Option Investor
Newsletter

Daily Newsletter, Saturday, 2/15/2014

Table of Contents

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

Market Wrap

Gold Medal Market

by Jim Brown

Click here to email Jim Brown

The Nasdaq is going for the gold with seven wins in seven days. The Dow and S&P are tied for the silver with 6 of the last 7 days higher.

Market Statistics

The Nasdaq closed at a new 13 year high by ONE point. The close on January 22nd was 4243.00. Friday's close was 4244.03. As we have seen in the Olympics even a hundredth of a second can determine the difference in medal positions and a one point win on the Nasdaq is good enough for a new 13 year high. The Nasdaq has closed positive for seven consecutive days and the best rally since July 2011.

The S&P is only 10 points away from a new historic high and the Dow is -420 points below its high. Both are riding a wave of increasing bullishness after a consolidation dip on Wednesday. The closer we move to those old highs the stronger the market is becoming.

The market overcame another round of bad economic data to post another day of strong gains. January industrial production declined -0.3% compared to estimates for a +0.4% gain. The weather got the blame once again with a -0.8% decline in manufacturing output. That was the largest decline in five years. Durable goods output declined -0.8% and motor vehicles and parts declined a whopping -5%.

Consumer sentiment was unchanged for February at 81.2 thanks to a small gain in the expectations component. Analysts had expected a minor decline to 80.7. The present conditions component declined from 96.8 to 94.0 while the expectations component rose from 71.2 to 73.0. Consumers said they were depressed over their finances and this is normal. When the credit card bills come due in January and there is not enough money left over for discretionary spending we see consumers begin to be depressed. This leads to lower purchasing power over the next three months. Two months of weak job reports also weighed on sentiment.


The constant stream of weaker than expected economic numbers has not hampered the market. Nearly every day now we have seen multiple downgrades to GDP estimates and nobody seems to care. Citigroup downgraded their Q1 GDP estimates from 1.5%-2.0% to +1.0% growth. This is typical of the downgrades we have been seeing.

The economics for next week will be focused on the FOMC minutes on Wednesday and the Philly Fed Manufacturing Survey on Thursday. The PPI and CPI will not attract much attention because there is no material inflation today. The three housing reports could be weaker than expected as a result of the severe weather over the last two months.


When we say cold weather we mean really cold. The Great Lakes are more than 90% covered in ice and that is closing in on the record of 95% set in 1979. Lake Erie, Huron, Superior are all 95% covered or more. Lake St Clair is 99.5%, Lake Michigan is 82.3% and Lake Ontario is 43.4%.


FlightAware.com said there have been more than 60,000 flights cancelled in 2014 and more than 75,000 since December 1st. More than 250,000 flights have been delayed so far this year. If you have been on an airplane that was not delayed you were in the minority. This is the most cancellations since 1979, which just happens to have been the record year for ice in the Great Lakes.

This means the weather will be the "kitchen sink" excuse for earnings in Q1 even though most companies were already warning about the quarter before the weather even became a topic. Art Cashin called it a "Get out of jail free card" for Q1 earnings.

That theory will be tested next week when Walmart reports earnings on Thursday. They already warned when their quarter ended on January 31st. Because of their fiscal quarter their Q4 earnings will have both December and January weather events. Analysts are expecting $1.60 in earnings, which is a -4% decline and their first negative quarter since January 2009.

Walmart is also struggling because of the cutback in the Food Stamp program, which is thought to be 5% of Walmart revenues. The point here is that Walmart earnings are going to be weak and their guidance will be critical to analyst estimates for other retailers and for retail in general for Q1.


Friday was not a good day for earnings. GNC Holdings (GNC) reported weaker than expected earnings of 63 cents, which missed estimates by a penny. They blamed a competitive environment and heavy promotions during the holiday period. However, the real damage came from the guidance for full year earnings of $3.18-$3.24 compared to analyst estimates for $3.46.


Stamps.com (STMP) reported earnings of 61 cents that beat estimates of 54 cents but revenue of $32.4 million was below estimates of $34 million. They guided for the full year for a wide range of $2.10 to $2.50 and analysts were expecting $2.54. The company said subscriber growth was slowing and they were going to move away from the low profit photo stamp business and from customers acquired from "enhanced marketing activities." That means they don't want the high acquisition cost users that don't stay long and don't use the application.


Trulia Inc (TRLA) reported adjusted earnings of 3 cents, which was well below estimates of 7 cents. Revenue was in line with estimates. Unique visitors were 35.3 million, up +49% from the year ago quarter. Total subscribers rose +3,300 to 59,700 with the average revenue per subscriber at $179. Guidance was in line with estimates but shares declined -18% on the report. The CEO said they were about to embark on a $45 million strategic marketing campaign to combat the $65 million campaign announced by Zillow. For a company that only made $11 million in Q4 that $45 million is a major outlay.

Zillow (Z) reported earnings on Wednesday and warned on future profits because of the high cost of advertising that would double S&M expenses to $37 million in Q1. Shares of Zillow were also down.

There is an advertising war about to begin between Zillow and Trulia and my money is on Zillow.



Agilent (A) reported earnings of 67 cents that beat by a penny but warned on 2014. They guided to $2.96-$3.16 and they had previously forecasted $3.03 to $3.33. Analysts were expecting $3.19. The company cited "challenges" in the aerospace and defense market. Shares fell -8%.


Shares of Weight Watchers (WTW) imploded after the company guided for earnings of $1.30 to $1.60 for 2014 compared to analyst estimates of $2.78. The company said it would release plans to "resize" its business in the second quarter and the costs associated with that restructuring were NOT included in the lowered guidance. They said membership fell -8.5% in Q4 and profits fell by nearly 50% to 54 cents compared to $1.03 in the year ago quarter. Revenue declined -11%. Membership trends have been bad and continue to be bad. Shares fell -28% and I would expect them to continue falling as a result of that guidance.


So far the Q4 earnings cycle has surprised everyone with 7.8% earnings growth and likely to be over 8.0% by the time the laggards report. This is the highest growth rate in two years thanks to aggressive stock buybacks reducing the number of outstanding shares. The beat rate is around 67% although the numbers are starting to get a little flaky because all the bean counters seem to have different criteria on how to determine a beat. However, Q1 earnings estimates are plunging since nearly every company is warning on 2014 guidance.

One company not expected to warn when it reports earnings next week is Tesla (TSLA). They are expected to report stronger sales and higher guidance. With used Tesla Model S cars selling for more than new ones it seems there is no weakness in demand. According to iSeeCars.com the average used Model S sold for $99,734. That is well above the MSRP of $71,700 to $94,900 fully equipped. The average selling price for a new car is $93,000. Several are listed on AutoTrader.com for more than $100,000 used. There is a 2-3 month wait for a new car so impatient customers are searching for them online.

The earnings event is expected to provide more information on the first deliveries to China and the progress on the "giga" factory to produce lithium-ion batteries for Tesla cars. The lack of batteries is the main reason Tesla can't ramp up sales to even higher numbers.

Another fire in a Model S was reportedlast week in Toronto bringing the total to 5 out of the 40,000+ cars on the road. Tesla said we don't know the precise cause but have definitely ruled out the battery, charging system, adapter or the electrical receptacle because these items were untouched by the fire. Seven Tesla employees visited the owner and surveyed the car and garage. They offered to pay for the damages but the owner declined. That is suspicious to me. Why decline an expensive repair job unless you are at fault in some way? Despite the five fires the Tesla cars have a much lower fire rate than gasoline powered cars. The rate of fires in gasoline cars is 5-10 times higher according to Tesla. Tesla shares declined -1.40 on the news. Earnings are Wednesday.


Twitter (TWTR) shares rallied $1 on Friday ahead of the first lockup expiration on Friday. Twitter employees will be eligible to sell up to 9.9 million shares on Monday. This is their first opportunity to cash out. However, the big hurdle is the expiring lockup on May 6th of 474 million shares. That will include shares owned by executives, directors and early backers with monster equity stakes from their venture capital investments. With the volume on Friday of 12.6 million shares the 9.9 million new shares available for sale on Monday should not rock the market. Just because they are available for sale does not mean all 9.9 million shares will be sold. Employees may hope the price returns to $74 and wait to sell rather than take the $57 today. The lockup expiration in May will be a very different story. Get your puts early.


Gold traders have a tiger by the tail. Gold has rallied from $1260 to $1320 over the last week and showing no signs of slowing down. The $1318 close on Friday was over the 200-day average at $1309 and the first time to trade over the 200-day since February 2013. There is a major short squeeze in progress and the gold bugs are showing up in droves. They point to the constant stream of weaker than expected economic data, the currency fluctuations in the global markets and their expectations for the Fed to halt the taper and even increase QE as the country slips back into recession later this year. Multiple gold miners have shut in reserves with a high cost of production until prices return to profitable levels and China is stockpiling gold on a massive scale according to multiple analysts. Barrick Gold wrote down reserves by $11.5 billion with $2.82 billion in Q4 alone. I am not going to expound on those points but the short squeeze is making believers out of a new flurry of gold investors.

After a double bottom at $1185 the price of gold is nearing crucial resistance at $1350. A breakout there would be very bullish. Gold posted its best weekly gain since August. An analyst at Stifel Nicolaus said the break over the 200-day targets $1600. Goldman Sachs reiterated their forecast for a drop to $1050 by year end.

Silver also broke out of three month consolidation to close at $21.48 and over the 200-day average at $21.12. Silver has been a laggard but a move over $23 could be powerful. This was the best week for silver since March 2008.



Does size matter in a correction? Apparently not since the broader markets only declined average of -7% before rebounding to almost completely erase the decline in only seven sessions. The constant call for a deeper decline of at least -10% went unanswered and now it appears the 2013 market has returned. Just remember, appearances can be deceiving.

When the bears were left out of the rebound without their 10% correction being fulfilled they are now preaching the double top mantra saying once we return to the highs a new decline will begin. While that is certainly possible I don't view it as probable today. Once we get there and see how the market reacts I may need to change my view but as of today the markets are acting very bullish.

The only warning I would make today is that volume during the week's rally has declined significantly. Friday's volume was only 5.9 billion shares and the lowest since January 3rd. However, we were heading into a three-day weekend and quite a few traders left early on Friday to stretch that weekend out even longer. The real truth is that there were probably quite a few that did not even show up for work on Friday because of the winter storm.

While a low volume day does not negate the gains it does put a question mark on the score card. If the S&P has even a mediocre day on Monday it could close right at those old highs of 1848 and the test of the bull market would begin. If we can move over 1850 there will be a bout of strong short covering. If we fail at the old highs the bears would load up again and the entire correction conversation would begin anew.

The S&P closed at 1838 and only 10 points away from its prior high at 1848, which should now be resistance. Support would be the Wednesday lows at 1816-1820. The S&P has sprinted for +101 points since the 1737 low on February 5th. That is overextended by almost any measure. It does not mean it is overvalued but simply overextended on a short term basis.

The spring to 1838 did appear to negate the right shoulder formation but it does not mean there is no decline in our future. Only a strong move over 1850 would put those rumors to rest.


The Dow still has the potential for a head and shoulders formation but it could take another week to prove it out. If the Dow runs another +400 points to 16,500 the S&P would probably already be well over 1850 and that could drag the Dow higher. The 16,200 level is the next material uptrend resistance dating back to January 2000. The shorter term trend shown in the red line predicts resistance at 16,400.

The Dow has a rough road ahead. Just getting to 16,500 will be a challenge after the +810 rebound over the last seven days. The consolidation on Wednesday helped and suggests traders are still willing to buy every dip regardless of how shallow or what caused it.



The Nasdaq could give us a preview of what to expect from the Dow and S&P when they reach their prior highs. The Nasdaq Composite made a new 13 year closing high by one point on Friday. If the bears are correct in their predictions about a new decline that starts when the indexes reach their prior highs then next week should be ugly for the Nasdaq. However, if they are proven wrong by a move to even higher highs on decent volume then we could be off to the races.

Support is 4195 and resistance could be 4275 (red dashed) and 4330 (red solid).


The Russell 2000 continues to underperform despite a strong day on Thursday. The minor +1 point gain on Friday with the Dow up +127 suggests fund managers are not yet convinced the rally is real. The 1150 level on the Russell is currently resistance but any further gains should put that in the rear view mirror. That would then put the focus on 1165 and the early January resistance. Support is 1144 and 1130.


Random Thoughts

China has $1.8 trillion in "trust" products and a large portion of those could default this year. More than 43% of these trusts come due in 2014 and 80% mature over the next two years. The trusts in China take investor money and lend it out to companies that can't get financing from banks. This is part of the "shadow banking" system that China is trying to control. Investors get a higher interest rate but recent defaults suggest the system is about to implode. In January the "Credit Equals Gold" trust was poised to default on $495 million in obligations until a mystery group stepped in at the 11th hour and paid investors. It is rumored the Peoples Bank of China funded the bailout group to delay the impending trust disaster.

Last week a trust known as "Songhua River #77 Shanxi Opulent Blessing Project" defaulted on payments to investors. The trust was relatively small at $48 million. The money was raised from wealthy clients of China Construction Bank, China's second largest lender. The promised yield was 9.8%. This was the fourth trust managed by Jilin Trust that has defaulted in recent months.

The amounts listed above are just a trickle compared to the $1.8 trillion in trust products of which $778 billion will mature in 2014. If this trend continues the resulting defaults could seriously undermine China's financial economy.

According to Bloomberg China's non-performing loans grew by $4.7 billion in Q4 to a record 592.1 trillion yuan. This prevents the banks from making new loans and the defaults in the trust sector are dramatically slowing new investments. China's financial sector is a slow motion train wreck and the end result could be ugly.


The economy is growing and that is why the Fed is tapering. At least that is what we are supposed to be thinking. The Fed started tapering before the unexpected miss in the December payrolls at +74,000 instead of +205,000. That was before the ISM Manufacturing posted the largest decline in new orders in 4 years. That was also before the unexpectedly weak jobs gains of +113,000 instead of 189,000 for January. Then there was the unexpected decline in retail sales to the slowest growth since 2009. There was also the unexpected decline in industrial production that was the most since 2009 and the sharpest drop in factory orders in six months. We are told not to worry because all of these events are due to the weather. I guess it has never snowed in winter before.

Comstock Partners pointed out that the economy was sluggish before the abnormal weather and QE tapering was launched because it was losing its effectiveness. In English that means the Fed was no longer able to push the markets and economy higher. Risks Are High in Coming Months

Citigroup cut Q1 GDP estimates from 2.0% to 1.0%
Barclay's cut Q1 GDP estimates from 3.2% to 2.2%
Credit Suisse cut Q1 GDP estimates from 2.6% to 1.6%
Philly Fed cuts Q1 GDP estimates from 2.5% to 2.0%
Are you sensing a trend here?

Copper prices have been stuck in a rut for the last year after declining -35% from the post recession bounce. There has never been a global recovery without a spike in copper prices. The lack of a rally suggests the global recovery is nonexistent. This is even more amazing now that Indonesia, the world's ninth largest copper producer, has halted exports. Prices should be soaring.


According to the Stock Trader's Almanac option expiration week in February has been up 7 of the last 8 years. However, it has been rocky and Monday and Friday have been down more than up. The last week in February has been down 12 of the last 20 years. Also, they pointed out that more than half of the bear markets over the last 114 years have occurred during phases of economic expansion. The economy does not have to be in the tank for a bear market to occur. Events outside the market such as wars, currency crisis, debt crisis, credit bubbles, etc, caused the bear markets. An expanding economy does not guarantee a rising market.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"Any fool can buy. It is the wise man who knows how to sell."


Albert W. Thomas (Investor, trader, author of If It Doesn't Go Up, Don't Buy It!,)

 


Index Wrap

Continued Upside Off Early-Febuary Bottom

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

It can be hard to switch gears and jump back in with bullish positions after a steep decline, but bull market bottoms like seen early this month require quick 'conversion'. Declines in strong bull moves eventually bring out fear over greed, to offer that simplistic formula of bull markets being overly dominated by expectations of gain, versus bear markets being dominated by fear.

Waterfall type declines within what had been a 'buying-every-dip' mentality are scary. It can be hard to figure IF and WHEN to get back into bullish positions. Technical tools are ideal for finding a bottom in bull market corrections as such bottoms tend to be 'technical' so to speak. For example, the strongest index, the Nasdaq 100 (NDX), makes a 'minimal' (Fibonacci) retracement of 38% then rebounds strongly; the S&P 500 (SPX) makes a 'common' 1/2 50% correction and rallies and the lagging Dow 30 (INDU) corrects 2/3 66% of its prior advance then rebounds more slowly. INDU 'bellwether' type technical indicator of recovery at the 200-day moving average which will find buyers who often don't involve themselves in chart/technical analysis.

Fundamental analysis drives bull markets more than technical considerations in many cases. An economic analysis is made for higher and higher earnings ahead and the multiples expand. The guess work is not knowing for a long time WHAT those P/E multiples should be.

Going back to the very important psychological aspect brings me to a bullish point in that there was a less than robust or immediate strong rebound in bullish sentiment by options traders this past week. Instead, my call to put daily volume indicator for equities options show a somewhat cautionary outlook or aspect this past week which suggests some staying power for the current recovery move.

And, of course, the leading sector of technology, internet, social media and other related stocks found in the big cap Nasdaq 100 (NDX) Index, which is a current bellwether for this Market, went to a new high for the current move already. Expect the S&P and especially the Dow to lag for a while as has been the case mostly in the current market cycle, but they should work higher also. I'm stating the 'obvious' no doubt as Nasdaq doesn't soar without more mainstream economic stocks also following. They are followers here however, which is the point currently.

Last week I wrote the following related to the bottom made week BEFORE last, which is worth repeating for the summary of what happened technically:

"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 62-66 percent of its prior advance whereas a strong mover might only retrace about 38% of its 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.

Typical for the last 3 important lows in the NDX tracking stock QQQ, were the multiple spikes in daily trading volume as high volume typically precedes a bottom in previously strong bull movers."

Going back to the origin point of recent lows in the major indexes helps assimilate the type influences seen consistently in past bull market cycles; influences or aspects worth remembering. Namely, what are common technical patterns as to WHERE and HOW bull market corrective lows will tend to occur. This is worth repeating because primary or major bull markets have an average DURATION that is significantly longer than primary bear markets. If you get in EARLY in bull market trends, you have less to worry about, but there are times you will want to exit bullish positions to guard profits, maybe participate in a bear move with puts and the like, but then be ready to turn on a dime and get back in on the bull side but at a very favorable price relative to the next bull move.

What is 'most' favorable about the foregoing timing aspect is that with good timing of entry you can then set an exiting stop that will result in a (relatively) small loss if a floor doesn't hold but will not get yourself triggered by an early dip in an upside turnaround. If you control trading RISK by entry mostly or only in 'low risk' oversold conditions, profits will typically take care of themselves. Read the Market Wizards series (by Jack Schwager) to see how much the most profitable/greatest traders talk more about controlling risk than predominate focus on reward. This isn't to say that we shouldn't be bold when the time is right to do so. My trading mentor had real guts to go against consensus and lazy thinking but based on astute study of how market trends unfold.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The recent S&P 500 (SPX) index has reversed its bearish short-term decline decisively by its renewed upside momentum as the Index sailed above its 21 and 50-day moving averages. Good upside potential was seen from when SPX crossed above 1800.

What was resistance at 1800 now 'should' become near support. Assuming this rally is the real deal, which is how the chart pattern reads, I anticipate 1800 holds up as support on any dip. If 1850 is pierced first time SPX may build support above 1850 for a run to 1900 next and potential resistance at the top end of SPX's uptrend channel. Downside support is seen around 1767, extending to the 1740 area.

Bulls shouldn't want to see the Index become immediately overbought so the fact that it's not favors further upside progress. My sentiment indicator doesn't suggest an immediate overheating in bullishness. Waterfall type corrections scare the heck of too-overly optimistic bulls. The recent sharp decline and sudden bearish atmosphere brought needed caution for now. The moderate mid-range reading of bullishness/bearishness is in contrary opinion terms, bullish.

1850 is a key level to overcome for the bulls. Whether SPX slices through this in the near-term, or not, the Index projects higher. Possible hiccups along the way would be a dip back to 1800. SPX may be over-stretched in the near-term, but near term only, is the way the chart looks.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart is bullish like big brother SPX. The big cap S&P 100 index, unlike big cap Nasdaq 100 (NDX), is not so close to a new high. It's lagging here. Still, the index chart remains bullish above 800. Dips to this area could be bought with tight exit stop-loss points.

OEX had a 'stronger' top pattern, relative to SPX in that OEX formed an earlier and distinct double top at 824. 824-825 is a pivotal line of resistance for the big cap S&P. The OEX chart pattern is bullish and there's potential for a move to the upper end of OEX's uptrend channel. In that regard a measured move upside objective is to 840.

800 is pivotal near support if the rally has steam and it looks like it does. Strongest suggested technical support comes in around 775, at OEX's up trendline.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow (INDU) is showing renewed bullish momentum with its strong close of the past week well above prior key resistance at 16000 and putting INDU back into mid-range in its broad uptrend channel. The Dow had the deepest pullback peak to trough, at a 66% retracement and one of my perennial favored 'retracement' buy points in a bull market. Support came in on the recent bottom at INDU's 200-day moving average and the low end of the Dow's uptrend channel, suggesting intermediate support was reached and buyers rushed in to prove it.

Below 16000 support, support in the Dow is 15900, with major support coming in at 15500-15430. Any pullbacks to 16000 in the Dow, now that it passed above that milestone, look to be well supported.

INDU looks headed up the 16300 area to test resistance 150 points higher than its Friday Close. Pivotal break-out kind of resistance begins at 16500, extending to near 16600. Longer range projections for the Dow point to 17000.

Strongly bullish Weekly Dow stocks are seen with DIS, MRK, and V. Moderate gains are underway or could develop in AXP, CAT, CSCO, GE, HD, JPM, MMM, NKE, PFE, UTX, and XOM. This is barely half of the Dow and there are just the 3 strongly bullish charts, so the Dow doesn't project strongly high, but moderate gains can be projected from looking at the 30 individual Dow charts. One of my pastimes! Try it, it's interesting!



NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) chart is bullish and has by ONE point made a new Closing high, but immediate resistance should still be considered at 4243-4244 until COMP can decisively climb above these highs. Next resistance looks to come in at the top end of COMP's well-defined uptrend channel, intersecting in the 4316 area currently. On a short-term hourly chart basis (not shown), COMP is at an 'overbought' extreme and I would not be surprised, especially in the holiday shortened week ahead, to see a minor pullback to the 4180-4200 area.

Next technical support is suggested in the 4150 area with further chart support around 4060. 4000 begins what should be fairly major support.

Bullish sentiment, as I discuss in my initial 'bottom line' commentary above, has moderated. Traders have not jumped back so heavily into calls although the last dip to and just below 4000 and into the 38-50% retracement zone, should have been strongly bought if you went by the chart and the oversold condition seen with the 13-day Relative Strength Index (RSI). Hey, not easy to do if you think you're just buying into a falling knife!

Just a point on the RSI is that COMP hadn't gotten 'fully' oversold since before what is shown on the daily chart below; we have to go back to the late-June low to see the 13-day RSI getting near 35 and back to mid-November 2012 to see this indicator dipping to, and under, 30 which is the area that tends to definitively 'define' an oversold extreme at least for 13-day Relative Strength Index. Of course, it can be hard to 'believe' that a bottom can be trusted based on such seemingly simple chart/technical aspects. Of course RSI pattern ALONE might not be a basis of market action, but putting together price AND indicator patterns, plus sentiment, this is a basis for probing the bottom, with an excellent 'stop out' point below the up trendline.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) chart remained bullish on the pullback as the Index only fell back to prior support at 3435. The Index then not only rebounded strongly but has gone on to make new highs of course. NDX had a pullback that only retraced a 'minimal' Fibonacci 38% of the October to January rally. Such relatively shallow pullbacks are common in strong stocks and stock indexes.

There may be some resistance that shows up at the upper end of NDX's uptrend channel line, currently intersecting around 3720. Next anticipated resistance, assuming NDX breaks out above its multimonth uptrend channel, comes in around 3800.

Near support is seen in the area of the 21-day moving average, at 3580. Next anticipated support is highlighted at 3500.

I'm anticipating at least a test of the 3700-3720 area ahead as resistance but the longer-range weekly chart (not shown) would suggest 3800 is a possible next objective but perhaps not in the near-term. Near-term NDX looks due for a pause and possible dip to the 3620 area, maybe to 3580 which should be an area to be bullish.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART: The QQQ chart reflects the strong bull recovery of the underlying Nas 100 Index. The tip off technically for a turnaround was when heavy volume came out so to speak. My market mentor used to say that "volume 'precedes' price, in that volume pickups either tend to mark lows or HEAVY volume spikes will tend to mark selling-'climax' lows. This is quite true in the case of QQQ as I've highlighted on the daily chart below.

The other strong suggestion that this ETF was making a bottom and traders should have been BUYING, not selling (which was where the volume was coming from mostly), is seen in the touch to and rebound FROM the stock's up trendline in the 84 area. Buying there was sweet for a quick nearly 6 point gain.

I'm anticipating near resistance coming in around 91, although on a weekly chart basis and not shown here, QQQ has achieved what looks like a decisive upside penetration of its long-term uptrend price channel, at least dating back to QQQ's March 2009 bottom. However, this uptrend channel may be EXPANDING or widening. These uptrend channel lines don't always 'work' as a containing factor in very bullish major moves.

Near support is highlighted at 87.8, then lower at 86 even. The On Balance Volume (OBV) line has turned up strongly, which is a supportive bullish technical indicator. Price trends are always the primary aspect technically, but volume can be a secondary bullish indicator as it would look to be here.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) has had a good recovery move off its oversold lows (per the RSI indicator) and such RSI lows only occur occasionally, but are quite 'reliable' in signaling bottoms, when occurring within overall bull market trends. The simplest way to know that the intermediate to long-term trend hasn't reversed down is to observe that the LAST prior downswing low hasn't been penetrated, especially on Closing basis both on daily and weekly chart.

My re-drawn up trendline was based on the upside reversal after the fact. The prior uptrend channel intersected in the 1100 area. An excellent indicator of near to intermediate-term price momentum is seen in the move back above the 21-day moving average.

Anticipated upside resistance is highlighted at 1166, then at the prior intraday highs in the 1180-1182 area and above that at the upper trend channel line in the low-1200 area. Downside support in RUT is seen at 1120, then back at the up trendline intersecting currently just below 1100 in the 1090 area.

I anticipate RUT working higher but it doesn't look to be leader on this current recovery move; instead, will follow Nasdaq higher but not quickly to NEW highs in my estimation.


GOOD TRADING SUCCESS!




New Option Plays

Energy, Caffeine, and Soda

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Continental Resources - CLR - close: 113.27 change: +1.29

Stop Loss: 109.75
Target(s): 119.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
CLR is in the basic materials sector. They are a domestic oil company. The stock had a strong 2013 with a rally from $73 to $120. Since peaking at $120 in October-November last year CLR has already seen a -20% correction. Now after a multi-week consolidation shares of CLR look poised to breakout higher.

Friday's intraday high was $113.55. I am suggesting a trigger to buy calls at $113.75. If triggered our target is $119.75.

FYI: CLR is trying to bounce from support on its point & figure chart. A move over $114.00 would produce a new buy signal.

NOTE: CLR is due to report earnings in the next two to three weeks (very late February or early March) and we will plan to exit prior to the announcement.

Trigger @ 113.75

- Suggested Positions -

Buy the MAR $120 call (CLR1422C120) current ask $2.50

Annotated Chart:

Entry on February -- at $---.--
Average Daily Volume = 1.1 million
Listed on February 15, 2014


Starbucks Corp. - SBUX - close: 75.03 change: +0.34

Stop Loss: 73.95
Target(s): 79.00 & 81.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
SBUX is in the services sector. Shares of this ubiquitous coffee shop owner have had a rough couple of months. After an amazing performance in 2013 shares of SBUX lunged from all-time highs near $82 n very late November to about $69 in early February. That's a -15% correction in just over two months. The oversold bounce stalled a few days ago but since then SBUX has been consolidating sideways.

SBUX currently faces resistance at $75.00 and at the $76.00 levels. Plus there is potential resistance at its simple 50-dma (currently at 75.75). It is worth noting that SBUX appears to have broken the two-month trend of lower highs. If the stock can trade over $76.00 it should create a new buy signal on the Point & Figure chart.

Right now market pundits are worried that the unusually cold December, January and now February has negatively impacted the U.S. economy. The weather has been keeping people indoors, which would be negative for any retailer like SBUX. Then again it's possible the cold weather might inspire an extra trip to your nearby Starbucks store.

We are suggesting traders wait for a breakout over $76.00. I'm listing a suggested entry point at $76.15. If triggered I am setting two potential targets. Our conservative target is $79.00. Our more aggressive target is $81.75.

Trigger @ 76.15

- Suggested Positions -

Buy the Mar $77.50 call (SBUX1422C77.5) current ask $0.84

- or -

Buy the Apr $80 call (SBUX1419D80) current ask $0.79

Annotated Chart:

Entry on February -- at $---.--
Average Daily Volume = 8.1 million
Listed on February 15, 2014


NEW DIRECTIONAL PUT PLAYS

Pepsico, Inc. - PEP - close: 78.09 change: -1.60

Stop Loss: 80.15
Target(s): 74.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
PEP is in the consumer goods sector. The company is best known for its soft drink beverages but they also make snack food. PEP reported earnings on Thursday morning. Wall Street was expecting a profit of $1.01 a share on $20.21 billion in revenues. PEP delivered $1.05 a share with revenues of $20.12 billion. PEP said that foreign exchange rates hurt net revenues. Management's guidance was in-line with estimates. PEP is raising the dividend by 15% and announced another $5 billion in stock buybacks.

The market was unhappy with this latest earnings report. Before the report PEP's bounce had stalled right at technical resistance on its 50-dma. After the report PEP has been plunging, now down two days in a row. Shares ended the week on support at the $78.00 level.

The path of least resistance appears to be down. I am suggesting a trigger to buy puts at $77.85. If triggered our target is $74.00. This coincides with the bearish price target from its point & figure chart.

Trigger @ 77.85

- Suggested Positions -

Buy the APR $75 PUT (PEP1419P75) current ask $0.96

Annotated Chart:

Weekly Chart:

Entry on February -- at $---.--
Average Daily Volume = 5.7 million
Listed on February 15, 2014



In Play Updates and Reviews

Already Up 100 Points

by James Brown

Click here to email James Brown

Editor's Note:

The market's widespread bounce continued on Friday. The S&P 500 index is already up 100 points from its early February lows near 1740.

Don't forget that the U.S. market is closed on Monday, Feb. 17th.

Prepare to exit our LMT trade at the opening bell (on Tuesday).


Current Portfolio:


CALL Play Updates

Caterpillar Inc. - CAT - close: 96.55 change: +0.44

Stop Loss: 93.85
Target(s): 99.85
Current Option Gain/Loss: +18.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
02/15/14: CAT followed the market's slow drift higher on Friday. Shares ended the week at new multi-month highs. If the market cooperates we could see CAT testing the $100 area soon.

The Point & Figure chart for CAT is bullish with a $117 target.

small positions - Suggested Positions -

Long MAR $97.50 call (CAT1422C97.5) entry $1.45

02/13/14 planned entry at the opening bell
CAT gapped down at $95.29

chart:

Entry on February 13 at $95.29
Average Daily Volume = 8.3 million
Listed on February 12, 2014


Salesforce.com - CRM - close: 62.80 change: -0.33

Stop Loss: 59.90
Target(s): 67.50
Current Option Gain/Loss: + 0.0%
Time Frame: Exit PRIOR to earnings on Feb. 27th
New Positions: see below

Comments:
02/15/14: CRM garnered some bullish analyst comments this morning but the news failed to lift the stock price. After outperforming the market yesterday CRM underperformed on Friday with a -0.5% decline. More conservative traders might want to adjust their stop loss closer to the simple 20-dma near $60.50.

Earlier Comments:
Our target is $67.50. CRM has set its earnings date for Feb. 27th. We will plan to exit prior to earnings. 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*

02/11/14 new stop loss @ 59.90
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


Computer Sciences - CSC - close: 61.72 change: -0.59

Stop Loss: 59.45
Target(s): 68.00
Current Option Gain/Loss: Mar $60c -11.0% & Jun $65c: - 9.6%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
02/15/14: CSC did not see any follow through on Thursday's breakout to new multi-year highs. If CSC does see a pullback we can look for potential support near $60.00 and its simple 10-dma.

Earlier Comments:
Our target is $68.00. I will point out that CSC did see additional resistance in the past near the $63-64 zone back in 2007. I prefer the June calls but I'm listing March as well for shorter-term traders. FYI: The Point & Figure chart for CSC is bullish with a $78 target.

- Suggested Positions -

Long MAR $60 call (CSC1422C60) entry $2.81*

- or -

Long JUN $65 call (CSC1421F65) entry $2.27*

02/13/14 triggered @ 62.15
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:

Entry on February 13 at $62.15
Average Daily Volume = 1.59 million
Listed on February 12, 2014


Facebook, Inc. - FB - close: 67.09 change: -0.24

Stop Loss: 63.85
Target(s): 69.75
Current Option Gain/Loss: +40.1%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
02/15/14: Friday was a quiet session for FB's stock with it drifting sideways in a narrow range. Broken resistance near $65.00 could offer some short-term support.

Earlier Comments:
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.

- Suggested Positions -

Long MAR $70 call (FB1422C70) entry $1.27

02/13/14 new stop loss @ 63.85
02/11/14 triggered @ 64.75

chart:

Entry on February 11 at $64.75
Average Daily Volume = 60 million
Listed on February 08, 2014


F5 Networks - FFIV - close: 111.91 change: +0.17

Stop Loss: 108.60
Target(s): 118.50
Current Option Gain/Loss: - 2.8%
Time Frame: 4 to 5 weeks
New Positions: see below

Comments:
02/15/14: We see a similar performance in shares of FFIV with the stock drifting sideways on Friday. The high on Friday was $112.41. I am suggesting traders wait for a new move above $112.50 before considering new positions.

Earlier Comments:
Our multi-week target is $118.50. We'll start with a stop loss at $106.90. More conservative traders will want to consider a higher stop loss.

- Suggested Positions -

Long MAR $115 call (FFIV1422C115) entry $3.14

02/13/14 new stop loss @ 108.60
02/11/14 triggered @ 111.10

chart:

Entry on February 11 at $111.10
Average Daily Volume = 2.8 million
Listed on February 10, 2014


Gilead Sciences - GILD - close: 81.21 change: -1.34

Stop Loss: 79.75
Target(s): 89.75
Current Option Gain/Loss: Mar $85c: -34.0% & Apr $85c: -22.6%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/15/14: It was a rare day with biotechs actually underperforming the broader market on Friday. GILD was definitely a culprit with shares down -1.6% on no real news. Nimble traders could use a dip or a bounce near $80.00 as a new entry point. If shares trade much below $80 GILD could hit our stop loss at $79.75.

Earlier Comments:
Our target is $89.50. I am listing both the March and the April calls. Pick a month that best suits your time frame.

FYI: The Point & Figure chart for GILD is currently bearish but a move above $83.00 should produce a new triple-top breakout buy signal.

- Suggested Positions -

Long MAR $85 call (GILD1422c85) entry $2.00

- or -

Long APR $85 call (GILD1419D85) entry $3.04*

02/13/14 new stop loss @ 79.75
02/12/14 triggered @ 82.50
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:

Entry on February 12 at $82.50
Average Daily Volume = 13.7 million
Listed on February 11, 2014


Lockheed Martin - LMT - close: 162.89 change: +3.09

Stop Loss: 155.65
Target(s): 165.00
Current Option Gain/Loss: +267.7%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
02/15/14: The relative strength in LMT continues with the stock outperforming the market. Shares rallied +1.9% on Friday and closed at new record highs. LMT is up eight out of the last nine session. The move above $160 is bullish but LMT is growing short-term overbought.

Not only does LMT look overbought but it's testing a trend line of resistance. More aggressive traders may want to aim higher. Up until today we have been aiming for $165.00. However, I am suggesting an immediate exit to lock in gains. The market is closed on Monday so we'll exit on Tuesday morning (Feb. 18th).

Our March $155 call is currently trading with a bid/ask of $8.20/8.70.

- Suggested *small* Positions -

Long MAR $155 call (LMT1422C155) entry $2.23

02/15/14 prepare to exit on Tuesday morning
02/13/14 new stop loss @ 155.65
02/12/14 new stop loss @ 153.45
02/12/14 planned exit to sell half this morning.
LMT gapped higher (+$1.15)
Option opened @ 5.10 -30c spread = $4.80 exit (+115.2%)
02/11/14 Sell Half now to lock in potential gains
(sell half of our position tomorrow morning, Feb. 12, at the open)
02/11/14 new stop loss @ 151.90
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


Monster Beverage - MNST - close: 71.59 change: +0.26

Stop Loss: 69.90
Target(s): 77.50
Current Option Gain/Loss: + 0.0%
Time Frame: 4 to 5 weeks
New Positions: see below

Comments:
02/15/14: MNST slowly drifted higher on Friday after gapping down at $71.00 Friday morning. I would still consider new positions here or you could wait for a rally above $72.00 as an alternative entry point.

Earlier Comments:
We want to keep our position size small to limit our risk.

*Small Positions * - Suggested Positions -

Long MAR $75 call (MNST1422C75) entry $2.10

02/14/14 trade opened at $71.00

chart:

Entry on February 14 at $71.00
Average Daily Volume = 1.39 million
Listed on February 13, 2014


Constellation Brands Inc. - STZ - close: 79.37 change: -0.07

Stop Loss: 76.40
Target(s): 84.75
Current Option Gain/Loss: Mar$80c: - 8.8% & Apr$80c: - 3.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/15/14: STZ traded up to new three-week highs near $80 before paring its gains in the last hour on Friday. I would not be surprised to see a dip back toward $78.00, which we can use as a new bullish entry point.

Earlier Comments:
The prior highs near $81.50 could be overhead resistance but we're aiming for $84.75. STZ does not move super fast so you may want to buy the April calls instead of the March calls.

Trigger @ 79.00

- Suggested Positions -

Buy the MAR $80 call (STZ1422C80) entry $1.70

- or -

Buy the APR $80 call (STZ1419D80) entry $3.30

02/13/14 new stop loss @ 76.40
02/12/14 triggered @ 79.00

chart:

Entry on February 12 at $79.00
Average Daily Volume = 1.5 million
Listed on February 11, 2014


United Parcel Service - UPS - close: 97.24 change: +0.68

Stop Loss: 94.40
Target(s): 99.85
Current Option Gain/Loss: +30.6%
Time Frame: 4 to 5 weeks
New Positions: see below

Comments:
02/15/14: UPS was showing some relative strength on Friday with a +0.7% gain. That was double the transportation average's +0.33% gain. The next hurdle for UPS bulls is the 100-dma near $98.00.

- Suggested Positions -

Long MAR $95 call (UPS1422C95) entry $1.96

02/13/14 new stop loss @ 94.40
02/11/14 triggered @ 96.15

chart:

Entry on February 11 at $96.15
Average Daily Volume = 4.3 million
Listed on February 08, 2014




PUT Play Updates


Currently we do not have any active put trades.