Option Investor
Newsletter

Daily Newsletter, Saturday, 2/22/2014

Table of Contents

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

Market Wrap

Nasdaq Still Leading

by Jim Brown

Click here to email Jim Brown

The tech sector is still leading the market higher but the Dow and S&P are starting to show some fatigue.

Market Statistics

The Nasdaq posted decent gains for the week and closed only -9 points from a new 13-year high. Unfortunately the Dow and S&P lost ground after coming close to testing their own resistance highs. Whether this is consolidation from the February bounce or the beginning of a failure at those highs will not be known for another week. The rally by the Nasdaq, now joined by the Russell 2000, suggests this is consolidation but only time will tell.

It was surprising that the Russell joined the Nasdaq in rally mode after the week's economic reports accelerated into negativity. On Friday the Existing Home sales for January declined -5.1% from the December level and the same amount below January 2013 levels. The headline number at the pace of 4.62 million units on an annualized basis was the slowest sales rate since July 2012.

I know what you are thinking but it was not the weather. This report is based on closings and that means the contracts were probably signed in November and very early December before the cold weather. Lastly, the Western region, totally unaffected by the multiple winter storms, showed a decline of -7.1% in sales. The Northeast, the area hardest hit by the storms only declined -3.1%. Obviously there may have been some weather impact but it was minimal. The biggest hit to sales was rising mortgage rates and home prices up +10.7% over January 2013. The supply of homes on the market rose +2.2% from 4.6 months of supply to 4.9 months. Single family sales declined the most at -5.8% with multi-family sales flat.

The number of first time home buyers declined from the normal average of 40% to 26% and the lowest level on record. The decline in sales could be from a multitude of factors including less appetite by investors given the rise in prices. Also there may be shrinking demand from individuals faced with higher healthcare premiums or uncertainty over future healthcare changes. More than six million people had their healthcare cancelled and that means they have to go into a shrinking marketplace where premiums are higher as well as deductibles and that is a challenge for home buyers trying to plan their budgets for the coming year. Utility bills have rocketed higher over the winter with some consumers forced to pay double what they paid last winter. Gasoline prices are rising again, many workers have had their hours cutback to part time and more than 1.2 million workers have seen their employers drop their health insurance.

All of these factors could be weighing on not only the housing sector but the economy in general. We have seen almost every economic report in 2014 report weaker activity and the weather was a convenient excuse. Maybe it was not all weather but the unintended consequences of those points I outlined above.


February has been an ugly month for economics. In addition to the pending home sales above we saw housing starts decline -16% to 880,000 compared to estimates for 950,000. The Philly Fed Manufacturing number dropped from +9.4 to -6.3 compared to estimates for +8.0. That was the largest drop since June 2012. Mortgage applications fell -4.1% with the purchase index at the lowest level since September 2011. Homebuilder confidence fell from 56 to 46 and the lowest reading since May 2013. Industrial production fell -0.3% compared to estimates for a gain of +0.4%. Retail sales fell -0.4% compared to estimates for a +0.1% gain. Factory orders declined -1.5% compared to a gain of +1.8% in the prior month and expectations for a +0.7% gain. Construction spending fell from +1.0% to +0.1%. The pace of auto sales declined from 15.4 million to 15.2 million compared to estimates for 15.7 million. Nonfarm payrolls came in at a gain of +113,000 compared to estimates for +175,000. The New York manufacturing survey dropped from 12.5 to 4.5 compared to estimates for 11.0. There were a couple of reports that showed minor gains but all the major indicators are accelerating to the downside. Analysts tell us to blame it on the weather. Let's hope they are right.


The economic calendar for next week has a bunch of minor reports that are expected to show a continued slowdown in the economy. The Richmond and Kansas Fed surveys are regional and the Chicago Fed activity index is a look at the national data. All are expected to show a decline with weather as the easy excuse.

Home sales and pending home sales are also expected to decline with weather getting the blame whether or not it is the real cause.

The next GDP revision for Q4 is expected to decline from +3.23% growth in the last report to +2.5% growth. We should not complain because estimates for Q1 growth are plunging fast with +1.0% the likely target before the first quarter is over. The final Q4 revision will be on March 27th.

Janet Yellen's testimony to the Senate Banking Committee was postponed by snow and has been rescheduled for Thursday at 10:AM. That will be the hot ticket for the week. While her testimony will be exactly the same the questions are going to be dramatically different. The transcripts from the 2008 Fed meetings surrounding the financial disaster have been released and it does not paint a pretty picture of the Fed's understanding of the disaster as it progressed. Even well into the crisis the Fed members were still expecting unemployment to decline and the economy to grow. They just did not get it until they were in the middle of the implosion. You can bet there will be questions on those points because Yellen was prominent in all the transcripts. Also, there have been two more weeks of bad economic data since the first testimony to the House so we can expect pointed questions about QE and the direction of the economy. This is going to be a pivotal event for the week.

Late Friday China's PMI will be released and the trend is down. The HSBC/Markit flash PMI for February fell from January's 49.5 to 48.3 and a seven-month low. The employment sub-index fell for a fourth consecutive month to 46.9 and the lowest since February 2009. Every sub-index except for supplier delivery times fell for February. Analysts are saying the Lunar New Year Festival probably impacted the numbers but that event happens every year and it should not have impacted two months of data. The celebration only lasts a week.


With earnings season winding down there was not much happening in the market on Friday. It was option expiration and that produced a little extra volume and volatility but the indexes traded in a narrow range until just before the close.

Priceline (PCLN) was the biggest earnings news. After the bell on Thursday they reported adjusted earnings of $8.85, up +31%, compared to estimates of $8.29. Revenue rose +29% to $1.54 billion and slightly above estimates.

Priceline guided for earnings in Q1 of $6.35 to $6.85 and analysts were expecting $7.19. That did not appear to be a problem since the company is normally very conservative. The company predicted a 15% to 25% jump in revenue in Q1. Debt at the end of the quarter was $1.9 billion with net cash at $4.85 billion, an increase of $600 million for the quarter. Piper Jaffray raised the price target from $1200 to $1400. RBC Capital Markets raised their target from $1300 to $1500. Jefferies went from $1475 to $1500 and Cantor Fitzgerald from $1380 to $1400. Priceline shares gained +$32 to close at $1315.


Groupon (GRPN) shares were crushed after they forecast earnings drastically below estimates. The company said EBITDA would be in the range of $20-$40 million compared to estimates of $96 million. The CEO said two purchases last month would hurt profit by $20 million and they were going to incur another $25 million in additional expenses for marketing and growth initiatives. Groupon recently acquired Ticket Monster Inc in South Korea and fashion site Ideeli for $43 million in cash.

Sales rose +20% to $768.4 million and that beat estimates of $718 million. Adjusted earnings of 4 cents beat estimates of 2 cents. Groupon shares fell -22% on the lowered guidance.


So far in 2014 it has been a biotech year with the sector up +18% YTD. On Friday Isis Pharmaceuticals helped to keep that trend alive with an announcement about the drug known as ISIS-SMN. In partnership with Biogen Idec (BIIB) the drug is for a rare spinal disorder. They announced a mid-stage trial of the experimental treatment showed increased muscle function in children. Patients treated with the highest dose of the drug had an average 3.7% increase in muscle function in nine months plus an increase in levels of a protein critical to health and survival of nerve cells in the spinal cord. Spinal muscular atrophy affects about 35,000 patients in the U.S., Europe and Japan. UBS said this was a bullish report although dosage and safety at higher doses was yet to be determined. However, since there is no effective treatment for this disease the "bar is low." Sales are expected to be $1 billion a year. Shares of ISIS rose +15% to $59.


Electronic health record company Allscripts (MDRX) posted earnings of 8 cents that were in line with estimates and revenue of $351 million that beat estimates of $344.7 million. While the earnings were not great the bookings were. The company said it booked $274 million in new contracts during the quarter. That was an increase of +52% and pushed the backlog to $3.4 billion. Shares rallied +6% on the news.


Pharmacyclics (PCYC) shares spiked +6.5% after reporting a +53% increase in earnings to 95 cents. Revenue rose only +13% to $123.6 million but that is expected to rise sharply in the current quarter. The company said the Imbruvica launch gained $13.6 million in sales with only six weeks on the market. The cancer drug is seeing a lot of off-label prescriptions for chronic lymphocytic leukemia, an illness it was not approved for until last week. A Normura analyst said there was "strong underlying demand in this population." A RBC analyst said there was a "whopping 41 studies in progress and 10 in phase III with the top two drugs capable of producing $1 to $3 billion in upside from the current $3.4 billion in expected revenue for 2019. JMP securities raised the price target from $163 to $191 and PCYC closed at $151.


Safeway (SWY) shares rallied +4% after news broke that Cerberus was in advanced talks to buy the company within the next few weeks. The leveraged buyout deal has been in discussions for the last several months and Reuters claims there are no remaining talks with other buyers. Safeway has a market cap of $8.7 billion and $5.6 billion in debt. Cerberus already owns Albertsons and Jewel-Osco and the acquisition of Safeway would give them plenty of synergies. There could be antitrust concerns in southern California where both chains have a strong presence. Safeway was purchased once before in 1986 by KKR and then spun back out in 1999.

Safeway has been selling off noncore assets and has been pressured by various activist shareholders to revise strategic alternatives. Jana Partners has forced them to consider leaving weak markets and the store said it was leaving the Chicago market early this year to pacify Jana. The company announced on Wednesday it was going to distribute the 37.8 million shares of Blackhawk it still owns to Safeway shareholders and would consider alternatives for its 49% stake in Casa Ley, the 5th largest food chain in Mexico.

Shares of Safeway have been rocketing higher since rumors began to break in early February.


Railcar makers Trinity Industries (TRN), Greenbrier (GBX) and American Railcar Industries (ARII) are soaring to new highs as the oil shipping business is facing a crisis. With half a dozen rail accidents involving oil tanker cars over the last year there is a call to modernize the fleet. According to the Association of American Railroads (AAR) more than 85% of the 90,000 tanker cars in operation today are outdated and more than 80,000 don't meet current safety standards. The government announced new regulations on Friday regarding the speed of trains carrying oil and the number of track checks to keep the trains safe. It is only a matter of time before they require significant upgrades to existing cars and new safety features on new cars. Oil shipments by rail rose +71% in 2013 to 800,000 barrels per day.

BNSF Railway said on Thursday they planned to buy 5,000 tank cars with safety features that exceed current standards. The railroad is going to solicit bids from manufacturers for the purchase. Greenbrier is already increasing capacity by 50% to handle future orders. ARII has said its production capacity was already maxed out with a large number of backorders. Last week Canadian National Railway and Canadian Pacific Railway said they were going to charge higher rates for customers that ship crude in railcars built before October 2011, which the National Transportation Safety Board has said were unsafe. Valero, the largest U.S. refiner has ordered 5,300 new tanker cars.

On Thursday Trinity reported earnings of $1.44 that rose +58% and beat estimates by 3 cents. They forecast earnings for 2014 of $6.30 to $7.00 compared to $4.75 in 2013. Order backlogs rose to $5 billion at the end of 2013.



Facebook (FB) went negative by the close on Friday after recovering from a sharp drop at Thursday's open to close positive on Thursday. The announcement of the $19 billion purchase of WhatsApp has totally confused the market. Some analysts feel it was an act of desperation by Facebook because of declining active users. WhatsApp has 450 million users and is adding more at the rate of one million a day.

Some say it was offensive in an attempt to control as many mobile devices as possible. Others say it was defensive in order to keep Google and Apple from becoming a major competitor overnight. Some investors hate it, others love it. Quite a few are claiming we are back in the dot.com era where massive valuations and share prices can fund any purchase despite the ridiculous valuations.

The company is four years old and only has 55 employees. So exactly how hard would it have been to clone it? Facebook has the cash and the programmers. Why couldn't they have created a duplicate service for a lot less money? Of course buying a company already running and adding one million users a day does make a lot of sense. WhatsApp only charges $1 per year for the service and there is no advertising. That gives Facebook a lot of upside by simply increasing the subscription fee and adding mobile ads.

Some say users faced with those factors would simply go somewhere else. Some will but others will not and the network will continue growing. Remember, WhatsApp is a "free" messaging service unlike texting with the phone company. In 2013 Vodaphone, America Movil and Verizon earned $32.5 billion in text messaging fees. As more and more people realize services like WhatsApp are basically free and offer a better user experience the number of users is going to rocket higher.

Business Insider was reporting on Thursday that Google was ready to match the $19 billion offer from Facebook and CEO Larry Page had appealed directly to the founders at WhatsApp but was turned down. The founders at WhatsApp felt Google did not really appreciate the service and was bidding only to keep Facebook from getting access to the service. Another source claimed Page was not really making an identical bid but was trying to get WhatsApp to remain independent rather than be consumed by Facebook.

To put the $19 billion acquisition in perspective the NYSE-Euronext acquisition was only $11.1 billion, Motorola Mobility $12.9 billion and Skype $8.5 billion. That is roughly the market cap of Gap Stores. It is 25 times Instagram, more than Sony (SNE) or United Airlines (UAL) and four times the market cap of BlackBerry. You could buy two nuclear submarines and seven Mark Cubans.

Did Facebook just score an amazing deal or did we just see the top in the social media market and possibly the Nasdaq? Did Mark Zuckerberg just become a Jeff Bezos clone? "Profits don't matter. If you build it they will come."


On Friday Bank of America Merrill Lynch said investors came roaring back into equities at the fastest pace in 12 weeks. For the week money market funds saw outflows of $40.45 billion compared to inflows of $11.55 billion the prior week. Inflows into equities totaled $13.4 billion. Inflows into high yield bond funds were $2.4 billion and a 17 week high. European equities and Japanese equities also saw heavy inflows.


When Walmart (WMT) reported earnings last week the Q4 earnings cycle came to an official close. There are still some smaller companies to report but all the big names have already confessed. According to Bespoke Investment Group the final tally was 61.9% of U.S. companies beat earnings estimates and that was slightly higher than Q3. At least 63.8% beat on top line revenue numbers. That was the best showing since Q2-2011. Earnings growth was around +7.8%. Unfortunately 59% of companies warned on forward guidance and earnings estimates for Q1 are hovering somewhere in the upper +3% range.

The Dow and S&P struggled last week and each ended down slightly for the week. Considering the strong eight-day rebound from the February 5th lows this was probably a simple consolidation week. I was encouraged that negative economics did not cause more market damage.

The S&P came close to the prior highs of 1848 with a print at 1847 on Wednesday and 1846 on Friday. With strong resistance at the 1848-1851 level the failures just below that level were probably the result of impatient traders loading up on their shorts a couple points early just to be sure they got a trade launched. I do that all the time. I will set a sell stop a point or two below the actual resistance to enter or exit plays before the actual resistance level is hit. If you are shorting a particular resistance level it can pay to enter a couple points early and then set your stops a couple points above the resistance.

This is what we saw last week on a large scale. However, there was not a lot of selling. There was just enough to stop the rallies but not enough to cause a material decline. Apparently trader sentiment is evenly mixed with about the same number bearish as bullish.

This was also an option expiration Friday but unlike previous expiration days the volume was only slightly higher at 6.5 billion shares compared to 6.4 billion on Thursday and 6.9 billion on Wednesday, which was the high for the week. Friday's volume was 3.14 billion advancing and 3.25 billion declining and almost a tie.

Traders are waiting for something. The lack of volume on an expiration Friday shows a lack of interest and engagement in the market. The weak economics and political hotspots overseas are weighing on investor sentiment. Add in the Yellen testimony scheduled for next Thursday and investors seem to be patiently waiting on the sidelines.

I believe traders are simply waiting to see if the S&P moves through 1850 on decent volume, which would be a buy signal, or eventually fails at that 1848 level and begins a new leg down. Quite a few analysts are still looking for lower lows before the normal spring rally.

Over the last ten years the market has declined from about February 19th to about March 9th and then rallied into the end of April where the "sell in May" cycle begins. Scott Krisiloff at Avondale Asset Management posted this chart last week showing the average seasonality for the last ten years. The red line shows the -6% decline in the S&P in February, which was totally out of the seasonal norm.


While seasonality is interesting to track we can't rely on it for accurate trade signals. Events in the economy and around the world can have a dramatic impact on current markets and void the seasonal norms. However, as the Stock Trader's Almanac constantly reminds us over the very long term the cycles repeat more often than not.

For our purposes next week we need to simply watch the S&P for a breakout over 1850 or a failure below 1825. Either move should predict future market direction in the coming weeks.


The Dow found resistance at 16,175 last week and the lone spike through that level to 16,223 was immediately sold and knocked the index back to 16,000. With the exclusion of that one move the Dow traded in a very narrow range between 16,100-16,200 and was mostly dormant.

The Dow could still form a head and shoulders top, which would project a drop back to 15,300 or lower. However, we must remember the Dow sprinted for +883 points from the Feb 5th low to the Feb 19th high. It was due for some profit taking and consolidation. Pausing after that run would be expected. On the positive side the sharp intraday dip to 16,000 was immediately bought on decent volume. The dip buyers are alive and well but there was not enough volume to push the Dow through short term resistance at 16,200.

At this point the Dow is in follower mode with the Nasdaq leading the charge. As long as the Nasdaq continues making new highs the Dow will eventually follow along.



The Nasdaq momentum slowed last week but it still managed post a gain for the week. The tech sector has been led by the biotechs and that has not changed. With all the major tech earnings behind us there could be a shortage of positive headlines to keep the momentum going. Resistance is currently 4280 and support at 4230 and Wednesday's low.




I am very encouraged by the strong move in the Russell 2000 with a huge 1.34% gain last week when the other major indexes were either losing ground or treading water. The Russell rallied to resistance at 1165 and closed there on Friday. It would appear the Russell is poised to push higher and that would provide positive sentiment for the big cap indexes. The prior high was 1181 and only 16 points above Friday's close.


I think we watch and wait next week. The Yellen testimony is going to be the focal point and analysts will be predicting what she will say all week to the point where the testimony could be anticlimactic. With the Russell finally showing signs of life and the Nasdaq sitting at new 13-year highs there is positive sentiment for the broader market. The key sentiment level for the institutional traders will be that 1848-1851 level on the S&P.

Random Thoughts

China threw another hissy fit when President Obama met with the Dalai Lama at the White House on Friday. At the two Nobel laureates met in the White House, Chinese officials were warning in the strongest possible terms that the meeting would inflict "grave damage" on Sino-American relations. China accused Obama of allowing the Dalai Lama to use the White House as a podium to promote anti-Chinese activities. Officials called it a "gross interference in China's domestic politics" and "a severe violation of the principles of international relations." China also objected to the meetings in 2010 and 2011 but never followed up on the threats about severing diplomatic ties.

In Kiev the president has fled the city after the Parliament voted to remove him from office and the former Prime Minister Yulia Tymoshenko was released from prison. She said she would run of office again in the May elections. She hailed the opposition protestors as conquering heroes. The army and the police have done an about face and now claim they stand with the people. Russian officials are becoming more vocal saying the Parliament had no right to impeach the president and he was removed illegally. Russia is making moves that seem to indicate they may be planning on splitting the country with Crimea being largely populated by ethnic Russians. A senior Russian official warned if the Ukraine breaks apart it will trigger a war. We will protect Crimea like we protected Georgia. Ukraine Update

In Venezuela tens of thousands of protestors gathered to protest the 56% inflation and the lack of food and necessities brought on by price controls and nationalization of hundreds of businesses. Chavez successor Nicolas Maduro added more riot police and soldiers in an effort to break up the demonstrations and enforce control. This uprising in Venezuela is not going to end well and violence is sure to increase. Maduro is strongly in control but the lack of food and fuel is prompting citizens to press their case. We import more than one million barrels of oil per day from Venezuela and that oil could be at risk as the unrest increases.

In Libya the 340,000 bpd El Sharara oil field has been completely shut down since Thursday due to violent clashes with protestors. Armed protestors have repeatedly shutdown the facility over the last year to pressure Libya's weak government into political and financial concessions. Libyan production is now below 200,000 bpd compared to 1.6 mbpd before the civil war. Libyan crude is light sweet crude and this production shortfall is supporting Brent prices.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"The principles of successful stock speculation are based on the supposition that people will continue in the future to make the mistakes that they have made in the past."
Thomas F. Woodlock (Wall Street Journal editor & columnist, quoted in Reminiscences of a Stock Operator, 1866-1945)

 


Index Wrap

Some Worries About Daddy-Fed But Tech Powers On

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The S&P 500 is seeing a strong line of resistance at 1850, which bears watching, but Nasdaq rules the roost still. What's 16-19 billion from Facebook for an app you've likely never heard of!

Well, actually I did see a supposed voice mail from "WhatsApp" in my junk mail box and I curiously, not cautiously, opened it to find my virus guard warning me away from it. Duh, I should have known cause it's a TEXT app only. This application has caught on big time, especially in Europe where the wireless carriers charge big time for text messages. Our intrepid AT&T and Verizon have made billions on our teens especially charging lots for text heavy users and now new plans have unlimited text messaging and competition in ACTION. Facebook probably sees things I don't, such as 'eyeballs' are the be all and end all. It takes a visionary in this world of brave new tech to see ahead.

The Composite went to new highs and that's what I find important. The S&P and even more so, the Dow, are going to need to get through this next few weeks and obtain more insights on earnings in the real world before it will forge ahead and move higher it should do. February-March tends to be seasonally weak or at least less likely to surge like December-January can.

I think we have to expect higher prices over the coming weeks but cautious near-term in terms of taking on overly much in the way of bullish positions. Buy dips only. Runaway past moves had the Fed wind at our backs but they see the economy taking over for them. Hey, back to a 'normal' market, driven by earnings. Imagine that!

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The recent S&P 500 (SPX) index is bullish but stalled at a what has proved so far to be a strong line of resistance at 1850. Technically, as in 'technical' analysis, I'd have to say SPX is showing a minor triple top. However, triple tops also tend to be rare in the major indices; somewhat more common in stocks and commodities. And, of course, we can't look at one index in isolation when we have the 'other' (Nasdaq) Market forging ahead.

Seasonally, February-March tend to be consolidation periods for prior bullish moves from fall into year end and into the new year. A weekly Close below 1800 would be bearish but as long as the prior low is not pierced, the chart remains bullish.

Pivotal resistance is obviously at 1850, with next anticipated resistance at 1880, then at the upper channel line, currently intersecting just over 1900.

Indicators are mixed. RSI shows the recently faltering upside momentum and my bullish/bearish 'sentiment' model suggests rising bullishness, but moderate bullishness. No caution to the wind here, but the wind blows higher in the bigger picture and that's the advice I have for myself and others.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart is bullish and the recent back and forth sideways type movement looks like a bull flag consolidation currently. A move below 800 on a Closing basis is mildly bearish for the next 1-2 weeks. Pivotal support implied by OEX's up trendline comes in around 780 currently and as long as there's no weekly Close below that trendline, the chart remains bullish on an intermediate and long-term basis.

Key near resistance is at 812-814, with next resistance at the prior minor double top. If there's a decisive upside penetration of 824, 835 is a next target in my estimation, with potential then for the Index to get back up to the upper resistance end of its broad uptrend price channel.

I would watch the 50-day moving average in the near-term. If OEX holds above it for the most part, it's a bullish sign. If there's a slide below this key average, look for what happens at the 21-day average. Bullish positions look favorable on dips into the 790-780 zone.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow (INDU) chart looks a lot like the S&P 100 seen above as the recent sideways narrow-range move looks like a possible bull flat. INDU is maybe more clear cut as to near support close byu at 16000; next support comes in at 15800. Bullish positions look favorable in this area and even down to closer to 15500 with an exit just below the prior intraday low.

Currently I see better potential for a break out move above 16200 than to much below 16000, but I'm willing to wait and see if 16000 holds up. Resistance above recent highs at 16200 comes in next at 16500.

CAT is in a recovery move; DD is strong; DIS is bullish, as is JPM and MRK. MSFT looks to be in a bullish consolidation; UTX and V have bullish charts. Not enough here overall with the 30 stocks to suggest a power move higher but nothing looking all that bearish in the mix either.



NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) chart is bullish and unlike the S&P side of the aisle, COMP has gone on to make a new high for the current move.

4280 is near resistance in COMP, with next resistance not that far overhead, at the upper channel line, currently intersecting around 4333. I don't see major-major upside potential in the near-term; not like what it was when the Index was at the LOW end of its uptrend channel.

Near support is suggested in the 4200 area, then at 4150 at the 21-day moving average. This average has been a good 'dividing line', with trade above it bullish, trade below it bearish on a near-term basis. Fairly major support is suggested at the up trendline, currently intersecting at 4030.

Slightly rising bullishness suggested by the call to put daily volume ratios in CBOE equities options is, we can assume, driven by the Nasdaq as big deals are still getting done which keeps investor interest. Hey, I love to read about the latest tech-savvy billionaire who had a vision in the internet space.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) chart is bullish; the chart looks most bullish short-term with NDX continuing to trade above its prior 3635 high.

Pivotal near support is at 3600, extending to 3570. A Closing dip below the 21-day moving average would suggest waning upside momentum. Fairly major support comes in around 3500, at NDX's up trendline.

On the prior note, I'd consider it an opportunity if I could take on bullish positions at the LOW end of the Index's broad uptrend channel again but I doubt that I'm going to have a second opportunity to buy another dip to the up trendline. It seems more likely that there will be a move above near resistance at 3685-3700 ahead and then perhaps, up to 3745-3750.

A take-over focus or speculation ahead should keep the bulls enthusiastic as traders speculate on how much cash Google or Microsoft could put to work in some below the radar Nasdaq stock that has the next great idea to mint billionaires. It keeps the excitement going in the big cap Nasdaq 100 as down scale Walmart or even up scale Nordstrom's, are struggling over on the retail 'old-economy' universe. Ah, the American dream of the next new thing!

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The QQQ chart is bullish, especially so with the recent move to a new high for the current move; a move which started at the low end of QQQ's uptrend channel or at QQQ's up trendline.

Near support is at 89.4, extending to 89.0; next lower support then comes in at 88 even, extending to 87.45, at the current intersection of the Q's 21-day moving average.

Near resistance is seen at 90.4, then at the upper price channel, intersecting in the 91.5 area currently.

Volume is on the low side recently, which is supportively bullish, since big volume spikes tend to be bearish as they most often come on sell offs and breaking of support levels as bullish holders of this ETF stock race for the exit.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) is bullish as it tracks Nasdaq higher but not to new highs like Nasdaq, at least not yet for the current move. Pivotal resistance comes in at 1180-1182; immediate overhead resistance is at 1170.

Key near support is at 1140, extending to 1130. I didn't highlight even closer-by support at 1150-1148; holding this area would keep the chart in a 'maximum' bullish pattern.

RUT will tend to follow the Nasdaq, but not lead it. The Russell will tend to lead the S&P however.

On a longer-term basis, RUT would appear to have potential to again reach the top end of its broad and well-defined multimonth uptrend channel, which is a current top most target, cum 'resistance', at 1208, with this upper channel line rising fairly steeply over time.


GOOD TRADING SUCCESS!




New Option Plays

Airlines, Automation, and Technology

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Alaska Air Group - ALK - close: 81.54 change: +1.62

Stop Loss: 79.45
Target(s): 88.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
ALK is in the services sector. The company is a regional airline. Airlines as a group have been performing well in the market. ALK has rebounded from its February lows and is now approaching all-time highs.

Shares are trading just below resistance near $82.00. We're suggesting a trigger to buy calls at $82.25. If triggered our target is $88.00. The Point & Figure chart for ALK is bullish with a $98 target.

Trigger @ $82.25

- Suggested Positions -

Buy the APR 85 call (ALK1419D85) current ask $2.35

Annotated Chart:

Entry on February -- at $---.--
Average Daily Volume = 818 thousand
Listed on February 22, 2014


Rockwell Automation - ROK - close: 119.32 change: +0.33

Stop Loss: 117.90
Target(s): 129.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
ROK is in the industrial goods sector. The company provides automation solutions to a wide number of industries. ROK has been showing relative strength with a nearly non-stop bounce from its February lows. Now shares are on the verge of a bullish breakout past resistance in the $120 area.

The January 21st intraday high was $121.01. I am suggesting a trigger to buy calls at $121.25. If triggered our target is $129.00.

Trigger @ $121.25

- Suggested Positions -

Buy the APR $125 call (ROK1419D125) current ask $1.65

Annotated Chart:

Entry on February -- at $---.--
Average Daily Volume = 1.1 million
Listed on February 22, 2014


NEW DIRECTIONAL PUT PLAYS

LinkedIn - LNKD - close: 192.62 change: -0.77

Stop Loss: 200.50
Target(s): 171.00
Current Option Gain/Loss: Unopened
Time Frame: exit prior to March expiration
New Positions: Yes, see below

Company Description

Why We Like It:
LNKD is in the technology sector. The company operates an online professional network service. The stock peaked back in September last year. Since then LNKD has been suffering with a bearish trend of lower highs and lower lows. This past month has seen a breakdown below round-number support at the $200 level. Just a couple of days ago LNKD's 50-dma and 200-dma produced a "death cross" with the 50-dma falling below the 200-dma.

The recent sell-off accelerated following disappointing earnings guidance. The oversold bounce is revering near resistance at its 10-dma. Overall shares look ready to resume the down trend again.

We are suggesting small bearish positions now at current levels. Our target is $171.00. I confess that target looks a bit optimistic with only four weeks left until March option expiration but stocks tend to fall faster than they climb.

*small positions* - Suggested Positions -

Buy the Mar $180 PUT (LNKD1422o180) current ask $3.45

Annotated Chart:

Entry on February -- at $---.--
Average Daily Volume = 4.0 million
Listed on February 22, 2014



In Play Updates and Reviews

Expiration Encumbers The Rebound

by James Brown

Click here to email James Brown

Editor's Note:

The market's rally off its February lows paused again on Friday thanks in part to option expiration.

ALKS and IMPV hit our entry triggers. SBUX has been removed.


Current Portfolio:


CALL Play Updates

Alkermes plc. - ALKS - close: 52.96 change: +1.36

Stop Loss: 50.65
Target(s): 59.00
Current Option Gain/Loss: - 9.5%
Time Frame: Plan to exit on Feb 26th at the closing bell
New Positions: see below

Comments:
02/22/14: I've got good news and bad news on our new ALKS trade. The good news is that shares displayed relative strength on Friday and hit our suggested entry point at $53.25 on its way to a new high. The bad news is that our time frame just changed. Previously it looked like we might have a few weeks and would plan to exit prior to ALKS' earnings report in March. The company's earnings announcement has now been set for February 27th. That is next Thursday. I am suggesting we plan to exit on Wednesday, Feb. 26th at the close to avoid holding over the report.

Given our new time frame I am not suggesting new positions. Our plan was to keep the position size small to limit risk.

*small positions* - Suggested Positions -

Long MAR $55 call (ALKS1422C55) entry $2.10

02/22/14 Our time frame has unexpectedly changed.
ALKS is now expected to report earnings on Feb. 27th. We want to exit prior to the earnings announcement
02/21/14 triggered @ 53.25

chart:

Entry on February 21 at $53.25
Average Daily Volume = 986 thousand
Listed on February 20, 2014


Caterpillar Inc. - CAT - close: 97.50 change: +0.58

Stop Loss: 94.85
Target(s): 99.65
Current Option Gain/Loss: +29.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
02/22/14: CAT continues to push higher and extended its rally to four up weeks in a row. I am adjusting our exit target just a bit from $99.85 down to $99.65. The concern is that the $100.00 level could be round-number resistance. The 2013 high was $99.70.

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

02/22/14 adjust exit target to $99.65
02/20/14 new stop loss @ 94.85
02/18/14 new stop loss @ 94.40
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: 63.59 change: +0.58

Stop Loss: 60.90
Target(s): 67.50
Current Option Gain/Loss: +10.6%
Time Frame: Exit PRIOR to earnings on Feb. 27th
New Positions: see below

Comments:
02/22/14: CRM tagged a new high on Friday but pared its gains by the closing bell. Shares still managed to show some relative strength with a +0.9% gain.

Please note that CRM is at an important test on its daily chart. The rally tagged resistance at a trend line of higher highs and then faded lower. I have drawn what appears to be a bearish (rising) wedge on CRM's chart. Our stop loss is just below the blue support line.

We are almost out of time on this trade. CRM has set its earnings date for Feb. 27th. That is next Thursday. We will plan to exit prior to earnings.

- Suggested Positions -

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

02/20/14 new stop loss @ 60.90
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: 62.20 change: -0.15

Stop Loss: 59.45
Target(s): 68.00
Current Option Gain/Loss: Mar $60c - 5.6% & Jun $65c: - 3.0%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
02/22/14: CSC's performance the last few days has not been very inspiring. Shares look like they are forming a short-term top. More conservative traders may want to raise their stop loss. I am not suggesting new positions at this time.

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


F5 Networks - FFIV - close: 110.28 change: -0.24

Stop Loss: 108.60
Target(s): 118.50
Current Option Gain/Loss: -41.7%
Time Frame: 4 to 5 weeks
New Positions: see below

Comments:
02/22/14: FFIV has spent the last week consolidating sideways inside the $109-113 zone. Shares just failed at the top of this trading range again on Friday.

I am not suggesting new positions at this time.

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

02/19/14 FFIV looks poised to hit our stop loss tomorrow
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: 82.59 change: -0.22

Stop Loss: 79.75
Target(s): 89.75
Current Option Gain/Loss: Mar $85c: -19.0% & Apr $85c: - 6.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/22/14: The biotech stocks have continued to show leadership. Yet GILD is lagging behind some of its peers. This stock is still struggling with resistance near its January highs. I would wait for a breakout higher before considering new positions.

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


Imperva Inc. - IMPV - close: 61.92 change: +2.57

Stop Loss: 58.65
Target(s): 68.00
Current Option Gain/Loss: +11.7%
Time Frame: exit prior to March option expiration
New Positions: see below

Comments:
02/22/14: IMPV displayed relative strength on Friday with a +4.3% gain and a breakout past resistance at $60.00 to close at all-time highs. Our suggested entry point to buy calls was hit at $60.50.

I am raising our stop loss to $58.65.

NOTE: There was a typo in IMPV's option data. I suggested the March $60 call but listed the March $65 option symbol. We want the March $60 call. Our entry would have been about $3.40. If you used the March $65 call then your entry would have been about $1.10.

Earlier Comments:
The Point & Figure chart for IMPV is bullish with a $77.00 target.

- Suggested Positions -

Long MAR $60 call (IMPV1422c60) entry $3.40*

02/22/14 new stop loss @ 58.65
*option entry price is an estimate since the option did not trade at the time our play was opened.
02/21/14 triggered @ 60.50

chart:

Entry on February 21 at $60.50
Average Daily Volume = 264 thousand
Listed on February 18, 2014


Monster Beverage - MNST - close: 74.79 change: +0.09

Stop Loss: 71.75
Target(s): 76.50
Current Option Gain/Loss: +47.6%
Time Frame: prepare to exit PRIOR to earnings on Feb. 27th
New Positions: see below

Comments:
02/22/14: We only have a few more days left on our MNST trade. Tonight I am adjusting our exit target down to $76.50 If MNST does not hit our exit target then we will plan on exiting this trade on Wednesday, March 26th, at the closing bell, to avoid holding over the earnings report on the 27th.

I am raising the stop to $71.75

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

02/22/14 adjust exit target to $76.50
02/22/14 new stop loss @ 71.75
prepare to exit on Wednesday, Feb. 26th
02/20/14 new stop loss @ 71.25,
exit PRIOR to earnings on February 27th
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: 80.35 change: -0.25

Stop Loss: 77.80
Target(s): 84.75
Current Option Gain/Loss: Mar$80c: + 5.8% & Apr$80c: + 3.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/22/14: STZ has extended its gains to four up weeks in a row. The stock is near resistance in the $81.00-81.50 area. If STZ fails here it will look like a potential bearish double top pattern. A breakout could signal the next leg higher.

Tonight we're adjusting the stop loss to $77.80. I am not suggesting new positions at this time.

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

02/22/14 new stop loss @ 77.80
02/18/14 new stop loss @ 77.40
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




PUT Play Updates

Cigna Corp. - CI - close: 77.34 change: +0.24

Stop Loss: 79.25
Target(s): 70.50
Current Option Gain/Loss: -31.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
02/22/14: CI continues to consolidate sideways below technical resistance at its 200-dma. I would still consider new put positions here but more conservative traders may want to wait for a new relative low under $75.00 before initiating positions. Our target is $70.50.

FYI: The Point & Figure chart for CI is bearish with a $63 target.

- Suggested Positions -

Long MAR $75 put (CI1422o75) entry $1.50

02/20/14 trade opened with CI's gap higher at $76.76

chart:

Entry on February 20 at $76.76
Average Daily Volume = 2.6 million
Listed on February 19, 2014


Pepsico, Inc. - PEP - close: 78.22 change: +0.21

Stop Loss: 80.15
Target(s): 74.00
Current Option Gain/Loss: -18.9%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
02/22/14: PEP bounced again on Friday but for the second day in a row the rebound has failed under the $79.00 level. I would be tempted to buy puts now but readers may want to wait for a new drop below $77.75 as another entry point to buy puts.

- Suggested Positions -

Long APR $75 PUT (PEP1419P75) entry $0.95*

02/18/14 triggered @ 77.85
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:

Entry on February 18 at $77.85
Average Daily Volume = 5.7 million
Listed on February 15, 2014



CLOSED BULLISH PLAYS

Starbucks Corp. - SBUX - close: 72.56 change: -0.99

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

Comments:
02/22/14: SBUX is not cooperating. The stock's oversold bounce has failed at resistance near $75.00. Investors are starting to worry about the shocking rise in the price of coffee futures and how that might impact SBUX's margins.

Our trade did not open. We are removing SBUX as a candidate. Shares look like they are headed toward their February lows near $69.

Trade did not open.

02/22/14 removed from the newsletter. Trade did not open. Suggested entry trigger was $76.15

chart:

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