Option Investor

Daily Newsletter, Saturday, 11/20/2010

Table of Contents

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

Market Wrap

Dow Scores In Final Minutes

by Jim Brown

Click here to email Jim Brown

After spending the entire day in negative territory the Dow managed a last minute run to end the day and the week in positive territory.

Market Statistics

When I said Friday would most likely be range bound and devoid of volatility other than the open I certainly did not expect the Dow to trade in a 40-point range for most of the day. The expiration volatility at the open caused a -60 point decline but after the first hour the volatility disappeared and it was a very boring trading day. The volatility index declined to 18.04 to match a seven-month closing low. Volume was very light for an expiration Friday at only 6.5 billion shares.

The only economic report for Friday was the ECRI Weekly Leading Index, which came in at 124.3 and a new six-month high. This index moves at a snails pace and is mostly ignored unless there is a reversal of a trend. The WLI has been trending higher since early October and is projecting a slow recovery but at least a recovery. You may remember back in May when the index suddenly collapsed from year's high at 134.7 to hit a low of 120.6 in mid July. This reversal of fortunes had analysts glued to the index but now that the trend has solidified to the upside everyone has lost interest.

Next week's calendar is chock full of events as they cram five days of reports into only three days. The biggest event is the FOMC minutes on Tuesday. This is the minutes from the November 3rd meeting where they launched the QE2 program. It will be interesting to know what the Fed was thinking behind the scenes at that meeting. This release at 2:PM on Tuesday should be the end of the trading week. Once this is published there will be a brief period of volatility and then volume will die as everyone leaves for the holiday weekend.

The second most important report is the GDP on Tuesday morning. Expectations are for an upward revision to 2.4% growth from 2.0% in the first version. The upgrade is due to a string of increasingly positive weekly reports that suggest the economy is stronger now than in Q3 and conditions in September had improved over August. The August dip appears to have just been a blip in the process and not a change in direction.

There are several regional reports from Chicago, Kansas City and Richmond but I doubt they will get much play because it is a holiday week. If you had a company that needed to restate earnings or lower guidance this is the week to do it. The odds are good you could slip in under the radar because of the heavy economic calendar and most market watchers reading the Black Friday ads rather than the news feed.

Economic Calendar

Investors will not be the only ones scanning the Black Friday ads next week. Target (TGT) said it expects to post the best holiday sales in three years. Target said those consumers with jobs have started to feel more secure and they are opening their wallets. The company expects same store sales to grow by as much as 4% in Q4. Wal-Mart expects to break a six-quarter streak of same store sales declines. Retailers started early this year with sales labeled as Black Friday deals as early as November 1st. Apparently the traditional Black Friday sales push has turned into a Black November campaign.

Verizon is pushing hard on the holiday sales pitches. One that has been playing on TV for the last several days is the "Buy one Blackberry Curve, get three free." That has got to be piling up the subscribers for Research in Motion. I know the iPhone and Android models are the hottest smart phones but there is still a dedicated crowd that loves the Blackberry. Buy one, get three free is a killer holiday promotion for businesses to use for employees and for families. I am thinking RIMM should have a good quarter.

RIMM Chart

It was a slow news day on Friday but there were some highlights in a few stocks. SalesForce.com rallied +21 after posting earnings with better than expected guidance on Thursday. CRM had been a heavily shorted stock and the good news produced a monster short squeeze.

Walter Energy surged another $9 to $106 after saying on Thursday they were in talks with Canadian miner Western Coal about a $3.3 billion acquisition. Apparently investors liked the deal because WLT spiked to new highs and the acquirer rarely rallies that strongly. Hedge fund Audley Capital had been an activist investor in Western Coal for the last three years and had built up a 25% stake at a cost of about $25 million. At the $11.50 per share offer by Walter that stake is worth about $600 million. That is a pretty good return on your investment.

There were several deals in the coal sector last week with a total value of more than $15 billion. It sure brings home the demand story on a global basis. I wrote about China's peak coal problem in the OilSlick.com newsletter last week and pointed out they use 47% of global coal production but have only 14% of the global coal reserves. 78% of its electricity comes from coal-fired plants. Cut off coal shipments to China and you turn off their lights.

Peabody Energy (BTU) and Cliff's Natural Resources (CLF) are rumored to be on the hunt for acquisition targets. Massey Energy (MEE) and James River Coal (JRCC) are considered to be targets.

Register for the OilSlick.com newsletter and receive free daily updates and commentary on the energy sector. Register here

Green Mountain Coffee Roasters (GMCR) said it would restate financials for 2007, 2008, 2009 and the first three quarters of 2010 due to errors found in those statements. The company said it found the errors during an audit triggered by an SEC investigation into its revenue recognition practices. The errors over the four years totaled about $12 million in income overstatements based on revised recognition parameters. The stock dropped sharply in the morning in anticipation of the announcement and was halted briefly after the announcement. When it reopened in after hours it spiked +10% because the amounts were less than expected.

GMCR Chart

Boeing is preparing to announce the seventh delay in the 787 Dreamliner production schedule. At least this is what several analysts are projecting after one of the planes caught fire during a test flight. One analyst claims this next delay is already baked into the price after the -$10 drop since the fire was reported. Boeing is currently $63 and critical support is $60.

Boeing Chart

Harrah's Entertainment officially canceled its planed IPO on Friday due to lack of interest in the offering. The expected price was $15 to $19 and they were offering 31 million shares for a target of $470 million from the sale. Initially they blamed it on GM sucking all the IPO money out of the market but I believe it was more lack of interest in Harrah's than GM. I warned about the IPO last week and suggested it was one I would avoid because of the $22 billion in debt. Apollo Management Group and Texas Pacific Group paid $17.1 billion and took on $12.4 billion in debt in 2007 to take Harrah's private. Since then they have added nearly $10 billion in debt and that does not suggest a positive cash flow. If the IPO had gone off at the $19 price it would have valued the company at $6 billion and only a third of what they paid.

The financial crisis killed the U.S. casino business and those private equity firms are in trouble on this deal. In the IPO they were only offering 19% of the company for sale and doing so to raise some money for remodeling and debt payments. Also, having a public stock would offer them advantages for raising additional funds in the future. Harrah's has lost $634 million in the first nine months of 2010 making the $470 million IPO questionable at best. Interest payments are now 22% of Harrah's revenue and roughly $1.47 billion over the last nine months. It is unknown if Harrah's will attempt to refile the IPO at a cheaper price later this month. Given the rate they are bleeding cash I would say the odds are good.

The Federal Reserve purchased just under $31 billion in securities last week under the new QE2 program. They will purchase more on Monday and Tuesday next week then resume the following week. The Treasury will sell $99 billion in 2s, 5s, and 7-year notes next week. What is wrong with this picture? With the Fed buying $30 billion for every $90 billion the Treasury sells it seems like a losing battle to me. That is probably why the first $1.7 trillion in QE1 did not rescue the economy. The government is printing debt faster than the Fed is printing money.

The Ireland story has cooled and it appears they will get a bailout somewhere in the range of 60 to 120 billion euros. This will help recapitalize their banks and provide some stability. The problem mushroomed recently when depositors began withdrawing money from the banks in anticipation of a collapse of the banking system. If Ireland had imploded Spain and Portugal would have been next in line. Banks in those countries have already seen some deposit flight but not like Ireland. The fix for Ireland will fix those other countries as well but probably only for a few months.

When Greece defaults in the second quarter of 2011 it will create an entirely new wave of fiscal instability in the EU. As each day passes the potential for a Greek default increases. Currently 90% of Greek bonds are covered by Greek law. That means they could officially default by passing a new law cutting the value of the bonds in half and effectively cut their debt in half with no recourse by the bondholders. It would be ugly but better than the other option. Greek bonds are only worth 50% of face value on the market today anyway. Currently they are accepting progress payments from the IMF and others under a deal worked out several months ago. These obligations are NOT restructurable. In other words they can't default on those obligations and they will never go away.

Since Greece will need additional funding in the years ahead they can't stiff the banker. (IMF) They have to chose who to stiff and it comes down to the current bond holders. If they continue to take IMF money and pay off the bondholders they are effectively taking the equivalent of money from a loan shark to pay off a loan from their mother. Loans from mothers can be restructured or simply ignored forever. Defaulting on loans from a loan shark will get you some broken limbs and hospital time. Greece can't pay its debts and has admitted it if you read between the lines. That means they have to default on the bonds to cut down on the amount of loans they need from the IMF. Sovereign debt lawyers are betting on a second quarter default. That gets them two more progress payments from the IMF and EU before they run out of options.

Ireland's problem and its impact on our markets will go away but there are bigger Eurozone problems in our future. An official default by Greece could be the first in a long line of dominos to fall.

China announced on Friday night it was raising the reserve rate for banks for the second time this month and the fifth time this year. Banks have until November 29th to transfer another 0.5% of their total assets to the central bank. That increases the reserve rate to 18% and Goldman Sachs economists expect this rate to rise again by year-end. U.S. banks have a reserve ratio of 10%. The central banks uses these reserves to buy about $1 billion a day worth of dollars, euros and other currencies to keep the Chinese renminbi from appreciating.

China has resisted pressure from the U.S. and others to halt this daily currency intervention and let the renminbi rise in value. Beijing is forcefully arguing today that the U.S. QE2 is a de facto devaluation of the dollar. Actually they are right. China expected Bernanke to mention China as a currency manipulator in his Friday speech so they took the action before he spoke. Bernanke did point a finger at China in his speech and blaming "persistent imbalances that represent a growing financial risk" and blamed "export countries with undervalued currencies" for retarding growth in developed countries. Economists actually believe China is taking the best course of action for China in holding down the value of the renminbi. There are other actions they could take but buying dollars is considered a less forceful move. Reportedly the central bank is prepared to do whatever necessary to fend off the impact of a cheaper dollar.

They had been expected to raise rates to slow the economy but that would also raise the value of the currency. This leaves them with a conflict. If they do nothing inflation will increase. If they raise rates the currency will rise. It appears they elected to buy dollars to keep the currency low and maintain exports. The relative weakness of the renminbi to the dollar has been crucial to China's multiyear export boom and the reason the country is growing at a 10% rate.

Friday's action did not irritate the U.S. markets because it was the lightest of the multiple alternatives China could have taken. Unless some new event causes China to ratchet up their anti inflation fight we should be free of the China cloud for the next couple of weeks. When the next CPI report comes out in three weeks this problem will escalate again unless inflation suddenly declined but that would be so surprising I would suspect a bogus report. That would allow them to "overlook" the problem until the QE2 program is out of the headlines and the holiday shopping season behind us.

Finance heads from all over the world accosted Bernanke in Frankfurt on Friday. He and the Fed are taking some serious heat on the QE2 program. Dozens of nations have complained that weakening the dollar will damage their economies. The German Finance Minister called the policy "clueless." Bernanke answered his critics at the beginning of his speech saying, "The best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar, as well as to support the global recovery, is through policies that lead to a resumption of robust growth in a context of price stability in the United States."

He stressed that sluggish growth, declines in inflation and an unemployment rate that has hovered near 10% for months convinced the Fed to take aggressive action. Other Fed heads came to Bernanke's aid at home and a prior hawk switched sides to come to his defense. Minneapolis Fed President Narayana Kochertakota told a conference in Chicago "I believe that QE is a move in the right direction." Cleveland Fed chief Sandra Pianalto also defended the action. However, Philly Fed President Charles Plosser is not drinking the kool aid and continues to claim the costs and risks of the program outweigh the benefits. Fed governor Kevin Warsh said the economy faced problems that monetary policy could not fix. He believes businesses need a firm regulatory and tax environment that allows them to plan for years into the future. Overall the Bernanke speech had very little impact on the market.

Unemployed workers are facing a December 1st deadline for the end of unemployment benefits. Nearly two million unemployed workers will stop receiving unemployment checks as of Dec 1st. The federal extensions have given unemployed workers an additional 73 weeks of benefits in addition to the standard 26 weeks of coverage provided by the states. Prior extensions have been paid to 9.5 million households and injected around $7 billion a month into the economy. A bill to further extend benefits was passed in the House by a vote of 258-154 but lacked the 275 votes needed to move the bill forward under the fast track rules. Republicans did not vote for it because there was no provision for funding. It would have added to the deficit. Instead, they wanted to use unspent funds from the stimulus bill to fund the extension. The odds are extremely good that the bill will eventually pass but it could be later rather than sooner with benefits retroactive. Analysts believe it will be a three-month extension. While I disagree in principal to more than two years of unemployment benefits, (why work), I think cutting off two million people three weeks before Christmas is not a good economic plan.

There are currently 8,854,206 people collecting unemployment. That is declining by about 250,000 per month as people run out of benefits and drop off the list. At the same time the number of people on food stamps is increasing dramatically. At the end of August there were 42,389,619 people on food stamps. That was an increase of 553,379 from July. The number of people on food stamps has increased +17% since August 2009. John Vogel pointed out there were 19,720,255 households on food stamps, an increase of 284,877 from July. That is a 19% increase over August 2009. Another survey showed that 42% of Americans are on some kind of government welfare and the number is growing. Obviously those unemployed and on welfare are not paying any significant amount of taxes leaving those of us who are employed to foot an ever growing welfare bill. The American system is broken. If it does not recover soon we are going to be in serious trouble even worse than the 2008 recession.

Friday was the calmest expiration Friday we have had in a long time. Despite the dip at the open the indexes slowly recovered the lost ground and moved back to strong resistance levels ahead of the normally bullish holiday week. The S&P dipped to 1189 but ended with a minor +3 point gain and a close right at 1200. The Dow eked out a close just over 11,200.

I view this close at resistance as a perfect setup for next week's normally bullish activity. In normal years the Thanksgiving week tends to have a bullish bias on low volume. Consumers seem to be in a holiday spending mood and that carries over into their investments.

If there are no new external events like Ireland or China to weigh on the markets the odds are pretty good we will move over those resistance levels and trigger some additional short covering. For the S&P the range between 1200 and strong resistance at 1225 is congested but after last week's -4% decline the bulls may be getting ready to run again. Granted -4% is not much of a correction compared to the +18% rally since the August lows but it was close enough to a 25% retracement that we can call it a correction and hope nobody notices.

The dip at Friday's open reinforced support at 1190 and the close reinforced resistance at 1200. This narrowed range gives us a clear trading plan for next week. Long over 1200, short below 1190. Analysts who get paid a lot more than I do are still projecting 1315 to 1325 for the S&P by year-end. I would be thrilled to see it happen but I am not holding my breath. A decent more over 1200 next week could rekindle the buying but getting over 1225 is still going to be a challenge.

S&P Chart

The Dow chart is as close to perfect as you can get in giving you a clear trading signal. The rebound on Friday returned exactly to strong resistance at 11,200 and Wednesday's dip confirmed strong support at 11,000. For active traders you could play the inside range but cautious traders can hardly go wrong buying the breakout or shorting the support failure. Just remember volume should be light so expect some head fakes.

Dow Chart

Tech stocks could lead us higher next week. Tech stocks normally outperform other sectors around Thanksgiving. Why retail investors tend to favor techs at this time of year is unknown but it is a historical trend.

Resistance from April at 2520 has come back into play but with only a 2 point hedge from Friday's close, almost any positive move should push us over that level and trigger additional short covering. I seriously doubt we will see a retest of the 2592 high from November 9th but we could make significant progress if the news flow does not get in the way. Support is now 2500.

Nasdaq Chart

Russell Chart

The Dow Transports rebounded back through resistance at 4800 and are just one good day away from retesting the highs at 4950. A breakout by the transports could energize the Dow and stimulate bullish sentiment. Transports and copper are considered leading indicators for the economy. Copper futures also rebounded the last three days but this time that was related more to the dollar weakness and China than economic recovery.

Dow Transports Chart

The dollar rally may have run its course now that the Euro debt problems are easing and the Fed is on a $30 billion a week pace for securities purchases. If the dollar declines, stocks and commodities will go up. For us as traders we don't want to fight the Fed and even China with all its resources is having a tough time in that same battle for currency values.

Dollar Index Chart

In summary I believe the markets are poised to move higher during Thanksgiving week assuming there are no further surprises from overseas. This week normally has a bullish bias and the markets closed right at resistance. ANY further upward movement should trigger additional short covering.

Volume will be light and that could accentuate any moves. I continue to recommend buying dips to S&P 1190 and 1175.

Don't fight the Fed!

Jim Brown

It's a recession when your neighbor loses his job: it's a depression when you lose yours. Harry S Truman

Index Wrap

A Rebound, But For How Long?

by Leigh Stevens

Click here to email Leigh Stevens

This past week's price action had the pattern I anticipated, in that an initial decline was followed by another rally. After the major indexes registered short-term oversold readings basis the hourly charts (e.g., per my first chart below), a good-sized rebound followed. My further expectations are for a second, probably more prolonged, decline after this recent rally runs its course.


A chart I wouldn't normally feature but one of interest in its technical aspects, is seen with the hourly Nasdaq Composite (COMP) Index. When anticipating a short to intermediate-term reversal after a prolonged uptrend, I pay close attention to any well-defined up trendline of several weeks duration. Once there is a decisive downside penetration of such an up trendline, this becomes a reversal 'signal'. Often the first rebound after a trendline break carries the index back to the trendline, where selling again drives prices lower. A mentor of mine from my Wall Street days used to say that such a previously broken trendline becomes a "kiss of death" trendline due to strong resistance back at that line; what had been support reverts to later resistance.

Of trading interest also is seen above with the 21-hour Relative Strength Index (RSI). The recent dip of this RSI into the 25-30 oversold zone was the first such instance since August. Once into this (oversold) zone, a subsequent rally almost 'had' to be anticipated. In the context of stocks rising for months, a first significant sell off (especially with more dollars sloshing though the system with QE) is going to find buyers. A second decline, often not as much, as more bearish events capture the attention of market participants.

Typically a correction, especially after an extended advance, will have a first decline that's followed by a rally, but when the rebound runs its course, a second decline follows which is more extended than the first sell off and where the investment outlook is not at the bullish pitch it was at previously.



Upside momentum in the S&P 500 (SPX) index has stalled and the dominant up trendline broken. The short-term trend is down, while the intermediate and long-term trends remain up. A decline below 1160 would turn the intermediate-term trend mixed to lower.

Conversely, SPX would 'regain' its up trendline by a move above 1227-1228 resistance and suggest that the intermediate uptrend was back on solid footing. On a closing basis, SPX (unlike Nasdaq) ended the week above its 21-day moving average, which shows that the index hasn't fallen apart. However, the chart pattern suggests to me that there's a further decline coming.

If SPX rebounded to the 1207-1210 area, a second decline starting from there might end up around 1130-1127. My current expectation is for a second down leg that carries farther than the first. I don't have a particular target as to an end point in SPX's most recent rally but don't think much higher; and don't think that, from wherever it starts, the prospects for a second decline is one that carries farther than the 54 points (peak to trough) seen in the first pullback.

Near support is in the 1173-1178 area, then at 1160. Fairly major support should be found in the 1130 area. Near resistance is at 1207, then at 1227, at the prior intraday high and extending up along the prior up trendline.

In terms of my technical indicators seen above, RSI finished the week at a 'neutral' 55. My sentiment indicator finished the week a bit higher in terms of bullish expectations than I think is warranted, given the risk of a further correction.


The S&P 100 (OEX) chart is mixed in the same way as with the larger SPX index. Prices are no longer advancing above the prior up trendline as upside momentum has stalled; such trendlines being a good visual representation of momentum. Another key gauge of support is holding up so far, as suggested by the most recent two Closes above the 21-day moving average.

Although OEX closed above its 21-day moving average, which is a bullish plus, I don't think we've seen the end of the recent correction and my expectation is for another down leg ahead.

Near support is evident in the 530 area, then at 520. Near resistance is in the 550-553 area. A close back above the up trendline and the prior 553 intraday high would regain OEX's previous upside momentum.


Part of my outlook last week (11/13) regarding the Dow 30 (INDU) was that "I anticipate some further weakness in the early part of the week, but a rally by mid-week or so (it came Thursday) as a likely return volley by the bulls but which isn't likely to be as robust as before this past week's sell off."

We'll see how far INDU can carry on any extension of its recent (short-term) oversold rebound. At its 11203 close this past week, the Dow was just below support implied by its 21-day average. I anticipate another decline ahead after any further upside progress. Further upside for the recent rebound might carry to the 11280-11310 area but not as likely to or above 11400-11415.

Key chart resistance is at 11413 at the previously broken up trendline, extending to the prior INDU intraday high around 11450. Pivotal support is in the 11000 area, with next support projected at 10880.

I don't see sufficiently strong bullish patterns to easily get INDU back into its previous uptrend channel or back above 11400. Stocks in the Average looking capable of strong further upside are few in number; i.e., CAT, IBM, KO, MCD, and maybe XOM.


The Nasdaq Composite (COMP) Index chart is still mixed in its pattern, after its steep up trendline was pierced. So far the rebound is not impressive and COMP remains under support implied by its 21-day moving average. I'd be surprised if the Composite can challenge resistance in the 2600 area. Assuming it does, this would be a further opportunity to be short Nasdaq, as I anticipate another downswing after this recent recovery rally runs its course.

Key resistance is in the 2600 area, extending to around 2632. Near support is noted at 2460, then at 2400.

As noted with my S&P 500 commentary, an overbought extreme for saying extremes in the RSI is past, with a 'neutral' 55 reading on Friday. Bullish sentiment seems high for a market at risk for a further correction.


The Nasdaq 100 (NDX) chart remains mixed, given the slowing of upside momentum, signaled prominently by the break of its steep up trendline. Such high angle ascent rallies can go on for weeks, but not usually months; not in stocks anyway. This past week's snap back rally from a short-term oversold, isn't hugely impressive although the index did gap higher into Thursday. I can't say the current rally has run its course and we have the added wrinkle of heading into a big holiday week.

Key near resistance is 2150, then 2200. I look for another decline once this current rally runs its course; a second decline in a bearish correction typically falls further than the first sell off measured peak to trough.

Near support is 2090, then 2050.

I'm bearish to the extent that the typical corrective pattern is a sell off, a rally (and not tending toward a robust rebound), followed by a bigger point decline than the first sell off. The corrective pattern (within a still larger bullish trend) I'm anticipating seems mostly likely to complete in this manner.


Low volume days only from the Wednesday low into the Thursday-Friday rally. A tepid response from the bulls on this rebound. The bloom may be off the tech 'rose'.

My analysis is that the Nas 100 is setting up for another sell off, either from the 52.5 area or perhaps 53.0. It looks least likely to me currently to expect the 54 level in the Q's to be seriously challenged. I'm a seller on further rallies from here.

Near support: 51.3

Next support: 50.0

Near resistance: 53.0

Major resistance: 54.0


A key bullish technical test for the Russell 2000 (RUT) index would be for it to 'regain' (trade back above) its recently pierced up trendline seen on the daily chart. My 729 red arrow 'resistance' highlight is because this level puts RUT (on Monday) at its previously broken up trendline; what was support 'becoming' resistance.

Absent RUT resuming its prior strong advance, the common outcome in a correction is one leg down, another up (a recovery rally), followed by another downswing; e.g., from the 725-730 area to 680-675.

Near support is in the 700 area, extending to 690. Near resistance is at 729-730, extending to 738-740. A close above 740 that wasn't reversed the next day would renew the strong uptrend dating from the late-August low.


New Option Plays

Healthcare Services & Railroads

by James Brown

Click here to email James Brown

Editor's Note:
In spite of the recent volatility the market is still poised to move higher. We want to take advantage of some recent moves as we look toward yearend. MCK is a bullish candidate in the healthcare services area and UNP is a bullish candidate in the railroad industry.

- James


McKesson Corp. - MCK - close: 66.00 change: +0.61

Stop Loss: 63.75
Target(s): 67.95, 70.75
Current Option Gain/Loss: + 0.0%
Time Frame: 6 to 8 weeks
New Positions: Yes

Company Description:
McKesson Corporation, currently ranked 14th on the FORTUNE 500, is a healthcare services and information technology company dedicated to helping its customers deliver high-quality healthcare by reducing costs, streamlining processes, and improving the quality and safety of patient care. Over the course of its 177-year history, McKesson has grown by providing pharmaceutical and medical-surgical supply management across the spectrum of care; healthcare information technology for hospitals, physicians, homecare and payors; hospital and retail pharmacy automation; and services for manufacturers and payors designed to improve outcomes for patients. (source: company press release or website)

Why We Like It:
MCK has turned itself into a healthcare services company and management just announced plans to buy US Oncology for $2.16 billion on November 1st. Shares of MCK initially spiked higher on the announcement but then spent the next two weeks correcting lower. Traders have bought the dip near prior resistance and its 200-dma. This rebound looks like a new entry point to buy calls. I am suggesting new positions now. More conservative traders may want to wait for a dip near $65.00 before initiating positions. We'll use a stop loss at $63.75. Our first target is $67.95. Our second target is $70.75. The 2010 highs stand at $71.49. FYI: The P&F chart is bullish with an $85 target.

Suggested Position: Buy the 2011 January $65 calls (MCK1122A65) current ask $3.20

Annotated Chart:

Entry on November 22nd at $ xx.xx
Earnings Date 01/26/11
Average Daily Volume = 2.7 million
Listed on November 20th, 2010

Union Pacific - UNP - close: 91.82 change: +0.13

Stop Loss: 88.99
Target(s): 96.25, 99.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Company Description:
Union Pacific Corporation owns one of America's leading transportation companies. Its principal operating company, Union Pacific Railroad, links 23 states in the western two-thirds of the country. Union Pacific serves many of the fastest-growing U.S. population centers and provides Americans with a fuel-efficient, environmentally responsible and safe mode of freight transportation. Union Pacific's diversified business mix includes Agricultural Products, Automotive, Chemicals, Energy, Industrial Products and Intermodal. The railroad emphasizes excellent customer service and offers competitive routes from all major West Coast and Gulf Coast ports to eastern gateways. Union Pacific connects with Canada's rail systems and is the only railroad serving all six major gateways to Mexico, making it North America's premier rail franchise. (source: company press release or website)

Why We Like It:
UNP just raised its dividend again for the second time this year and the stock has garnered some positive analyst comments recently. Bigger picture UNP looks very overbought but instead of correcting lower the stock has been consolidating sideways. Now after two weeks of churning UNP is poised to breakout higher again. The November highs are in the $92.50-92.75 zone. I am suggesting a trigger to buy calls at $92.85. If triggered our targets are $96.25 and $99.75.

Trigger @ 92.85

Suggested Position: Buy the 2011 January $95 calls (UNP1122A95)

Annotated Chart:

Entry on November xxth at $ xx.xx
Earnings Date 01/20/11
Average Daily Volume = 2.9 million
Listed on November 20th, 2010

In Play Updates and Reviews

A Few New Highs

by James Brown

Click here to email James Brown

Editor's Note:

We had a few new highs on the play list this Friday. Overall bulls are still in control. Financials are still lagging but stocks in general look poised to move higher. We are exiting a couple of bearish plays.


Current Portfolio:

CALL Play Updates

Ansys, Inc. - ANSS - close: 48.30 change: -0.17

Stop Loss: 44.90
Target(s): 49.50,
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

11/20 update: ANSS is still consolidating sideways in what is starting to look like a pennant formation. More nimble traders may want to consider buying calls on a dip near $47.50. Alternatively you could wait for a breakout to new highs over $50.00. At the moment I want to keep our trigger at $46.75 but we ANSS doesn't correct in the next couple of days we'll re-evaluate an entry point.

Buy-the-dip trigger @ 46.75

Suggested Position: Buy the 2011 January $50.00 calls (ANSS1018L50)

Entry on November xxth at $ xx.xx
Earnings Date 02/24/11 (unconfirmed)
Average Daily Volume = 651 thousand
Listed on November 13th, 2010

Caterpillar - CAT - close: 83.97 change: +0.86

Stop Loss: 79.40
Target(s): 84.85, 89.50
Current Option Gain/Loss: +30.0% & +55.5%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

11/20 update: CAT has seen a strong round in just the last couple of days and the stock closed at new two-year highs. Shares could hit our first target at $84.85 soon. Keep in mind that CAT has found tough resistance in the $85.50-86.00 zone back in 2007 and 2008. We might see this stock rally toward $86 and pull back before moving much higher.

Earlier Comments
Our first target is $84.85. We want to exit the majority of our position here. We'll set a secondary target at $89.50 but again I warn you the $85 level should be tough resistance.

Current Position: Long the December $85 calls (symbol: CAT1018L85)
Entry @ $1.40

Double Down
New Position: Buy the December $85 calls (CAT1018L85), current ask $1.17

Entry on November 9th at $ 81.75
Earnings Date 01/27/11
Average Daily Volume = 7.7 million
Listed on November 6th, 2010

CH Robinson Worldwide Inc. - CHRW - close: 72.85 change: +0.60

Stop Loss: 69.90
Target(s): 74.75, 79.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes

11/20 update: CHRW is a new play from Thursday night. I was hoping for a little pull back and set a trigger to buy calls at $71.75. The stock dipped to $72.07 on Friday before rebounding. I'm concerned shares might run away from us so I'm suggesting new positions now. I normally hate chasing stocks but CHRW just started to breakout from the recent consolidation pattern on Thursday. More conservative traders may want to wait. The $73.25 highs could still be resistance and it wouldn't surprise me to see CHRW retest $72.00-71.50 again before moving higher. Please note I'm adjusting our targets to $74.90 and $79.50. Our stop is unchanged at $69.90. FYI: The Point & Figure chart is very bullish with a $92 target.

Open positions now at current levels. I prefer the January calls.

Suggested Position: Buy the December $75.00 calls (CHRW1018L75) current ask $0.55

- or -

Suggested Position: Buy the January $75.00 calls (CHRW1122A75) current ask $1.25

Annotated Chart:

Entry on November 22nd at $ xx.xx
Earnings Date 02/03/11
Average Daily Volume = 1.1 million
Listed on November 18th, 2010

Cliffs Natural Resources - CLF - close: 69.92 change: +2.12

Stop Loss: 64.75
Target(s): 71.50, 74.75
Current Option Gain/Loss: +32.2%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

11/20 update: Commodity stocks continued to bounce on Friday and CLF outperformed the S&P with a +3% gain. If you're looking for an entry point I would wait for a dip near $68.50. Keep an eye on the dollar. Weakness in the dollar should be bullish for commodity-related issues.

Current Position: Long the 2010 December $70.00 CALL, Entry @ $2.42

Entry on November 12th @ 67.00
Earnings Date 02/17/11
Average Daily Volume = 4.3 million
Listed on November 1, 2010

Costco Wholesale - COST - close: 66.56 change: +0.15

Stop Loss: 62.90
Target(s): 69.00
Current Option Gain/Loss: + 60.0%
Time Frame: 3 to 4 weeks
New Positions: No

11/20 update: Retailers were still showing some strength on Friday but I'm still a little concerned about COST's bearish reversal on Thursday. There wasn't much follow through lower but if you're looking for a new bullish entry point I'd wait for a dip or bounce near the $65.00 area. Of course that requires COST to slip under short-term support at $66.00 first.

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

Current Position: December $65.00 calls (symbol: COST1018L65)
Option Entry @ $1.50

Entry on November 8th at $64.50
Earnings Date 12/09/10
Average Daily Volume = 3.4 million
Listed on November 6th, 2010

Express Scripts - ESRX - close: 53.38 change: +0.39

Stop Loss: 49.65
Target(s): 53.95, 57.25
Current Option Gain/Loss: +60.6%, and +35.7
Time Frame: 5 to 6 weeks
New Positions: Yes, wait for a dip

11/20 update: ESRX extended its gains to three days in a row and shares hit new five-month highs on Friday. I don't see any changes from my Thursday comments. If you're looking for a new entry point I would watch for a pull back toward $52.00. Keep your position size small. Our first target to take profits is at $53.95. I'm setting a secondary target at $57.25.

We only have half a position open.

Current Position: Long the 2010 December $52.50 calls (ESRX1018L52.5) Entry @ $1.22
- or -
Current Position: Long the 2011 January $52.50 calls (ESRX1122A52.5) Entry @ $2.10

Entry on November 18th at $51.81
Earnings Date 02/24/11
Average Daily Volume = 4.3 million
Listed on November 17th, 2010

Humana Inc. - HUM - close: 56.03 change: -0.78

Stop Loss: 51.75
Target(s): 59.75
Current Option Gain/Loss: -13.1%
Time Frame: 4 to 6 weeks
New Positions: Yes, look for another dip

11/20 update: As expected HUM started to decline again. I suspect that HUM will retest $55 and possibly its 50-dma again before moving higher. I'm suggesting readers buy calls on the next dip near $55.

Current Position: Long the 2011 January $55 calls (HUM1122A55) Entry @ $3.80

Entry on November 18th at $55.05
Earnings Date 11/01/10 (confirmed)
Average Daily Volume = 2.1 million
Listed on October 16th, 2010

iShares DJ Financial ETF - IYF - close 53.77 change +0.00

Stop Loss: 52.90
Target(s): 57.50, 59.75
Current Option Gain/Loss: -65.0%
Time Frame: 6 to 8 weeks
New Positions: Yes

11/20 update: The financial sector was a laggard on Friday with the major banking indices closing in negative territory. The IYF managed to rebound from another test of its 50-dma and it closed unchanged on the session. I would use this bounce as a new bullish entry point since we have a relatively tight stop loss at $52.90. More conservative traders may want to wait for a new close over $54.00 as confirmation of the rebound.

Current Position: Long the December $55.00 CALLS, entry @ $2.00

11/20/10 Use the bounce as a new entry point (call @ $0.70)

Entry on November 9th @ 55.00
Earnings Date N/A (unconfirmed)
Average Daily Volume: 1.0 million
Listed on November 4, 2010

Nike Inc. - NKE - close: 85.81 change: +3.34

Stop Loss: 79.90
Target(s): 86.75, 89.50
Current Option Gain/Loss: +80.0%
Time Frame: 4 to 6 weeks
New Positions: Wait for a dip, see below

11/20 update: Friday was a big day for NKE. It looks like the +15% increase in the company's dividend was bigger news than expected. The stock screamed higher on Friday morning and never let up. NKE closed at new highs with a +4% gain on the session. The intraday high was $86.32 and our first target is $86.75. I am not suggesting new bullish positions at this time. Wait for a dip or a bounce near $84.

Current Position: Long the December $85.00 CALLS (symbol:NKE1018L85) Entry @ $1.15

Entry on November 11th at $83.00
Earnings Date 12/21/10
Average Daily Volume = 2.3 million
Listed on November 6th, 2010

VimpelCom Ltd - VIP - close 15.80 change -0.02

Stop Loss: 14.80
Target(s): 16.75, 17.75
Current Option Gain/Loss: -19.0%
Time Frame: 6 to 8 weeks
New Positions: Yes, on dips

11/20 update: There is no change from my previous comments on VIP. The stock is still consolidating sideways but looks poised to breakout higher. I have been suggesting entries on dips near $15.50 and VIP dipped to $15.56 on Friday. FYI: VIP is due to report earnings around Dec. 2nd.

Current Position: December $15.00 CALLS, Entry @ $1.05

Entry on November 8, 2010 @ 15.60
Earnings Date 11/24/2010 (unconfirmed)
Average Daily Volume: 3.5 million
Listed on November 3, 2010

PUT Play Updates

Lubrizol Corp. - LZ - close: 105.08 change: +0.08

Stop Loss: 110.25
Target(s): 100.50
Current Option Gain/Loss: +13.7%
Time Frame: 3 to 4 weeks
New Positions: No

11/20 update: LZ managed to eke out a minor gain on Friday but the trend of higher lows is still in place and the short-term outlook remains bearish.

Current Position: Long the December $105 puts (symbol:LZ1018X105)
Entry @ $2.90

Entry on November 10th at $107.68
Earnings Date 02/03/11 (unconfirmed)
Average Daily Volume = 525 thousand
Listed on November 9th, 2010


Oceaneering Intl. Inc. - OII - close: 70.98 change: +1.13

Stop Loss: 71.05
Target(s): 64.50, 62.25
Current Option Gain/Loss: -31.0%
Time Frame: 3 to 4 weeks
New Positions: No

11/20 update: The energy sector continues to show strength and OII rallied to $71.09 intraday. That was enough to hit our stop loss at $71.05 and close this trade. We knew this was an aggressive trade trying to pick a top after the Nov. 12th reversal but there hasn't been any follow through.

Closed Position: Long the December $65.00 puts (OII1018x65) Entry @ $1.45, exit @ $1.00 (-31%)

Entry on November 15th at $69.21
Earnings Date 02/17/11
Average Daily Volume = 1.0 million
Listed on November 13th, 2010

Research In Motion - RIMM - close: 58.66 change: +1.41

Stop Loss: 60.25
Target(s): 55.05, 53.00
Current Option Gain/Loss: -29.2%
Time Frame: 1 to 2 weeks
New Positions: No

11/20 update: I am giving up early on RIMM. After the failed rally near $60 and its 200-dma it looked like shares might see a larger correction. Unfortunately there has not been any follow through lower. Now the stock is inching higher again and looks ready to challenge resistance near $60 again. I am suggesting an early exit now to limit our losses.

Closed Position: Long the December $55 puts (RIMM1018X55) Entry @ $2.53 , exit now current value @ $1.79 (-29.2%)

Entry on November 16th at $57.28
Earnings Date 12/16/10
Average Daily Volume = 17.6 million
Listed on November 15th, 2010