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Newsletter

Daily Newsletter, Monday, 2/3/2014

Table of Contents

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

Market Wrap

A Lot of Swearing Going on Today

by Linda Piazza

Click here to email Linda Piazza
Market Internals

Introduction

This morning, Janet Yellen was sworn in as the first female Chair of the Federal Reserve. She made no remarks after the ceremony.

FOMC Chair Janet Yellen's swearing in probably wasn't the only swearing going on today. A lot of colorful language, gnashing of teeth, and hair ripping could probably be heard or seen at trading desks around the globe. Some who were previously not inclined to use colorful language might have tried it out for the first time. I sound flippant, but I am not flippant about the potential for loss in this market place.

Trading in high volatility requires a different skillset than that usually needed. The sharp rise in volatility hits the negative vega trades such as butterflies and iron condors especially hard. I sincerely hope our subscribers had heeded pleas to manage risk in this environment.

What happened? What caused the Dow to drop more 300 points and the Nasdaq to see its first more-than-100-point loss in more than two years? We could spread blame in many directions, including concerns about emerging markets, the ECB's decision later this week, today's disappointing economic reports, the upcoming non-farm payrolls, and debt ceiling concerns.

When we look at daily charts, we will see that many indices pulled back to the same support configurations that they tested in June, August and October of last year. If you're a technician, you could pin today's action to the "it was time" sentiment. It didn't matter what the precipitating events were.

Perhaps it wasn't an auspicious day to be reminded of the upcoming debt-ceiling wrangling, however. This morning, Treasury Secretary Lew spoke at the Bipartisan Policy Center, described as a Washington think tank. He warned, "No Congress in the history has failed to meet" the responsibility to extend the debt limit, also reminding participants that "raising the debt limit . . . is about fulfilling spending obligations that Congress has already made and paying bills that have already been incurred" rather than about renegotiations.

Treasury Secretary Lew also cautioned that Congress should not wait until the last minute since the February 7 deadline coincides with the beginning of the tax filing season. Tax refunds result in net cash outflows during that season, he said, and drain our borrowing capacity more quickly than normal. He suggested that, even with the government's extraordinary measures after February 7, borrowing capacity would be depleted by the end of the month unless the debt ceiling was raised. Delaying will also impact consumer and business confidence, he said.

After the close, Dallas Federal Reserve President Richard Fisher had no mercy for spooked traders and investors. He spoke on talk TV and said that he didn't see any reason to stop tapering just because equities were falling and emerging markets experienced difficulties. He thought as long as the economy showed growth, the FOMC should speed up the taper to the tune of $65 billion a month rather than the current $10 billion. President Fisher is a current voting member of the FOMC, and he has long been known for his hawkish views.

The SPX lost 2.28 percent; the Dow, 2.08 percent; and the NDX, 2.31 percent. The RUT dropped 3.21 percent, and the SOX, 2.22 percent. The Dow Jones Transports (DJT) dropped 3.23 percent. The defensive utilities lost only 0.8 percent.

By the end of the day, the SPX had dropped 5.8 percent for the year; the RUT, 5.8 percent, and the Dow 7.3 percent. The COMP had dropped 4.3 percent for the year.

Treasury yields dropped as our treasuries became one safe-haven trade. The interest rate on the 10-year note dropped to 2.5810 percent, and the interest rate on the thirty-year treasury dropped to 3.54 percent.

Light sweet crude futures (/CL) for March delivery settled at 96.43, down 1.06 points. Gold was another safe haven trade today. Gold futures (/GC) for April delivery (the largest volume contract) settled at 1259.9, up 20.1 points. Silver futures (/SI) for March delivery settled at 19.409, up 0.289. Copper futures (/HG) for March delivery settled at 3.1835, down 0.0135. Fears about slowing manufacturing, particularly in China, likely impacted by copper and aluminum futures, despite lower copper stockpiles, Bloomberg noted.

Monday's Developments

Currency issues hit some Asian bourses, such as the Nikkei 225. A stronger yen hurt that bourse. The Thai bhat also bounced when political pressures eased after a peaceful election, but South Korea's won dropped. In addition, China's non-manufacturing PMI slipped to 53.4 from the prior 54.6 while manufacturing PMI dropped to 50.5. Still, it remained above the benchmark 50.

The Nikkei 225 lost 1.98 percent, and the Straits Times, 1.20 percent. The Hang Seng and China's Shanghai Composite were still shuttered for the holiday.

The Eurozone countries look ahead to Thursday's rate decision by the ECB, and currency issues impacted bourses. The ECB is expected to--or variously described as "being pressured to" by falling Eurozone inflation--cut rates. Hungary's forint dropped. January's Eurozone Final Manufacturing PMI measured 54.0, slightly above the prior and expected 53.9. Spanish Manufacturing PMI beat expectations, but Italian Manufacturing PMI disappointed.

The FTSE 100 lost 1.11 percent; the DAX, 1.29 percent; and the CAC 40, 1.39 percent. Spain's IBEX 35 dropped 1.96 percent, and Italy's FTSE MIB, 2.63 percent. Greece's bourse gained more than 2.5 percent, however, on news of a loan to cover the country's deficits for the next several years.

In the U.S., two Manufacturing PMI's were released. One was the Markit Final January Manufacturing PMI. That 53.7 result disappointed, dropping to a three-month low and well below December's result. Job creation remained strong, but Markit's summary pointed out that output and new order growth weakened and supplier lead times lengthened markedly.

The more closely watched ISM Manufacturing PMI sank to 51.3 from the prior 57.00, well below the expected 56.2. It should be noted that late last week, ISM made its annual adjustments to seasonal factors for the ISM Manufacturing PMI and other diffusion indices.

As Markit had done, ISM noted a weakening of orders, with abnormally cold weather and weakness in emerging markets both blamed for the slump that led to the largest decline in new orders in four years. For example, some manufacturers such as Ford Motor Company (F) saw disrupted production due to the cold weather. Respondents mentioned delayed deliveries of supplies, and "a slow start to 2014, mostly attributed to weather."

New orders dropped 13.2 percentage points to 51.2. Production also dropped, although it registered 54.8, above the benchmark 50. Inventories, customers' inventories and backlog of orders all were below the benchmark 50. The low inventories and customers' inventories can be either a good thing or a bad thing: it can predict that customers will soon need to restock and production will ramp up again or it can indicate caution on the part of customers who don't want to be stuck with inventory they can't utilize in their own production or sell. Measurements for the overall economy and the manufacturing sector indicated growth but growth that was slowing.

The news wasn't all bad. Despite the adverse conditions, ISM noted that many respondents remained optimistic and indicated increasing business. Ten out of 18 industries reported growth in employment. Eleven out of 18 manufacturing indices reported growth in production. The seven industries that reported contraction included nonmetallic mineral products; petroleum and coal products; apparel, leather and allied products; miscellaneous manufacturing; chemical products; paper products; and computer and electronic products.

ISM Manufacturing Prices rose to 60.5, well above the expected 54.2 or the prior 53.5. ISM reports this component of the PMI separately, breaking it out to serve as a leading indicator of consumer inflation.

December's Construction Spending rose 0.1 percent, less than the anticipated 0.4 percent rise. The prior report had seen a gain of 1.0 percent.

Moody's weekly Business Confidence slipped to 37.2 from last week's 37.7, but Moody's characterized businesses as "feeling very upbeat." Moody's hasn't so far seen an impact due to the disorder in emerging markets.

Later in the day, the Federal Reserve reported on the first quarter's Loan Officer Survey. Domestic banks reported that they had seen increased loan demand in the quarter and had eased lending standards on consumer and business loans. When prime residential real estate loans were considered, banks appeared to have been as likely to have tightened standards (small banks) as to have eased standards (large banks). In response to the Fed's supervisory guidance on leveraged lending, some large banks noted that they had tightened standards as a result, significantly changing some leveraged loans. These banks felt that borrowers would be able to find funding elsewhere.

About 20 to 40 percent of banks thought delinquencies would fall on most types of business loans this year, with the range indicating their expectations for various types of loans. The exception would be auto loans to borrowers with low credit scores. They felt delinquencies would rise for these loans.

Automakers made the news with January's Vehicle Sales. GM reported that sales fell 12 percent. Three of GM's brands saw sales declining at least ten percent. Ford reported a 7 percent decline, although the Mustang brand sales rose 7.6 percent and the Flex crossover utility vehicle sales, 2.2 percent. The Chrysler Group reported growth of 8 percent, although that was due to a 25-percent rise in truck sales. Passenger car sales dropped 21 percent.

Automakers also blamed the extreme cold for the declines. The industry cautions that January's declines should not be interpreted as signaling what might happen the rest of the year. Car makers expect to sell 16M units this year, with the prior expectation having been 15.7M. Last year's sales totaled 15.6 million.

Companies reporting earnings today included APC, HIG, TTWO, and YUM, among others. As this report was prepared for publication, Anadarko Petroleum (APC, 78.17, down 2.52 or 3.12 percent) had dropped another $0.42 in after-hours trading after reporting earnings. The company reported a loss of $1.53 a share on revenue of $3.34 billion. FactSet predicted a profit of $0.89 a share on revenue of $3.92 billion. The company pointed to the spinoff of Tronox Inc. and other one-time items as leading to the disappointment.

The Hartford Financial Services Group, Inc. (HIG, 32.18, down 1.07 or 3.22 percent) was last up $0.40 from the close in after-hours trading after reporting earnings. Due to lower disaster losses, in part, the company reported that it earned $0.94 per share instead of the expected $0.90 per share. HIG plans a new $2 billion share buyback plan and wants to repay $656 million in debt over the next two years.

Take Two Interactive Software Inc. (TTWO, 18.90, down 0.28 or 1.46 percent) had declined another $0.31 from the close in after-hours trading as this report was prepared. The company reported earnings of $1.70 per share on revenue of $707.4 million. That's better than the $1.40 predicted by one source. The company guided expectations lower for its fourth quarter, however.

Yum! Brands, Inc. (YUM, 66.16, down 0.99 or 1.47), the parent company of KFC, Pizza Hut and Taco Bell, rebounded in after-hours trading after reporting earnings. It was last up 2.44 points from the closing value as this report was prepared for publication. After one-time items were excluded, the company reported earnings of $0.86 a share on revenue of $4.18 billion. FactSet had predicted earnings of $0.79 a share on $4.26 billion, although a different source quoted expected revenue at $4.15 billion. The company reiterated prior guidance for the full year.

Herbalife (69.02, up 4.65 or 7.22 percent ) gained on strong volume today. The company issued upside guidance for the fourth quarter and downside guidance for the first quarter of fiscal 2014.

Story stocks included Wells Fargo (WFC, 44.43, down 0.91 or 2.01 percent), with its brand once again named the most valuable in the banking world. That didn't stop the stock price from diving today along with that of many other financials.

Google (GOOG, 1,133.43, down 47.54 or 4.03 percent) today published information on the number of data requests received due to the Foreign Intelligence Surveillance Act as well as providing information on the number of affected accounts. The company said today's published information encompassed all such reports except those delayed by the Justice Department. Those who would like to peruse the report can find it on Google's official blog.

Among equities, a heat map showed a sea of read. There were few safe havens to be found, with one exception being some pharma companies such as Pfizer (PFE, 30.60, up 0.20 or 0.66 percent). The company's drug for breast cancer achieved its goal in a mid-stage study.

Healthcare providers such as HUM (96.36, down 0.94 or 0.97 percent), WLP (85.62, down 0.38 or 0.44 percent), CNC (59.11, down 1.49 or 2.46 percent), and AET (67.06, down 1.27 or 1.86 percent) dropped with the rest of the markets. Tentative January numbers have shown that ACA enrollment momentum remained strong in January, perhaps meeting original January goals, despite negative perceptions by some. Enrollment is strongest in those states with their own exchanges as might be expected.

A new study by PwC's Health Research Institute (HRI) has computed that the average cost of premiums sold on the exchanges is 4 percent less than the average cost of employer-provided plans with comparable benefits. Surprised?

Of course, this information may seem surprising or even untrustworthy if you've been reading other information contrary to this conclusion, so I went looking for the background of the underlying entity that prepared the information. In our current atmosphere, when news isn't quite as trustworthy as it might have been when Walter Cronkite delayed for several hours announcing JFK's death until he could obtain confirmation from several sources, please do your own research and determine who produced the information you're reading. If it's the Heritage Foundation, it's probably slanted toward the right, and if it's the Rachel Maddow program, it's probably slanted toward the left. There's nothing wrong with either source, but just be sure you understand the underlying bias. I try my best to read and listen to both sides to understand all perspectives and then to find the most objective information I can for this report, but these days that's often difficult to do. It requires, among other tasks new to those providing a news summary, searching out political contributions.

PwC turns out to reference PricewaterhouseCoopers LLC, of course, a multinational professional services firm and one of the Big Four auditors. I even performed what research I could into the political contributions made by PcW. The top recipient of donations was the National Republican Senatorial Committee. Through 2013, PcW donated 63 percent of its political funds to Republicans, 36 percent to Democrats, and 1 percent to "Other." This research clarifies that PcW Health Research Institute's (HRI) conclusion that premiums under ACA are 4 percent less than comparable premiums under employer-provided plans can certainly not be pegged on a left-leaning bias.

HRI concurs with other sources that warn that although the premiums are lower, as they were expected to be, the problem may not lie in the cost of the insurance premiums, especially with subsidies. The problem for some enrollees may lie with the deductibles that those relatively unused to choosing healthcare policies may be choosing. HRI projects that by 2021, a full 92 percent of the enrollees will be people in relatively good health, however. One major provider in Ohio has stated that they are seeing the hoped-for mix of enrollees regarding age and relative health.

Let's look at daily charts. Last week, many indices had set up new potential downside targets at a specific Keltner channel configuration. We'll find that the indices dropped down to test that Keltner configuration, hitting the targets and even exceeding them today. Where did the indices end up with respect to those configurations?

Charts

Those new to my Monday Wraps might find the following paragraphs useful when interpreting my charts. Those who have read the Wraps can skip straight to the charts. I set up nested Keltner channels on my charts. It's a run-of-the-mill channeling system like the more familiar Bollinger Bands. As with those more familiar BB's, channel boundaries are often targets for upside or downside moves. They also mark levels where prices might find support or resistance on closes. When several channel lines converge, that potential resistance or support might appear stronger, just as it would if 20-, 50- and 100-sma's all converge in one spot.

For the benefit of subscribers, I mark potential upside and downside target/support/resistance levels with rectangles, usually green for upside and red for downside. Orange rectangles are sometimes used when the darker-colored ones would not allow for a clear examination of the next target. From now on, I will mention the nearest potential support or resistance level in the discussion on the chart, but not the further-out ones. They can be located on the charts if price breaks through the nearest levels on consistent daily closes. If an interpretation such as "support levels appear stronger than resistance, so up looks more likely than down" is possible, I'll tell you. Often we traders must be able to defend our trade against a move in either direction.

As with any type of potential support or resistance, those with profits should be protective of those profits as support or resistance is tested. If prices find support and climb, look to the next higher rectangle, even one just broken through, as potential resistance. Do the reverse when resistance is breached. Hopefully, this format provides you with the information you need without requiring all night to read as happens when I list each potential support or resistance level individually.

Annotated Daily Chart of the SPX:

Last week, the SPX's daily closes beneath the red 9-ema set a potential downside target at the lower yellow-orange rectangle. Today that target was met and exceeded. According to Keltner evidence, sustained SPX daily closes beneath about 1,756 mean that the SPX is vulnerable to a decline toward 1,648-1,667. However, we and everyone else who can look at a chart can easily see the swing highs from last fall and understand that they may provide potential support, too, whether that support is interim support before a drop to the eventual target or marks a bottom. Therefore, if the SPX continues lower, I would watch for bounce potential near 1,725-1,730 and again near 1,690-1,710.

Traders are caught in a dilemma, however, because the decline has been sharp. Make no assumptions: some of the steepest declines come out of such conditions, but so do some of the most rabid relief rallies. If the SPX can maintain closes back above about 1,756, the short-term tenor has improved. If the SPX can maintain daily closes above 1,775, that action sets a target at the declining red 9-ema and up to about 1,810, with the next higher potential resistance on daily closes perhaps in that 1,787-1,810 range. Be careful of rollover potential if the SPX spurts up to 1,810 or perhaps a little higher and then stalls.

For now, a lower downside target has been set, with the potential that the important 1,775 support zone could now be strong resistance on any bounce attempt.

Annotated Daily Chart of the Dow:

The Dow also fell to the target predicted last week and then today pierced that target. In doing so, that action set a new potential downside target at about 14,800-15,100. Such a target, even if eventually reached, might not be reached without a few intervening relief rallies. In addition, that's a wide potential target but that's because I extended it higher to include the round-number potential support at 15,000.

Today's price action also pierced what I had thought could be potentially strong historical support at earlier swing highs. That does not augur well for other indices that traders hope will find support on those previous swing highs.

If the Dow should bounce, traders should be aware that resistance could kick in as soon at 15,600. Since that level provided support for only one day, it's possible that the Dow could push up through it just as easily as it fell below it today. Look for potentially stronger resistance on daily closes at 15,690-15,850. If the Dow can maintain daily closes above about 15,850, it sets a new potential upside target at 16,000-16,175, where it would again encounter potential resistance on daily closes.

For now, the Dow has set a potentially lower target. Daily closes above about 15,690 would improve the tenor, but the Dow needs daily closes above about 15,850 before it sets a new potential upside target. We're in a dangerous time, since some of the biggest declines come out of such oversold conditions and so do some of the most rabid relief rallies.

Annotated Daily Chart of the NDX:

The NDX suffered big losses today, but it still outperforms on a Keltner basis. It has not yet dropped all the way to its next Keltner target, now at about 3,350-3,425. The NDX did find at least temporary support near December's swing low. The NDX price action can still catch up to the other indices, however, dropping into the next Keltner target.

Daily closes beneath about 3,350 set the next potential downside target from about 3,100-3,140. Be aware, however, of potentially strong intervening historical and round-number support from about 3,300-3,333. If I had an NDX-based bearish trade, I would remain aware of bounce potential in that zone, too.

If the NDX bounces immediately or after a test of the red Keltner support zone, be aware of potentially strong resistance on daily closes at 3,500-3,540.

For now, the next downside target set for the NDX has been approached but not yet tested.

Annotated Daily Chart of the RUT:

The RUT dropped into and then slightly exceeded its downside target today. Sustained daily closes at or above about 1,096 suggest that the support is tentatively holding, but sustained daily closes beneath that set a potential new Keltner downside target of 1,000-1,015. I would not ignore potential intervening support at about 1,080 and 1,060, however.

Today's closing proved a bit ambiguous. We know that the RUT can overrun such support levels a bit and then price action will act as if it didn't, at all? Is the RUT going to continue holding. The RUT needs to sustain the closes beneath about 1,096 before we believe in the downside target too strongly. Prepare what-if plans for that possibility but don't start counting your bearish profits just yet, either.

Sustained daily closes above about 1,112 set a tentative upside target of about 1,130-1,148, where rollover potential might be strong. However, I would be aware of potentially strong historical support/resistance in the 1,120 zone, too.

The RUT's action today was ambiguous. It's not clear that it's setting a new downside target; neither is it clear that support held.

Annotated Daily Chart of the VIX:

Last Monday, I warned that bulls should be wary if the VIX shot higher from the resistance it was testing. The 22-23 zone also marks potential resistance. Keep the VIX on your radar screen.

Bears want to see the VIX stay here or shoot higher, and they want the DJT and RUT to continue to show greater percentage losses than the other indices. That all happened today. Bulls want the opposite.

Tomorrow's Economic and Earnings Releases

This week's important economic events are carried forward from Jim Brown's weekend Wrap.

Companies reporting earnings tomorrow include, BIDU, BP, ETN, KORS, UBS, and Z.

What about Tomorrow on the Intraday Charts?

The moves have been so big that they have pierced through support on all intraday charts, including the 120-minute charts. Keltner channels are scrambled by the action, and the 120-minute charts provide the most trustworthy look among the intraday charts.

Annotated 120-Minute Chart of the SPX:

As will be true of most of the indices, the SPX punched all the way through the bottom boundary of the widest of its Keltner channels today. Therefore, there are no Keltner-assisted downside targets to be mentioned on the intraday charts. Look to the daily charts for next potential downside targets.

If the SPX bounces tomorrow, the intraday chart shows that potential resistance on 120-minute closes might be encountered at about 1,760-1,770. Until and unless the SPX can sustain 120-minute closes above about 1,760 and maybe even 1,770, it's still in runaway mode to the downside.

However, sustained 120-minute closes above about 1,770 set a next potential upside target at about 1,800-1,810. Rollover potential might be strong in that range or again at the target at about 1,820-1,827.

Annotated 120-Minute Chart of the Dow:

The Dow has also broken through the bottom boundary of its widest Keltner channel and is in runaway mode to the downside. Look to the daily chart for potential downside targets. If the Dow should pop higher tomorrow, the Keltner chart suggests that resistance on 120-minute closes might be found at 15,600-15,700. It's not until the Dow can maintain 120-minute closes above about 15,700 that it sets that next potential upside target now at about 15,900-16,000. The next potential target is about 100 points above that, but be aware of rollover potential at each of these potential upside targets.

Annotated 120-Minute Chart of the NDX:

The NDX has not yet hit its potential downside target of 3,400-3,415, and it is not in runaway mode on this 120-minute chart. The chart suggests that it might find support rather quickly if it continues lower tomorrow, although it could emulate the other indices and overrun Keltner support, of course.

It's not until the NDX can maintain 120-minute closes above about 3,460 that the tenor begins to change. It's not until it can maintain 120-minute closes above about 3,482 that it sets a new potential upside target. The Keltner channels suggest that target would be at about 3,518-3,537, but traders should of course be aware of potential historical and round-number resistance at 3,500.

The NDX has set a new potential downside target on this chart but hasn't yet touched it. It does not always touch the outer boundaries as is shown when it was testing the upper channel boundary less than two weeks ago.

Annotated 120-Minute Chart of the Russell 2000:

The RUT followed the example of the SPX and Dow. It has overrun its lower Keltner channel boundary on this 120-minute chart and should be considered in runaway mode. A bounce might encounter resistance on 120-minute closes at 1,102-1,108 and then again at about 1,114-1,120 if it can get past the first resistance level. The next potential target would be at about 1,137-1,145. Rollover potential exists at each of these potential upside targets. However, the RUT can be particularly rabid when shorts start covering, particularly if there's a large morning gap that isn't quickly reversed.

Even if the indices bounce tomorrow, we should expect some selling on any bounce unless indices gap higher and run up so fast that shorts are forced to cover. There could be some margin calls to be met, for example, and some nervous short-term bulls who could not get out because of slow fills today might exit at their first opportunity to lessen losses.

Today's heat map produced a sea of red, with AAPL, TWTR, TWC and PFE being among the outperformers. It's always worrisome when the Dow Jones Transports, the RUT and the discretionary sector drop a heftier percentage than the other indices and when the big-cap based indices such as the Dow, OEX, and NDX drop less. Traders and/or investors were abandoning the less liquid stocks today, and that's not an encouraging thing to see. I don't know what happens next, and unless someone has enough money to move the markets, no one else does, either. All I know for certain is that we had some downside targets set last week and indices' prices thundered lower to them and through them in some cases. Those targets were the make-it-or-break it levels that should have held if the markets were to behave as they had on previous dips. In some cases, they did or mostly did. In others, they didn't.

Linda Piazza


New Option Plays

Look Out Below

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Intl. Business Machines - IBM - close: 172.90 change: -3.78

Stop Loss: 176.55
Target(s): 161.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
IBM is in the technology sector. They used to be a major player in the hardware industry but have turned into more of a technology services company. The company is a bit famous for meeting or exceeding Wall Street earnings estimates by aggressive stock buyback programs to reduce the number of shares outstanding. It's recently been revealed that IBM may have manipulated its profit by shuffling sales through a subsidiary to reduce its tax liabilities. It's tax rate has fallen to a 20-year low.

IBM has been suffering with a long-term down trend since it peaked in 2013. Today's market sell-off has pushed IBM to key support near $172.50. Bulls on the stock could argue that IBM shares are already oversold with a plunge from $190 just a few weeks ago. That's true but stocks can always grow more oversold. A breakdown under support could spark another wave of selling.

I am suggesting we limit our risk by using small positions. We'll use a trigger to buy puts at $172.25. If triggered our target is $161.00. FYI: The Point & Figure chart for IBM is bearish with a $156 target.

Trigger @ 172.25

- Suggested Positions -

Buy the MAR $170 PUT (IBM1422o170) current ask $3.60

Annotated Chart:

Weekly Chart:

Entry on February -- at $---.--
Average Daily Volume = 6.0 million
Listed on February 03, 2014



In Play Updates and Reviews

Stocks Plunge More Than 2%

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market collapsed with the major averages all down more than -2% today. This is the worst start to February since 1933.

Our plan was to close our CBI trade at the opening bell.
ENOC was stopped out. SJM hit our entry trigger.

We want to exit our PM trade immediately to lock in potential gains.


Current Portfolio:


CALL Play Updates

Biotech ETF - BBH - close: 94.25 change: -2.63

Stop Loss: 93.75
Target(s): 109.00
Current Option Gain/Loss: -41.9%
Time Frame: 6 to 7 weeks
New Positions: see below

Comments:
02/03/14: Stocks were crushed lower on Monday and the BBH gave up -2.7% to settle on its 20-dma. The low today was $93.92. Our stop is at $93.75. I am not suggesting new positions at this time.

Earlier Comments:
We're listing the March calls. You may want to consider the June calls. The Point & Figure chart for BBH is bullish with a $111.00 target.

Caution: The BBH does not see a lot of option volume. Traders may want to use small positions to limit their exposure.

- Suggested Positions -

Long MAR $100 call (BBH1422C100) entry $3.10*

01/30/14 triggered on gap open higher at $97.49. suggested trigger was $97.25
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on January 30 at $97.49
Average Daily Volume = 164 thousand
Listed on January 29, 2014


Salesforce.com - CRM - close: 58.47 change: -2.06

Stop Loss: 59.40
Target(s): 67.50
Current Option Gain/Loss: Unopened
Time Frame: Exit PRIOR to earnings in late February
New Positions: Yes, see below

Comments:
02/03/14: CRM reversed lower today and underperformed the market with a -3.4% decline. Shares settled on their 20-dma, which was support a few days ago. Right now our suggested entry point is $61.75. We'll see how CRM performs tomorrow and potentially adjust our entry point strategy or remove CRM.

Earlier Comments:
CRM has short-term resistance at $61.50. I am suggesting a trigger to buy calls at $61.75. If triggered our target is $67.50. However, we will plan on exiting prior to CRM's earnings report in late February (no confirmed date yet).

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

Trigger @ 61.75

- Suggested Positions -

Buy the Mar $62.50 call (CRM1422C62.5)

Entry on February -- at $---.--
Average Daily Volume = 4.8 million
Listed on February 01, 2014


General Dynamics - GD - close: 98.47 change: -2.84

Stop Loss: 97.75
Target(s): 107.00
Current Option Gain/Loss: -30.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
02/03/14: GD reversed all of its recent gains with a -2.8% decline and a close below its simple 10-dma today. The stock is poised to retest short-term support near $98.00 soon.

- Suggested Positions -

Long Mar $100 call (GD1422C100) entry $3.00*

01/28/14 triggered @ 100.50
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on January 28 at $100.50
Average Daily Volume = 2.6 million
Listed on January 27, 2014


iShares Russell 2000 ETF - IWM - close: 108.65 change: -3.51

Stop Loss: 103.75
Target(s): 113.00
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
02/03/14: The stock market's widespread decline on Monday hit the small caps pretty hard. The IWM broke down below support near $111 and its 100-dma. It is unlikely that the IWM will hit our suggested entry point at $114.15 any time soon. Therefore we are making major adjustments to our strategy.

The simple 200-dma could be support (currently near $105). We are now suggesting a buy-the-dip trigger at $106.00 with a stop loss at $103.75. If triggered our target is $113.00. I am adjusting our option strike.

Trigger @ $106.00, stop loss @ 103.75.

- Suggested *SMALL* Positions -

Buy the Mar $110 call (IWM1422C110) current ask $2.69

02/03/14 STRATEGY adjustment: New trigger buy the dip at $106.00,
move the stop loss to $103.75, change the option strike.
02/01/14 remove trigger at $110.30. Adjust stop loss higher.
02/01/14 *Use small positions to limit risk*
01/29/14 adjust stop on buy-the-dip entry point to 108.65
01/28/14 add a secondary entry point to buy calls at $114.15
01/27/14 adjust the entry point trigger to $110.30 and move the stop loss to $108.85.

chart:

Entry on January -- at $---.--
Average Daily Volume = 31.7 million
Listed on January 25, 2014


NASDAQ-100 ETF - QQQ - close: 84.29 change: -1.98

Stop Loss: 83.90
Target(s): 92.00
Current Option Gain/Loss: -44.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/03/14: The market's weakness has pulled the QQQ down to support near $84.00. If there is any follow through lower tomorrow we could see the QQQ hit our stop at $83.90. I am not suggesting new positions at this time.

*small positions* - Suggested Positions -

Long Mar $87 call (QQQ1422C87) entry $1.60

01/27/14 adjust stop loss to $83.90
01/27/14 triggered at $86.00

Entry on January 27 at $86.00
Average Daily Volume = 29 million
Listed on January 25, 2014


SBA Communications - SBAC - close: 91.99 change: -0.76

Stop Loss: 89.90
Target(s): 99.50
Current Option Gain/Loss: - 25.6%
Time Frame: Exit PRIOR to earnings on February 25th
New Positions: see below

Comments:
02/03/14: SBAC held up pretty well today. Shares only fell -0.8% versus a -2.2% drop in the S&P 500. If this pullback continues we can watch for support near $90.00. P> FYI: The Point & Figure chart for SBAC is bullish with a $107 target. A move above $93.00 would produce a new buy signal.

- Suggested Positions -

Long MAR $95 call (SBAC1422C95) entry $1.95

01/31/14 triggered at $93.05

Entry on January 31 at $93.05
Average Daily Volume = 1.3 million
Listed on January 30, 2014




PUT Play Updates

Philip Morris Intl. - PM - close: 75.39 change: -2.75

Stop Loss: 80.15
Target(s): 75.25
Current Option Gain/Loss: +232.1%
Time Frame: Exit PRIOR to earnings on Feb 6th
New Positions: see below

Comments:
02/03/14: PM almost hit our target today. The intraday low was $75.28. Our suggested exit target has been $75.25. The stock is looking pretty oversold with a -3.5% drop on top of its recent losses.

We are suggesting an immediate exit to lock in potential gains. Exit at the opening bell tomorrow morning.

- Suggested Positions -

Long Feb $80 PUT (PM1422N80) entry $1.43

02/03/14 prepare to exit immediately
02/01/14 new stop loss @ 80.15, prepare to exit before Feb. 6th
01/29/14 triggered @ 79.85

Entry on January -- at $---.--
Average Daily Volume = 5.9 million
Listed on January 27, 2014


Restoration Hardware - RH - close: 54.85 change: -1.89

Stop Loss: 58.25
Target(s): 51.00
Current Option Gain/Loss: + 0.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
02/03/14: RH looks good. The stock displayed some relative weakness with a -3.3% decline. Shares are poised to breakdown below their simple 300-dma very soon. Tonight I am adjusting our stop loss down to $58.25.

Earlier Comments:
Please note that I do consider this a somewhat more aggressive, higher-risk trade because RH does have above average short interest (about 10% of the 34 million-share float). Our multi-week target is $51.00. More aggressive traders could aim lower. The Point & Figure chart for RH is bearish with a $43 target.

*Small Positions* - Suggested Positions -

Long MAR $55 PUT (RH1422o55) entry $3.00*

02/03/14 new stop loss @ 58.25
01/29/14 trade opened this morning. RH gapped down at $56.47.
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on January 29 at $56.47
Average Daily Volume = 981 thousand
Listed on January 28, 2014


Sears Holding - SHLD - close: 35.23 change: -1.14

Stop Loss: 38.55
Target(s): 30.25
Current Option Gain/Loss: + 4.9%
Time Frame: exit PRIOR to earnings in late February
New Positions: see below

Comments:
02/03/14: Shares of SHLD also underperformed the market today with a -3.1% decline. SHLD is on the verge of breaking down below the $35.00 mark. I would consider new positions now or you could wait for a drop below $35.00.

Earlier Comments:
I do consider this a more aggressive trade because there is so much short interest. The shorts are probably right on this stock but SHLD could still see short-term spikes if some of the weaker shorts rush to cover on any unexpected good news. The most recent data listed short interest at 54% of the 50.7 million share float.

Our target is $30.25. More aggressive traders could aim lower since the Point & Figure chart for SHLD is bearish with a $20 target. However, I would not hold over the earnings report expected in late February.

- Suggested Positions -

Long MAR $30 PUT (SHLD1422o30) entry $1.63

01/31/14 triggered @ $35.85

Entry on January 31 at $35.85
Average Daily Volume = 2.6 million
Listed on January 29, 2014


The J.M.Smucker Company - SJM - close: 93.93 change: -2.46

Stop Loss: 98.25
Target(s): 90.50
Current Option Gain/Loss: +30.9%
Time Frame: Exit PRIOR to earnings on Feb. 14th
New Positions: see below

Comments:
02/03/14: SJM broke down sharply with a -2.5% decline. Our suggested entry point was hit right after the opening bell at $96.25. I would not launch new positions at current levels.

Our target is $90.50. More aggressive traders could aim lower since the Point & Figure chart for SJM is bearish with an $86 target. However, our target at $90.50 may already be too optimistic. SJM is scheduled to report earnings on February 14th and we do not want to hold over the report. We have two weeks. Nimble traders might want to use the February options. I am suggesting the March $95 put.

- Suggested Positions -

Long MAR $95 PUT (SJM1422o95) entry $2.75

02/03/14 triggered @ 96.25

Entry on February 03 at $96.25
Average Daily Volume = 896 thousand
Listed on February 01, 2014



CLOSED BULLISH PLAYS

Chicago Bridge & Iron - CBI - close: 73.23 change: -1.76

Stop Loss: 73.15
Target(s): 82.50
Current Option Gain/Loss: -26.4%
Time Frame: Exit PRIOR to CBI's earnings report in February
New Positions: see below

Comments:
02/03/14: We had decided in the weekend newsletter to immediately exit our CBI trade. The stock opened at $74.92 and then plunged to $70.76 by midday.

- Suggested Positions -

Buy the Mar $80 call (CBI1422C80) entry $1.70 exit $1.25 (-26.4%)

02/03/14 planned exit this morning
02/01/14 prepare to exit immediately on Monday morning
01/30/14 CBI not performing well today. This could be a warning signal.
01/28/14 new stop loss @ 73.15

chart:

Entry on January 27 at $76.17
Average Daily Volume = 1.5 million
Listed on January 25, 2014


EnerNOC, Inc. - ENOC - close: 20.68 change: -1.72

Stop Loss: 21.90
Target(s): 25.75
Current Option Gain/Loss: -40.5%
Time Frame: EXIT PRIOR to earnings on February 13th
New Positions: see below

Comments:
02/03/14: ENOC got crushed today. I didn't see any news to explain the relative weakness. The stock opened near its 10-dma and then plunged to a -7.6% decline. Our stop was hit at $21.90.

- Suggested Positions -

MAR $22.50 call (ENOC1422C22.5) entry $1.85* exit $1.10** (-40.5%)

02/03/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
02/01/14 new stop loss @ 21.90
01/30/14 triggered at $23.10
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:

Entry on January 30 at $23.10
Average Daily Volume = 485 thousand
Listed on January 28, 2014