stop Loss: 99.75
Target(s): 108.00
Current Option Gain/Loss: -10.2%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
12/07/13: UPS also gapped open higher. The Friday morning rally struggled with UPS' recent highs near $103.00. Thanks to Friday's gain UPS has extended its rally to eight weeks in a row. I am not suggesting new positions at this time.

- Suggested Positions -

Long 2014 Jan $105 call (UPS1418a105) entry $0.98

11/23/13 new stop loss @ 99.75
11/20/13 new stop loss @ 98.95

chart:

Entry on November 14 at $101.25
Average Daily Volume = 3.8 million
Listed on November 13, 2013


Western Digital Corp. - WDC - close: 78.91 change: +2.13

Stop Loss: 75.75
Target(s): 79.75
Current Option Gain/Loss: +70.5%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
12/07/13: WDC displayed relative strength again with Friday's +2.77% surge to new highs. More conservative traders may want to just take profits now. I am raising our stop loss to $75.75.

Our target is $79.75 but more aggressive traders may want to aim higher. The Point & Figure chart for WDC is bullish with a $91 target.

- Suggested Positions -

Long 2014 Jan $80 call (WDC1418a80) entry $1.46

12/07/13 new stop loss @ 75.75
12/04/13 new stop loss @ 74.75
11/27/13 new stop loss @ 73.40

chart:

Entry on November 22 at $75.25
Average Daily Volume = 2.4 million
Listed on November 21, 2013


PUT Play Updates

SPDR Gold ETF - GLD - close: 118.30 change: -1.66

Stop Loss: 121.25
Target(s): 115.50
Current Option Gain/Loss: - 9.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/07/13: Gold and the GLD managed a small bounce on Friday. Yet the overall trend remains bearish.

I am not suggesting new positions at this time.

Earlier Comments:
Traders may want to limit their position size to limit risk.

Our target is $115.50. More aggressive traders may want to aim lower since the Point & Figure chart for GLD is bearish with a $110 target.

- Suggested Positions -

Long 2014 Jan $115 PUT (GLD1418m115) entry $1.80

12/05/13 new stop loss @ 121.25
11/30/13 new stop loss @ 122.55

chart:

Entry on November 20 at $121.00
Average Daily Volume = 7.0 million
Listed on November 12, 2013


Intl. Business Machines - IBM - close: 177.67 change: +1.59

Stop Loss: 181.25
Target(s): 170.25
Current Option Gain/Loss: - 9.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/07/13: Shares of IBM were downgraded again on Friday morning. Yet that didn't stop the stock from following the market higher. Shares did stall near short-term resistance at its 10-dma and the $178.00 level. I would wait for this bounce to reverse before initiating new positions.

Earlier Comments:
Our target is $170.25, a new lower low. However, more conservative traders may want to exit near the October lows near $172.50 since they could be potential support.

- Suggested Positions -

Long 2014 Jan $175 PUT (IBM1418m175) entry $3.15

chart:

Entry on December 03 at $176.90
Average Daily Volume = 5.1 million
Listed on December 02, 2013


The St. Joe Company - JOE - close: 17.60 change: -0.05

Stop Loss: n/a *use small positions*
Target(s): $11.00-13.00 range
Current Option Gain/Loss: -51.9%
Time Frame: 2 to 3 months
New Positions: see below

Comments:
12/07/13: Shares of JOE continued to show relative weakness on Friday. That's very encouraging if you're bearish. I would be tempted to launch new positions here.

Remember, this is a lottery ticket style of trade.

I don't see any changes from JOE's new play description.

Earlier Comments:
I do consider this an aggressive, higher-risk trade. Not everyone agrees with Einhorn. There are some big names in the stock on the bullish side. Plus, there are so many bears that any good news can produce these massive spikes higher. The most recent data listed short interest at 35% of the 92.1 million share float.

I am going to label this one a lottery ticket trade. We'll buy a cheap, out of the money option. If JOE continues to sink like we expect it to then great! We expect to more than double our money. If not, then we did not have that much invested. We definitely want to limit our position size to reduce our risk. I am not listing a stop loss because shares of JOE can be so volatile.

Our long-term target is $11.00 although we'll seriously consider exiting near the 2011 lows around $13.00.

*Small Positions* - Suggested Positions -

Long 2014 March $15 PUT (JOE1422o15) entry $0.52

chart:

Entry on November 25 at $17.50
Average Daily Volume = 627 thousand
Listed on November 23, 2013



Longer-Term Play Updates



Vanguard FTSE Europe ETF - VGK - close: 56.54 change: +0.75

Stop Loss: 54.90
Target(s): Sell half @ $58.00, sell the rest at $63.00
Current Option Gain/Loss: +36.1%
Time Frame: exit PRIOR to 2014 March option expiration
New Positions: see below

Comments:
12/07/13: A widespread bounce both in Europe and the U.S. helped the VGK produce a +1.3% gain. The stock is back above what could have been short-term resistance at $56.00 and its 50-dma. Yet the broken trend line of higher lows could now prove to be new technical resistance (see chart).

Earlier Comments:
Don't forget that we have two exit targets for this trade!

We are taking a multi-month time frame with this trade. FYI: The Point & Figure chart for VGK is bullish with a $63 target.

- Suggested Positions -

Long 2014 Mar $55 call (VGK1422C55) entry $1.80*

11/30/13 new stop loss @ 54.90
10/22/13 Strategy Update: Plan to exit half @ $58.00 and exit the rest at $63.00. New stop loss @ 53.90
10/19/13 new stop loss @ 52.75
09/11/13 trade opens. VGK @ 53.60
*option entry @ 1.80 is an estimate. Ask closed at $1.75 yesterday
09/10/13 entry trigger met. open positions tomorrow.
09/10/13 new stop loss @ 50.95
08/24/13 adjust the option strike from 2013 Dec $55 to $2014 Mar $55.

chart:

Entry on September 11 at $---.--
Average Daily Volume = 3.0 million
Listed on August 10, 2013


CLOSED BULLISH PLAYS

FleetCor Technologies - FLT - close: 118.73 change: -3.46

Stop Loss: 119.70
Target(s): 128.50
Current Option Gain/Loss: - 54.5%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
12/07/13: Ouch! FLT was a serious underperformer on Friday. Strangely I do not see any company-specific news to account for Friday's weakness. FLT gapped down while most of the market gapped higher. Our stop loss was at $119.70 but FLT gapped open at $119.30 and closed with a -2.8% decline. Our call option opened at $2.00 and the bid/ask spread on the volatility.

- Suggested Positions -

2014 Jan $125 call (FLT1418a125) entry $3.30* exit $1.50 (-54.5%)

12/06/13 stopped out on gap down at $119.30
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:

Entry on November 29 at $122.50
Average Daily Volume = 936 thousand
Listed on November 27, 2013


Starbucks Corp. - SBUX - close: 79.94 change: +0.22

Stop Loss: 78.75
Target(s): 87.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
12/07/13: SBUX underperformed the market on Friday. Shares gapped open higher like so many other stocks did. Yet SBUX's rally reversed at short-term resistance near its 10-dma.

Our trade has not opened yet. Given Friday's relative weakness we are removing SBUX as an active candidate.

Trade did not open.

12/07/13 removed from the newsletter. Trade did not open. suggested trigger to buy calls was $81.00
12/04/13 adjust entry trigger from $82.75 to $81.00
adjust the stop loss from $79.75 to $78.75
adjust the option strike to the 2014 Jan. $82.50 call

chart:

Entry on November -- at $---.--
Average Daily Volume = 4.5 million
Listed on November 30, 2013


CLOSED BEARISH PLAYS

Ctrip.com Intl. - CTRP - close: 47.39 change: -0.13

Stop Loss: 49.25
Target(s): 42.00
Current Option Gain/Loss: -19.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/07/13: On Thursday night we decided to drop CTRP since shares were not moving and given the market's decline, CTRP was actually showing too much relative strength. CTRP continued to show a lack of movement on Friday.

Our plan was to exit positions on Friday morning. CTRP opened at $47.57, an 18-cent gap higher from Thursday's close. The option opened at $1.90 (20-cent spread).

- Suggested Positions -

2014 Jan $45 PUT (CTRP1418m45) entry $2.10 exit $1.70 (-19.0%)

12/06/13 planned exit at the open
12/05/13 prepare to exit tomorrow morning at the open
12/02/13 triggered @ 47.25

chart:

Entry on December 02 at $47.25
Average Daily Volume = 3.7 million
Listed on November 30, 2013