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Newsletter

Daily Newsletter, Saturday, 2/8/2014

Table of Contents

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

Market Wrap

Rally or Mirage?

by Jim Brown

Click here to email Jim Brown

When everyone was expecting a further decline a rally suddenly appeared. It is real or a mirage?

Market Statistics

After looking at more than 500 individual stock charts on Friday afternoon I would say this rally as a good chance of being real and not just a temporary rebound. Quite a few stocks had rebounded above initial resistance levels after a stop clearing dip early this week. The strength of the rebound in individual stocks suggests the shorts were squeezed out and investors were putting money back to work.

Last year in the midst of the best year in a decade we had three dips in the 4-5% range and three in the 2-3% range. Each was rumored to be the "big one" but all six were bought and the markets closed at the highs for the year. Traders and to some extent investors have a short term memory. If something has worked in the recent past they tend to believe it will work again. A rebound from a -5% dip is what the average investor expected. It was only the professional traders and market analysts that expected the January decline to surprise to the downside.

One reason why I think this rebound has legs is the response to the Nonfarm Payrolls on Friday. The report disappointed for the second month in a row with a gain of only +113,000 jobs compared to lowered estimates for +180,000. December's dreadful +74,000 gain was only revised up +1,000 to 75,000. Everyone was already prepared to blame the weather but economists including the BLS said no. While there was some small weather impact, the big decline was not weather related. Oops! The BLS said the survey week was a relatively warm and a storm free week so weather was not a significant factor.


The unemployment rate declined -0.1 to 6.6% and the labor force participation rate rose from 62.8 to 63.0%. The benchmark revision that happens in January added +509,000 jobs for all of 2013. This revision is done every year to update for the business birth/death rate, final updates from actual data that was submitted late and seasonal data revisions. Historically, the benchmark revision adds to the overall employment for the year. For 2013 BLS found an error that subtracted -119,000 jobs or the revision would have been higher.

Why was the market rebounding on bad news? First, it was not all bad. The separate Household Survey showed a gain of +616,000 jobs compared to a loss of -347,000 in December. This pushed up the labor force participation rate from 35 year low. November jobs were revised +33,000 higher to +274,000 and the strongest month since January 2012. That makes the three month average ending in November of +225,000 jobs per month. The last two months have averaged only +98,000 but nearly every traders believes it was weather related even when the BLS and others are saying it was not material.

As an example of the weather impact there was a decline of -22,000 construction jobs in December that may have been weather related or simply seasonal. In January, with horrible weather, the construction sector added +48,000 jobs. Manufacturing payrolls rose from +8,000 in December to +21,000 in January. Government employment fell -29,000 jobs, which were concentrated in the Postal Service and education. The postal service is thinning the ranks so that is not likely weather related.

Also, the manufacturing portion of the economy created 76,000 jobs and that was the highest number in seven years according to David Rosenberg of Gluskin Sheff. The service portion of the economy only produced 37,000 jobs and that was the lowest number since June 2012. Analysts claim the spike in manufacturing employment was positive because the service sector will follow manufacturing. Secondly, you can always find something to like and hate in every report. Highlighting one number from an ugly report does not make it a good report.

Lastly, the BLS publishes a number for people "not at work due to weather." That number for January 2014 was 226,000. However, in five of the last six years the number was actually higher. Only January 2012 was lower at 200,000 so that effectively kills the "weather" excuse for the low number of new jobs.

Lastly, the BLS published a disclaimer in the January report. The warning says "Establishment survey data has been revised as a result of the annual benchmarking process and the updating of seasonal adjustment factors. Also, the household survey data for January 2014 reflects updated population estimates." They changed the base data, the total population estimates and the seasonal adjustments. They added 2,103,000 jobs to the actual January numbers as a "seasonal adjustment" to get to that final +113,000 number. The Nonfarm Payroll numbers are more fiction than fact as a result of all the manipulation they go through to get a "satisfactory" final number.

I can only guess that two months of significantly lower job creation may have given investors the impression that the Fed will taper it's taper and slow the removal of QE. Why else would investors be bullish when other economic reports have been bearish and job creation is slowing?

I suspect the market simply rebounded from an oversold condition on the theory bad news is good news once again. We had weaker than expected numbers from the Nonfarm Payrolls, ADP Employment, Factory Orders, Vehicle Sales, ISM Manufacturing, Construction Spending, Pending Home Sales, Durable Goods, New Home Sales, Existing Home Sales, etc. While retail traders may think this data will force the Fed to taper the taper there is little possibility of that now that they are well into the process.

However, some investors do believe this sudden downturn in economics could be lasting and the Fed could possibly halt the taper. Gold posted the biggest weekly gain in a month to close at $1,262.90 an ounce. Gold futures are showing a potential breakout over $1,270 if economic worries continue.


Earnings are going to fade next week with 60% of the S&P already reported. So far 67% have beaten on earnings with the earnings growth rate now approaching +7.5%.

If we expand our universe to the 1,100+ companies that have reported earnings so far the numbers improve dramatically. Of that number 65% have beaten EPS estimates and 64% have beaten on revenue. If this trend continues it will be the strongest earnings beat rate since Q4-2010 according to Bespoke and the strongest revenue beat rate since Q2-2011.

The Bespoke data is contrary to the narrower S&P data we have been seeing with only about 50% beating on revenue. However, about 59% of the S&P companies giving guidance have lowered their 2014 forecast. What does that say about Q1 earnings expectations?

The economic calendar for next week is minimal. The most important event is not economic but Janet Yellen's first testimony to Congress on the state of the economy. This is likely to be a pivotal point for the markets. How she presents herself and her plans will set the tone for the first year of her tenure. It could be a rocky day for the markets and there is always the potential for a market spike if her dovish side makes an appearance.


The current debt ceiling authorization expired on Friday. Treasury Secretary Jack Lew warned Speaker Boehner that the Treasury would exhaust its "extraordinary measures" and run out of money by February 27th. By that date the government's available cash would fall below $50 billion and could no longer guarantee payment of America's debts.

The debt ceiling debate is going to start heating up over the next two weeks and it could get ugly again. However, I believe the republicans will want to keep it from becoming a hindrance to the November elections and will give up quickly in their attempt to attach some concession to the debt ceiling extension. Over the last 50 years almost every time the debt ceiling has come up for a vote there have been conditions attached. The prior demands are almost equally split between the democrats and republicans so neither party has a record of clean debt limit extensions.

As Friday's go it was very quiet in the market. Not summer Friday quiet but the headlines were few and far between. There were the obligatory earnings updates and a constant rehash of the Nonfarm numbers and debate over tapering but the intensity was missing. Even the report of an attempted plane hijacking to Sochi was little noticed. Volume was almost identical to Thursday with 6.95 billion shares compared to 6.91 billion. These were the lowest volumes for the week with Monday's crash coming on 9.55 billion shares. Apparently traders were content with watching the rebound rather than chasing it.

The earnings leader for the day was AthenaHealth Inc. (ATHN). The company reported earnings of 57 cents compared to estimates for 44 cents and 16 cents in the year ago quarter. AthenaHealth is an electronic health records service provider. They said their network of doctors increased by 28% and bookings were up 30%. The strong earnings came after several quarters of earnings misses and apparently many traders were expecting another miss. Shares of ATHN rose $35 or +25% on the news.

Barron's said ATHN was in the strongest position to profit from the coming revamp of the World Health Organization's disease codes called ICD-10. Barron's estimated that of the 1.1 million healthcare providers in the U.S. as many as 25% will be transitioned to an outsourced billing service following the implementation of ICD-10 in October. Barron's believes that will add 10,400 new doctor's offices to the AthenaCollector service in 2014. Barron's said AthenaCollector was the better mousetrap for outsourced billing for hospitals and independent practices.


LinkedIn needs a better mousetrap to capture new users. Earnings for Q4 fell -67% to 3 cents while revenue rose +47% to $447.2 million. The company projected revenue in Q1 of just over $455 million compared to analyst estimates of $469.4 million. The new revenue forecast for 41% growth was down from prior estimates for 72% growth. Membership rose +37% to 277 million but analysts were expecting closer to 290 million. The slowing growth weighed on the stock for a $14 drop to $209.


Expedia (EXPE) shares rallied after gross bookings rose +21% for the quarter driven by room night growth at its Hotels.com brand. An increase in flights booked online also drove revenue higher. Earnings were 92 cents compared to estimates of 85 cents. Revenue rose +18% to $1.15 billion. Shares rallied +14% on the news. As you can see in the chart it is either feast or famine for Expedia when earnings are reported. There is either a gap up or a gap down every time.


Cigna (CI) shares fell -9% after reporting earnings of $1.39 compared to estimates of $1.48. Revenue rose +7% to $7.62 billion but missed estimates of $8.06 billion. More bad news came from the guidance. Cigna is expecting to earn between $6.80-$7.20 for 2014 but analysts were expecting $7.29.


Verisign (VRSN) shares dropped -6% on worries the company's profit margins are shrinking. The company's earnings of 67 cents were up +8% and in line with estimates but forecasts for $1.0-$1.02 billion in revenue for 2014 was lower than analyst estimates at $1.03 billion. The company added 1.29 million net new domain names in Q4 compared to 1.55 million in Q3. Active .com and .net names increased +5% to 127.2 million. Verisign processed 8.2 million new domain name registrations for the quarter and down slightly from the 8.3 million in the prior quarter. The company bought back 4.1 million shares in the quarter and the board upgraded the outstanding approval from $472 million to $1.0 billion for buybacks in 2014.


Another company benefitting from a share buyback plan was Outerwall (OUTR) the parent of the Redbox DVD rental business. The company said it was going to purchase $350 million in shares through a modified Dutch auction tender offer. If fully subscribed that will bring the total dollar amount of shares purchased since February 2013 to $555 million. The company reported earnings of $1.68 on revenue of $593.7 million compared to estimates of $1.24 and $596.1 million. Earnings rose +81% and revenue +5%. Shares rose +12% on the news.


IBM shares rallied +2.50 on Friday after the company hired Goldman Sachs to help it find a partner for its chip business. IBM has been trying to sell the division for some time with no luck. By switching to a partnership IBM can continue to control the design and intellectual property and the new partner gets the benefit of a deep pocketed and knowledgeable benefactor.

IBM shares have rebounded from the $172 level for the third time in four months and this should be decent support. IBM is selling low margin divisions to concentrate on its high margin businesses. I think IBM shares will come roaring back later in 2014.


Apple (AAPL) shares rallied +$7 to $520 after the company said it had bought back $14 billion in stock over the past two weeks. CEO Tim Cook said in an interview with the WSJ that he was "surprised" by the -8% decline after they reported earnings that included disappointing iPhone sales. That brings the total buybacks to $40 billion over the last 12 months. Carl Icahn is pressuring Apple to buy back another $50 billion in addition to the $100 billion program they are currently working on completing. That $100 billion includes buybacks and dividends. Icahn wants the buybacks to be completed in 2014. Icahn raised his stake to $3.6 billion after adding $500 million in shares after the post earnings drop.


The markets seem to have avoided a 10% correction with the late week rebound but it is too soon to know for sure. Investors withdrew money from equity funds at the fastest rate on record with a $28.3 billion outflow so far in 2014. Investors put about half of that cash to work in bond funds, which saw inflows of $14.8 billion. We have been waiting for a year for the "great rotation" to begin where cash would come out of bonds and into equities as the Fed ended the QE program and interest rates moved higher. The massive outflow from equities and into bonds has gone the other way and it appears the rotation is from equity risk to bond safety as a result of the weak economics and weak market.

At the S&P low for the week at 1,737 that was a -6% dip from the 1,848 high close on January 15th. After Monday's monster -326 point decline in the Dow and -40 drop in the S&P the fear factor increased significantly with the VIX hitting 21.48 intraday. That was the high point for the week as the 21 level is seen as a buying opportunity in most cases. The VIX has reached that level four times since late 2012. Each time a rally began over the next several days. Eventually that plan is not going to work since the VIX can go up another 200-300% in times of real stress.


Since 1945 there have been 27 corrections of 10% or more with 12 bear markets with losses of 20% or more. The average correction loses -13.3% and takes an average of 71 days. Since the bottom of the market in March 2009 we have had three corrections. In 2010 there was a 69 day drop of -16%. In the summer of 2011 there was a 154 day correction of -19%. In 2012 there was a -9.9% correction of 59 days. (Data courtesy of Josh Brown) The -6.5% drop in 2014 was still just a pothole in the market highway unless the market rolls over again soon.

Also helping the U.S. markets recover was a rebound in the Nikkei and the emerging markets in general. The Nikkei rebounded +462 from a three month low. The Nikkei plunge to 14,000 put the index in a seriously oversold condition and it was due for at least a dead cat bounce. Since every decline does not magically stop at a large round number the test will be whether the rebound continues next week or goes back to retest that 14,000 level.


The S&P tested the 1,740 level on Monday and Wednesday with the low for the week on Wednesday at 1,737. The rebound recovered 60 points of the decline to put the index right back at 1,797 and just under the key 1,800 resistance level. Not only is that the resistance high from the prior week but also the longer term uptrend resistance from May.

A +60 point rebound is more than enough to relieve the oversold conditions and clear out the majority of the shorts. Thursday's short squeeze stopped right at the prior support of 1,775 and some shorts probably reloaded at the close ahead of the payroll report. They were punished again on Friday when the bad news bulls bought the dip after the report.

If the S&P moves over 1,800 with any velocity then the sell off is over. If it struggles to gain a handful of points the bears will jump right back in and the fight will begin anew.

The worry for pattern traders is that we struggle at the 1,800 level for a week and build a right shoulder on the daily chart before going back to retest the 1,740 level again. That would be a very bearish setup.



The Dow tested the 15,350 level twice last week before sprinting for +437 points into Friday's close. The index is now entering a resistance range from 15,800 to 15,940. I doubt it will be a straight run with a breakout on Monday ahead of Yellen's testimony but anything is possible.

Numerous Dow stocks were severely oversold with very bearish charts and the shorts were clearly shaken lose. It remains to be seen if they reload those positions or go find a different trade.

If the Dow does continue higher the bigger challenge will be the 16,000 level where it could find right shoulder resistance similar to the S&P. A continued run to 16,000 would be +640 points from the lows and it would be extended and in need of a rest.

Only one Dow component was negative on Friday and that was Coca Cola by -8 cents.




The Nasdaq Composite had the best recovery of the big three indexes according to the charts. The +68 point rebound on Friday pushed it over resistance at 4,100 and positioned it nicely for an attempt to recapture 4,200. The sell off punched through the 4,000 level intraday but could not hold it but that was probably enough to flush out the weak holders. The +168 point rebound (+61%) was impressive. At its lows the Nasdaq was down -275 or -6.5% from the 4,243 closing high on January 22nd. I believe the Nasdaq has an easier task to regain the prior highs than the Dow and S&P. Support on any weakness would be 4,050.



Unfortunately the Russell 2000 is well below the relative levels of the other indexes. The decline pierced support at 1,100 and the rebound was lackluster relative to the points lost. The Russell declined -99 points to a low of 1,082 and rebounded only +34 points or basically one-third of its loss where the Nasdaq regained +61% of its losses.

The Russell did not return to 1,140, which would be the same relative resistance level seen on the Dow and Nasdaq. This means any future gains will require a +24 point move just to get to the level the other indexes are at today.

The Russell 2000 LOST -1.27% for the week.



I believe the key for next week will be the S&P moving over 1,800. If it happens on volume then the correction is probably over. If it is a lackluster move of just a few points I would be cautious about piling on a bunch of long positions. There is plenty of time to trade as long as you have capital. The Yellen testimony is going to be a pivotal event. Waiting until after her interrogation could be worthwhile.

Random Thoughts

David Woo, head of global rates and currencies at BofA, released a report last week saying there is a direct correlation between temperature and Q1 economic growth over the last decade. He said January was the coldest since 1988 and February is on track to be colder than normal. He found that a 1 degree Celsius drop (-1.8 F) in the average temperature in the first quarter is associated with a -1.5 percentage point drop in GDP growth since 2004. He said retail sales are much more sensitive to cold weather in Q1 when consumers don't have to shop compared to Q4 when consumers are forced to shop for the holidays. Bottom line, Q1 GDP may be significantly below estimates.

The Q4 GDP of 3.2% was mostly due to a buildup in unsold inventory and that will detract from GDP in future quarters.

Don't ignore the January Barometer. Here is an article by Jeffrey Hirsch on why we should be worried about the negative January. Prepare for Weakness

Months without electricity? It may be closer than you think. In what may have been a trial run a group of trained shooters shutdown a San Jose electrical substation in 2013 by firing 120 rounds in a 7 minute attack on 17 transformers from 40 yards outside the chain link fence. The location was scouted in advance and fiber optic cables were cut to eliminate communication from the station. This scenario has been a concern for planners for years. Targeted attacks on key substations could knock out the electrical grid to specific states or regions with very little risk to the terrorists. The transformers are expensive, made overseas and take months to replace in any quantity. Electrical Terrorists

Where is the gold? I reported on this back in 2012 but it is getting worse. In 2012 Germany told the Fed it wanted a third party audit of the 300 metric tons of gold stored at the New York Federal Reserve Bank. The Fed refused to allow an audit. Not to be denied they then told the Fed they wanted full custody and would repatriate the gold to Germany. The Fed said ok but not now. We will return it over the next seven years. Obviously this raises significant questions. Is the gold there or not? If it is there why would it take 7 years to return it? That suggests the gold is not there. In the year since the Germans requested the return of their gold only 5 tons has been released. If it is there why only 5 tons in a year? The conspiracy theorist in me is going crazy with this one. Even more of a problem is the rapid accumulation of gold by China. That is the second part of this article. Who Has the Gold

Comstock Partners laid out their reasons for claiming we are in a cyclical downturn in the markets. Are they right? Cyclical Downtrend Underway

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"Even being right 3 or 4 times out of 10 should yield a person a fortune, if he has the sense to cut his losses quickly on the ventures where he has been wrong."


Bernard Baruch (Financier, speculator, statesman, presidential adviser, 1870-1965)

 


Index Wrap

Market Bottoms in Bull Markets Occur in a Blink

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

Typically Market bottoms in a primary bull market occur quickly; down to 'common' retracements, oversold levels, and with the high volume of panicky profit taking. This then followed by a fast rebound. Not like tops that unfold in seemingly slow and extended motion!

Usually traders do get at least somewhat cautious and tend not to 'believe' the first low as a bottom, but it often is; in a major (primary) bull market, not in a mixed trend. Trader sentiment has drifted down a bit; not dramatically but the readings reflect cautiousness and is mildly bullish in terms of contrary opinion dynamics.

Summing up some key technical aspects of our recent low:

The S&P 500 (SPX) retraced approximately 50% of the October to January advance, which tends to be a 'normal' one-half correction in a stock or major market index after getting 'fully' oversold. A weaker index might retrace a Fibonacci 62 percent and a strong mover might only retrace about 38% of the prior move. The foregoing was the case with the Dow 30 (INDU) and the later was true for the big cap Nasdaq 100 (NDX) as it retraced a 'minimal' Fibonacci 38% before rebounding.

INDU rebounded after getting fully oversold (basis the 13-day Relative Strength Index or RSI) and after falling to the area of the pivotal 200-day moving average. The Dow was the weakest on the recent Market decline but twice now has managed weekly Closes above 15600-15660, a key long-term line of support in INDU.

The Nasdaq Composite, which got as 'oversold' as it has since its June low, also retraced close to a Fibonacci 50% retracement, but not more to date, which is a plus for a potential bottom. Good signs of a bottom there also included COMP's rebound from support implied by its long standing up trendline.

Even more bullish signs were seen in the still red-hot Nasdaq 100 (NDX) as it not only held in the area of its up trendline but only retraced a 'minimal' 38 percent of its October-January advance. Typical for the last 3 important lows in the NDX tracing stock QQQ, were the multiple spikes in daily trading volume as high volume typically precedes a bottom in previously strong bull movers.

I noted last week that a break of key chart/trendline supports at SPX, 1770, OEX 750, Dow 15600, COMP 3920-3900, NDX at 3400, QQQ 82.3 and RUT at 1120-1100, would suggest my lower highlighted support areas would next come into play. This was pretty much the way it played out as the Market got spooked into a second leg down.

All in all, so far at least, this has been a fairly normal and not especially deep correction. 'Average' so to speak, 401k investors who don't normally ask me about the Market were coming up to me in social gatherings this past week and were clearly nervous. They didn't get 'nervous' with the S&P gaining 30%, or the Nasdaq 40%, last year! But, when the Market goes the other way for awhile in a period when it often corrects (February-March), its Maalox time!!

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The recent S&P 500 (SPX) lows turned out to be a bit below SPX's long-standing up trendline, but close to a normal 50 per cent give back or retracement of the prior upswing. The 3-day dip below the trendline was short-lived and minor before still more buying showed up. The following two days, Thursday and Friday, saw strong back to back gains. This pattern suggests that SPX's intermediate uptrend is intact, not broken.

SPX's 'fully' oversold RSI readings went on for a few days but it didn't require a lot of patience to wait for the rally that followed. Quite unlike the weeks of 'overbought' RSI levels before SPX broke down! Usually in strong bull trends, oversold conditions DO NOT last long.

A bearish flag pattern was seen in the sideways move of a few days coming into this past week as SPX bounced between 1772 and the low-1790 area. This was a bearish chart aspect suggesting a possible further dip of 50-70 points, which turned out to be only another 40 points from the low end of the flag, so not much really. A bottom looks to be in place for now and perhaps for coming weeks.

Upside resistance is at the moving averages, then at 1820, extending to the prior highs in the 1850 area.

Technical support is suggested in the 1760 area, then at 1740-1738. A couple of Closes below 1740 might see 1700 as a next stop and a next possible downside target.

A pattern seen prior to this past week that suggested SPX could make a still lower bottom further on was that bullishness remained relatively high per my CPRATIO model seen above. More bearishness then we were seeing would typically occur before a significant and long overdue correction ran its course.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart is bearish on a short term basis, but the intermediate uptrend is intact given OEX's rebound back into its uptrend channel. OEX saw intraday lows closer to the next key retracement level at a Fibonacci 62% but that was it. The strong move back into OEX's uptrend channel is bullish and keeps the intermediate trend pointed higher.

Pivotal chart resistance is seen at OEX's prior 'breakdown' point at 810, with resistance then extending to prior minor double top in the 824 area.

Near support is at the up trendline which, while penetrated briefly, is still an important technical support. Next support below comes in at recent lows at 771-772. Given that support developed close to OEX's up trendline and seemed most related to sell stops being elected just below the trendline, there is potential ahead for a continued rebound.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow (INDU) was the weakest of the major indexes as its retracement was the 'classic' 66 percent/2/3rds of the prior advance and a classic short-covering area. This later retracement amount is the lowest I expect to see typically, absent a round-turn pullback to the prior low in the 732 area. I expect the Dow has made a significant low which may be re-tested but not as likely to be exceeded further.

Near resistance is seen at 16000, then at 16100, with fairly major resistance coming in starting in the 16500 area, with resistance then extending to the prior top that formed at 16520-16588.

Key near support is seen at INDU's redrawn up trendline intersecting at 15385. I should not that it was very important from an Investor standpoint that the Dow rebound from the area of its 200-day moving average. A weekly Close below the 200-day moving average would suggest a deeper decline than the 30-odd Dow stock charts suggest to me currently.

The Dow got to the low end of its 13-day RSI scale that suggests what I call a 'fully' oversold condition. I wrote last week that the Dow in recent months has reliably rallied from such oversold conditions over the past 12+ months as is partly seen from the daily chart below.



NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) chart was looking bearish on a short-term basis but within the context of a still-strong intermediate to long-term uptrend, which can now be said to be INTACT given the rebound from COMP's up trendline.

I wrote last week that "In a bull market like this, especially with such a strong tech segment, odds will tend to favor a continued bullish outlook until proven otherwise." Until 'proven otherwise' would mostly be seen if there was a decisive downside penetration of COMP's up trendline; a trendline that's been defining support for a year+ period.

I also noted that I'd adopt bullish option plays on a dip TO the trendline that held (there) with buying coming in. Hopefully you dipped toes in the bullish waters such as buying calls in key tech stocks or with the NDX for this initial rebound and beyond.

COMP next needs to clear resistance implied by its 21-day moving average (currently at 4131) to suggest that the previously strong up trend can resume. Resistance extends to 4150, then 4200 on up to 4250. 4300 is technical resistance implied by the upper end of the Composite's uptrend price channel. Support is seen at 3985, extending to 3950; next pivotal support comes in at 3900.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) chart was looking short-term bearish with the recent dip to its up trendline. I indicated last time that "...a dip would 'normally' be a buy at the up trendline as support is strongly assumed there." It turned out that the simple answer was the best answer. I did go on to say that I favored buying dips like the recent one to NDX's up trendline only if 'risk' was held to exiting on a high volume break of the up trendline.

I'm not quite as sure about my more bullish statement that upside potential could next extend to the upper end of NDX's price channel in the 3700 area. That's a bit too far out ahead in the future for me to repeat, but the chart remains bullish.

Initial technical resistance comes in around 3600, extending to 3635. Near support is seen at the up trendline currently intersecting around 3450 with support likely extending to the recent intraday low at 3418. Pivotal lower support begins in the 3350 area.

NDX rebounded back above the pivotal 21-day moving average which is bullish. Most bullish was the shallow retracement and buying interest found at NDX's up trendline.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nas 100 tracking stock (QQQ) saw bearish recent action off its peak price at 89, but remained firmly within its intermediate-term uptrend as the stock rallied strongly from technical support at its long-standing up trendline.

Near support is seen at 84, then lower at 82 even. Near resistance is highlighted at 88, extending to the recent QQQ intraday high at 89.

The high volume spikes on the recent sell off, as has often been the case, occurred ahead of a key low at the up trendline, followed by a strong rebound. It's a bull market and that doesn't change necessarily just because the Fed stops priming the pump; recall it tapered because of gathering strength showing in the US economy.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) daily chart saw a full-blown downside correction but held the low end of its October-January trading range. I did re-drawn RUT's up trendline to make for what is probably its renewed and broad uptrend price channel.

Last week I wrote that "The Russell has a tendency for rallies to develop when and after the Relative Strength Index (RSI) gets to the low end of the scale." This may seem too simple to be true, but is often the case with the Russell 2000, at least within the current bull market.

I look for support in the 1080-1090 area, then at 1060. I've highlighted anticipated resistance at 1140, next at 1166 at the downside price gap seen there.

I anticipate we've seen the lows in RUT and anticipate that 1100-1085 may be as low a dip as we'll see this month.


GOOD TRADING SUCCESS!




New Option Plays

Technology, Transports, & Personal Care

by James Brown

Click here to email James Brown

Editor's Note:

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

(bullish ideas)
UA, PSA, WYNN, GILD, NSC, ILMN, STZ, CAT, AMGN, FFIV, NFG, SYK, RTN, AGN, ATK



NEW DIRECTIONAL CALL PLAYS

Concur Technologies - CNQR - close: 115.97 change: +2.80

Stop Loss: 113.75
Target(s): 125.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 5 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
CNQR is in the technology sector. The company makes travel and expense management software. By mid January 2014 shares of CNQR were testing all-time highs near $115.00. Then the company reported earnings on January 29th and beat Wall Street's estimates on both the top and bottom line. Management then raised their guidance. The next trading day CNQR shares soared from $110 to $130.

Since that post-earnings pop CNQR has experienced a -$20 or -15% correction lower. Traders bought the dip near the $110 level (new support) and the pattern of higher lows remains in place. Friday's display of relative strength (+2.4%) and its close above the simple 10-dma is short-term bullish.

Tonight we're suggesting a trigger to buy calls at $116.65. If triggered our target is $125.00.

Trigger @ 116.65

- Suggested Positions -

Buy the MAR $120 call (CNQR1422C120) current ask $2.95

Annotated Chart:

Entry on February -- at $---.--
Average Daily Volume = 822 thousand
Listed on February 08, 2014


Facebook, Inc. - FB - close: 64.32 change: +2.16

Stop Loss: 61.85
Target(s): 69.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
FB is considered part of the technology sector. The company runs the largest online/mobile social network on the planet with over 1.23 billion monthly active users. The company reported earnings in late January and beat analysts expectations on both the top and bottom line. Shares popped to new all-time highs and there was a parade of analysts raising their target prices on FB.

The stock held up well during the market's recent sell-off. Now after a brief sideways consolidation FB is pushing to new highs with a nice display of relative strength on Friday. We are suggesting a trigger to buy calls at $64.75. It is conceivable that the $65.00 level is round-number resistance so more conservative traders might want to wait for a rally above $65.00 before initiating positions. Our short-term target is $69.75. More aggressive investors could aim higher since the Point & Figure chart for FB is bullish with an $89 target.

Trigger @ 64.75

- Suggested Positions -

Buy the MAR $70 call (FB1422C70) current ask $1.30

Annotated Chart:

Entry on February -- at $---.--
Average Daily Volume = 60 million
Listed on February 08, 2014


United Parcel Service - UPS - close: 95.37 change: +0.63

Stop Loss: 93.85
Target(s): 99.85
Current Option Gain/Loss: Unopened
Time Frame: 4 to 5 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
UPS is in the services sector. The company is part of the transportation industry. As the largest package delivery service on the planet many look to UPS as a gauge for the health of the economy. Unfortunately for UPS shareholders the stock has slipped almost straight down in the first five weeks of 2014. Although it looks like this past week UPS may have found a bottom with a bounce from its exponential 200-dma. The current rebound just pushed shares of UPS past short-term technical resistance at the 10-dma. It's probably not a coincidence that UPS is bouncing from the trend line of higher lows on the weekly chart (see below).

Friday's high was $95.60. We are suggesting a trigger to buy calls at $96.15. More aggressive traders may want to jump in early above $95.60. If triggered our target is $99.85.

Trigger @ 96.15

- Suggested Positions -

Buy the MAR $95 call (UPS1422C95) current ask $1.75

Annotated Chart:

Weekly Chart:

Entry on February -- at $---.--
Average Daily Volume = 4.3 million
Listed on February 08, 2014


NEW DIRECTIONAL PUT PLAYS

Nu Skin Enterprises - NUS - close: 71.83 change: +1.79

Stop Loss: 76.75
Target(s): 1st target @ 63.50, 2nd target @ $55.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
NUS is in the consumer goods sector. The company sells anit-aging personal care products and nutritional supplements. The company is a direct selling and multi-level marketing company founded in 1984. The stock delivered a very impressive rally last year with a run from $37 to $140.

In mid January disaster struck after the Chinese government said they were investigating NUS as a potential pyramid scheme. The stock plunged over -44% in two days. The January 16th low was $67.51. Since then NUS has seen a bit of an oversold bounce but the bounce has reversed at technical resistance at its 200-dma. Now NUS shares are trying to hold the $70.00 level.

We are suggesting a trigger to buy puts at $69.75. Our initial target is $63.50 but we're setting a more aggressive target at $55.00. We do consider this an aggressive trade due to NUS' volatility and therefore suggest small positions to limit risk.

FYI: The Point & Figure chart for NUS is bearish with a $51 target.

Trigger @ 69.75

- Suggested Positions -

Buy the MAR $65 PUT (NUS1422o65) current ask $4.10

- or -

Buy the JUN $60 PUT (NUS1421R60) current ask $6.80

Annotated Chart:

Entry on February -- at $---.--
Average Daily Volume = 4.6 million
Listed on February 08, 2014



In Play Updates and Reviews

Stocks Shrug Off Jobs Data

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market ignored disappointing jobs data (again) and continued its oversold bounce on Friday.

We have removed IWM and CAH as potential trades.

SBAC, IBM and RH hit our stop loss.


Current Portfolio:


CALL Play Updates

Salesforce.com - CRM - close: 61.55 change: -0.15

Stop Loss: 59.40
Target(s): 67.50
Current Option Gain/Loss: - 9.0%
Time Frame: Exit PRIOR to earnings in late February
New Positions: see below

Comments:
02/08/14: I am suggesting caution on our CRM trade. The stock market has produced a strong two-day bounce and CRM did not really participate, which is a warning signal. Granted shares were showing strength prior to the market's rebound but it seems odd that CRM would stall as the market moved higher. There appears to be new short-term resistance in the $62.65-62.75 area.

I am not suggesting new positions at this time.

Earlier Comments:
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.

- Suggested Positions -

Long Mar $62.50 call (CRM1422C62.5) entry $3.30*

02/05/14 triggered @ 61.75
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:

Entry on February 05 at $61.75
Average Daily Volume = 4.8 million
Listed on February 01, 2014


Harman Intl. - HAR - close: 102.93 change: -0.18

Stop Loss: 102.45
Target(s): 114.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
02/08/14: The rebound in HAR also stalled on Friday, which is odd since the broader market produced a widespread gain on Friday. The overall trend remains positive. I don't see any changes from the new play description from Thursday night.

Earlier Comments:
I am suggesting small positions to limit our risk. The intraday high for HAR is $105.58. I am suggesting a trigger to buy calls at $105.75. If triggered our target is $114.00.

Trigger @ 105.75

- Suggested Positions -

buy the APR $110 call (HAR1419D110) current ask $2.50

chart:

Entry on February -- at $---.--
Average Daily Volume = 1.2 million
Listed on February 06, 2014


Lockheed Martin - LMT - close: 155.13 change: +3.39

Stop Loss: 149.65
Target(s): 165.00
Current Option Gain/Loss: +43.4%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
02/08/14: LMT shot higher on Friday morning and outperformed the major indices with a +2.2% gain. I am raising our stop loss to $149.65. Broken resistance near $152.00 should offer new support so more conservative traders may want to use a higher stop loss.

Earlier Comments:
Our multi-week target is $165.00. That is a little bit aggressive since the $158-160 zone could be overhead resistance. Plus our stop loss is a little bit wide at $147.00. Use small positions to limit risk.

- Suggested *small* Positions -

Long MAR $155 call (LMT1422C155) entry $2.23

02/08/14 new stop loss @ 149.65
02/06/14 triggered at $152.25

chart:

Entry on February 06 at $152.25
Average Daily Volume = 2.4 million
Listed on February 05, 2014




PUT Play Updates

CommVault Systems - CVLT - close: 66.52 change: +1.13

Stop Loss: 66.75
Target(s): 60.15
Current Option Gain/Loss: -48.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
02/08/14: Our CVLT trade is in trouble. The widespread two-day market bounce has fueled an oversold rebound in CVLT. Shares almost hit our stop loss at $66.75. The high on Friday was $66.65. If there is any follow through higher on Monday we will see shares hit our stop. I am not suggesting new positions at this time.

- Suggested Positions -

Long MAR $60 PUT (CVLT1422o60) entry $1.95*

02/08/14 CVLT is poised to hit our stop loss on Monday
02/05/14 trade opened with a gap down at $63.68
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:

Entry on February 05 at $63.68
Average Daily Volume = 1.1 million
Listed on February 04, 2014


Sears Holding - SHLD - close: 35.50 change: -0.32

Stop Loss: 37.55
Target(s): 30.25
Current Option Gain/Loss: + 9.2%
Time Frame: exit PRIOR to earnings in late February
New Positions: see below

Comments:
02/08/14: SHLD continues to perform well for the bears. The rally attempt on Friday failed below short-term resistance near $36.50. We're adjusting our stop loss down to $37.55.

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

02/08/14 new stop loss @ 37.55
01/31/14 triggered @ $35.85

chart:

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: 93.37 change: -0.22

Stop Loss: 95.55
Target(s): 90.50
Current Option Gain/Loss: +41.8%
Time Frame: Exit PRIOR to earnings on Feb. 14th
New Positions: see below

Comments:
02/08/14: SJM also displayed relative weakness on Friday. The stock briefly spiked above the $94.00 level but settled with a -0.2% decline. I am adjusting our stop loss down to $95.55. I am not suggesting new positions at this time.

Earlier Comments:
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

02/05/14 new stop loss @ 95.55
02/05/14 new stop loss @ 96.55
02/03/14 triggered @ 96.25

chart:

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



CLOSED BULLISH PLAYS

iShares Russell 2000 ETF - IWM - close: 110.75 change: +1.24

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

Comments:
02/08/14: The market has produced a sharp rebound from its lows on Wednesday. Our IWM trade did not open and we do not want to chase the bounce.

This ETF stalled just below its 100-dma and 10-dma on Friday. If shares push higher the next level of resistance could be $112 or its 50-dma near $113.

We are removing IWM as an active candidate. Our trade did not open.

Trade did not open.

02/08/14 removed from the newsletter, trigger was not hit at $106.00
02/03/14 STRATEGY adjustment: New trigger buy the dip at $106.00,
move the stop loss to $103.75, change the option strike.

chart:

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


SBA Communications - SBAC - close: 92.91 change: +0.91

Stop Loss: 89.90
Target(s): 99.50
Current Option Gain/Loss: - 48.7%
Time Frame: Exit PRIOR to earnings on February 25th
New Positions: see below

Comments:
02/08/14: SBAC bounced from support near $90.00 on Tuesday's decline. It wasn't so lucky on Friday. Most of the market shot higher on Friday morning. Not so for shares of SBAC, which moved lower. The stock pierced support near $90.00 and fell to an intraday low of $89.82 before reversing higher and climbing to a +0.9% gain by the closing bell.

The weakness on Friday morning appears to be a reaction to a downgrade by Citigroup from a "buy" to a "neutral". Unfortunately our stop loss was hit at $89.90.

I would keep an eye on SBAC for rally past $94.00 as an alternative entry point to launch new positions.

- Suggested Positions -

Long MAR $95 call (SBAC1422C95) entry $1.95 exit $1.00* (-48.7%)

02/07/14 stopped out thanks to an analyst downgrade Friday morning
*option exit price is an estimate since the option did not trade at the time our play was closed.
01/31/14 triggered at $93.05

chart:

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


CLOSED BEARISH PLAYS

Cardinal Health - CAH - close: 67.54 change: +1.27

Stop Loss: 66.25
Target(s): 60.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
02/08/14: CAH is not cooperating. The stock market's big two-day bounce has produced a similar rebound in CAH. We had been waiting for a breakdown below support but that seems unlikely at the moment. Our trade did not open.

Trade did not open.

02/08/14 removed from the newsletter. suggested entry trigger was not hit at $64.65.

chart:

Entry on February -- at $---.--
Average Daily Volume = 2.9 million
Listed on February 05, 2014


Intl. Business Machines - IBM - close: 177.25 change: +2.58

Stop Loss: 176.55
Target(s): 161.00
Current Option Gain/Loss: -55.7%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
02/08/14: The stock market's big bounce on Friday sparked more short covering in IBM. The stock gapped open higher above short-term resistance at $175.00 and it was all over from there. IBM raced past its 10-dma and closed up +1.47%. Our stop loss was hit at $176.55.

Earlier Comments:
I am suggesting we limit our risk by using small positions.

- Suggested *small* Positions -

Long MAR $170 PUT (IBM1422o170) entry $3.50 exit $1.55*(-55.7%)

02/07/14 stopped out
*option exit price is an estimate since the option did not trade at the time our play was closed.
02/05/14 triggered on gap down at $172.19

chart:

Entry on February 05 at $172.19
Average Daily Volume = 6.0 million
Listed on February 03, 2014


Restoration Hardware - RH - close: 59.77 change: +3.68

Stop Loss: 58.25
Target(s): 51.00
Current Option Gain/Loss: -48.3%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
02/08/14: The stock market's rally on Friday morning looked like more short covering. The sharp +6.5% gain in RH on Friday also looks like short covering. Shares hit our stop loss at $58.25.

*Small Positions* - Suggested Positions -

MAR $55 PUT (RH1422o55) entry $3.00* exit $1.55** (-48.3%)

02/07/14 stopped out
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.

chart:

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