Option Investor

Daily Newsletter, Saturday, 4/9/2011

Table of Contents

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

Market Wrap

Event Risk Wins Again

by Jim Brown

Click here to email Jim Brown

Despite more bad news, the political theater playing out in Washington and weekend event risk the markets remained relatively stable with the Dow squeezing out a +3 point gain for the week.

Market Statistics

The dollar collapsed and commodities soared on inflation concerns and geopolitical events. Equities were flat to down but commodities were setting new highs. I can understand investors not wanting to hold equities over the weekend while the political theater in Washington played out because uncertainty is always a negative for the equity markets.

There were only a couple of economic reports and neither was important. The Wholesale Inventory report showed inventories rose +1% in February after a similar +1% rise in January. Sales fell by -0.8% after a +3.3% gain in January. Inventory levels remain low and any material pickup in sales would mean more orders for manufacturers. The report was pretty much as analysts expected.

The ECRI Weekly Leading Index rose again to 131.2 and a high for this cycle after a dip in early March to 129.1. This is a long-term index and little attention is paid to it on a week-to-week basis. The dip in early March showed the recovery is still fragile and has yet to reach a self-sustaining level.

The economic calendar for next week shows an increase in activity but only three reports are expected to garner any attention from traders. The Fed Beige Book, a report of economic activity in all Fed regions, is the most important report of the week. The price indexes are next in importance to indicate how inflation is filtering through the economy.

Economic Calendar

Investor focus turns to earnings next week starting with Alcoa on Monday. There are relatively few companies reporting but they include JP Morgan, Bank America and Google.

Earnings Calendar

The big news on Friday was the monster rally in the commodity sector. Oil prices rallied to 30-month highs at $113 on the WTI and $126 on Brent. The rally came after Gaddafi launched further attacks on his own oil fields to keep the rebels from raising cash by selling oil. He began launching attacks after the rebels loaded a tanker with one million barrels on Wednesday. Fighting appears to be intensifying on the ground and analysts are now saying the fighting could last the rest of the year and there could be long term damage to Libya's oil production capabilities.

WTI Crude Chart

Brent Crude Chart

In Nigeria a bomb targeting an election office killing at least eight people ahead of Saturday's election. Nigeria produces 2.6 mbpd of light crude so any unrest there could complicate the current lack of light crude from Libya. Historically the opposition groups in Nigeria target oil facilities to protest the government. The MEND rebels have publicly announced they would not target oil ahead of the election but warned they would not hesitate if the new government did not meet their demands.

In Yemen President Saleh rejected a Gulf Arab plan for him to step down and end his 32-year reign. He had initially accepted a proposal put forth by Saudi Arabia and the Gulf Cooperation Council to hold talks with the opposition. On Wednesday the GCC said there was a deal for Saleh to leave but on Friday he told thousands of supporters he would reject this "belligerent intervention." Frustration sent tens of thousands of demonstrators back into the streets and at least five were killed and dozens injured after security police fired on the crowds. That brings the total killed for the week to more than 25. More than 40% of the Yemen population lives on less than $2 per day and a third face chronic hunger. Yemen sits on a shipping lane that sees three million barrels of oil pass through daily. Yemen produces 300,000 bpd of oil.

In Bahrain the number of opposition activists arrested and detained by the government with help from Saudi troops now exceeds 500 according to the Bahraini Center for Human Rights. Dozens have been killed and dozens more are missing. The regime is using support from Saudi troops to go house to house searching for opposition activists. This suppression of dissention is suppressing fears of a new uprising so that takes Bahrain off the threat board for future oil price spikes. Bahrain has no material oil production but its proximity and relationship with Saudi Arabia makes it a flash point for a potential disruption in Saudi production.

In Syria thousands again massed in protests that left more than 30 dead and hundreds wounded in Dara. More than 130 have been killed in the last two months. The Syrian government took a page from Gaddafi's playbook and blamed the deaths on armed groups of foreigners, vandals and al-Qaeda terrorists trying to take over the country. Protestors are trying to force the ouster of President Assad after 11 years of power. Syria produces 400,000 bpd of oil.

In Egypt tens of thousands of demonstrators gathered again in Tahrir Square to demand the prosecution of former president Hosni Mubarak and accuse the current Supreme Military Council of not acting quickly enough to bring corrupt members of the old regime to justice. The military used force to breakup the demonstration and two were killed and 15 others wounded by gunfire. Three military vehicles were still burning at dawn as a result of the conflict. Egypt produces about 600,000 bpd of oil.

Now you should understand the geopolitical reasons why oil rose but there is also the financial reason. The ECB hiked rates on Thursday and the Euro currency jumped to a two year high. The ECB and several other nations including China, which hiked rates earlier in the week, are now on the path to higher rates and stronger currencies but the Federal Reserve is still on a quantitive-easing program where they create money and inject it into the markets in the form of treasury purchases. This deflates the value of the dollar. Apparently they will continue to pursue a very accommodative stimulus policy for the rest of the year.

Fed Vice Chair Janet Yellin said in a speech on Saturday it was too soon for the Fed to reverse its extremely accommodative economic policy. "Economic conditions do not yet call for the Fed to exit from its unconventional policies." She said the Fed officials are very aware of the need to ease up on the gas pedal at the "appropriate time" and has a "suite of tools" to enable a graceful exit. She also said continuing to purchase treasuries beyond current committed amounts could hinder that graceful exit. "This could lead to an undesired rise in inflation expectations" and a precise communications strategy will be key to guiding market expectations. This is why Bernanke will begin giving quarterly press conferences on April 27th to give specific guidance on future Fed policy. Of the major government security dealers surveyed last week 67% said the press conferences would lead to greater clarity on Fed policy but 47% also expected they would lead to greater market volatility.

The result of the ECB rate hike was a strong divergence between the two currencies and the dollar fell nearly 1% to a two year low.

Chart of the Euro

Chart of the Dollar Index

The impact of the falling dollar and rising geopolitical concerns in the Middle East and Northern Africa sent oil prices soaring with WTI gaining $2.75 and Brent +3.98. The average price of gasoline has risen to $3.75 per gallon and could be over $3.80 next week.

An OilSlick reader in Maui sent me this picture on Saturday morning of gasoline prices. Obviously there are drawbacks to living in paradise.

Maui Gasoline Prices

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

Oil was not the only commodity spiking to new highs. Silver pulled to within 57 cents of an all time high at $40.93. The high back in 1980 of $41.50 came on an attempt by the Hunt brothers to corner the silver market. The high today is based on rising global demand plus the acquisition of silver bullion, futures and ETFs as a hedge against inflation. Silver is the poor man's gold and it is currently drastically undervalued compared to gold. If historical relationships between gold and silver were to return, as many believe could happen soon, silver would be trading over $100 per ounce.

Silver Chart - Weekly

Silver Chart - Quarterly

Gold continues to hit new highs and closed at $1476 and the high of the day on Friday. The Fed may not believe there is any material inflation in the system but you only need to look at the commodity charts to disprove that theory.

Gold Chart - Weekly

Grain prices have also been rising. Corn has doubled in the past year and that directly impacts the prices we pay for food. Of course the government does not believe food and energy are relative to inflation because of the short-term volatility but as you can see by the charts prices have definitely inflated.

Corn Chart - Weekly

CRB Commodity Index Chart

In a survey taken last week before oil prices spiked to $113 the majority of analysts surveyed did not believe the Fed would change its bias as long as oil prices were high. Many were increasing the odds of a QE3 program in order to offset the impact of high fuel prices to the struggling economy. The Fed Funds Futures are predicting no rate change through December but a hike to just under 1% by June 2012 and a Fed rate just under 1.75% for December 2012. That is far from the accelerated rate of increases most analysts were expecting six months ago. Most believed the Fed would act aggressively once they changed their bias. It sounds like the Fed will continue to refill the punch bowl for many months to come.

Stock news was limited on Friday with Tempur Pedic International (TPX) the biggest gainer at +6 after they projected earnings of 67-68 cents for Q1 and well above the 58-cents analysts expected. Raised revenue estimates of $325 million exceeded estimates of $290 million. You know stock news had to be thin when Tempur Pedic was the big news for the day.

Tempur Pedic Chart

Chip stocks weakened again on worries over supply chain problems out of Japan. These worries increased after Japan reported that 7.1 magnitude aftershock on Thursday. The semiconductor sector was rebounding prior to that Thursday quake and the SOX actually finished the week with a +1.5% gain despite the declines of the last two days.

The Justice Dept approved Google's acquisition of ITA Software but the approval had a list of conditions attached. Google must continue to license the ITA service to online airfare sites for at least five years and on terms described in the settlement as "reasonable and nondiscriminatory." Bing, Orbitz, TripAdvisor, Hotwire and Kayak use the ITA software for about 65% of their bookings. Google must also put in place internal firewalls to prevent access to sensitive information gathered from customers of those companies. Google must also allow the government to monitor compliance for five years. Google is paying $700 million for ITA.

Google is under investigation for antitrust concerns and this deal may actually increase those concerns. Now that the Justice Dept will have a window inside the search company to "monitor" compliance there are some analysts that believe this will open eyes at the Justice Dept on exactly how much control Google really does have. A lawyer for Expedia said "the Justice Dept is clearly reserving judgment on whether it needs to take further enforcement action in this area." Google shares were down -$3 on Friday.

Johnson & Johnson (JNJ) shares were also flat despite an agreement to pay $70 million for bribes in Greece, Poland and Romania relating to sales of medical devices. They even admitted kickbacks to Saddam Hussein's regime. This fine is seen as the first of many because of a long history of bribes to get by restrictions on operating in other countries.

Toyota (Nyse:TM) announced on Friday it would resume production in Japan at half capacity from April 18th to April 27th. The automaker suspended production at all 18 plants in Japan after the March 11th earthquake. Plants will close again from April 28th to May 9th for Japan's Golden Week holiday. Toyota also said it would suspend production at U.S. plants in a series of one day shutdowns because of parts shortages. The shutdowns will impact 25,000 workers. The company said future production plans in Japan and the U.S. would be decided at a later date as more parts came available. Reportedly they are still trying to source 150 different parts where the original maker can't supply due to quake damage. Originally they were trying to find alternate sources for more than 500 different parts so conditions have improved. For cars built in America Toyota claims 85% of the parts are manufactured in North America and only 15% come from overseas. Ford is still not taking orders for various black and red cars because the pigments are made by a company in Japan that is in the evacuation zone around the damaged nuclear plant. If you want a "tuxedo black" Ford you are out of luck.

The political theater played out in multiple acts all day on Friday with every sound bite scripted to blame the other side. The uncertainty weighed on the markets because nobody knew how a government shutdown at midnight on Friday would affect the recovery or the billions in government spending. Late Friday night with less than an hour to spare the gruesome threesome of Boehner, Reid and Obama reached an agreement to cut another $37 billion in Federal spending and avert a government shutdown. This should produce a minor relief rally on Monday morning.

The S&P dipped to 1322 intraday before rebounding into the close. The 1325 level was my buy the dip threshold from Thursday night and baring some unforeseen event over the weekend we should move higher from here. The key resistance levels at 1333 and 1340-44 are still in play. Volume on Friday's decline was the lightest in two weeks at 6.4 billion shares. There is still a lack of conviction but the daily headlines all week were about the impending government shutdown. Who knows how much that affected trading but I am sure there was an impact. If we see a rebound on Monday that takes the S&P back over 1333 I think that would be bullish. Obviously over 1340-44 would be very bullish.

S&P-500 Chart

The Dow rebounded significantly off its -85 point low to end with a loss of only 29 points. Considering the weekend event risk I view that as very acceptable. The dip to 12,320 was exactly to support and without any negative events over the weekend I would think the potential for a rally on Monday is good. Dow component Alcoa will report after the bell but commodity prices have been rising and that should have helped their profits but the trade off was rising input costs. JPM and BAC report later in the week.

Dow Chart - 15 min

Dow Chart

The Nasdaq declined below initial support at 2780 but remained above 2770. The minor rebound was lackluster but at least it was enough to keep it in the consolidation pattern. The Nasdaq was hurt by large declines in ISRG, FSLR, WRLD, STRA, APPL and GOOG but the weakness in the index was really broad based. There were a lot of stocks down over a buck. I believe we have some serious worry building about the impact of the Japanese quake on tech stock earnings.

The quake happened on March 11th and that removed nearly three weeks from the quarter on the production side but even more importantly it may have created some longer-term problems. We will find out in the earnings cycle which companies are seeing longer-term disruptions to the supply chain and there may be more firms confessing than originally thought. If the Nasdaq does rally at the open on Monday we need to pay close attention to its hang time. If it spikes and them immediately falls back below 1280 we could be in trouble.

Nasdaq Chart - 15 Min

Nasdaq Chart - Daily

Fund managers got a buying opportunity on the Russell on Friday. The small cap index fell -1% to close -19 points off its intraday high at 859 on Wednesday. That is more than a -2% drop from the highs and it erased the gains for the entire week. However, it is still up +7% for the year and the biggest gain of the broader market indexes.

I don't know if investors were simply more concerned a government shutdown would hit small caps harder or they were just taking profits off the table to be safe. Minus eight points on the Russell is not the end of the world. We could easily recover that in an opening short squeeze. However, I am concerned a Monday close with anything less than an eight-point gain could be viewed negatively. The Russell fell out of its consolidation pattern and that is a concern.

Russell Chart

The Dow transports are being dragged lower by the higher oil prices. Airlines are raising prices and shippers are raising prices but crude is spiking faster than they can make the changes. The transports were at a new two-year high the prior week with oil at $108. Do you really think the difference between $108 and $113 is that material? I believe this was profit taking caused by the constant headlines on higher prices rather than a material change in the outlook. Of course projections for $130 Brent crude are definitely a drag on sentiment for the sector.

Dow Transport Chart

To put everything in perspective for the coming earnings cycle we have to realize that oil prices have been over $90 since January 1st. Oil companies are raking in the money but companies with a dependence on oil, either as a fuel in some form or a raw material, are going to show a hit to earnings. It may be minimal but I suspect it will exist. That is another wildcard for investors. Was it enough to cause a material drag on the bottom line? Prices did not move over $100 until late February but have remained high and well over that level last week. Was that enough time to damage earnings?

The problem may not be a material decline in Q1 earnings but come in the form of guidance warnings for Q2 and beyond.

Earnings for the S&P are back in the $95-$97 range with a few estimates over $100. They are almost back at their pre recession highs. You would think the recovery was roaring forward at a 6% GDP clip. Obviously the strong earnings are coming from restructuring moves made during the recession. Employers cut payrolls, eliminated low profit divisions and trimmed up into lean, mean, moneymaking machines. If the recovery ever does begin to accelerate to the 4% to 5% growth range they will be making a lot of money. That is what investors have been betting on since March 2009. The Q1 earnings cycle will tell us if that was a good bet or not.

Jim Brown

Send Jim an email

"You can't fail if you never stop trying!" - Yogi Bear

Index Wrap

Pause or a Second Top?

by Leigh Stevens

Click here to email Leigh Stevens

With a stall in the area of prior highs in the S&P and Dow and a bit more shy of that in the Nasdaq, we have to consider the possibility of another top having formed. However, I don't think the market came back this quickly and strongly only to trace out a double top.

It is a high risk game if you're in bullish options strategies and counting on a further up leg in the next week. Prices are headed higher I expect but in terms of trading strategies I like to buy in when bullishness is low and not hang in when progress gets stalled as far as holding index/stock calls. It works differently when buying stocks to hold for the long haul. In terms of bullish sentiment, options traders are showing above average bullishness, but haven't gone to extremes yet in buying calls relative to puts on individual stocks.

The Dow Average (INDU) most looks like it can break out to decisive new highs, possibly headed for the 13000 area next. The Nasdaq Composite could be forming a major double top, but the same pattern does not show up in the big cap Nasdaq 100 (NDX), as NDX is holding above its prior (Nov, 2007) major top. If NDX needs further upside help from bellwether Apple (AAPL) to progress, good luck, as that stock looks like it's been tracing out a broad rectangle top.

I remain bullish; modestly so, to rank or qualify my view at this juncture. I don't see enough selling pressure to take this market down by much. In terms of the S&P 500, the index may pull back to the 1300 area again. A decline to under 1300 that lasted more than 1-2 days would suggest an interim or longer-lasting top.



The S&P 500 (SPX) index has stalled around 1340 not far below its prior highs for this move. The daily chart looks mixed because of this indecision pattern. On a longer-term weekly chart basis (not shown), over time, SPX looks like it could be headed to the 1400-1425 area. This seems unlikely before this month's expiration but before May's in my estimate. To keep on a bullish track, SPX should hold above 1300-1303 on a daily and weekly closing basis. I still rate the odds for new highs as good.

I noted last week that "SPX might struggle to churn through resistance in the area of prior highs between 1332 and 1344..." and this dynamic was in evidence this past week. I've noted resistance around 1340, extending to the mid-Feb 1344 intraday high. Next resistance then looks like 1360, with fairly major resistance at the previously broken up trendline, intersecting in the 1400 area currently.

Near-term support begins around 1320; generally, buying interest in the area between 1309 and 1313 (at the 21 and 50-day moving averages) is what I'm anticipating. Pivotal technical support next comes in at 1300.


Bullishness has picked up since the last bottom, but isn't at that kind of 'extreme' seen at the last top (indicator charts seen above). The 13-day RSI could fall into the 'neutral' 45-50 zone if there's a further downside drift. Neither of these indicators are suggesting extremes.

Moreover, the CBOE Volatility Index fell to around 18 by Friday, down from a peak level of 28 that occurred at the 3/16 low and which is also a mostly neutral reading and at the 10-day moving average.


The S&P 100 (OEX) remains at a crossroads in a chart/technical sense as the index drifts sideways in the area of a key prior high just under 600. We have to consider the possibility that OEX tops again in this area. While I think that the OEX will break out to new highs at some point, short-term the index may struggle to advance above 602-603. An upside penetration of this level on a closing basis would turn the intermediate trend back up.

Resistance implied by a return to the previously broken up trendline is another technical focus. I've noted resistance at the extension of this trendline at 603 currently. Major resistance begins in the 620-625 area.

OEX technical support is at 585-589, extending to 580. A close below 580 would be a bearish development, especially if weakness continued into the following day's session. At that point it would set up a possible retest of OEX's prior intraday lows around 560.


I wrote last time about the Dow 30 (INDU) average having the potential of getting back above its long-term up trendline which I've been noting as a key technical resistance. Extensions of such trendlines, what I sometimes refer to it as 'kiss of death trendlines', are a close watch on my charts. The kiss of death term was coined by an astute technical trader I knew from New York/Wall Street days, Michael Jenkins. ("Geometry of Stock Market Profits; A Guide to Professional Trading for a Living")

INDU's previously broken up trendline continues to 'act as' apparent resistance as can be seen on my daily INDU chart below. This rising line of resistance could mean that the Dow possibly just creeps up along this line 'hugging' this resistance. Conversely, a retreat from the 12400 area could result in a setback to 12200 support or possibly to 12000 again. I doubt we'll see much more than a pullback than to around 12200.

Of course, INDU could again rally to above what had been its long-term up trendline, by breaking out above nearby resistance at 12465. The Russell 2000 (RUT) did this recently but then settled back to below this key trendline by week's end. I've noted next resistance as 12600. Major resistance begins around 13000, extending to 13130.

THE 30 DOW STOCKS p> I rate as technically strong/bullish: AA, BA, CAT, CVX, IBM, KO, T, UTX, and VZ

Moderately strong/bullish: DD

Mixed (e.g., faltering uptrends): AXP, DIS, HD, JPM, KFT, PFE, MMM, TRV, and XOM

Moderately bearish to markedly bearish charts: BAC, CSCO, GE, HPQ, INTC, HPQ, MCD, MRK, MSFT, PG, and WMT

This current 'bottom's up' analysis suggests some further upside potential in INDU, but not a major new up leg absent a rebound in some of 9 'mixed' stocks and/or some of the 11 more bearish looking charts.


The Nasdaq Composite (COMP) did have prior strong upside momentum and the sideways drift of last week may be a consolidation before a push up through a line of resistance at 2815. That's the bullish scenario and implies then a further push above the prior intraday 2840 high. Next resistance comes in around 2862 currently, at the previously penetrated up trendline; what was support at the trendline has 'become' potential resistance.

The more bearish near-term scenario is for a pullback to support starting around 2750 and extending to 2730. Major support begins at 2700.

I think COMP is headed higher but I'll be watching the S&P 500 (SPX) for how it does in taking out ITS prior high. The S&P has been occupying the prior leadership role provided previously by the tech heavy Nasdaq Composite. Tech stocks had a big run when investors assessed the economy wasn't in a growth pattern strong enough to warrant buying the more cyclical (with the economy) stocks traditionally listed on the NYSE.

The Relative Strength Index (RSI) and my CPRATIO sentiment indicator aren't at 'overbought' extremes. RSI was headed in that direction but a sideways to only slightly lower trend tends to pull this indicator down again fairly quickly.


The Nasdaq 100 (NDX), which was in a strong rebound, faltered this past week and we've seen slightly lower daily highs and lows since then. There's a small rounding top formation seen on the hourly chart (not shown) that suggests there could be a further slide. Support is at 2300, then at 2275, extending to around 2253-2250.

There's also a bullish interpretation suggested by the recent sideways to lower move seen as a possible bull flag that has formed prior to another rally. However, NDX should rally SOON as an outcome of this pattern. If the index continues to drift lower, it negates this chart interpretation as 'flag' type patterns form for brief periods only, covering just a few bars or trading periods.

Resistances levels are at 2359-2360, then at 2375, extending to the 2400 area. 2470, on up to 2500, is the start of fairly major resistance. At some point, maybe not in this coming week, I envision another rally that could carry to around 2500. I don't see current upside potential as to much more than to this area but the unknown is whether there's a breakout to back ABOVE the previously broken up trendline.

My current 'worst case' scenario is for pullback to the 2200-2190 area. In the next few weeks I think it more likely that NDX will see a move toward 2500 than to sink to 2200 again.


The Nasdaq 100 tracking stock symbol has reverted to "QQQ" from QQQQ.

QQQ looks to be at a crossroads on a short-term basis. I think it's more likely another QQQ rally sets up than it is for the stock to drift much lower. Resistance levels to be tested: besides the most recent intraday high at 57.9, there's the previous 58.3 peak; next resistance is assumed to come in at the highest prior top, at 59.0. A move above 59 would suggest potential back up to resistance suggested at the highlighted trendline, currently intersecting around 60.7.

If instead, QQQ continues to slide, especially to below 56.0, then a move to the 55 area looks like a next target.

The daily volume numbers have on balance been declining on recent down days, consistent with a still bullish price trend.


The Russell 2000 (RUT) didn't prove to the mighty leader index in the face of lackluster buying interest in the overall market. RUT got only up to where I noted initial resistance last week at 860. It looks like a bout of profit taking set in on Friday, pulling RUT's Close back below its previously regained up trendline.

I should note, because my daily chart doesn't take us back far enough, that RUT built a major top at 850-856 back in June-July 2007. By October ('07) RUT peaked once again at 850. So, we're in a powerful price area with this Index. The 2007 856 top was the previous all-time RUT top. RUT has extended its absolute historical high slightly here by a hair's breath.

Friday's close brought the Russell to just under its short-term up trendline, bearish on a short-term basis. However, if RUT can hold around 840 and rebound by Tuesday-Wednesday, the index could quickly challenge 860 again. Major resistance begins at 877-880 and extends at around 900 by mid-May.

If RUT continues to slip pivotal support is provided by the 50-day moving average, currently at 816. I'd call key support as 820-816. Fairly major support comes in at 800.


New Option Plays

Diversified Technology and Drug Makers

by James Brown

Click here to email James Brown

Editor's Note:

Energy stocks were showing some relative strength on Friday. There are plenty of stocks that could be bullish candidates in this sector. DVN caught my eye with the traders buying the dip twice near $90.00. Aggressive traders may want to buy calls on DVN on a move over $92.50. I am watching for a move past $93.50 as a potential entry point.

CXO is another energy stock that looks bullish. The stock is starting to bounce from technical support at its 50-dma. I was very tempted to buy calls now with a tight stop under the 50-dma. You could target a quick move toward resistance near $110.00. More conservative traders could wait for a breakout over $110 before initiating positions.

BCR is a healthcare stock. I'm watching for a dip near $98.00. VMW is a technology company. Look for a move past $84.00 or $85.00 as a potential entry point.

If you prefer bearish candidates given the market's recent weakness, then check out these stocks: SHLD, LEA, COH, MMS, and COHR all looks like possible bearish put candidates.

- James


Honeywell Intl. Inc. - HON - close: 58.30 change: -0.19

Stop Loss: 56.99
Target(s): 62.75
Current Option Gain/Loss: + 0.0%
Time Frame: less than two weeks
New Positions: Yes, see below

Company Description

Why We Like It:
HON is a very diversified technology and manufacturing company. The stock rallied to new two-year highs at the end of March and has slowly been consolidating lower. Prior resistance near $58.00 is now acting as support. Friday's intraday bounce from this level near $58 looks like a new bullish entry point. However, the broad market indices look vulnerable. We want to be cautious launching new bullish positions. Therefore I am suggesting small positions either 1/2 or 1/4 your normal trade size. We'll use a stop loss at $56.99. More conservative traders could put their stop closer to Friday's low near $57.80 instead. Our upside target is $62.75 but we will plan on exiting ahead of the April 21st earnings report.

Open Small Positions Now

- Suggested Positions -

Buy the May $60.00 call (HON1121E60) current ask $1.03

Annotated Chart:

Entry on April 11th at $ xx.xx
Earnings Date 04/21/11 (confirmed)
Average Daily Volume = 4.0 million
Listed on April 9th, 2011

Vertex Pharmaceuticals - VRTX - close: 48.16 change: +1.25

Stop Loss: 45.95
Target(s): 51.85, 58.50
Current Option Gain/Loss: + 0.0%
Time Frame: about 2, maybe 3 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
VRTX soared to new nine-year highs back in February this year on some positive clinical trial data. Shares have been pretty volatile since then but VRTX is developing a trend of higher lows. The stock is marching to the beat of its own drum and doesn't seem as influenced by the broad market indices. That doesn't mean it will be immune if the S&P 500 or NASDAQ declines. This remains a higher-risk trade because VRTX has been so volatile. I can't find a confirmed earnings date but it looks like VRTX might report on April 21st. That gives us less than two full weeks.

I am suggesting very small bullish positions now. Our first target is $51.85. Our second, much more aggressive target is $58.50 but again, we don't have a lot of time so we may have to exit early. I am listing our stop at $45.95, under last week's lows.

- Open Very Small Bullish Positions -

- Suggested Positions -

Buy the May $50.00 calls (VRTX1121E50) current ask $2.70

Annotated Chart:

Entry on April 10th at $ xx.xx
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume = 2.1 million
Listed on April 9th, 2011

In Play Updates and Reviews

April Expiration Looms

by James Brown

Click here to email James Brown

Editor's Note:

Attention! I want to remind you that April options expire in five trading days. If you're holding April calls you will want to seriously consider an early exit now. Or you can risk waiting with the expectation the market might bounce after last week's consolidation.

The Q1 earnings season is about to begin. We do not want to hold over any earnings reports.


Current Portfolio:

CALL Play Updates

Baker Hughes - BHI - close: 71.57 change: +0.35

Stop Loss: 68.75
Target(s): 76.50, 79.75
Current Option Gain/Loss: -79.0% and -21.4%
Time Frame: 4 to 6 weeks
New Positions: see below

04/09 update: BHI was upgraded on Friday morning. The news produced a gap higher but traders sold into strength. Shares faded back toward their lows for the week. While the long-term trend is up, BHI has developed a short-term bearish trend of lower highs. I have been suggesting readers buy a dip near $70.00 and technical support at the 50-dma but I am concerned with the wider market's weakness. Readers may want to wait for a new rise past $73.50 instead. Remember that April options expire soon. Our first target is $76.50. Our second target is $79.75. More aggressive traders could aim higher.

- Suggested Positions -

Long the April $75 calls (BHI1116D75) Entry @ $1.00

- or -

Long the May $75 calls (BHI1121E75) Entry @ $2.61

04/02 New stop loss @ 68.75


Entry on March 24th at $72.35 *gap higher*
Earnings Date 05/03/11 (unconfirmed)
Average Daily Volume = 4.6 million
Listed on March 23rd, 2011

Baidu, Inc. - BIDU - close: 141.88 change: +2.78

Stop Loss: 132.40
Target(s): 139.00, 147.50
Current Option Gain/Loss: +275.0%, and +134.3%
Time Frame: 4 to 5 weeks
New Positions: see below

04/09 update: BIDU produced a decent bounce on Friday with a +2% gain. Shares are close to their all-time highs set earlier in the week. I am growing more conservative given the state of the U.S. markets and we will exit our April $130 calls now. Meanwhile, we will raise our stop loss to $132.40. More conservative traders may want to up their stops closer to $135.00 or even consider selling your May calls now to lock in gains. I am not suggesting new positions at this time. Our final target is the $147.50 level.

We will plan to exit ahead of BIDU's late April earnings report. BIDU can be a volatile stock so I would consider this a more aggressive, higher-risk trade.

- Suggested Positions -

April $130 calls (BIDU1116D130) entry @ $3.20, Exit @ $12.00 (+275%)

- or -

Long the May $135 calls (BIDU1121E135) entry @ $5.10

04/09 New stop loss @ 132.40, Exit April Calls Now (+275%)
04/04 New stop loss @ 129.75
04/02 New stop loss @ 127.50
04/01 1st Target Hit @ $139.00. Options @ +201% & +100.9%
03/26 New stop loss @ 124.00


Entry on March 22 at $127.00
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume = 6.0 million
Listed on March 21st, 2010

Caterpillar Inc. - CAT - close: 109.82 change: -0.03

Stop Loss: 107.40
Target(s): 109.00, above $112 for Aprils, $114.90 for Mays
Current Option Gain/Loss: + 47.0%, and +20.6%
Time Frame: 4 to 6 weeks
New Positions: see below

04/09 update: CAT spiked to a new high last Monday and has been consolidating lower ever since. I am not suggesting new positions and readers will want to strongly consider an early exit now to lock in gains. If CAT sees another bounce over $112.00 we will exit the rest of our April calls early. Please note that I am raising our final target for the May calls to $114.90, from $114.00 (FYI: the high on Monday was $113.93).

- Suggested Positions -

Long the April $105 calls (CAT1116D105) Entry @ $3.40

- or -

Long the May $110 calls (CAT1121E110) Entry @ $3.15

04/04/11 New stop loss @ 107.40.
04/02/11 New stop loss @ 104.75, Consider an early exit now
03/26/11 New stop loss @ 103.75
03/25/11 1st Target Hit @ 109.00, Options @ +58.8%, +37.7%


Entry on March 18th at $104.99 (gap higher)
Earnings Date 04/29/11 (unconfirmed)
Average Daily Volume = 7.4 million
Listed on March 17th, 2010

CH Robinson Worldwide Inc. - CHRW - close: 74.28 change: -0.49

Stop Loss: 71.90
Target(s): 79.50
Current Option Gain/Loss: -15.5%
Time Frame: 3 to 4 weeks
New Positions: see below

04/09 update: Prior resistance near $74.00 should be new support and thus Friday's dip near $74.00 (the low was $73.74) should be a new bullish entry point to buy calls. However, we may want to think twice about bullish positions on a transport stock with oil prices surging higher! If you're going to launch positions here I would keep your position size small to limit your risk. We are raising our stop loss to $72.75.

We do not want to hold over the late April earnings report. FYI: The Point & Figure chart for CHRW is bullish with a $91 target.

- Suggested Positions -

Long the May $75.00 calls (CHRW1121E75) Entry @ $2.25

04/09 New stop loss @ 72.75


Entry on April 7th at $74.50
Earnings Date 04/26/11(confirmed)
Average Daily Volume = 1.2 million
Listed on April 2nd, 2011

CSX Corp. - CSX - close: 76.92 change: -0.99

Stop Loss: 74.45
Target(s): 79.90, 83.75
Current Option Gain/Loss: -90.5%
Time Frame: 4 to 6 weeks
New Positions: see below

04/09 update: Railroad stocks have been slowly correcting lower and look like they have finally found short-term support. If there is one group that is going to handle higher fuel prices better than the rest it should be the trains. CSX is nearing potential support in the $76-75 area. Aggressive traders could buy calls now while more conservative traders could wait for a dip closer to $75.00. If you do launch positions now I'd prefer the April $75s or April 77.50s instead of the $80s. Our final target remains the $83.75 mark.

CSX is due to report earnings on April 19th and we plan to exit ahead of that report to avoid holding over the announcement.

Our plan was to keep our position size small to limit our risk. FYI: The Point & Figure chart for CSX is bullish with a $98 target.

- Small Bullish Positions -

Long the April $80 calls (CSX1116D80) Entry @ $1.06

04/05 New stop loss @ 74.45
03/28 1st Target Hit @ 79.90, Option @ $1.90 (+79.2%)


Entry on March 21 at $77.25
Earnings Date 04/19/11 (confirmed)
Average Daily Volume = 3.4 million
Listed on March 19th, 2010

Fortune Brands - FO - close: 63.20 change: -0.07

Stop Loss: 61.75
Target(s): 67.50, 69.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

04/09 update: FO has been going nowhere the last three days as the stock consolidates sideways. We are still waiting for a breakout through the top of its trading range.

I am suggesting a trigger to buy calls at $64.00. If triggered our targets are $67.50 and $69.75. I would aim higher but we do want to exit ahead of the late April earnings report.

FYI: A move past $64.00 would create a brand new quadruple top breakout buy signal.

Trigger @ $64.00

- Suggested Positions -

Buy the May $65.00 call (FO1121E65) current ask $1.25


Entry on April xxth at $ xx.xx
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume = 973 thousand
Listed on April 5th, 2011

SPDR Gold ETF - GLD - close: 143.66 change: +1.15

Stop Loss: 137.00
Target(s): 149.50, 154.50
Current Option Gain/Loss: +18.4%, and +18.0%
Time Frame: 6 to 12 weeks
New Positions: see below

04/09 update: Commodities continue to rally higher thanks to renewed weakness in the U.S. dollar. Gold futures rallied to new all-time highs at $1,476 an ounce on Friday. This boosted the GLD gold ETF to $143.84 intraday. If you're looking for a new entry point I would widen the entry point range to dips in the $142.00-140.00 zone. Our targets are $149.50 and $154.50 within the next six to twelve weeks.

FYI: The Point & Figure chart for GLD is bullish with a $172 target.

- Suggested Positions -

Long the May $145 call (GLD1121E145) Entry @ $1.84

- or -

Long the June $150 call (GLD1118F150) Entry @ $1.33


Entry on April 6th at $142.40
Earnings Date --/--/--
Average Daily Volume = 12.5 million
Listed on April 5th, 2011

Goldman Sachs - GS - close: 160.96 change: -1.44

Stop Loss: 157.00
Target(s): 169.75
Current Option Gain/Loss: - 54.5%
Time Frame: about two weeks
New Positions: see below

04/09 update: Warning! We may have to abandon ship pretty early on this GS trade. If Thursday's failed rally at the 100-dma wasn't bad enough the stock produced a bearish engulfing candlestick pattern on Friday and closed back under short-term resistance at $162.00. Conservative traders will want to exit early now. If we see GS close under $160.00 I will probably drop this play early. I am not suggesting new bullish positions at this time.

Our target is $169.75. Since we plan to exit before April 19th and April options expire after April 20th I am suggesting April options but these will be much more volatile than May or later options.

- Suggested Positions -

Long the April $165.00 call (GS1116D165) Entry @ $1.10


Entry on April 7th at $162.50
Earnings Date 04/19/11 (confirmed)
Average Daily Volume = 4.3 million
Listed on April 6th, 2011

Jones Lang Lasalle Inc. - JLL - close: 103.16 change: -1.16

Stop Loss: 97.90
Target(s): 102.50, 109.00
Current Option Gain/Loss: + 8.8%
Time Frame: 4 to 8 weeks
New Positions: see below

04/09 update: Time is almost up. We have five days left before April options expire. It's time to start looking for an exit on this JLL trade. Right now I am tempted to exit early on any bounce back into the $104.50-105.00 area. Officially our exit target is $109.00 but we are almost out of time. No new positions at this time.

Prior Comments:
We wanted to keep our position size small to limit our risk. Our targets are $102.50 and $109.00.

- Suggested Positions - (Small Positions)

Long the April $100 calls (JLL1116D100) Entry @ $3.40

04/02 New stop loss @ 97.90
04/01 1st Target hit @ 102.50, Option @ +2.9%
03/30 new stop loss @ 96.40
03/24 New stop loss @ 95.40
03/17 Exited March calls @ open, Estimated exit @ 0.10 (-94.2%)
03/10 New stop loss @ 93.85


Entry on February 28th at $97.96
Earnings Date 04/27/11 (unconfirmed)
Average Daily Volume = 386 thousand
Listed on February 26th, 2010

Noble Corp. - NE - close: 45.60 change: +0.62

Stop Loss: 43.95
Target(s): 49.75, 53.50
Current Option Gain/Loss: -18.8%, and -29.1%
Time Frame: 3 to 4 weeks
New Positions: see below

04/09 update: After underperforming most of the week the energy stocks finally showed some strength on Friday. Another big gain for oil didn't hurt but oil stocks had been ignoring strength in oil most of the week. NE produced a +1.3% gain and looks poised to breakout past resistance near the $46.50 area.

I would be tempted to buy a breakout past $46.50 but keep in mind that NE has earnings on April 20th and we do not want to hold over the announcement.

Our targets are $49.75 and $53.50. I would expect the $50.00 level to offer some resistance and it could take NE a little while to break through it.

- Suggested Positions -

Long the May $46.00 calls (NE1121E46) Entry @ $2.17

- or -

Long the May $48.00 calls (NE1121E48) Entry @ $1.37


Entry on March 31st at $46.25
Earnings Date 04/20/11 (confirmed)
Average Daily Volume = 4.5 million
Listed on March 30th, 2011

Norfolk Southern - NSC - close: 67.69 change: -0.44

Stop Loss: 65.70
Target(s): 72.00, 74.90
Current Option Gain/Loss: - 90.0%, and -25.0%
Time Frame: 4 to 6 weeks
New Positions: see below

04/09 update: NSC has been consolidating lower all week after failing at $70.00 the week before. Shares did produce a nice intraday bounce from $67.00 on Friday. Aggressive traders may want to buy calls on this bounce. Or you could wait for a dip closer to the $66.00 level, which should be stronger support. I am raising our stop loss to $65.70. Our targets are $72.00 and $74.90. We do not want to hold past NSC's late April earnings report.

- Suggested Positions -

Long the April $70 calls (NSC1116D70) Entry @ $0.50

- or -

Long the May $70 calls (NSC1121E70) Entry @ $1.40


Entry on March 25th at $67.84
Earnings Date 04/27/11 (unconfirmed)
Average Daily Volume = 3.0 million
Listed on March 24th, 2011

Panera Bread Co. - PNRA - close: 120.17 change: -2.05

Stop Loss: 119.00
Target(s): 129.50, 134.50
Current Option Gain/Loss: - 82.9%, and -47.7%
Time Frame: 3 to 5 weeks
New Positions: see below

04/09 update: PNRA has seen a dramatic correction lower from $129 to $120 in three days. The close under $125 and what should have been support near the $122.50 area is bearish. Shares did manage to close above $120 so nimble traders could buy a bounce from current levels. Readers may want to up their stop toward Friday's low of $119.39.

Our second and final target is $134.50. We do not want to hold over the April 26th earnings report.

FYI: PNRA is currently trading over the $120 area. The last time the company had a stock split it was back in June 2005 with shares in the $120s. You never know when they might announce a split although if they do it would probably be with their earnings report.

- Suggested Positions -

Long the April $125 call (PNRA1116D125) Entry @ $2.05

- or -

Long the May $130 call (PNRA1121E130) Entry @ $3.35

04/04 1st Target Hit @ 129.50. The April option was at $4.82 (+135.1%) and the May option was at $5.25 (+56.7%)


Entry on March 29th at $123.55
Earnings Date 04/26/11 (confirmed)
Average Daily Volume = 363 thousand
Listed on March 26th, 2011

Praxair Inc. - PX - close: 102.29 change: -0.23

Stop Loss: 97.90
Target(s): 104.75, 109.00
Current Option Gain/Loss: + 5.1%, and + 3.5%
Time Frame: 4 to 5 weeks
New Positions: see below

04/09 update: PX is holding up reasonably well. Shares spent most of last week consolidating sideways in the $102-104 zone. I would still expect a dip near the $100 level. Wait for a dip near $100 before considering new bullish positions. Please note our new stop loss at $97.90.

Our first target to take profits is at $104.75. Our second and final target is $109.00. We will plan to exit ahead of the late April earnings report.

Open bullish positions now, above $100

- Suggested Positions -

Long the May $100 call (PX1121E100) entry @ $3.90

- or -

Long the May $105 call (PX1121E105) entry @ $1.40

04/09 new stop loss @ 97.90


Entry on March 30th at $101.54
Earnings Date 04/27/11 (unconfirmed)
Average Daily Volume = 1.4 million
Listed on March 29th, 2011

Quality Systems Inc. - QSII - close: 83.10 change: -1.91

Stop Loss: 82.95
Target(s): 87.00, Aprils-89.50, Junes-94.00
Current Option Gain/Loss: - 70.3%, and + 2.9%
Time Frame: 4 to 8 weeks
New Positions: see below

04/09 update: It was a rough week for QSII. Shares did hit new highs early on but the last three days has seen some dramatic profit taking. On the weekly chart the action definitely looks like a bearish reversal. The selling stalled on Friday near short-term support near $83.00. If the stock market sees any weakness on Monday I would expect QSII hit our stop loss at $82.95. I am not suggesting new positions at this time. More conservative traders will want to seriously consider an early exit now. Our second and final target for the April calls is $89.50. Our second and final target for our June call is $94.00.

Prior Comments:
FYI: Readers will be interested to note that the most recent data listed short interest in QSII at almost 28% of the very small 17.5 million-share float. That's definitely a recipe for a short squeeze. Plus, the Point & Figure chart for QSII is bullish with a $119 target.

- Suggested Positions -

Long the April $85 calls (QSII1116D85) Entry @ $1.35

- or -

Long the June $85 calls (QSII1118F85) Entry @ $3.40

04/05 New stop loss @ 82.95
04/05 New exit target for our April options at $89.50
04/04 1st Target Hit @ 87.00. Options @ +81.4% and +55.8%
04/02 New stop loss @ 79.90, Adjusted targets to $87.00 and $94.00
03/24 New stop loss @ 78.60


Entry on March 4th at $81.44
Earnings Date 05/31/11 (unconfirmed)
Average Daily Volume = 154 thousand
Listed on March 3rd, 2010

Sohu.com - SOHU - close: 96.35 change: -1.02

Stop Loss: 87.40
Target(s): 99.00, 107.50
Current Option Gain/Loss: +17.6%
Time Frame: 3 to 4 weeks
New Positions: see below

04/09 update: The rally in SOHU has stalled in the $98-99 zone for the third time this week. The high on Friday was $98.72. With our first target at $99.00, readers may want to consider an early exit right now. I am not suggesting new positions at these levels.

We will plan to exit before the earnings report in late April. I want to reiterate that this is an aggressive, higher-risk trade. I'm suggesting we keep our position size small to limit our risk. FYI: The Point & Figure chart for SOHU is bullish with a $120 target.


- Suggested Positions -

Long the May $100 call (SOHU1121E100) Entry @ $4.25


Entry on April 4th at $92.50
Earnings Date 04/25/11 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on April 2nd, 2011

Stericycle Inc. - SRCL - close: 89.70 change: -0.80

Stop Loss: 86.75
Target(s): 93.50, 98.50
Current Option Gain/Loss: +10.0%
Time Frame: 4 to 5 weeks
New Positions: see below

04/09 update: SRCL's late day bounce near $89.00 on Friday looks like a new bullish entry point. However, given the market's precarious position we may want to wait for a dip closer to $88.00 before initiating positions on SRCL. Readers might want to adjust their stop losses closer to the $88.00 level. Our targets are $93.50 and $98.50.

We will plan to exit ahead of the late April earnings report.

- Suggested Positions -

Long the May $90 calls (SRCL1121E90) Entry @ $2.50

04/04 New stop loss @ 86.75
04/02 New stop loss @ 85.75


Entry on March 30th at $88.93
Earnings Date 04/27/11 (confirmed)
Average Daily Volume = 479 thousand
Listed on March 29th, 2011

Whole Foods Market Inc. - WFMI - close: 62.90 change: -1.44

Stop Loss: 59.90
Target(s): 64.75, 69.00
Current Option Gain/Loss: - 66.1%, and + 1.3%
Time Frame: 3 to 4 weeks
New Positions: see below

04/09 update: WFMI has spent the entire last week correcting lower. Shares are nearing what could be potential support near $62.00. I would wait for a bounce near $62 before considering new bullish positions. Readers might want to raise their stop loss closer to the $62 area. Our final target is the $69.00 level. FYI: The Point & Figure chart for WFMI is bullish with an $86 target.

- Suggested Positions -

Long the April $65 calls (WFMI1116D65) Entry @ $0.65

- or -

Long the May $65 calls (WFMI1121E65) Entry @ $2.25

04/02/11 new stop loss @ 59.90
03/30/11 1st Target Hit @ 64.75, April $65 call @ 1.25 (+92.3%)
May $65 call @ 3.50 (+55.5%)
03/29/11 new stop loss @ 59.49
03/26/11 New stop loss @ 58.49


Entry on March 21 at $61.55
Earnings Date 05/11/11 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on March 19th, 2010

Wellpoint Inc. - WLP - close: 68.95 change: -0.12

Stop Loss: 67.45
Target(s): 72.25, 74.75
Current Option Gain/Loss: -77.4%, and -38.2%
Time Frame: 3 to 5 weeks
New Positions: see below

04/09 update: WLP has spent the last three days chopping sideways in the $68.50-70.00 zone. Personally, I would prefer to see a rally past the $70.00 mark before considering new bullish positions. Please note our new stop loss at $67.45. We do not want to hold over the late April earnings report.

FYI: Readers may want to keep their position size small.

- Suggested Positions -

Long the April $70 call (WLP1116D70) Entry @ $1.55

- or -

Long the May $70 call (WLP1121E70) Entry @ $2.80

04/09 New stop loss @ 67.45
04/02 new stop loss @ 66.75


Entry on April 1st at $70.25
Earnings Date 04/27/11 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on March 26th, 2011


Capital One Financial - COF - close: 51.65 change: -0.30

Stop Loss: 50.85
Target(s): 54.75, 59.00
Current Option Gain/Loss: -29.6% and -96.9%
Time Frame: 4 to 6 weeks
New Positions: see below

04/09 update: I am giving up on our COF call play. The mid March lows in the banking sector might be a bottom for the sector but COF is just not moving for us. The stock appears to slowly be forming a bearish double top pattern. I am suggesting an early exit now.

NOTE: Realistically the April $55s have already vanished so I would go ahead and hold them since the damage is done. Personally, I would plan to sell on any bounce that boosted the option above $0.35 or higher.

- Suggested Positions -

April $50 call (COF1116D50) Entry @ $2.63, Exit @ 1.85 (-29.6%)

- or -

April $55 call (COF1116D55) Entry @ $0.65, Exit @ 0.02 (-96.9%)

04/09 Early Exit. Options @ -29.6% and -96.9%
04/05 New stop loss @ 50.85
03/24 New stop loss @ 49.49


Entry on March 16th at $51.08
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume = 4.4 million
Listed on March 15th, 2010