Option Investor

Daily Newsletter, Saturday, 4/16/2011

Table of Contents

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

Market Wrap

Economics Overcomes Earnings

by Jim Brown

Click here to email Jim Brown

Better than expected economics overcame an earnings miss by Google and Bank America and potential weekend event risk to post a minor gain ahead of next week's earnings parade.

Market Statistics

Starting the morning off was the Consumer Price Index for March. The headline number came in at +0.5% with energy prices the main driver. The more important core CPI rate showed a gain of +0.1%. The core rate for the trailing 12 months rose to +1.2%. That is well below the Fed's desired range so the Fed is under no pressure to change its current policy.

The core rate has finally started to rise after several months at zero. The fear of deflation has eased and the Fed will be breathing easier in the months to come since it appears the trend is finally headed in the right direction. Energy prices rose +3.5% for the month and food prices +0.8%. On a year ago basis energy is up +15% and food +2.9%. Gasoline was up 5.6% in March after a +4.7% gain in February.

This was a positive report because it shows growth in pricing but that growth was minimal and means the Fed can remain safely on the sidelines for several more months.

CPI Chart

The New York Empire Manufacturing Survey spiked +4.2 points to 21.7 for the April reading. This was much stronger than analysts had expected and a 12-month high. New orders exploded higher to 22.3 from 5.8. Inventories turned negative at -1.3 from an already low 3.9. This pushed the activity index to 23.6. That is the difference between new orders and inventory. If inventories were 22 and new orders 23 there would be no need to increase manufacturing because orders could be filled from inventory. The spike to 23.6 suggests a sharp increase in activity is needed.

Even more impressive was the spike in the employment component from 9.1 to 23.1. That is the highest level since May 2004. The prices paid index fell from 71.4 to 56.4 suggesting the spike due to high commodity prices is fading.

This is the first manufacturing report for April and this report suggests we could see a sharp increase in activity when the Philly Fed and other regional reports are released. This is what traders want to see, a sharp increase in activity after several years of minimal growth.

Industrial production for March rose by +0.8% and the biggest gain so far this year. Factory output grew by an annualized +6% for the first quarter. Capacity utilization rose to 77.4% and a new high for this economic cycle. The early quarter lull in activity appears to have ended in March with a sudden spurt of activity. If that carries over into April we could see a strong month. The earthquake in Japan does not appear to have caused a major disruption in U.S. activity but we may not see that until April.

Industrial Production Chart

Consumer sentiment rose two points to 69.6 but remains lackluster after the big drop in March. High gasoline prices, low home prices and high unemployment are still the primary reasons given. Two weeks of government shutdown threats in the news could also have been a drag. The present conditions component only rose by 0.2 to 82.7 but the expectations component rose from 57.9 to 61.2. The index hit a three-year high at 77.5 in February before declining to 67.5 in March.

The higher gasoline prices deeper into April are probably going to pressure the second reading on sentiment in two weeks. Three fifths of the survey is done in the first half of the month and the other two fifths in the last half. Gasoline averaged $3.82 nationwide this weekend.

Given the earthquake in Japan and the headlines about radiation reaching the U.S., the country entering a new war in Libya and gasoline over $3.50 the sentiment numbers were definitely higher than I was expecting. As these problems get resolved or at least drop off the headlines I think we will see substantial improvement. However, the political theater that will be hogging the headlines after the Easter recess will bring the budget battle back to the forefront. Everyone will be warning of impending doom if nothing is done about cutting the budget and handling the debt. This is likely to depress sentiment again for the first May reading.

Consumer Sentiment Chart

The calendar for next week is relatively light with the Philly Fed Manufacturing Survey the most important report for the week. Other reports of interest are the three housing reports but everybody already knows the news is bad. The hope is for a "less bad" report on home sales. Two million foreclosures still in the pipeline will continue to depress prices.

Economic Calendar

The real news for next week will be the earnings calendar. More than 20% of the S&P-500 will report and expectations are slipping. Companies already disappointing include Bank America, JP Morgan, Google, Infosys and Alcoa and this was just the first week with a very light calendar. Next week is heavy in tech and financial earnings and those are the two biggest market sectors.

Intel and IBM report on Tuesday and that could be a serious inflection point for the market. There are some credible worries over Intel's earnings but so far IBM has remained above the fray. IBM is not really impacted by the retail consumer but Intel is tied to that fickle clientele.

On the financial front the major reports will come from C, USB, WFC, GS, MS, AXP and COF but there are dozens of smaller banks reporting as well. Bank earnings have not been well received so far this cycle.

The largest oil service companies Halliburton and Schlumberger report this week and they should say positive things about activity in the sector although both have already warned that unrest in the Middle East has impacted their earnings.

I highlighted GE on Thursday but nobody really cares about their earnings. It is their guidance that keeps everyone tuned into the call. GE is seen as a proxy for the economy since they have businesses in nearly every sector. Their earnings should be viewed as an economic report.

By far the biggest hurdle will be the IBM/INTC reports on Tuesday night. Once past those reports and the Wednesday morning reaction the trading volume will quickly shrink even more. With Friday a market holiday the majority of traders will be packing up and heading for the door by noon on Wednesday.

Earnings Calendar

The big loser on Friday was Infosys. (INFY) The stock lost -13% after posting a weak outlook that produced a cloud over the sector. Earnings were inline with estimates but sales were weaker than expected and the company's 63-cent profit forecast for Q2 was well below the analyst estimates of 69-cents. For the full year INFY predicted a profit around $2.85 compared to analyst estimates of $3.09. Needless to say INFY did not have a good day.

Infosys Chart

Bank of America (BAC) reported earnings of $2.05 billion on Friday that were sharply lower than the $3.18 billion it earned in the comparison quarter. BAC said it had to set aside another $1 billion for repurchasing mortgages from investors who bought mortgage-backed securities. The bank also said it had agreed to pay Assured Guaranty $1.6 billion in a different dispute over mortgage repurchases. The total charge related to mortgages was more than $3.8 billion. BAC shares fell to a three-month low at $12.82 on the news.

BAC Chart

You may remember JP Morgan (JPM) took a billion dollar charge with earnings earlier in the week due to mortgage servicing problems and another $650 million in increased foreclosure costs. CEO Jamie Dimon said it will continue to cost more money to service mortgages because of new regulations and litigation. JPM said its mortgage portfolio declined by -12% for the quarter.

This is going to be a challenge for Wells Fargo (WFC) when they report next week. They don't have near as many mortgages as BAC but they also don't have the giant asset base to offset the losses. Dick Bove warned the earnings could be ugly because they don't have the same trading divisions to offset losses elsewhere in the bank. JPM only posted decent earnings because of big profits in their trading. WFC declined -5% for the week after the JPM earnings.

Wells Fargo Chart

On the positive side of earnings Charles Schwab (SCHW) posted earnings of 20-cents compared to zero in the same quarter last year. Revenue rose to $1.21 billion from $979 million. Analysts had predicted earnings of 19-cents. Schwab said rising markets had attracted more customers leading to new accounts and existing accounts had placed more trades. Competition from other brokers forced Schwab to lower fees for trades but they made up for it through fees earned from their Schwab mutual funds. Retail investors that had grown tired of the volatility moved cash into the Schwab funds. Average revenue per trade fell to $12.12 from $12.60 a year ago. Daily trades averaged 472,500 a +14% increase over Q4.

The CFO said investor sentiment had definitely improved. In fact cash balances in retail accounts were at their lowest since before the 2008 crisis because everyone was invested in the market in some way. Client assets rose +10% to $688.6 billion. Shares of Schwab posted a gain after the report making them one of a very few post earnings gainers for the week.

Schwab Chart

Cisco closed at a two year low after Auriga downgraded the company from buy to hold. It has not been a good two weeks for Cisco with badly worded emails from John Chambers suggesting things inside the networker were not going well. Cisco also said it was going to shutdown Flip Video, a company it paid $500 million for just two years ago. Multiple articles critical of management, margins and sales made headlines. When your hot, your hot and when your not, you not. Cisco is not hot today and odds are good we will see the shares at a lower level soon. The company said it completed the acquisition of cloud computing company newScale this week. No terms were disclosed.

Cisco Chart

Google ended the day with a $48 loss after earnings disappointed. Other big caps like Apple also declined on fears they may suffer the same fate when they report next week. It is not enough to hit the analyst estimates. You also have to please the street with your forecast.

Google Chart

Apple Chart

Apple has a monster cloud over its earnings report next Wednesday. There are constant rumors about supply chain issues as a result of the earthquake in Japan. Steve Jobs has asked customers to be patient saying, "We are making the iPad 2 as fast as we can" but has not said there were any supply chain issues. Apple likes to keep any bad news to themselves as long as possible but they may be obligated to report any material manufacturing disruptions with their earnings. Fears of these revelations plus a general worry that sales may not be as robust as expected have put pressure on the stock price. JP Morgan analyst, Mark Moskowitz, probably did not help Apple when he cut his estimate for Q1 iPad sales to 5.4 million from 6.6 million citing the constantly out of stock product. He did raise his estimates on iPhones and Macs but the focus today is on the iPad 2.

Apple has the added problem of the Nasdaq-100 ($NDX, QQQ) rebalance at month end. Apple's weighting is going to shrink from more than 20% to 12% and require funds to sell a lot of shares. However, most professional traders believe this is already priced into the stock and the decline last week was on earnings fears. Traders are not worried that Apple's earnings will be weak. That is not the problem. The problem is the potential supply chain announcement that is scaring retail traders and creating worries over future earnings. However, at this level ($300-$325) I think any further declines would be a buying opportunity. Apple rules the smartphone and tablet market despite the gains by Android and BlackBerry. They are going to be printing money for the next several years.

One earnings report that bodes well for the future was office furniture maker Knoll Inc. (KNL) The company said net income jumped more than 400% as the "improving economy boosted demand for office furniture." Order backlogs are up more than 24%. Knoll produces modular office furniture, power and data systems and office lighting. Knoll sells to large companies, government agencies, schools, hospitals and hotels.

This could be a leading edge indicator of the new economy. You can't hire employees until you have somewhere for them to sit. If the office furniture business is exploding then additional hiring should not be that far behind. When Knoll and its competitors Steelcase (SCS) and Herman Miller (MLHR) reported Q4 earnings in mid February they predicted then that business would grow sharply based on conditions they were seeing then.

Knoll Chart

We are very early in the earnings cycle for Q1 with only 30 of the S&P 500 companies reported. Of those 30 companies 26 beat the street and the average increase in earnings was +23%. That is well over the estimates of 15% growth but the early reporters normally post the best earnings.

You would think traders were expecting the other 470 companies to do even better based on the complete lack of volatility in the market. Despite the market dip earlier in the week the volatility index ($VIX) closed at 15.32 and a closing level not seen since July 2007. You can't tell it by looking at the indexes but the bullishness is at extremes today. Or to put it a different way, investors are so confident the market is not going down they are not buying puts for insurance. When complacency reaches extremes we should pay attention.

The VIX is based on the near the money option premiums on the S&P-500. However, some question if buying puts on the SPX as portfolio insurance is valid in today's market. There are so many other ways to hedge your positions today the VIX may be losing its value. While that may be true I still believe in using all the indicators possible to anticipate the next market event. The VIX is just one weapon in the trader's arsenal. While the VIX may not be as relative as in prior years and can remain at extreme levels for days or even weeks before a market reversal, it still "bears" watching.

VIX Chart

Two weeks ago I said if I were forced to pick a date in April for a market top I would pick either April 1st or April 19th. I suspected April 1st could have been a top because we saw the short squeeze from the payroll numbers push the Dow to 12,419. April 19th because Intel and IBM both report that evening and could be trouble. Also, the 19th is only five trading days ahead of the April 27th FOMC meeting and Bernanke press conference. The combination of those events could be a perfect storm for the markets.

Friday was option expiration and volume was a mediocre 6.8 billion shares. That is a level it held for the last three days. There was still a lack of conviction by both buyers and sellers and we are approaching the height of the earnings cycle. We need to see more volume to be able to trust the trend.

More and more analysts are beginning to say there will be no impact to the end of QE2. (Wishful thinking?) Everyone has known about the end date for six months and had plenty of time to prepare for it. More analysts are starting to talk about the pay-off purchases as a separate QE program. The Fed announced in November it was going to buy roughly $75 billion in treasuries every month until the end of June. This is commonly referred to as QE2. They also previously announced they were going to use the proceeds from payoffs received on their previous purchases (QE1) of mortgage back securities and agency debt to also buy treasuries. As these loans terminate the Fed has been taking the money and reinvesting it in treasuries. This is somewhere between $30-$40 billion a month and is separate from QE2. This supplemental program was announced in August. Some analysts at the time called it QE1.5 since it was additional purchases to keep the QE1 assets from shrinking and it came before QE2. QE2 will end in June but the continued buying of treasuries with the pay-off proceeds will likely continue through year-end. This could simulate the addition of a new program and soften the blow of a sudden halt in all treasury buying by the Fed.

Eventually the Fed is going to need to actually confirm this in a statement. Since they want to avoid sudden shocks to the market they need to confirm it soon and not wait until the last minute. Should the Fed announce they are also halting those purchases on June 30th we could have a problem in the market. So many analysts are talking about it that the continuation is already deemed to be true. Perception is often seen as reality if it is repeated often enough.

Today we are faced with the perception the Fed will end QE2 on schedule and continue QE1.5 until year-end as insurance against a rapid rise in interest rates. Anything that damages that perception could also damage the market.

The S&P rallied over 1320 intraday on Friday but pulled back to just under that level at the close for a five-point gain. Given the declines in Google and Apple I am surprised it managed any gain at all. Apple is the second largest weighting in the S&P and Google is in the top 20. I am not sure of its exact weighting today. Combined they lost -53 points so it is a miracle the S&P closed positive.

The minor rebound on the S&P from Thursday's lows was stretched to about +17 points but as long as it remains under 1325 I will be suspicious. Support remains 1300-1305. We could be setting up for a another test of that much stronger resistance at 1333 again next week but I am increasingly doubtful it will be successful. Anything is always possible but that does not mean it is probable.

Many technicians are looking at 1333, the 100% rebound from the March 2009 lows, as terminal resistance for this rally. They claim it is too big of a technical hurdle to cross without a longer period of consolidation or correction ahead of the attempt. After watching the S&P fight that level for nine days before failing I have to admit it is pretty formidable. That makes any move higher next week ahead of the critical earnings and even more critical FOMC meeting, a high-risk venture.

S&P-500 Chart

The Dow posted a decent gain on Friday thanks to Chevron, Exxon, IBM and PG. The Dow finished about 28 points off its highs but still a decent performance. It closed about 50 points from that very strong resistance from February and early April and I suspect it would take a major news event to push through that 12,391 level with conviction. With several Dow components reporting earnings next week I would expect traders in Dow stocks to be cautious rather than wildly enthusiastic. I would expect 12,391-12,400 resistance to hold at least until after Intel reports on Tuesday. A large upside surprise there could be a catalyst but other Dow reporters this week like MMM, UTX, MCD and HON could dampen the mood. Support is well below at 12,200.

Dow Chart

The Nasdaq was struggling and like the S&P I am very surprised it maintained positive territory with Google and Apple in the tank for a lot of points. In normal times that kind of relative strength would be bullish. However, there is decent resistance at 2765 and a lot more techs reporting next week that could stink up the place. I would be very surprised to see the Nasdaq make any kind of serious move higher without some very strong earnings by several big names. Support is 2740, resistance 2765. Intel and IBM report on Tuesday.

Nasdaq Chart

The Russell is the most bullish chart with a clear break over resistance at 830 but I doubt the Russell can lift the entire market by itself. I view this breakout as bullish but the S&P is still stuck below 1325. However, the rally in small caps suggests fund managers are not as afraid of earnings and the Fed as you would think. It is a strange world when big caps are the recipients of all the market worry and small caps are flying free.

With the Russell making strong gains we have to wonder if the lackluster performance by the S&P and Nasdaq really was solely because of Apple and Google and without them those indexes would have been a lot higher even in the case of the weekend event risk.

I reserve judgment and suggest we err on the side of caution. I would be cautiously bullish on Monday if the Russell continued higher but I would bail at the first signs of trouble.

Russell Chart

To put this in perspective I am bullish on the fundamentals of the market. I think earnings will be decent despite a drag from Japan and higher gasoline prices pressuring the consumer. I am bullish on the economic fundamentals and I expect them to improve significantly over the coming weeks as evidenced by the last round of reports. I am cautious on the market short term because of the earnings uneasiness and the FOMC meeting and Bernanke press conference on the 27th. The dip over the last week could have been the market pricing in that uncertainty and we move higher from here. Unfortunately it could have also been just the first step in a deeper decline ahead of those events.

It was option expiration week and the normal period of volatility ahead of expiration is either the Friday of the preceding week or the Mon/Tue of expiration week. That just happens to be exactly when the market was weak. Also, there is a historical trend for the market to be weak on the week before tax day. Too many traders having to lighten up on positions in order to pay the tax bill.

If you really sit back with the TV off and ponder all the reasons why the market behaved a certain way it will eventually give you a headache. The factors involved are only limited by the number of news events times the number of traders in the market. That is far too many zeros for anyone to ever be 100% sure of the reason for a market move.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

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- Walter Breuning

World's oldest man, died last week at 114 in Montana.

Index Wrap

End of the Correction?

by Leigh Stevens

Click here to email Leigh Stevens

This past week's rebound that came after the major indexes retraced 33% to 38% of the last run up (plus the buying coming in when prices dipped under the 50-day moving averages), provides an initial indication that the recent correction has run its course. Looking particularly strong or resurgent is the Dow with some consumer/consumer cyclical stocks surging such as JNJ, KO, KFT, MCD, MRK, and PG.

The Nasdaq had the 'deepest' retracement to date but that's only been a 'minimal' Fibonacci 38% of the last run up. The correction in the tech heavy Nasdaq is pulling the index back from an overbought extreme and the 13-week RSI has recently gotten to more 'neutral' readings around 50. The MACD weekly indicator has retreated some to below 'overbought' extremes; a typical pattern with the longer-range MACD is to see 2-3 such extremes before there's a deeper downside correction or trend reversal.

As I noted last week "The Dow Average (INDU) most looks like it can break out to decisive new highs, possibly headed for the 13000 area next." 13000 is a longer range target; the Average could next hit resistance in the 12500-12600 price zone. Of course first there's the not so small matter of INDU's ability to pierce its prior recent high in the 12450 area.

If the Nasdaq Composite (COMP) gets into gear along with the S&P, it could eventually be headed for the 2950 area or a bit higher (e.g., 3000); at least that would be a 'measured move' objective, provided COMP doesn't fall below 2733-2700.

I am more bullish than last week as the major indexes (so far) have recovered where they 'needed' to in order to suggest that the recent market dip was a correction only and not part of a decline from significant double tops in the S&P 500 and Composite. I mentioned also last week that a decline to below SPX 1300 would be bearish; 1300 looked like pivotal support. The weekly SPX low was around 1302, with the Fri close near 1320.



The S&P 500 (SPX) could have formed a double top but I discount that possibility and see this recent correction as a prelude to a move to above the previous 1344. A bullish outlook is enhanced by the ability of the index to stay above 1300. An eventual move to the 1400 area is possible. SPX rebounded from the convergence of the 21 and 50-day moving averages which is a bullish plus.

1340-1344 is the key resistance at prior highs, with fairly major resistance in the low-1400 area, at the current intersection of the previously broken up trendline. Near-term support begins in the 1300 area, extending to 1280.


On my technical indicators seen above, bullish sentiment picked up only slightly in the late-week rebound, which is a bullish plus in a contrary opinion sense. The 13-day RSI fell to a midrange 'neutral' reading of 48 this past week. I would not have anticipated a fall to yet another 'oversold' reading such as seen with the mid-March relative low. In most any strong long-term uptrend, the major indexes only rarely pull back to 'fully' oversold readings.

As an added note, the CBOE Volatility Index (VIX) fell further this past week by Friday to 16.8. Low VIX readings are not necessarily correlated or well-correlated with declines, unlike very high VIX readings which tend to occur at significant bottoms; e.g., 29.4 at the 3/16 low.


The S&P 100 (OEX) retraced a Fibonacci 38% of the last advance before rebounding some after a dip to a bit below under the pivotal 21 and 50-day moving averages. Retracements of 33 to 38% are fairly 'minimal' in terms of a rally pullback. In a strong trend, retracement amounts are often of the 33-38% variety and not usually even as much as half or 50% of a prior advance.

Key resistance is apparent in the 599-602 area, with next resistance above these prior highs implied by the previously broken up trendline, currently intersecting around 607.

OEX technical support is at 582-585, extending to 575. As with big brother SPX, the RSI fell to a 'neutral' mid-range reading, which is the most I would anticipate in a still-bullish trend.


The Dow 30 (INDU) average remains bullish. The last high was above the prior peak and the pullback to the 12200 area was fairly 'minimal'. The various highs made prior to INDU's last upswing averages out to 12250, which suggests that prior 'resistance' had become new support. This is what someone technically oriented sees as keeping a bullish trend on track.

I was a bit surprised at good to strong moves in the more consumer driven stocks of HD, JNJ, KO, KFT, MCD, MRK, and PG. Kraft (KFT) was a stand out performer and an excellent example of how pullbacks to the 200-day moving average was a buying opportunity in every instance after the stock experienced an upside breakout move in July '09. Not your high-flyer, but a slow steady gainer. KFT's move accelerated big time last week.

Key support comes in around 12200-12250, with fairly major support in the 12000 area. Key resistance is at the prior high at 12451, extending to 12546, the current intersection of the previously broken up trendline.


The Nasdaq Composite (COMP) to date has experienced a 38% retracement of its advance off recent lows. This fairly 'minimal' retracement, followed by a minor rebound at the end of this past week suggests that the recent downdraft may have run its course. I wrote last week that "The more bearish near-term scenario is for a pullback to support starting around 2750 and extending to 2730." Bingo, as the low was 2733. Fairly major support begins at 2700.

Resistance begins in the 2800 area, extending to 2815, then to the prior 2840 high. I've noted further expected resistance currently at 2889, at the current intersection of the previously broken up trendline.

The Relative Strength Index (RSI) and my CPRATIO sentiment indicator seen above are no longer at 'overbought' extremes; I now rate these indicators as 'neutral' by virtue of having pulled back to around half way in their ranges.


The Nasdaq 100 (NDX) pulled back to the 2300-2288 area, where support/buying interest was found this past week. I remain bullish on NDX's prospects from here. The initial strong rebound from the 2180 low, followed by a relatively modest pullback of around 40% of the prior advance, looks like a prelude to another rally. If support in the 2290 to 2275 area fails to hold on future dips, then the chart turns more mixed. I'd rate the chart as somewhat mixed on an intermediate-term basis as the two rallies, after 2403 was reached, have each peaked at successively lower highs. On the other hand, the 2180 low fulfilled my downside objectives and the major trend remains UP. I anticipate 2400 being challenged again and possibly exceeded. NDX could advance to the 2500 area before strong selling interest came in again.

On a weekly chart basis (not shown), the major trend is clearly UP. The pullback to the 2200 area for the week ending 3/18 took prices back to the area of prior resistance (at the November '07 peak), after which NDX rebounded strongly. The most bullish looking charts often have such pullbacks to prior highs where renewed buying then surfaces.

Pivotal support is at 2300-2288, extending to 2275. Major support is expected around 2200.

Resistances levels are still 2359-2360, then at 2375, extending to the 2400-2403 area. 2490, on up to 2500, is the start of fairly major resistance at the previously broken up trendline.


The Nasdaq 100 tracking stock symbol has reverted to "QQQ" from QQQQ. Certainly anyone who trades the NDX tracking stock is aware of this by now.

QQQ has been drifting lower along its prior downtrend line as highlighted on my last chart. Daily trading volume has picked up recently on signs of QQQ's recent stabilization. On Balance Volume (OBV) continues to fall and this indicator needs to turn up before the stock will look like a renewed buy.

Key near support is at 56.1-56.0, then at 55.0.

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 further upside potential of 2-2.5 points.


Somewhat predictably, the Russell 2000 (RUT) found support in the area of its 50-day moving average. The key moving average for RUT that suggests either key support or resistance is often seen with a daily chart moving average length setting of 50; I sometimes use a setting of 55, but there's not a big difference in the two levels.

I'd again note from last week that RUT built a major top at 850-856 back in June-July 2007; RUT then peaked again in October 2007 at 850. I try to keep this in mind as my shorter-term daily chart doesn't provide this comparison. RUT is one of the few major indexes that could make a major new high if it decisively clears its prior recent peak. There's a good possibility that RUT could climb above 853-855 and regain its longer-term up trendline with the next technical challenge then being to clear 859-860. If that happens, a next potential objective is to 880, extending to the 900 area.

Technical support is at 820, extending to 816 at the prior recent intraday low; I anticipate fairly major support/buying interest in the 800 area.



New Option Plays

Consumer Goods and Manufacturing

by James Brown

Click here to email James Brown

Editor's Note:

In my search for possible trades this weekend I noticed a lot of stocks with potential. You'll need to dig a little deeper but these stocks caught my eye as potential bullish trades.

If they have earnings coming up, I suggest you wait until after we see the market's reaction to the earnings news.

CTXS - earnings on April 27th, I'd be tempted to buy calls on a move over $75.50 or a new high over $77.00.

DLTR - earnings in mid May, DLTR might be a candidate on a move past $58.00.

SIVB - earnings could be this week, SIVB is not seeing the same weakness the rest of the banking sector is. The stock could be a buy right now.

TECH - earnings in early May. Traders could buy Friday's bounce or wait for a move over $75.00.

IDXX - earnings on April 21st, A rally past resistance at $80.00 could be an entry point.

DECK - earnings could be this week. A rally past $95.50 or a dip near $91.00 might be a bullish entry point (target the $99-100 area).

BCR - earnings on April 21st, BCR looks like a buy right now or better yet, wait for a dip near $101.

GWW - earnings on April 18th, The $140 level should be support. Do you buy it now or wait for a dip. Definitely wait for the earnings news.

BTU - earnings on April 19th, BTU is poised to bounce or break significant support.

Plus, readers may want to check out the REIT industry. Most of the REIT stocks I saw this weekend have been showing some relative strength.

- James


Church & Dwight Co. Inc. - CHD - close: 80.86 change: +0.91

Stop Loss: 79.45
Target(s): 84.75, 89.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see Trigger

Company Description

Why We Like It:
CHD is a consumer goods company that makes a number of household cleaning, personal care, and specialty products. The stock has been very resilient the last four weeks with a sideways consolidation near its highs. Now the stock has rallied to the top of its trading range and resistance at its all-time highs near $81.00. A breakout from here could portend a move toward $85, $90 and beyond.

I do consider an aggressive trade because CHD doesn't have a lot of option volume and the spreads on its options are relatively wide. Keep your position size small to limit your risk.

I am suggesting a trigger to buy calls at $81.35. If triggered we'll use a stop loss at $79.45.

Trigger @ $81.35 (Small Positions Only!)

- Suggested Positions -

Buy the May $85 call (CHD1121E85) current ask $0.35

Annotated Chart:

Entry on April xxth at $ xx.xx
Earnings Date 05/10/11 (unconfirmed)
Average Daily Volume = 390 thousand
Listed on April 16th, 2011

Rockwell Automation - ROK - close: 93.05 change: +1.07

Stop Loss: 90.45
Target(s): 99.50
Current Option Gain/Loss: Unopened
Time Frame: six trading days
New Positions: Yes, see Trigger

Company Description

Why We Like It:
ROK is a domestic manufacturing company in the industrial goods sector. It looks like the correction is over and shares are trying to bounce from support. Aggressive traders may want to go ahead and buy calls now. I want to see a little more confirmation because the action in early April has created a bearish reversal pattern on its weekly chart. The action last week doesn't really confirm the bearish reversal but it doesn't refute it either.

The patterns on the weekly chart would suggest this is an aggressive, higher-risk trade. Plus, we have a very short time frame. ROK reports earnings in several days and we don't want to hold over the announcement. I am suggesting we open small bullish positions at $93.75. If triggered our exit target is $99.50. More conservative traders could exit around $97.50 instead since the current high is just under $98.00.

Trigger @ $93.75 (Small Positions)

- Suggested Positions -

Buy the May $95 calls (ROK1121E95) current ask $2.50

Annotated Chart:

Entry on April xxth at $ xx.xx
Earnings Date 04/27/11 (confirmed)
Average Daily Volume = 1.1 million
Listed on April 16th, 2011

In Play Updates and Reviews

Gold At New Highs

by James Brown

Click here to email James Brown

Editor's Note:

The rally in precious metals continues with gold and silver surging to new highs on Friday. Transports have thus far been able to ignore the three-day bounce in oil prices. This week we will hear from hundreds of companies reporting their Q1 earnings results. Traders should expect a lot of volatility for individual stocks. The newsletter prefers to avoid risk by not holding an option position over an earnings announcements.


Current Portfolio:

CALL Play Updates

CH Robinson Worldwide Inc. - CHRW - close: 76.64 change: +1.25

Stop Loss: 73.25
Target(s): 79.50
Current Option Gain/Loss: +33.3%
Time Frame: 3 to 4 weeks
New Positions: see below

04/16 update: CHRW leapt to a new multi-week high thanks to an analyst upgrade before the opening bell. The stock is now trading above potential resistance near $76.00 and its 100-dma. I would prefer to not chase it here. If you are looking for a new bullish entry point wait for a dip near $75.00. Keep in mind our time frame. CHRW is due to report earnings on April 26th and we do not want to hold over the announcement. I would keep your position size small to limit your risk.

Please note our new stop loss at $73.25. Cautious traders might want to up their stop closer to $74.00 or $74.50ish.

- Suggested Positions -

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

04/16 new stop loss @ 73.25
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

Fortune Brands - FO - close: 63.31 change: +0.09

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

04/16 update: For the second day in a row FO spiked lower at the open and for the second day in a row traders bought the dip. Shares remain under resistance in the $63.50 area. We are still waiting for a breakout. Currently our plan is to buy calls when FO hits $64.00. Now that we know earnings are in early May it gives us about three weeks for this trade to work.

If triggered at $64.00 our targets are $67.50 and $69.75. I would keep our position size small to limit our risk.

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

Trigger @ $64.00 (Small Positions)

- Suggested Positions -

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


Entry on April xxth at $ xx.xx
Earnings Date 05/05/11 (confirmed)
Average Daily Volume = 973 thousand
Listed on April 5th, 2011

Fossil Inc. - FOSL - close: 94.48 change: +0.85

Stop Loss: 91.95
Target(s): 99.75, 104.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see trigger

04/16 update: FOSL is still consolidating sideways in the $92-95 zone. Traders have been buying dips in FOSL near the $92.00 level and they did so again today. We are waiting for a breakout from this range.

I do consider this an aggressive trade since we're looking at bullish positions with the market's major indices still acting vulnerable to new declines. However, FOSL has been able to ignore the market's weakness thus far. I am suggesting we open small bullish positions with a trigger at $95.60. If triggered our first target is $99.75. The $100.00 mark is probably round-number, psychological resistance. We'll set a secondary target at $104.75 but that might be wishful thinking.

Trigger @ 95.60 (small positions only)

- Suggested Positions -

Buy the May $100 call (FOSL1121E100) current ask $2.65

- or -

Buy the June $100 call (FOSL1118F100) current ask $3.70


Entry on April xxth at $ xx.xx
Earnings Date 05/10/11 (unconfirmed)
Average Daily Volume = 858 thousand
Listed on April 13th, 2011

SPDR Gold ETF - GLD - close: 145.05 change: +1.24

Stop Loss: 137.00
Target(s): 149.50, 154.50
Current Option Gain/Loss: +35.8%, and +27.0%
2nd Option Position Gain/loss: +68.9% and +53.6%
Time Frame: 6 to 12 weeks
New Positions: see below

04/16 update: Momentum continues for the precious metals. There are plenty of investors who think gold has run out of gas but the commodity continues to rally. The GLD hit a new all-time high on Friday at $145.12. I am not suggesting new positions at this time. We'll wait to evaluate the next dip.

More conservative traders can tighten their stops closer to $139 or $140. The newsletter's stop is at $137.00. 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

- Second Entry Point, April 12th, Entry April 13th -

Long the May $145 call (GLD1121E145) Entry @ $1.48

- or -

Long the June $150 call (GLD1118F150) Entry @ $1.10


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

Intuit - INTU - close: 54.46 change: +0.18

Stop Loss: 53.45
Target(s): 57.50, 59.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

04/16 update: INTU spiked to a new multi-year high on Friday (@ $55.12) but it was not enough to open our play. INTU has resistance in the $54.00-55.00 zone. Our plan is to buy calls when shares hit $55.25.

If triggered we'll use a stop at $53.45. I would keep our position size small to limit our risk (1/2 or less than your normal trade size).

Trigger @ 55.25

- Suggested Positions -

Buy the May $55.00 call (INTU1121E55) current ask $1.75


Entry on April xxth at $ xx.xx
Earnings Date 05/19/11 (unconfirmed)
Average Daily Volume = 2.4 million
Listed on April 14th, 2011

Norfolk Southern - NSC - close: 67.74 change: +0.76

Stop Loss: 65.90
Target(s): 72.00, 74.90
Current Option Gain/Loss: -100.0%, and -39.2%
Time Frame: 4 to 6 weeks
New Positions: see below

04/16 update: It looks like the correction in the railroad stocks might be over. The bounce in the DJUSRR railroad index looks like a potential bullish entry point. Shares of NSC still look a little weak but the stock did add +1.1% on Friday. Aggressive traders may want consider buying this bounce. We've been waiting for a dip near $66.00 but that may not happen now. A new rally past the simple 10-dma or the $68.50 level could work as an alternative entry point to buy calls on NSC. The $66.00 level continues to look like support so we'll up our stop loss to $65.90.

Don't forget that earnings are April 27th and we do not want to hold over the announcement.

Our targets are $72.00 and $74.90.

- Suggested Positions -

April $70 calls (NSC1116D70) Entry @ $0.50, Expired @ -100%

- or -

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

04/16 New stop loss @ 65.90
04/16 April $70 calls have expired (-100%)
04/09 New stop loss @ 65.70


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

Panera Bread Co. - PNRA - close: 124.65 change: +1.23

Stop Loss: 119.00
Target(s): 129.50, 134.50
Current Option Gain/Loss: -100.0%, and -17.9%
Time Frame: 3 to 5 weeks
New Positions: see below

04/16 update: PNRA has continued to bounce and shares did close over short-term resistance near $124.00 but the rally on Friday was not enough for the April $125 calls. These calls have expired at -100%.

The very short-term trend looks bullish for PNRA but readers may want to wait for another dip near $122.50-122.00 before considering new bullish positions. Bear in mind that we will plan to exit ahead of the April 26th earnings report. Our final target for the May calls is $134.50.

- Suggested Positions -

April $125 call (PNRA1116D125) Entry @ $2.05, Expired @ -100%

- or -

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

04/16 April calls have expired @ -100%
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: 103.15 change: +1.30

Stop Loss: 98.90
Target(s): 104.75, 109.00
Current Option Gain/Loss: +10.2%, and + 7.1%
2nd Position Gain/Loss: +30.3%
Time Frame: 4 to 5 weeks
New Positions: see below

04/16 update: The rebound in PX continues and shares were showing relative strength on Friday with a +1.2% gain. The stock is nearing potential resistance at its recent highs near $104. I would not launch new bullish positions at this time.

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 April 27th earnings report.

- Suggested Positions -

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

- or -

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

- Second Entry Point, April 12th, Entry April 13th -
- Keep Positions Small -

Long the May $100 call (PX1121E100) Entry @ $3.30

04/12 New stop loss at $98.90
04/12 Second position on dip near $100
04/09 new stop loss @ 97.90


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

Sohu.com - SOHU - close: 95.38 change: -0.76

Stop Loss: 89.75
Target(s): 99.90, 107.50
Current Option Gain/Loss: - 8.2%
Time Frame: 3 to 4 weeks
New Positions: see below

04/16 update: It was a quiet Friday for SOHU. Shares hovered near the $95.00 strike price, waiting for option expiration to be over. The stock is still lagging behind some of its peers (BIDU, SINA). I would hesitate to launch new positions in SOHU. More conservative traders will want to seriously consider upping their stop toward $92.00, which looks like it could be short-term support. We do not want to hold positions over the April 25th earnings report.

Our first target to take profits is at $99.90.

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

04/13 New stop loss @ 89.75
04/11 Adjusted first exit target to $99.90


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

Stericycle Inc. - SRCL - close: 91.93 change: +1.27

Stop Loss: 87.75
Target(s): 93.50, 98.50
Current Option Gain/Loss: +52.0%
Time Frame: 4 to 5 weeks
New Positions: see below

04/16 update: SRCL is starting to breakout higher from a weeklong consolidation near the $90.00 area. Friday's move looks like a new entry point. We will raise our stop loss to $87.75. More aggressive traders will want to keep their stop under the 50-dma instead. We plan to exit ahead of the April 27th earnings report. Our targets are $93.50 and $98.50.

- Suggested Positions -

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

04/16 new stop loss @ 87.75
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

Vertex Pharmaceuticals - VRTX - close: 48.02 change: +0.43

Stop Loss: 45.95
Target(s): 51.85, 58.50
Current Option Gain/Loss: - 8.0%
Time Frame: about 2, maybe 3 weeks
New Positions: see below

04/16 update: VRTX looks poised to rally. Technically the stock is trading in a neutral pattern of higher lows and lower highs so the stock could breakout either way. Yet if you look more closely the stock has bounced more than once in the $46.50-47.00 zone. Thus far nothing has changed from my prior comments. We can choose to buy dips near $47 or wait for a rally past $49.00 as our entry point.

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.

- Very Small Bullish Positions -

Long the May $50.00 calls (VRTX1121E50) Entry @ $2.50


Entry on April 10th at $48.28
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume = 2.1 million
Listed on April 9th, 2011

Whole Foods Market Inc. - WFMI - close: 64.71 change: -0.26

Stop Loss: 61.70
Target(s): 64.75, 69.00
Current Option Gain/Loss: -100.0%, and +28.4%
Time Frame: 3 to 4 weeks
New Positions: see below

04/16 update: WFMI saw a little bit of profit taking on Friday morning but traders were in a buy the dip mode. Shares closed near the $65 strike price. Our April $65 calls have expired at -100%. I am not suggesting new bullish positions at this time.

- Suggested Positions -

April $65 calls (WFMI1116D65) Entry @ $0.65, Expired -100%

- or -

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

04/16/11 April calls have expired @ -100%
04/13/11 New stop loss @ 61.70
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 05/04/11 (confirmed)
Average Daily Volume = 1.9 million
Listed on March 19th, 2010

Whiting Petroleum Corp - WLL - close: 70.61 change: +0.80

Stop Loss: 64.45
Target(s): 69.75, 74.00
Current Option Gain/Loss: Unopened
Time Frame: 2 to 3 weeks maybe
New Positions: Yes, see trigger

04/16 update: Crude oil has produced a three-day bounce following the sharp sell-off early in the week. This rebound in the commodity is helping buoy the energy sector. Shares of WLL have been hovering near the $70 area. We're still waiting for a dip lower. I am suggesting we buy calls on a dip at $66.00. More aggressive traders may want to jump in early on a dip near the rising 50-dma. If triggered our targets are $69.75 and $74.00. We do not want to hold over the late April earnings report but so far the date is unconfirmed.

Trigger @ $66.00

- Suggested Positions -

Buy the May $70 call (WLL1121E70) current ask $2.70


Entry on April xxth at $ xx.xx
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on April 11th, 2011

Wellpoint Inc. - WLP - close: 69.41 change: -0.10

Stop Loss: 67.45
Target(s): 72.25, 74.75
Current Option Gain/Loss: - 100%, and -40.0%
Time Frame: 3 to 5 weeks
New Positions: see below

04/16 update: WLP tried to rally this morning but the stock was unable to breakout past resistance at the $70.00 level. The stock has been stuck under this level for over a week now. Unfortuantely, this means the April $70 calls have now expired worthless (-100%). I don't see any changes from my prior comments.

More conservative traders may want to up their stops closer to $68.00 or $68.50. Wednesday's high was $70.24. I would wait for a rise past $70.25 before considering new positions. We do not want to hold over the late April earnings report.

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

- Suggested Positions -

April $70 call (WLP1116D70) Entry @ $1.55, Expired @ -100%

- or -

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

04/16 April calls have expired @ -100%
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 (confirmed)
Average Daily Volume = 3.4 million
Listed on March 26th, 2011

PUT Play Updates

Apollo Group Inc. - APOL - close: 40.10 change: +0.14

Stop Loss: 44.25
Target(s): 38.15, 35.50
Current Option Gain/Loss: +19.3%
Time Frame: 4 to 6 weeks
New Positions: see below

04/16 update: I am not surprised to see APOL spend Friday hovering near the $40.00 strike price. The overall trend is down but readers may want to wait for another failed rally under $42 or the 200-dma before considering new positions. More conservative traders may want to use a stop closer to $43.50 instead. Our profit targets are $38.15 and $35.50.
The Point & Figure chart for APOL is bullish with a $31 target.

- Suggested Positions -

Long the May $40.00 puts (APOL1121Q40) Entry @ $1.24


Entry on April 13th at $41.21
Earnings Date 06/30/11 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on April 12th, 2011