Option Investor
Newsletter

Daily Newsletter, Wednesday, 11/13/2013

Table of Contents

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

Market Wrap

More Fed-Induced Rally

by Keene Little

Click here to email Keene Little
Following head-fake Thursday last week we've had a strong rebound in the stock market, keeping the pattern of bullish opex weeks alive. It looks like further upside potential from here as bullish hopes continue following rumors of more Fed support from Janet Yellen.

Market Stats

Last Thursday's strong decline was looking decidedly bearish for the stock market but like so many previous Thursdays prior to opex week it was just a head fake to draw the bears in and provide short-covering fuel to get a stronger rally going. Friday's big turnaround was proof of what was done on Thursday. Slight market manipulation perhaps? Big-money banks and their hedge fund buddies know how to play this game and they play it well. The pattern of bullish opex weeks, to protect sold puts and make some short-term money with weekly options, is holding again and when that pattern changes we'll know the market is talking. But for now it's looking like we've got some further upside potential.

There were rumors this morning that the Fed's Chairwoman-elect Janet Yellen was going to release a copy of her comments that she'll present at the Senate's hearing on Thursday. It's expected that she will continue the Fed's accommodative strategy, which the market of course loves to hear. There was a final spurt into the close as the rumors of the release of her comments persisted and they were in fact released after the close. Equity futures are higher in the after-hours session. We could see the market continue higher on the "good" news that Yellen will continue to feed money to the banksters. But the short-term pattern has it looking ready for at least a pullback to correct today's rally so there could be a little bit of sell-the-news on Thursday.

There was very little news and even fewer economic news to move the market today other than the expected positive (for the market) news from Janet Yellen. Between that and the effort to rally the market during opex week the poor bears didn't stand a chance. Now we look for upside targets to see how it does from here.

As is true for the other indexes, NDX provides a study in channels and I'll start with its charts tonight. There are a few trend lines and price projections in the 3350-3500 area, which is where NDX is now trading, so while I see further upside potential we have to keep in mind NDX has now entered a potentially strong area of resistance. The weekly chart shows two slightly different up-channels, one starting from the November 2008 low through the October 2011 low and the other from the March 2009 low through the October 2011 low. The tops of those two channels are currently near 3380 and 3460. A trend line along the highs from December 2012 - May 2013 is currently near 3435.

Nasdaq-100, NDX, Weekly chart

Not shown on the weekly chart above is a large 3-wave rally off the 2002 low. NDX has made it above the price projection at 3355 where the 2nd leg of the rally off the 2002 low is 162% of the 1st leg (the 2nd leg is the 2009-2013 rally). The rally from 2009 will have two equal legs at 3412, only 7 points above today's closing high. If the bulls can keep this up for a little longer we could see it reach the trend line along the highs from December 2012 and the top of the up-channel from 2009, both near 3485 in mid-December. So there's clearly some more upside potential but there's also a lot of congestion right here that could thwart the bull's efforts at any time.

Adding in some shorter-term up-channels and trend lines along highs and lows since September-October, along with a price projection for the 5th wave in the move up from August, there's upside potential to about 3425-3440. If it can rally through that area then the next price projection is at 3513 (where the 5th wave would equal the 1st wave up from August). As long as this morning's low at 3346 holds we should see higher prices but this is a rally that could fail at any time to caution is required if holding long positions. My feeling is that the catalyst for a market decline will arrive during the night from overseas and it will start us down with a large gap down that will not recover like this week's gaps.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3402
- bearish below 3346

From a shorter-term perspective, the 3-wave move down from October 30th has now been followed by a 3-wave move (so far) back up and achieved two equal legs up from November 7th at 3398. Watching today's rally, NDX stayed within an up-channel from this morning's low and came close to the top of it with the final push higher into the close. Today's rally counts well as a 5-wave move and therefore calls for a pullback Thursday morning before pressing higher again. But if the 3-wave move up from November 7th completes a b-wave in what will become a larger A-B-C pullback from October 30th then we'll see the start of a stronger decline. But it's unlikely that we've seen the final high if that happens. A stronger pullback would be good for a trade but only a trade. A drop back below price-level S/R near 3367 would be bearish, which would be confirmed with a drop below this morning's low near 3346. In the meantime the bulls have done nothing wrong.

Nasdaq-100, NDX, 60-min chart

A similar 5-wave move up from August, shown on the NDX daily chart, is shown on the SPX chart. It has a tighter rising wedge pattern because of the relatively small 4th wave correction (the pullback off the October 30th high). The top of the wedge is currently near 1793 and will be near 1800 by mid-week next week. So that gives us a potential target zone for the rally. On the weekly chart (not shown) I have a price projection to about 1830 so that will be the upside target if the bulls blast through 1800. Most are now expecting the market to press higher into the end of the year but I can't help but wonder if most are going to be very disappointed with what the market gives them instead. Respect the upside but worry about the downside.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1750
- bearish below 1730

The DOW has been struggling at the trend line along the highs from August-September, currently near 15778, and just missed tagging the top of its up-channel from April-May on November 7th. But it was able to tag the top of its channel today at 15820. The risk now is that the rally is complete and we'll see the market start back down. But I've drawn a trend line along the highs on October 30th and November 7th, which could be the top of a small rising wedge pattern to finish its rally, and that trend line will be near 15890 by the end of the week. Perhaps we'll see a small throw-over above the line to complete its rally. With the waning momentum it's hard to bet on much more of a rally from here but we also know the buying keeps coming anyway. Again, respect the potentially bearish setup here if you're playing the long side. As for the bears, patience, your day will come. A break below this morning's low at 15672 would be the green light for the bears.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 15,820
- bearish below 15,672

Last Thursday's decline for the RUT found support at its uptrend line from November-June (log price scale) and just above its 50-dma. Today's rally, especially with the jam higher into the close, has it now back above its 20-dma near 1107. The pattern supports the idea that we'll see another leg up to the top of its rising wedge pattern, which is the trend line along the highs from September 2012 - July 2013, currently near 1139. A throw-over finish by mid-week next week could see the RUT ring the bell at 1150. The pattern stays bullish as long as this morning's low at 1095 is not broken.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1110
- bearish below 1095

On November 4th the TRAN had closed above the top of its up-channel from June but dropped back inside the channel the next day. It again closed above the channel today with a minor new high but it's pushing higher with a significant bearish divergence against the highs since October 28th. It could continue to press higher but it's a risky place for bulls.

Transportation Index, TRAN, Daily chart

The U.S. dollar almost made it up to its 200-dma last week, now near 81.82, after pushing above its 50-dma. I show a steeper pullback before continuing higher but I wouldn't be surprised to see the 50-dma, now near 80.54, act as support. The next big test for dollar bulls will be the 200-dma and the broken uptrend line from August 2011 - February 2013, currently near 81.90. A rally above 82.00 would be more bullish for the dollar.

U.S. Dollar contract, DX, Daily chart

The dollar's strength has been putting the metals and other commodities under pressure and gold now looks like it could break support at its uptrend line from June-October. But that trend line is acting as support at the moment and as long as the October 15th low at 1251 is not broken there remains the possibility for a stronger rally leg to start from here. I consider it the less likely possibility but it will be the price action over the next couple of days that should answer the question as to whether support is going to hold or not.

Gold continuous contract, GC, Daily chart

There are two other commodity-related charts that I want to show because it highlights some of the disconnect in the current stock market, which is of course more concerned with the Fed's constant injection of money than in such silly things as the health of our economy. Dr. Copper is telling us the patient (economy) is not healthy and typically the stock market reflects the same. But so far, not this time.

The price of copper is generally recognized as one of the better indicators of global economic health and right now it's sending out a distress signal. Today it broke below the September low at 3.19 and suggests lower prices dead ahead. This follows the break of its H&S neckline shown on the weekly chart below. The summer bounce was a back test of the neckline and it appears to be tipping back over now. The first downside target is 2.13 for two equal legs down from February 2011 and then potentially down to about 1.50 (the H&S price objective), which it last saw in March 2009. A collapse in the price of copper, if it comes, should be a strong signal that the stock market should soon follow.

Copper futures contract, HG, Weekly chart

From a broader perspective, the weekly chart of the commodity index is shown below. It has now broken below the August low and looks to be heading lower. It would have two equal legs down from 2011 near 103 so that's the downside potential for now. A lack of demand for commodities is driving prices lower so why isn't the stock market reflecting the same thing?

DJ UBS Commodity index, DJUBS, Weekly chart

The chart below is one I've shown before and it's has only gotten further out of whack. This compares SPX, which is the black price line, to the DJUBS Commodity index, which is the pink price line. They normally trade very closely aligned, which makes sense because both reflect the strength in the economy. Demand for commodities naturally affects the prices paid and when the economy slows so too does demand, which in turn drops the prices of the commodities. Basic Economics 101. The stock market typically leads a slowing economy by about 6 months as analysts see the slowing in consumer and business spending as predictors of slower profits for companies. The stock market should have been following the commodities index but instead the spread between the two has widened since 2011, thanks to the Fed money pouring into the stock market through the banks. The decline in the commodity index is real; the rally in the stock market is false. And when the stock market loses faith in the Fed's ability to hold it up I suspect that gap is going to be closed quickly (which means lower prices for both in the years ahead). As noted on the chart, the stock market rally from 2011 is a Fed-induced bubble and we all know how bubbles end (not well). It really isn't different this time.

SPX vs. DJUBS, Weekly chart

Oil is now getting close to support at its uptrend line from June 2012 - April 2013, currently near 91.80. It could be good for a big bounce as depicted on the chart below. I show a bounce into December back up to about 101 before turning back down in what would be a stronger decline early next year. It's the same story here -- lower demand (and higher production) is causing prices to drop. I don't anticipate that changing anytime soon.

Oil continuous contract, CL, Daily chart

As further evidence of a slowing economy affecting company earnings, the 3rd-quarter earnings season has been mixed at best. Worse, 4th-quarter guidance has been mostly negative. The last figure I saw last week, from Factset, stated 84% of the companies that have issued 4th-quarter guidance have issued negative guidance. The same picture was presented last quarter and that didn't stop the stock market from making new highs so the negative guidance for the 4th quarter does not mean the stock market will head lower from here. It is instead further evidence of the gap shown on the SPX vs. DJUBS chart and it will matter when it matters. Once it matters we'll start hearing the bulls howling in protest that the market shouldn't be selling off because the Fed won't let it. Think again is all I'll have to say.

Tomorrow's economic reports include unemployment claims, which are expected to show 330K new claims. This follows 336K in new claims the week prior and the 4-week average is running near 348K. How anyone could get excited about 204K new jobs in last week's payrolls number is beyond me. People are losing jobs faster than they're gaining them. But of course bad news is good news because it keeps the Fed's foot on the gas pedal.

Economic reports and Summary

New all-time highs for the DOW and SPX keeps the public interested in climbing aboard this northbound train. The trend is your friend and so far the bulls don't have to worry about the bend at the end. I see some more upside potential although not that much. The waning momentum (bearish divergence) at the new highs warns bulls to be careful. I've got us into the final 5th wave of the move up from August to complete the 5th wave of the move up from November 2012. The bearish divergence fits this wave count. The short-term pattern supports higher prices but the longer-term pattern suggests caution by those chasing the market higher. We could end up with a nasty downside surprise at any time.

The rest of the week might go quiet on us as we finish up opex week. Trade carefully and don't rush any trades. This is a tricky spot.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Plays

Healthcare & Technology

by James Brown

Click here to email James Brown

Editor's Note:

Additional Trading Ideas:

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

(bullish ideas)
ADI, AVGO, ADSK, TXN, YHOO, MS, AFCE, CSX, PBI, EHTH, P,



NEW BULLISH Plays

Charles River Labs Intl. - CRL - close: 51.03 change: +0.05

Stop Loss: 49.40
Target(s): 55.00
Current Gain/Loss: unopened

Entry on November -- at $--.--
Listed on November 13, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 418 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
CRL is in the healthcare sector. The company provides services for drug research in the biotech field. The stock has been showing momentum with shares working on their fifth weekly gain in a row. Currently CRL is hovering below short-term resistance near $51.00. Today's high was $51.28. I am suggesting a trigger to open small bullish positions at $51.50. If triggered our target is $55.00.
FYI: The Point & Figure chart for CRL is bullish with a $58.00 target.

Trigger @ 51.50 *small positions*

Suggested Position: buy CRL stock @ (trigger)

Annotated chart:



VeriSign, Inc. - VRSN - close: 55.10 change: +0.37

Stop Loss: 53.75
Target(s): 59.50
Current Gain/Loss: unopened

Entry on November -- at $--.--
Listed on November 13, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.1 million
New Positions: Yes, see below

Company Description

Why We Like It:
VRSN is in the technology sector. The company provides Internet infrastructure for major networks around the world. The company manages major domains like .com, .net, .gov, .edu, .jobs, .tv, .cc, and .name. The stock just closed at new multi-year highs after spending the last three weeks consolidating below resistance in the $54.50-55.00 zone.

I am suggesting a trigger to open bullish positions at $55.25. If triggered our multi-week target is $59.50.
FYI: The Point & Figure chart for VRSN is bullish with a long-term $76.00 target.

Trigger @ 55.25

Suggested Position: buy VRSN stock @ (trigger)

- (or for more adventurous traders, try this option) -

buy the 2014 Jan $55 call (VRSN1418a55) current ask $1.88

Annotated chart:




In Play Updates and Reviews

New Highs for Stocks

by James Brown

Click here to email James Brown

Editor's Note:
The big cap indices (S&P 500 and Dow Industrials) are hitting new highs with another broad-based rally. The NASDAQ set a new 13-year closing high.

We want to exit our NAV and TDC trades at the opening bell tomorrow.


Current Portfolio:


BULLISH Play Updates

Anika Therapeutics - ANIK - close: 31.23 change: -0.37

Stop Loss: 29.75
Target(s): 38.00
Current Gain/Loss: unopened

Entry on November -- at $--.--
Listed on November 12, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 275 thousand
New Positions: Yes, see below

Comments:
Hmm... ANIK underperformed both the broader market and its peers in the biotech industry today. Nimble traders may want to consider buying a dip near $30.00. Officially the newsletter is suggesting a trigger to launch positions at $32.05. If triggered our target is $38.00.

Earlier Comments:
I do consider biotech stocks to be higher-risk, more aggressive trades. We never know when a headline about some clinical trial or FDA approval process could spark a big gap down or gap higher in the stock. I am suggesting small positions to limit our risk.

Trigger @ 32.05 *small positions*

Suggested Position: buy ANIK stock @ (trigger)



CBOE holdings - CBOE - close: 50.65 change: +0.47

Stop Loss: 49.25
Target(s): 57.50
Current Gain/Loss: - 2.1%

Entry on November 11 at $51.75
Listed on November 09, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 530 thousand
New Positions: see below

Comments:
Traders bought the dip in CBOE near its 10-dma and 20-dma and the $50.00 level. I would use today's intraday bounce as a new entry point to launch positions.

current Position: long CBOE stock @ $51.75

- (or for more adventurous traders, try this option) -

Long 2014 Jan $50 call (CBOE1418a50) entry $2.85



Brinker Intl. Inc. - EAT - close: 45.90 change: +0.16

Stop Loss: 44.75
Target(s): 49.75
Current Gain/Loss: + 0.3%

Entry on November 06 at $45.75
Listed on November 05, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.4 million
New Positions: see below

Comments:
Once again shares of EAT rebounded off short-term technical support at the rising 10-dma. I am raising our stop loss up to $44.75.

Earlier Comments:
The latest data listed short interest at 10% of the 65.5 million share float. If this rally continues it could spark some short covering. Our target is $49.75. More aggressive traders could aim higher. The Point & Figure chart for EAT is bullish with a $67.50 target.

I want to urge a little caution if you plan to use the call options. EAT's January options have some relatively wide spreads. The 2014 January $45s seem to be the exception for now but that doesn't mean the spread will stay this narrow (it could get worse).

current Position: long EAT stock @ $45.75

- (or for more adventurous traders, try this option) -

Long 2014 Jan $45 call (EAT1418a45) entry $1.70*

11/13/13 new stop loss @ 44.75
*option entry price is an estimate since the option did not trade at the time our play was opened.



Evercore Partners - EVR - close: 53.00 change: +0.87

Stop Loss: 49.95
Target(s): 59.00
Current Gain/Loss: + 1.0%

Entry on November 07 at $52.50
Listed on November 06, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 439 thousand
New Positions: see below

Comments:
EVR displayed some relative strength. The stock quickly bounced off its morning lows and rallied to a +1.66% gain. This is a new two-week high. Traders could use today's move as a new entry point to launch positions.

Our multi-week target is $59.00. More aggressive investors could aim higher since the Point & Figure chart for EVR is bullish with a $69 target.

current Position: Long EVR stock @ $52.50



Five Below, Inc. - FIVE - close: 52.10 change: +0.24

Stop Loss: 49.65
Target(s): 58.50
Current Gain/Loss: - 0.3%

Entry on November 12 at $52.25
Listed on November 11, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 694 thousand
New Positions: see below

Comments:
FIVE's early morning rally faded but shares still managed to close with a +0.4% gain on the session. I would consider new positions at current levels.

Earlier Comments:
There are plenty of investors who believe FIVE's valuation is too rich. That has led to a rise in short interest. The most recent data listed short interest at 19% of the 46.6 million share float. If FIVE continues to rally it could see a lot more short covering. The recent breakout past round-number resistance at $50.00 should have the bears in a panic. The Point & Figure chart for FIVE is bullish with a $68.00 target.

current Position: long FIVE stock @ $52.25

- (or for more adventurous traders, try this option) -

Long DEC $55 call (FIVE1322L55) entry $1.91



HB Fuller Co. - FUL - close: 49.45 change: +0.70

Stop Loss: 47.65
Target(s): 49.75
Current Gain/Loss: + 7.0%

Entry on October 15 at $46.20
Listed on October 12, 2013
Time Frame: 4 to 8 weeks
Average Daily Volume = 405 thousand
New Positions: see below

Comments:
FUL rebounded off its midday lows and then broke out to a new high. The breakout past resistance near $49.00 is bullish. Our exit target is $49.75 but more aggressive traders may want to aim higher.

current Position: long FUL stock @ $46.20

11/09/13 new stop loss @ 47.65
11/07/13 new stop loss @ 47.40
11/04/13 new stop loss @ 46.95
10/29/13 new stop loss @ 46.75
10/22/13 new stop loss @ 45.75
10/17/13 new stop loss @ 44.95
10/15/13 be careful. FUL hit our trigger on a very brief intraday spike
10/14/13 adjust entry trigger to $46.20 from $46.15



Halliburton Co. - HAL - close: 55.54 change: +1.08

Stop Loss: 53.25
Target(s): 57.50
Current Gain/Loss: + 2.6%

Entry on November 06 at $54.15
Listed on November 04, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 7.8 million
New Positions: see below

Comments:
It was a good day for HAL bulls. The stock quickly rebounded off its morning lows and surged to a +1.98% gain and a new two-year closing high. I am raising our stop loss to $53.25.

Earlier Comments:
Currently our target is $57.50 but we're debating whether to raise that target to $59.50. The Point & Figure chart for HAL is bullish with a $62.00 target.

current Position: long HAL stock @ $54.15

- (or for more adventurous traders, try this option) -

Long 2014 Jan $55 call (HAL1418a55) entry $1.78

11/13/13 new stop loss @ 53.25



Navistar Intl. - NAV - close: 39.75 change: -0.24

Stop Loss: 38.65
Target(s): 44.75
Current Gain/Loss: - 1.2%

Entry on November 11 at $40.25
Listed on November 09, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 824 thousand
New Positions: see below

Comments:
Warning! The market is breaking out to new highs but NAV is not participating. Shares underperformed the market today and is now back below resistance at the $40.00 level. I am suggesting we exit immediately to cut our losses early and make room for a stock that is participating in the market rally.

Exit at the opening bell tomorrow.

current Position: long NAV stock @ $40.25

- (or for more adventurous traders, try this option) -

Long 2014 Jan $40 call (NAV1418a40) entry $3.00*

11/13/13 prepare to exit at the open tomorrow morning
*option entry price is an estimate since the option did not trade at the time our play was opened.



Consumer Staples ETF - XLP - close: 42.97 change: +0.36

Stop Loss: 41.65
Target(s): 47.50
Current Gain/Loss: + 0.5%

Entry on October 29 at $42.75
Listed on October 28, 2013
Time Frame: 9 to 12 weeks
Average Daily Volume = 7.0 million
New Positions: see below

Comments:
XLP delivered a strong move higher (+0.84%) but this ETF closed just below prior resistance in the $43.00 area. I am not suggesting new positions and more conservative investors may want to raise their stop loss.

current Position: long the XLP @ $42.75

- (or for more adventurous traders, try this option) -

Long 2014 Jan $43 call (XLP1418a43) entry $0.71*

11/06/13 new stop loss @ 41.65
10/30/13 FYI: today's session has created a bearish reversal pattern. Look for a dip back toward $42.00.
*option entry price is an estimate since the option did not trade at the time our play was opened.



BEARISH Play Updates

Teradata Corp. - TDC - close: 44.95 change: +1.02

Stop Loss: 47.05
Target(s): 37.00
Current Gain/Loss: - 3.6%

Entry on November 04 at $43.40
Listed on October 31, 2013
Time Frame: 4 to 8 weeks
Average Daily Volume = 4.1 million
New Positions: see below

Comments:
Bearish plays can be tough to trade with the market breaking out to new highs. TDC has spent the last few days hovering below resistance at $44.00. The stock broke through that resistance today and outperformed the market with a +2.3% gain. I am suggesting we exit immediately to cut our losses and move on.

current Position: short TDC stock @ $43.40

- (or for more adventurous traders, try this option) -

Long 2014 Jan $40 PUT (TDC1418m40) entry $0.90

11/13/13 prepare to exit tomorrow morning at the open
11/04/13 triggered at $43.40
11/02/13 adjust entry trigger from $43.50 to $43.40