Option Investor

Daily Newsletter, Saturday, 2/19/2011

Table of Contents

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

Market Wrap

Different Scenario, Same Result

by Jim Brown

Click here to email Jim Brown

Friday's market skipped the obligatory dip at the open and declined significantly in the afternoon on a large sell program but investors bought the dip again despite possible event risk over the three-day weekend.

Market Statistics

The sharp afternoon sell off was a shot of adrenalin for both bulls and bears alike. The bears were suddenly awakened from their misery of another day of gains by the tantalizing prospect the long awaited sell off was beginning. The bulls suddenly saw the chance for a major pullback for a "real" buying opportunity. Unfortunately for both the dip never really achieved its potential because impatient investors jumped the gun and powered the Nasdaq and S&P back into positive territory.

Eventually both sides will get the meaningful dip they want and that should power an even stronger rally once the fear of buying the top has evaporated.

There were no economic reports of consequence on Friday. The Risk of Recession for January declined to 21% from 24%. This is the percentage of risk the country will enter a recession over the next six months. This is the lowest level since 2007.

The Weekly Leading Index declined fractionally to 129.5 from 130.2 but the smoothed, annualized growth rate component rose to 4.9% from 4.6%. The WLI has slowed its climb from the bottom but has failed to reverse. It has posted several fractional declines in recent weeks but they were followed by similar increases. This week's reading is only 0.7 from last week's high. The positive trend is still intact but the rate of climb is slowing.

Reports due out next week include the Richmond Fed Manufacturing Survey and the Kansas Fed Survey. I doubt those will be blowouts like the Philly Fed Survey last week but they should both be positive and confirm the continuing recovery.

The first revision in the Q4 GDP will be released on Friday with a minor increase inspected.

One event I added this week is the speech by the Saudi Oil Minister Ali al-Naimi on Tuesday at the International Energy Forum in Saudi Arabia. This forum marks the 20th anniversary of the dialog between producing countries and consuming countries that started in 1991. More than 96 countries will be attending the forum. One topic the forum will discuss is the collection and distribution of data and analysis with the aim of achieving market transparency. I would be truly amazed if we ever achieved any real transparency because it would be counter productive to OPEC. Since the OPEC nations are the ones who publish numbers that not even the other OPEC countries will believe it should be interesting to see what comes out of this forum. When OPEC management produces reports they sometimes have to resort to information from third party tanker trackers to get reliable production information from some OPEC nations.

As Saudi Arabia Oil Minister Al-Naimi is the most influential figure in OPEC, I doubt he will make any earth shaking pronouncements but his speech will probably move energy prices.

Economic Calendar

In other economic news on Friday China boosted its reserve rate by 50 basis points only ten days after raising interest rates. Friday's move will force banks to send another $55 billion to the central bank and take that money out of circulation.

The worry over a future slowdown in demand from China sent fertilizer stocks lower but personally I don't see the connection. I understand consumer loans will slow and consumer demand for products will eventually slow as China fights inflation but people still have to eat. Why wheat demand would decline significantly is a mystery. It is even more of a mystery when nearly every headline you read is talking about food inflation in Asia and around the world. The way to reduce that inflation is produce more food and that requires more fertilizer. Shares of fertilizer companies have been moving sharply higher since December when Potash said demand was soaring. Grain futures had also been hitting highs but cooled last week. I believe Friday's decline was just profit taking ahead of a three-day weekend and a reaction to the CF earnings. When traders grow nervous about their highly profitable positions they will always find an excuse to sell. CF Industries reported what appeared to be great earnings and a bullish forecast on Thursday but the stock was crushed with a $10 drop on Friday. Other decliners were POT -6.25 and MOS -3.73,

The problems in the Middle East are escalating. Over the weekend there were demonstrations in Bahrain, Yemen, Jordan, Algeria and Libya. More of these protests are turning deadly with more than 100 killed by the security forces so far in Libya and several hundred more wounded. Some reports claim many more dead with some hospitals running out of space to store the bodies. There were more dead reported in Bahrain even though the government recalled the tanks and military and allowed the protestors to again congregate in the square. Reports out of Iran claimed between 2 and 10 protestors were killed.

If these protests continue to gain strength it will eventually weigh on the U.S. markets again. Leaders in the Middle East cannot put the cork back in the bottle but after seeing regimes fall in Tunisia and Egypt they seem determined not to let that happen to them. This means ever increasing casualties as protestors defy government decrees not to congregate. This could evolve into a much bigger deal if another country is seen to be in danger of falling. As each domino falls it puts more pressure on those remaining countries.

The Dow was powered higher on Friday thanks to Caterpillar, Chevron and Travelers. Caterpillar said machinery sales soared in January with a +49% worldwide increase. North America was the strongest geography with a +58% rise and +56% in Latin America. Shares of CAT rose +2.50 and adding +20 points to the Dow's 73 point gain.

Shares of Intuit (INTU) soared on Friday after raising guidance for the current quarter. Intuit reported earnings of 32-cents on Thursday that was inline with estimates but the guidance raise seemed to do the trick. Intuit shares rose +3.67 to $54. In the why bother category, a Jefferies analyst reiterated his buy rating and raised the price target by $1 to $56. Why waste the digital ink to raise your target by a single dollar and only $2 over the current price?

Intuit Chart

Investors have a really short memory. FedEx surprised last week with an earnings warning and the stock was hammered for a loss back to $94. On Friday FedEx closed at a new high at $98.29. The warning has been forgotten or more likely forgiven and investors are flocking to FDX on expectations for increased business as the recovery continues. UPS also hit a new high on Friday at $77.

Apple (AAPL) was the number one reason the Nasdaq was negative most of the day on Friday. The stock lost $8 on news of an anti trust probe by the Justice Dept and the Federal Trade Commission on its new rules on iPad content. Apple has decided that anyone selling digital content like news feeds on its iPad must sell the subscriptions through the iTunes store so Apple can collect their 30% fee. Also, the seller cannot sell the product cheaper anywhere else. For example if they are selling it for $10 a month on the iPad they can't sell it for $7 a month on an Android platform. That means Apple is telling content providers what they can and can't do on other platforms. I personally have a serious problem with this and apparently many others have the same feeling. Apple has already turned down apps from numerous magazine and newspapers because those content providers did not agree to the rules and Apple's 30% fee. This is digital blackmail. Why does Apple get to control what content we can see on a device we own?

Apple dodged one bullet on Friday after Steve Jobs turned up at the president's supper meeting with all the tech heads in California. Apparently the press was kept well away and could not take any pictures of the attendees but others at the meeting said Jobs looked fine and did not appear to be in any immediate physical distress. In the "official" picture below that is Steve sitting next to the president with Mark Zuckerberg sitting on the far side of the president. Yes, Mark wore a suit and not his customary hooded sweatshirt. Note the awe struck look on Mark's face in his conversation with the president.

President's Dinner Meeting

President Obama and new pal Mark Zuckerberg

There were some other serious losers on Friday in what could be a warning our momentum trend could be nearing an end. The fertilizers stocks are one example. Another would be Carbo Ceramics (CRR). This is an oilfield services company that has been on a vertical sprint since earnings on January 25th. Carbo added +$25 in that period. On Friday the stock gave back -4 on no news. It was down nearly $6 intraday.

Refiner Tesoro (TSO) had rallied about 40% since mid January but gave back -6% on Friday on no news. First Solar (FSLR) at Friday's high had gained $20 over the last seven days but closed down -$7 from the intraday high after a blog site named a $153 price target. Since when do blogs have enough power to move a stock like FSLR $8 in one day?

The power moving these stocks is the continued skepticism in the rally and the feeling the market is severely over extended. When traders start to worry they tighten their stops and the slightest bit of volatility creates a cascade decline of stops getting hit. As markets become top heavy the volatility increases.

Momentum stocks with the slightest bit of negative news are crushed. Seacor Holdings (CKH) lost -$17 on Friday after reporting earnings that were 22% higher than the comparison quarter. They were crushed because of the slowdown in Gulf drilling. They lease service ships to the oil sector. In Q3 they had 1,772 vessel days on lease because of the response to the Horizon oil spill. This was a significant increase over activity prior to the spill. In Q4 when the Gulf activity went back to normal their revenue declined sharply from that in Q3 and they had only 336 vessel days. The problem is the new normal. Since there are no permits being issued in the Gulf nobody is leasing service ships. The new normal means they have 13 vessels off lease while we wait for the BOEMRE to release some permits. They still made a profit but because of their recent momentum gains the stock was quickly kicked to the curb.

Seacor Chart

We could see a change in the permit approval process soon. The Marine Well Containment Company announced its seafloor containment system was operational and ready for immediate use. They also announced the BOEMRE had witnessed a successful test. This was the main excuse the BORMRE had been using to deny permit applications, the lack of a proven containment system. Now that excuse no longer works.

Secondly the federal judge in New Orleans has ordered the BORMRE to act on five existing permit applications within 30 days. He has already found the government in contempt of his previous rulings and another delay is not going to go over well with the court. He said permits took an average of two weeks in the past and some applications have been pending for five months. This has forced six rigs to move out of the Gulf. It has caused the bankruptcy of Seahawk Drilling and forced the sale of rigs by smaller companies and forced some companies to abandon exploration in the Gulf completely. The government is out of reasonable excuses to reject permits so any further delay will be seen as politically motivated.

Rosetta Stone (RST) buckled under the pressure from the Borders Group bankruptcy and warned current quarter earnings would drop to 23-cents per share from prior forecasts between 28-38 cents. The Borders bankruptcy was a big hit for Rosetta because they were a big outlet for their language software and they were carrying a big accounts payable balance that is highly questionable in light of the bankruptcy.

Rosetta Chart

The China inflation story plus the tension in the Middle East combined to push the precious metals back to their highs. In the case of silver that is a 30-year high at $32. Dealers claim silver coins are flying off the shelves. Every silver dollar auction on Ebay has lots of bids even at $36-$38 per coin. Gold returned to $1389 and within shouting distance of resistance highs at $1425. Interest rates are rising around the world and the Fed's "extended period" clause is about to expire. European Central Bank Executive Board member Lorenzo Bini Snaghi said the bank may need to raise interest rates because of mounting global inflation pressures. Precious metals investors know the final chapter in this story.

Comex Silver Chart

Continuous Commodity Index

Volume remained low for option expiration Friday at just barely over 7.1 billion shares. However new 52-week highs rose to 927 and the largest number since the 1,005 on January 3rd. The meltup is continuing but it is very broad based.

Jane noted in the Market Monitor on Friday the current +27% S&P rally since September has only happened five times in the last 100 years. All five of those rallies continued higher, much higher. The average gain beyond this point was another +22%.

March 1935 thru August 1935
August 1949 thru March 1950
September 1953 thru March 1954
June 1958 thru Jan 1959
Jan 1995 thru July 1995

So far in February the S&P has gained +4.3%, Nasdaq +4.8% and Russell 2000 +6.6%. It is no wonder quite a few people are very reluctant to buy this market without a significant dip. These kinds of gains are begging for a correction and this is what has the bears in such a tizzy. I actually had a couple readers email me this week complaining about my comments in reference to the bears and their refusal to accept the rally.

I completely understand where the bears are coming from. I have paid my dues in the past for refusing to accept the trend at the time and continually betting against it. This is something we all have to deal with from time to time. Once you start looking for a contrarian play, a correction in a rising market or a rebound in a declining market, every minor blip looks like an early indicator of what your expecting and you miss the bigger picture. I have been there and done that more than I care to admit.

I want to emphasize I am not picking on any specific bear but just having a little fun with the facts. I guarantee you if I was the one calling for a daily top in a bull market my email would be full of comments not fit to print.

The object of the game is not to be right or wrong in theory but to make money on whatever direction the market gives us. Legendary trader Jesse Livermore was known for a specific quote. "There is only one side to the stock market and it is not the bull side or the bear side, but the right side." Jesse was basically a trend follower not a contrarian. He bought breakouts and sold breakdowns. He had another quote that explained his strategy. "Obviously the thing to do is to be bullish in a bull market and bearish in a bear market." And "Never argue with the tape." Jesse built up an enormous amount of wealth of more than $100 million in 1929. In today's dollars that would be several billion and he did it all on following the trend.

Jesse would love this market. The S&P just keeps moving higher and did so again on Friday despite the big loss in Apple. The index has moved above long-term resistance from August (dotted line) and is now using that as support. If there was to be a decent bout of profit taking we could easily return to the bottom of the channel at 1320 without even breaking stride. Strange to think that just last week we were struggling to get over 1320 and now it is distant support.

Just remember a dip for profit taking does not have to be big and scary. We have had numerous 2-3 day pauses in our climb to give traders an excuse to take money off the table. It has been nearly a month since we had any decent retracement and in market time that is a very long stretch. We are probably going to see that type of dip again this week but I would be surprised if it was damaging. Funds are still reporting positive money flows and we are approaching month end again. Unless there is a major news event the market is not expecting I believe the dips will remain shallow for several more weeks.

S&P-500 Chart

The Dow exploded out of the consolidation phase of the last two weeks and there is no short-term resistance in sight. Dow 12,500 would be the next level where sellers might appear. Like the S&P the Dow is using the failed longer-term resistance as support and any decline has plenty of pause points to slow the drop.

Dow Chart

The Nasdaq was chained to negative territory most of Friday with Apple -8 and Priceline -6 leading the list of the decliners. It is very bullish to carry a big loss in Apple with the stock at 18% of the weighting on the NDX and still manage to close positive for the day. However the resulting doji candle is typically indicative of a trend turning point. Regardless of the reason for the wide range but narrow close it is still a market fact. We can always explain away a single event but the market direction is the result of thousands of daily events. The market does not rise and fall on one stock even with an 18% weighting. However, the actions of one stock can spoil the sentiment for the market as we have seen time after time.

The Nasdaq has three levels of converging resistance at 2850 and could be relatively overbought by the time it gets there. Baring unforeseen circumstances it could happen this week. Support is 2800 followed by 2765.

The Nasdaq is very close to that ten year high with only 25 points separating the close at 2833 from the 2859 high in January 2001. That could be a significant hurdle.

Nasdaq Chart

The Russell is still gaining ground as it moves toward its all time historic high at 855. A move over this resistance level would be very bullish. Small caps have already gained +6.6% in February.

Russell Chart

The Dow Transports are a leading indicator for the economy and a confirming Dow Theory indicator. A continued move higher in the transports would be bullish for the Dow industrials. Resistance is now 5400 from May 2008.

Dow Transports Chart

The broadest measure of the market is the Dow Total Stock Market Index, formerly the Wilshire 5000. This index has also broken over uptrend resistance and moving away from that anchor line. This is a broad index showing exceptional bullish strength.

Dow Total Market Index

In summary I believe we are still in dip buy mode and eventually we are going to get more than a one-day dip. The violence in the Middle East is the wild card and any further escalation could be a problem. It is also about time for the EU debt crisis to flare up again. There was excessive overnight borrowing from the ECB late in the week, about ten times normal, and analysts were afraid it meant there was a bank in trouble. It was explained away this weekend as a bank doing an asset sale and needed to pay off existing loans so the assets could be sold free and clear. Once sold the overnight loans to the ECB would be repaid. At least that was the excuse for borrowing to go from 1.5 billion euros per day to 16 billion. We will see if it really works out that way.

Lastly Portugal is in the news again with rising worries they are going to need a bailout. We never know what new problem is going to pop up to cause us trouble. With markets at new highs they are very susceptible to event risk. Keep your stops tights and buy rebounds not dips. Buying the dip before the rebound begins could grow increasingly dangerous in the days ahead because we never know when that multi-day decline will arrive. Look for stabilization at the lows and evidence of an accelerating rebound before entering new plays.

Jim Brown

Send Jim an email

"When you sit with a nice girl for two hours, you think it's only a minute. But when you sit on a hot stove for a minute, you think it's two hours. That's relativity." - Albert Einstein

Index Wrap

Onwards and Upwards

by Leigh Stevens

Click here to email Leigh Stevens

In this latest phase of the accelerating S&P/Dow uptrend, bullish sentiment among options traders is not overly high. A cautionary stance among shorter-term trader types is not surprising, versus the bullishness among equity fund managers who have a trend following mindset. The lack of bullish 'extremes' in equity options call to put ratios is a net plus for a continued advance. The day we see daily CBOE equity call volume hit 2.5 to 3 times the daily put volume is a day suggesting that traders are overconfident regarding a continued run up.

With the financial stocks AND the energy stocks having good recent gains, it's not surprising to see the S&P accelerate to the upside compared to Nasdaq.

There is advisable caution in that Nasdaq started marking time and trended sideways from midweek on. There is a 'line' of resistance that the Nasdaq 100 (NDX) is hitting around 2400. Will this lead to a dip and the end of the buy every dip mentality? Possibly. We have to also remember that NDX has decisively cleared its November '07 top; the Composite (COMP) is nearing its prior (2007) intraday high at 2862 (versus Friday's Close at 2833). Compare this to the S&P 500 (SPX) which has to date retraced 74% of the distance, trough to peak, to its high made in the same period of 2007 (at 1576, versus the 1343 Friday close). It's not surprising that as economy revival evidence gains credence, the big cap 'mainstream' economy businesses have their day also.

It's difficult to measure any S&P/Dow 'resistance' short of prior tops. With COMP there is the prior '07 intraday high (2862) to watch, but I don't think 'technical' factors like a reversal at a prior top will rule here. This market is overbought on a daily and weekly time frame; not yet on a monthly chart basis. 'Overboughtness' is not a timing indicator. Apparent 'key' downside reversals on a daily chart basis haven't led to much of a pullback such as seen late last month. Watch and wait is my advice to the bulls. If you want to continue to trade for more upside take some money from Nasdaq profits if you have them and buy dips in SPX of 30 points or in OEX of 12-15 points, with suitable exit points just under the 21-day moving average.

Anyone who is standing aside from taking on any new bullish strategies is doing the conventionally prudent thing. Especially since any tradable correction may start out of nowhere so to speak. There is what I think is major resistance at the top end of the uptrend channels I've highlighted on my charts, but that's some distance higher in most cases; not so far in terms of the Dow 30 (INDU), which hits the upper end of its bullish uptrend channel around 12600 versus Friday's close at 12391.

I was forced to lay off my weekly column last week, which is pretty rare for me but I was busy all weekend with a family wedding in Cali. My younger son then gets married in July but that should be it as far as my being AWOL from this space absent acts of God or illness. May lightening not strike me down!



The S&P 500 (SPX) index chart is bullish and it accelerating to the upside as can be easily seen by looking at the SPX price trend relative to the 21-day moving average; i.e., the 'gap' between the two is widening.

As I noted in my initial 'bottom line' comments, the S&P and Dow stocks are now leading the overall market, versus the superior gains made by the red hot Nasdaq stocks in recent weeks and months. This is a 'broadening' out of the market into more cyclical stocks, which get a boost when a depressed economy starts to revive.

The only potential technical resistance I can point to is the top end of SPX's broad uptrend price channel; currently, the intersection of that line is at 1377. major support is implied by the lower uptrend line, currently intersecting at 1290. Near support is implied by the 21-day moving average at 1312.

Helping keep this rally going so to speak is still-moderate bullish sentiment, especially compared to the recent accelerating price trend as highlighted on the chart.

SPX is at another overbought extreme in terms of the Relative Strength Index or RSI on a daily chart basis but this is also a mostly 'normal' condition of such a strong advance. In terms of the long-term (weekly and monthly) charts, a second strong up leg is apparent, relative to the Mch '09 to April 2010 advance.


The S&P 100 (OEX) index chart is bullish and OEX cleared some resistance on its move above 600. I envision possible technical resistance at the top end of OEX's uptrend channel. The upper trendline intersects now at 613, within striking distance of Friday's 602 close. I place more credence in watching for a possible reversal and pullback based on what happens if/when SPX hits ITS upper channel line so will tend to key off the bigger index.

Near support is suggested by the 21-day moving average, currently at 590. Next chart support is implied by the up trendline, which presently intersects at 574.

There's no way of telling how long this rally keeps rolling along with investors buying every dip. I'm cautious now due to the lagging Nasdaq, but get very cautious if OEX reverses in the area of the upper channel line or if there's breakdown below the 21-day average; e.g., a Close below this key average that is followed by further weakness the next day.


The Dow 30 (INDU) average is in an accelerating uptrend due to prior INDU leaders but also due to the rebound in the financial stocks as well as with oil/energy stocks. I count 16 of the 30 INDU stocks now in strong uptrends: AA, BA (breaking out above a multimonth trading range), CAT (construction), CVX (oil/energy), DD, DIS, GE (a prime Dow bellwether), HD, IBM, INTC, JPM (banking), MMM, PFE, TRV (financial), UTX and XOM (oil).

There's no technical resistance I can measure before 12600, the current intersection of the upper trendline comprising the broad uptrend price channel for INDU. The Dow is within a 1-3 day rally of hitting this area. The average is overbought enough to pull back or go sideways after INDU reaches resistance implied by the top end of its broad uptrend channel.

Support is 12200, then in the area of the 21-day average currently at 12113. Trendline support is in the 11800 area.


The Nasdaq Composite (COMP) chart is bullish, as prices continue to work higher within the index's steep uptrend channel. I feel like a broken record on the bullish action part for all major index charts and by pointing out the obvious. The channel lines give us some parameters on possible resistance and certainly on key support.

Important technical support is suggested both by the up trendline and the 21-day moving average intersecting around 2760 currently. 2677 is an even more key support as piercing this prior low would suggest a significant downside reversal.

I've estimated near resistance as coming in around 2862, with likely major resistance in the 2987-3000 area. I don't think that COMP is going to blow through 3000 so easily, especially when the index is overbought.

Bullish sentiment, as I pointed out with the S&P 500, is moderate relative to the still-strong uptrend, which bodes well for a continued advance. If daily CBOE equities call volume spikes to 2.5 to 3 times that of the same day's put totals, it implies that traders are getting extreme in betting on a further rise. Extremes in the RSI and my sentiment indicator together suggest a high risk situation for a pullback. We aren't there yet in terms of bullish sentiment. And, the 13-day RSI can rise again into the 80's. It likely will take real indicator EXTREMES to suggest a pause or pullback in this market.


The Nasdaq 100 (NDX), which has led the overall market for some time, paused this past week. It's likely just a minor consolidation, especially with the recent pullback in Apple (AAPL); and Cisco systems (CSCO) too for that matter.

I suspect a consolidation-only prior to a move above immediate overhead resistance at 2400. Next resistance is estimated for the 2438 area, with fairly major resistance significantly higher, around 2550.

The up trendline represents a first technical support and currently intersects around 2327. 2258 is the prior (down) swing low and is a key support. A decisive downside penetration of a prior swing low suggests at least a near-term trend reversal.


The Nasdaq 100 tracking stock (QQQQ) chart has the same bullish pattern as the underlying NDX index. The recent 3-day sideways pause in QQQQ is probably a consolidation of the existing strong uptrend, but if the stock starts falling under 57.5, a short-term downside reversal could be underway. 57.1, the current intersection of the dominant up trendline is the key technical support.

I've estimated near resistance at 59.5, with major resistance well above this at 62.5, at the upper end of the Q's broad uptrend channel.

There's not much that recent volume figures tell us except that the most recent rally occurred on relatively low volume. A declining volume trend versus a strong price advance is typically a somewhat 'weak' technical pattern with the exception of QQQQ in my experience. There is portfolio hedging and 'proxy' long positions that get put on in the stock. It may be that volume spikes related to dumping proxy long positions or shorting the stock occurs most intensely at key upside or downside reversal points.


The Russell 2000 (RUT) turned around in the past couple of weeks and is showing the kind of strength that it had prior to its corrective pullback into late-January. RUT now looks to be on track to reaching the top end of its uptrend channel. Potential resistance at the upper channel line comes in around 864 currently.

Key technical support is seen in the 800 area. The bottom of the prior downswing low at 772 is an even more key level; i.e., if 772 is pierced, a near to intermediate term downside reversal is suggested. Absent that, look for still higher prices.


New Option Plays

Pancakes, Auto Parts, and Mining

by James Brown

Click here to email James Brown


DineEquity, Inc. - DIN - close: 58.81 change: +1.05

Stop Loss: 54.90
Target(s): 64.00, 68.50
Current Option Gain/Loss: + 0.0%
Time Frame: 7 trading days
New Positions: Yes, see below

Company Description

Why We Like It:
DIN's claim to fame are their Applebee's and IHOP restaurants. While I blame IHOP's chocolate chip pancakes for the rally in DIN it's actually bulls bidding up the restaurant names on stronger expectations for consumer spending. Or maybe it's not the bulls, maybe it's the bears who keep getting squeezed. Investors should take note that the most recent data (although not really very recent any more) listed short interest in DIN at 29% of the 14.9 million share float. The combination of very high short interest and an extremely low float is definitely a recipe for a short squeeze.

DIN could be ready for some more short covering. Traders bought the dip at DIN's rising 10-dma on Friday. A breakout past short-term resistance at $60.00 could fuel a run at the $70 area. Unfortunately, we only have a few days. DIN is due to report earnings on March 3rd and we do not want to hold over the announcement.

I am suggesting bullish positions now. I consider this a slightly more aggressive trade because our initial stop loss is a little wide (at $54.90). Plus, we only have seven trading days. Buy calls now. Our exit targets are $64.00 and $68.50.

The Point & Figure chart for DIN is bullish with a $92 target.

Open Bullish Positions Now!

- Suggested Positions -

Buy the March $60 calls (DIN1119C60) current ask $2.70

Annotated Chart:

Entry on February 22nd at $ xx.xx
Earnings Date 03/03/11 (confirmed)
Average Daily Volume = 150 thousand
Listed on February 19th, 2010

Lear Corp. - LEA - close: 111.92 change: +1.06

Stop Loss: 107.45
Target(s): 114.95, 119.00
Current Option Gain/Loss: + 0.0%, and + 0.0%
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Vehicle sales are slowly improving here in the U.S. but overseas in countries like China and India sales are surging. That should be strong business for auto parts makers like Lear. The stock is in a nice up trend and appears to be in the process of breaking out higher after a six-week sideways consolidation. The stock looks pretty good considering the recent earnings report. On Feb. 1st LEA blew away the estimates but then guided lower for 2011. This guidance news temporarily pushed the stock down to its rising 50-dma before investors bought the dip.

I am suggesting bullish call positions now. We'll use a stop loss at $107.45, just under short-term technical support at the 30-dma. More aggressive traders could keep their stop loss under the 50-dma instead. Our targets are $114.95 and $119.00.

Readers need to take note that LEA has a 2-for-1 stock split coming up and will start trading adjusted for the split on March 18th. When the split occurs, instead of having one $120 call contract you'll have two $60 call contracts with a new symbol and an adjusted value. FYI: The Point & Figure chart for LEA is bullish with a $140 target.

Open Bullish Positions now!

- Suggested Positions -

Buy the March $115 calls (LEA1119C115) current ask $2.65

- or -

Buy the Jun $120 calls (LEA1118F120) current ask $5.50

Annotated Chart:

Entry on February 22nd at $ xx.xx
Earnings Date 05/05/11 (unconfirmed)
Average Daily Volume = 747 thousand
Listed on February 19th, 2010


Freeport-McMoran - FCX - close: 52.95 change: -2.29

Stop Loss: 56.55
Target(s): 50.25, 46.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
Commodities are in breakout mode and yet FCX is poised to breakdown. FCX is one of the biggest and most well known miners on the planet. Right now copper is trading near its highs, gold is within striking distance of its highs, silver is hitting new 30-year highs, but shares of FCX are rolling over. The stock is currently testing support near the 100-dma and the $52.50 area. More aggressive traders may want to open bearish positions now. I suspect the stock will see one more bounce toward overhead resistance at its 30-dma. I am suggesting we buy puts at $54.50. If triggered we'll use a stop loss at $56.55. Our downside targets are $50.25 and $46.50.

Trigger @ 54.50

- Suggested Positions -

Buy the March $50 PUTS (FCX1119O50) current ask $1.25

- or -

Buy the May $50 PUTS (FCX1121Q50) current ask $3.25

Annotated Chart:

Entry on February xxth at $ xx.xx
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume = 14.4 million
Listed on February 19th, 2010

In Play Updates and Reviews

32-month High

by James Brown

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Editor's Note:

The S&P 500 has rallied to a new 32-month high. Meanwhile we had two bullish targets hit on Friday. The winners were COH and NKE. JOYG is also looking strong although it has hit potential resistance near $100. It will be interesting to watch if stocks see profit taking after option expiration or a resumption of the uptrend since so many stocks have just been churning sideways the last few days.

Please note that I will be traveling the next several days for a week-long seminar. Play updates will be brief and we might see fewer new positions added to the newsletter. Fortunately we already have a pretty strong play list for the OI newsletter.


Current Portfolio:

CALL Play Updates

Ashland Inc. - ASH - close: 60.90 change: -0.18

Stop Loss: 56.75
Target(s): 63.00, 67.00
Current Option Gain/Loss: +71.4%, and +25.4%
Time Frame: 6 to 8 weeks
New Positions: see below

02/19 update: Bulls were quick to buy the dip in ASH when it neared the $60 level on Friday afternoon. If you missed the pull back near $60.00 I would still consider new bullish positions now. However, if you're buying calls now you may want to raise your stop loss higher than the newsletter's, which is at $56.75. Our first profit target is $63.00. Our final exit target is $67.00.

The Point & Figure chart for ASH is bullish with a $83 target.

- Suggested Positions -

Long the March $60 calls (ASH1119C60) Entry @ $1.40

- or -

Long the April $60 calls (ASH1116D60) Entry @ $2.55

02/16 New stop loss @ 56.75, New 2nd target at $67.00


Entry on February 14th at $58.30
Earnings Date 04/27/11 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on February 12th, 2010

Peabody Energy Corp. - BTU - close: 65.02 change: -1.02

Stop Loss: 61.75
Target(s): 69.75, 74.00
Current Option Gain/Loss: -35.5%, and -16.6%
Time Frame: 6 to 8 weeks
New Positions: see below

02/19 update: With option expiration on Saturday shares of BTU gravitated toward the nearest strike price, which happened to be the $65 level. The mid afternoon selling pulled BTU toward the 10-dma (shares hit $64.18) but the stock recovered by the closing bell. I would use this dip in BTU as a new entry point to buy calls. Our first exit target is $69.75.

The Point & Figure chart for BTU is bullish with an $80 target.

- Suggested Positions -

Long the March $70 calls (BTU1119C70) Entry @ $1.07

- or -

Long the June $70 calls (BTU1118F70) Entry @ $3.60


Entry on February 17th at $66.30
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume = 4.6 million
Listed on February 16th, 2010

Caterpillar Inc. - CAT - close: 105.86 change: +2.50

Stop Loss: 97.90
Target(s): 104.75, 107.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

02/19 update: Shares of CAT continue to outperform. On Friday the company announced stronger than expected global sales with North America leading the way (+58% sales growth). The stock rallied to new highs again. Naturally this is frustrating since CAT is rising without us. We keep trying to buy a dip and it's not happening. I still don't want to chase it today. We will leave our buy-the-dip entry point at $101.00 for the time being but I don't have a time frame for when we could get filled. We'll just have to wait for the next hiccup in this bullish trend. The top of CAT's bullish channel should be a signal for some consolidation but the stock isn't there yet.

Trigger @ 101.00

- Suggested Positions -

Buy the March $105 calls (CAT1119C105) current ask $2.92

02/12 Adjusted our trigger, targets, stop loss and strike price.


Entry on February xxth at $ xx.xx
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume = 6.2 million
Listed on February 5th, 2010

Clean Harbors, Inc. - CLH - close: 93.18 change: -0.22

Stop Loss: 91.45
Target(s): 94.95, 99.00
Current Option Gain/Loss: +13.8%
Time Frame: 12 days
New Positions: see below

02/19 update: Friday saw CLH pull back toward short-term support near its 10-dma and the $92.00 level, which as prior resistance is naturally new support. The late day bounce looks like a brand new entry point to buy calls. Unfortunately, our time is up. Since the U.S. markets are closed on Monday our plan is to close this position on Tuesday at the closing bell to avoid CLH's earnings on Wednesday.

Investors should note that the most recent data lists short interest at 11.3% of the very small 23.1 million-share float. That is a good recipe for a short squeeze higher.

- Suggested Positions -

Long the March $95.00 call (CLH1119C95) Entry @ $1.80

02/19 Prepare to exit on Tuesday (Feb. 22) at the close
02/17 New stop loss @ 91.45
02/16 New stop loss @ 88.45


Entry on February 11th at $92.25
Earnings Date 02/23/11 (confirmed)
Average Daily Volume = 181 thousand
Listed on February 10th, 2010

Coach Inc. - COH - close: 58.28 change: +1.63

Stop Loss: 54.95
Target(s): 58.25, 62.00
Current Option Gain/Loss: +71.4%, and +123.5%
Time Frame: 4 to 6 weeks
New Positions: see below

02/19 update: Target achieved! I wish I could tell you what sent shares of COH almost straight up on Friday. The stock started off strong and barely paused midday. COH rallied past its recent resistance and hit new six-week highs at $58.28. Our first target to take profits was hit at $58.25 (options @ +69% and +117%). Unfortunately, I could not find any specific news behind the rally not that I'm complaining. The December 2010 highs near $58.50 should be resistance but given the strength of the rally on Friday COH could breakout sooner than expected. I am raising our stop loss to $54.95. More conservative traders may want to raise their stop even higher. Our final target is $62.00 but I expect the $60 level to act as a speed bump. No new positions at this time.

- Suggested Positions -

Long the 2011 March $55.00 calls (COH1119C55) Entry @ $2.10

- or -

Long the 2011 March $57.50 calls (COH1119C57.5) Entry @ $0.85

02/19: New stop loss @ 54.95
02/18: 1st Target Hit @ 58.25. Options @ +69% and +117%
02/12: Adjusted 1st target to $58.25
02/12: New stop loss @ 54.40
02/08: New stop loss @ 53.49


Entry on February 7th at $55.35
Earnings Date 04/20/11 (unconfirmed)
Average Daily Volume = 4.1 million
Listed on January 31st, 2011

Costco Wholesale Corp. - COST - close: 75.43 change: +0.59

Stop Loss: 72.95
Target(s): 79.75
Current Option Gain/Loss: + 0.0%
Time Frame: six trading days
New Positions: Yes, see below

02/19 update: COST showed some relative strength on Friday with a breakout and close above resistance at $75.00 and its old high of $75.23. The stock has not yet hit our trigger at $75.50 but it's close enough for me. I am suggesting we go ahead and buy calls now on this breakout. Our first target is $79.75. We will plan to exit ahead of COST's March 2nd earnings report. That only gives us about six trading days.

The Point & Figure chart for COST is bullish with an $88 target.

buy calls now!

- Suggested Positions -

Buy the March $75 calls (COST1119C75) current ask $1.82

02/19 New entry point. Buy calls now!


Entry on February 22nd at $ xx.xx
Earnings Date 03/02/11 (confirmed)
Average Daily Volume = 5.8 million
Listed on February 7th, 2010

Cognizant Technology - CTSH - close: 77.73 change: +0.85

Stop Loss: 74.45
Target(s): 84.50, 89.00
Current Option Gain/Loss: + 0.0%, and + 5.7%
Time Frame: 4 to 6 weeks
New Positions: see below

02/19 update: Our new bullish play on CTSH has been triggered. The stock was showing some relative strength on Friday and broke through resistance to close at new all-time highs. We had a trigger to launch bullish positions at $77.55. I would still consider new positions now. Our targets are $84.50 and $89.00. The Point & Figure chart for CTSH is bullish with a $105 target.

Play is open. Buy calls now!

- Suggested Positions -

Long the March $80 call (CTSH1119C80) Entry @ $0.95

- or -

Long the April $80 call (CTSH1116D80) Entry @ $1.75

02/18 CTSH hit our trigger to buy calls @ 77.55


Entry on February 18th at $77.55
Earnings Date 05/04/11 (unconfirmed)
Average Daily Volume = 2.4 million
Listed on February 15th, 2010

Eastman Chemical Co. - EMN - close: 95.41 change: -0.86

Stop Loss: 90.75
Target(s): 99.75, 104.00
Current Option Gain/Loss: + 0.0%
Time Frame: 4 to 6 weeks
New Positions: see below

02/19 update: I would not be too alarmed by EMN's relative weakness on Friday. The dip was probably a reflection of February option expiration. Shares moved toward the nearest strike price, which happened to be the $95.00 level. I am suggesting readers use the pull back as a new entry point to buy calls.

Our targets are $99.75 and $104.00. Expect the $100.00 level to initially act as overhead resistance. The Point & Figure chart for EMN is bullish with a $133 target.

- Suggested Positions -

Long the March $95 calls (EMN1119C95) Entry @ $2.65

02/17 EMN breaks out. Hits trigger to buy calls @ 94.60


Entry on February 17th at $94.60
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume = 946 thousand
Listed on February 14th, 2010

Fastenal Co. - FAST - close: 63.70 change: +0.61

Stop Loss: 61.90
Target(s): 67.25
Current Option Gain/Loss: + 0.0%
Time Frame: 4 to 6 weeks
New Positions: see below

02/19 update: FAST is refusing to dip for us. The stock has been consolidating sideways in the $63 area for about a week and a half. Traders did buy the intraday dip (near $63) and the stock closed at another new high. Instead of waiting for a dip to $61.65 I am adjusting our entry point strategy. We will go ahead and buy calls now, which is a much more aggressive and higher-risk trade. Since this is a higher-risk entry point we want to use very small positions (at least one half to one quarter your normal trade size). We will use a tighter stop loss. I'll set the stop loss at $61.90 and more conservative traders may want to use a stop loss near $62.50 instead. Remember, small positions! Our upside exit target is $67.25. Do not be surprised if the $65.00 mark offers a little resistance. Readers may want to keep in mind that the most recent data listed short interest at 11.4% of the 132 million-share float.

Open VERY small bullish positions now!

- Suggested Positions -

Buy the March $65 calls (FAST1119C65) current ask $0.95

- or -

Buy the May $65 calls (FAST1121E65) current ask $2.50

02/19 Adjusted entry point. Buy calls now. Very small positions
02/12 New trigger @ 61.55, new stop loss @ 59.40


Entry on February 22nd at $ xx.xx
Earnings Date 04/12/11 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on February 8th, 2010

Joy Global Inc. - JOYG - close: 100.03 change: +1.96

Stop Loss: 93.75
Target(s): 97.25, 104.50
Current Option Gain/Loss: +83.1%, and +58.9%
Time Frame: 3 weeks
New Positions: see below

02/19 update: Target achie...oops... wait. JOYG surged again with a +2% rally toward the $100 level. Originally our final exit target was $99.85. However, we recently upped our final exit to $104.50 thanks to news that JOYG would be added to the S&P 500 index. The stock hit $100.58 on Friday and closed near the $100.00 strike price in time for the February option expiration. More conservative traders may want to take profits now anyway.

JOYG looks a little bit overbought here so it might be time for a little profit taking. I would hate to see it but JOYG could dip toward its 10-dma near $95 and still remain in its up trend. I am raising our stop loss to $93.75. No new bullish positions at this time. On a short-term basis JOYG should have some support near $98 and $96.

- Suggested Positions -

Long the March $95 calls (JOYG1119C95) Entry @ $3.85

- or -

Long the April $100 calls (JOYG1116D100) Entry @ $3.46

02/19 New stop loss @ 93.75
02/17 New stop loss @ 91.75
02/17 1st Target Exceeded on Gap Higher. Options @ +50.6% and +41.6%
02/16 New stop loss @ 89.45


Entry on February 14th at $94.44
Earnings Date 03/02/11 (unconfirmed)
Average Daily Volume = 1.4 million
Listed on February 12th, 2010

Nike Inc. - NKE - close: 88.82 change: +2.78

Stop Loss: 83.85
Target(s): 88.00, 91.50
Current Option Gain/Loss: +115.3%, and +131.9%
Time Frame: 4 to 8 weeks
New Positions: see below

02/19 update: Target achieved. NKE surged throughout the session. Actually if you look at the intraday chart the action looks a lot like the move in COH. Bulls were hot for consumer names or someone was trying to cover their shorts ahead of expiration. NKE really outperformed with a +3.2% gain. The stock hit our first exit target at $88.00. Shares look a little bit overbought here so I would expect some profit taking early next week. I am not suggesting new positions at this time.

Currently our final exit target is $89.90, just over $1.00 away. I am going to adjust our final exit to $91.50. The December high was $92.49.

- Suggested Positions - (Small Positions Only!)

Long the March $85 calls (NKE1119C85) Entry @ $2.09

- or -

Long the April $90 calls (NKE1116D90) Entry @ $0.94

02/19 Adjusted final target to $91.50
02/18 1st Target Hit @ 88.00. March $85 call @ 3.75 (+79.4%)
02/18 1st Target Hit @ 88.00. April $90 call @ 1.80 (+91.4%)


Entry on February 15th at $85.25
Earnings Date 03/17/11 (unconfirmed)
Average Daily Volume = 2.2 million
Listed on February 9th, 2010

PACCAR Inc. - PCAR - close: 52.65 change: +0.24

Stop Loss: 49.95
Target(s): 53.45
Current Option Gain/Loss: +28.5%
Time Frame: 2 to 3 weeks
New Positions: see below

02/19 update: PCAR continues to consolidate sideways and appears stock between short-term support at its 10-dma and overhead resistance at its 20-dma. I am not suggesting new bullish positions at this time. More conservative traders may want to take profits now and exit. Currently our final exit target is $53.45 but more aggressive traders could aim higher.

Open Small Positions Now

Long the March $55 call (PCAR 1119C55) Entry @ $0.35

02/17 Planned Exit for February calls @ close: $2.60 (+73.3%)
02/16 New stop loss @ 49.95
02/12 Adjusted our final exit target to $53.45


Entry on February 7th at $50.60
Earnings Date 04/20/11 (unconfirmed)
Average Daily Volume = 2.9 million
Listed on February 5th, 2010

Quality Systems Inc. - QSII - close: 79.39 change: +0.18

Stop Loss: 77.95
Target(s): 84.90, 89.00
Current Option Gain/Loss: -64.7%
Time Frame: 3 to 4 weeks
New Positions: see below

02/19 update: The selling pressure on Friday was not enough to break down through the bottom of QSII's trading range. Nimble traders may want to consider buying this intraday bounce, especially with our stop loss at $77.95. Keep in mind I would consider this a somewhat more aggressive entry point given some of the deterioration we've seen in QSII's technical indicators. Momentum traders can wait for QSII to breakout to new highs. If we do not see QSII produce some follow through higher on Tuesday (since Monday is a holiday) then we will consider an early exit!

The Point & Figure chart for QSII is bullish with a $119 target.

- Suggested Positions -

Long the March $85 calls (QSII1119C85) Entry @ $0.85

02/19 Consider buying calls on this intraday bounce with a tight stop. March $80 calls ask @ $2.00 and March $85 @ $0.45


Entry on February 14th at $80.75
Earnings Date 05/31/11 (unconfirmed)
Average Daily Volume = 202 thousand
Listed on February 12th, 2010

Schnitzer Steel Industries - SCHN - close: 64.91 change: +0.03

Stop Loss: 61.45
Target(s): 68.75
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see Trigger

02/19 update: SCHN did not make a lot of progress on Friday and I'm not surprised. It was the last day before February options expired and shares of SCHN gravitated to the closest strike price, which was the $65.00 mark. Maybe now that expiration is over we will see SCHN dip a little bit.

I am suggesting we buy calls on a dip at $63.75. We'll start with a stop at $61.45. Our first target is $68.75, just under the January highs. We will consider adding a secondary target down the road.

FYI: Readers will be interested to note that SCHN most recent data listed short interest at 5% of the very small 18.3 million-share float. Now I don't think this data is up to date but the stock's very small float might contribute to any potential short squeeze.

Trigger @ 63.75

- Suggested Positions -

Buy the March $65 calls (SCHN1119C65) current ask $2.00

- or -

Buy the May $65 calls (SCHN1121E65) current ask $4.50


Entry on February xxth at $ xx.xx
Earnings Date 04/07/11 (unconfirmed)
Average Daily Volume = 250 thousand
Listed on February 17th, 2010

The Toronoto-Dominion Bank - TD - close: 81.35 change: -0.57

Stop Loss: 76.90
Target(s): 84.00, 89.00
Current Option Gain/Loss: + 74.4%
Time Frame: 3 to 4 weeks
New Positions: see below

02/19 update: Hmm.... TD hit some profit taking on Friday. Shares actually produced a bearish engulfing reversal candlestick pattern but these patterns normally need to see some confirmation. I would expect a pull back toward the $80.00 level and possibly the $78 area. Conservative traders may want to take profits now! No new positions at this time. Our targets are $84 and $89. We will plan to exit ahead of the early March earnings report (unconfirmed date).

FYI: The Point & Figure chart for TD is bullish with a $98 target.

- Suggested Positions -

Long the March $80.00 call (TD1119C80) Entry @ $1.35

02/16 New stop loss @ 76.90


Entry on February 11th at $78.89
Earnings Date 03/03/11 (unconfirmed)
Average Daily Volume = 583 thousand
Listed on February 10th, 2010

Proshares Ultra(long) Russell 2000 - UWM - close: 48.34 change: +0.12

Stop Loss: 42.99
Target(s): 49.75, 54.00
Current Option Gain/Loss: +12.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Small Positions - UWM Position -

Long the April $48 calls (UWM1116D48) Entry @ $2.75

02/14 UWM opened at $46.90. Option opened @ $2.75

UWM chart:

iShares Russell 2000 - IWM - close: 83.35 change: +0.09

Stop Loss: 78.65
Target(s): 84.95, 87.25
Current Option Gain/Loss: +15.1%
Time Frame: 6 to 8 weeks
New Positions: see below

02/19 update: The up trend for the small cap Russell 2000 index and its associated ETFs (UWM and IWM) continues. I do want to warn readers that we're starting to see the momentum stall just a little and some of the oscillators are at overbought levels. It's probably time for a little dip. The problem is a little dip might produce some big swings in the UWM options, but that's what we get for playing a double-long ETF (wanted to warn you early).

I remain bullish but we want to wait for a dips to consider new entry points. It is worth noting that the old highs for the IWM ETF are near $85, which might be resistance.

Small Positions - IWM Position -

Long the April $84 calls (IWM1116D84) Entry @ $1.92

02/14 IWM opened @ 82.11. Option opened @ 1.92

IWM chart:

UWM Entry on February 14th at $46.90
IWM Entry on February 14th at $82.11
Listed on February 12th, 2010

CBOE Market Volatility Index - VIX - close: 16.43 change: -0.16

Stop Loss: N/A
Target(s): 24.00, 28.00
Current Option Gain/Loss: -53.1%
Time Frame: 4 to 6 weeks
New Positions: see below

02/19 update: I remain very cautious on the VIX. The "fear gauge" is still trading near multi-year lows. There is a growing possibility that the VIX will breakdown and close under "support" near the 15.00 level.

Two weeks ago I suggested (again) that more conservative traders consider an early exit. Or you could keep this trade as some sort of hedge against a sudden market decline but bear in mind that this option expires on March 16th. I am not suggesting new positions at this time.

Earlier Comments:
Just because the VIX bounced near the 15.00-15.50 level in the past doesn't mean it can go crashing through it but this would be a good area to speculate on a rebound. I will point out that between 2005 and 2006 the VIX was pretty much dead, limping along the 10.00 area for two years.

- Suggested Positions -

Long the 2011 March $22.50 calls (VIX1116C22.5) Entry @ $1.60


Entry on January 26th at $17.00
Earnings Date --/--/--
Average Daily Volume =
Listed on January 25th, 2010