Option Investor

Daily Newsletter, Saturday, 5/21/2011

Table of Contents

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

Market Wrap

Third Week of Declines

by Jim Brown

Click here to email Jim Brown

The markets continued to decline for the third consecutive week as worries over economics, earnings and Europe continue to weigh on investor sentiment.

Market Statistics

Despite the three weeks of declines the Dow is only down about 300 points from its high close at 12,810 on April 29th. That close ended a +600 point sprint that began on April 18th at 12,093. We have had three weeks of pain equivalent to a bad scrape on your knee that will not heal. We have not yet seen the "rip off the Band-Aid" intraday decline that would signify a capitulation event and give investors the confidence to return to the market.

Volume late this week was exceptionally low with only 6.4 billion shares on Wednesday, 6.0 B on Thursday and 6.5 B on Friday. Remember, this was expiration week. Volume should have been much higher. The reason for the low volume is the uncertainty in the economy and the choppy market. There is no reason for investors to rush back into positions ahead of the summer doldrums with nearly every economic report showing slowing growth. Retailers were the punching bag this week as they posted lower than expected same store sales and lowered guidance. The consumer is pulling back on spending and the economic ripples are starting to be seen in the monthly reports.

There were no economic reports making waves on Friday. The Regional Employment report showed payroll employment rose in 42 states in April. There were significant increases in employment in 19 states. Only Michigan (-10,200) and Vermont (-2,200) reported significant job losses.

However, in the Mass Layoff report for April the number of layoff events rose from 1,286 to 1,564. The number of workers affected rose +22% from 118,523 to 143,927. Analysts believe this was related to the break in the supply chain from the Japanese earthquake. Many automakers were forced to layoff workers for several weeks until the overseas parts manufacturers began to ship again.

Another report confirming the sudden weakness in the economics was the ECRI Weekly Leading Index. The headline number declined again to 128.7 but even more concerning was the drop in the annualized growth rate to 5.3%. The growth rate peaked at 7.8% back in early April and in only six weeks the outlook as changed dramatically. The growth rate in the WLI does not correspond to the GDP. The growth rate in this report bottomed at -29.7% in December 2008. The WLI is seen as an early warning indicator for changes in the economic cycle. The sudden weakness suggests an economic turning point may have been reached.

Moody's WLI Chart

The economic calendar for next week has three more manufacturing reports plus the next revision of the Q1 GDP. Estimates are for a slight gain in GDP to show +2.1% growth compared to the +1.75% in the last report. There are also three home sales reports but I doubt anyone will be paying attention. The various reports next week are not likely to generate any material investor attention.

This is a holiday week and volume is likely to slow even further as traders close up shop and head out for vacations.

Economic Calendar

You would think investors were already on vacation by the low volume and the lack of news in the market. The Dow fell -120 at the open because the Euro collapsed. Actually it was the Fitch downgrade of Greece that started the ball rolling. It is becoming increasingly apparent that Greece is either going to default on its debt or the debt will have to be restructured. Once it happens to Greece it will set a precedent for Ireland, Portugal, Spain, etc. This is weighing on the Euro and by default pushing the dollar higher. A higher dollar pressures commodities and equities.

Euro Chart

Dollar Index Chart

Investors have no confidence in the current market or the economy. Every little headline is causing a knee jerk reaction like we saw from the Fitch downgrade on Friday. Fitch cut Greek debt three notches to B+ with a negative outlook. S&P currently has a B rating and Moody's a B1 grade. All are seriously into junk status. All have warned they could cut the debt further.

The worry now is not that Greece will actually default on its debt but the country will be forced to change the term to reduce the debt payments. By taking a two-year bond, currently yielding 25%, and change it to a ten-year bond with the same face value it is a technical default even though the face value remains the same.

The big concern is whether the credit default swaps that guarantee the debt would be triggered by change in term. The reason they won't change the face value is to protect all the European banks that own Greek debt. If they don't change the face value the banks won't have to write down the debt and will remain technically solvent. If the CDS insurance is not going to be triggered by a change in term then that would be a windfall for those that sold the CDS contracts and a total loss for those that bought the insurance. S&P said any restructuring of term on the debt would be seen as a "selective default" and constitute a "distressed exchange" and would immediately receive a rating of "SD." The ECB remains strongly opposed to such a move.

Fitch said current implementation of the austerity program and political risks have risen and further austerity measures would be required to meet the 2011 deficit targets. Fitch warned of more downgrades saying, "In the absence of a fully funded and credible EU/IMF program (bailout), the rating would likely fall into the "CCC" category indicating that a Greek sovereign debt default was likely." Greece is being pressured to sell €50 billion of public property to pay down some of its debt.

The current chapter in this European debt crisis novel would not be that important if there were not three more countries that could follow Greece down the default path. The impact on the euro currency from these sovereign debt problems is pushing the dollar around like a butterfly in a storm. This impacts commodities and equities on a daily basis and has added significantly to our volatility. Personally I could care less what Greece does on its debt because I don't own any. However, a bad decision on the part of Greece or any of the PIGS could cause a sharp decline in our markets and that is why we have to endure the weekly chapters in this saga. Unfortunately it may take a couple years before the ultimate resolution is known. During that time our markets will fluctuate on their own and probably move higher but they will always be subject to the short-term volatility from the euro.

This weekend John Mauldin had an interesting commentary on Greece and the euro that pretty well spells out that Greece will eventually default and withdraw from the Eurozone and the Euro itself will self-destruct. This is far more in depth than my cursory explanation above. You can read it here: One Euro for All?

On Saturday S&P cut its outlook for Italy to negative from stable citing a weak outlook for growth and reduced prospects for slashing its mountain of debt. Italy's GDP for Q1 rose only +0.1% compared to a +0.8% growth in Greece. Public debt is 120% of GDP, up from 100% in 2007, and the highest of any nation.

In the U.S. markets the retailers made all the news on Friday. Gap (GPS) warned after the close on Thursday that earnings would be significantly lower for the rest of the year and the stock lost -17% on Friday. That would have been enough to tank the sector but Aeropostale (ARO) also warned that earnings for Q2 would drop to around 14-cents from prior forecasts of 27-cents. This is the second warning this month. ARO warned on May 5th that earnings for Q1 could be in the range of 20-cents instead of the prior forecast of 37-cents. ARO shares declined -14% on Friday.

Areopostale Chart

Gap Chart

Other retailers declined in sympathy with Polo Ralph Lauren (RL) losing -4%, VFC -5%, PVH -5% and AEO -8%. However, Foot Locker (FL) rallied +13% after reporting same store sales that increased a whopping +12.8% thanks to the demand for running shoes. The company reported earnings of 60-cents compared to estimates of 44-cents. Foot Locker closed 650 underperforming stores over the last three years in an effort to streamline sales and increase profit margins. Apparently it is working.

Owners of shares in Linkedin (LNKD) must have been thinking the world might really end this weekend as one preacher in California claimed. Shares were up strongly for the second trading day with a morning spike to $107 after closing at $94 on Thursday. When the prices failed to continue climbing, profit taking finally appeared with LNKD closing down a buck at $93. I suspect that will be the first negative day of many. On Thursday they sold roughly eight million shares in the IPO but the volume for the day was 32 million so quite a few shares sold more than once. On Friday volume was 8.4 million, still some flipping but significantly less. Once the public believes the shares are going to decline the lack of buyers will force that reality to come to pass. Once there are shares available to short on Wednesday it could drop fairly quickly.

The explosion in the price of LNKD has prompted many to start ranking the slate of future IPOs in terms of the Internet bubble stocks back in 2000. The one getting the most buzz on Friday was Russian Internet giant Yandex (YNDX). They will sell 52 million shares at $22 on Monday. Reportedly the order book has already been closed due to the high demand. Remember this is 52 million shares not 8 million so the pop in price could be significantly smaller.

Also there is plenty of risk in the Yandex offering. In the prospectus the company warns that investors are subject to political risk when investing in Russia. That would be an understatement. They also warn the company could be harmed by politically motivated actions or could be hurt by "aggressive application of ambiguous laws." They also say "Many commercial laws and regulations in Russia are relatively new and have been subject to limited interpretation." According to Factcheck there are only five Russian companies publicly traded in the USA. The lack of a rule of law in Russia and the aggressive application of ambiguous laws against international companies like Shell and Exxon over the last decade has made Russia more of an outcast than China.

There are dozens of Chinese companies that trade in the USA. That is not without risk as Yahoo found out last month when Alibaba told them they transferred ownership of Alipay to a company controlled by the CEO without first telling Yahoo, the majority shareholder. Surprise! It will be interesting to see how Yandex trades next week but I will not be a buyer.

Another IPO coming up soon is Freescale Semiconductor. This is a company that was spun off from Motorola in an IPO that raised $1.6 billion in 2004. About two years later it was taken private by a consortium that included Blackstone Management Partners, TC Group, TPG and Permira Advisors for $17.6 billion. Freescale still has about $7 billion in debt from that leveraged buyout. The new IPO expects to raise $1.2 billion, which will be used to paydown existing debt but still leave them with $6 billion in debt. About $100 million will go to the equity partners. Freescale had $4 billion in sales in 2010 but lost $1 billion. Freescale is the biggest chip supplier to the automotive industry. This IPO has been eagerly awaited but I can't get excited given the metrics. Those equity partners are in for a long wait before they get paid back.

Late Friday afternoon news broke of an explosion and fire at the high-tech Foxconn plant in southwestern China. The explosion killed two people and injured sixteen others and shutdown production at the plant. This is material to us because the plant produces iPad tablets for Apple. Reports claim the explosion occurred in the "polishing plant" that is likely a cleaning stage at the end of the production process after devices are assembled. The $2 billion plant was constructed in record time and opened in October to produce 40 million iPads a year. An analyst with Sterne Agee said they were not concerned since Foxconn has 50 assembly lines spread across several buildings and several locations. Apple shares lost $5 on the news.

Apple Chart

I wrote on Thursday about the $1 billion offer by Liberty Media (LINTA) for Barnes and Noble (BKS). Liberty offered $17 for BKS. The stock opened on Friday at $18 and closed slightly higher so it appears many investors are expecting either a competing offer or a sweetened deal before BKS is eventually acquired. They put themselves up for sale many months ago but the response has been less than enthusiastic. The offer is probably more a bet on the Nook e-reader than a bet on Barnes and Nobles bricks and mortar storefronts.

The reason for the massacre in the book sector is simple. It is Amazon and the Kindle. Amazon announced this week that since April 1st they have sold 105 e-books for every 100 printed books including hardback and paperback combined. That excludes the four million or so free e-books available from Amazon. Last July Amazon said e-books sold more than hard covers and then in January said they outsold paperback books. To jump in only four months to total more than all their printed book sales is amazing. Sales should only grow because Forrester Research claims e-books are still only 14% of all books sold.

Amazon is expected to announce an Android tablet later this year and you can bet there is a Kindle app on that device. Amazon's lowest price Kindle is now only $114 and putting it in the reach of almost every consumer. Amazon has 950,000 e-books available for sale from 99-cents and the majority are less than $9.99 with no shipping. I love my Kindle and I buy about five e-books a month. That is far more than I used to buy in print. I just wish Amazon would split their stock about 4:1 so normal people could afford to buy options on it.

Amazon Chart

Time to fill up your gas tank. If you have been waiting for gasoline prices to go down in order to fill up your tank this would be a good weekend to do that. The average price of gasoline has declined about 10-cents from the recent highs to $3.88 per gallon. The Mississippi flood failed to wipe out the 17 refineries in Louisiana and they are operating normally. Cheaper summer fuel blends are now in full production and prices have taken a dip. However, we are only a week away from the kickoff of the summer driving season. It won't take long before prices begin to rise again as demand increases.

U.S. WTI crude futures expired at the close on Friday and that helped push the price of crude to $96 at the open of regular trading but prices returned to $100 by the close. Now that the futures expiration games are history for another month we should see prices stabilize around that $100 level before edging up as the summer progresses and hurricane season begins spewing out the weekly storms. With Brent still holding above $112 the pressure on prices will be to the upside rather than the downside until Qaddafi leaves Libya.

Crude Oil Chart

There are five weeks before the end of QE2. I have read dozens of articles on what we should expect when QE2 ends. Their expectations run the gamut between a market rally to a market crash and a monster spike in interest rates. To be honest nobody knows for sure and that is why we have uncertainty in the market today.

The economy appears to be weakening but we really don't know why. Employment is rising but economic indicators are declining. The Fed is torn on what to do when it becomes time to raise rates. Nobody expects that to be any time soon but it will happen. Some Fed heads want to sell assets first. Others want to raise rates first. It is not encouraging when you see the people in charge arguing among themselves about what to do.

The main point is QE2 may end but QE1 is still alive. They will continue to buy treasuries with the money they receive for the matured QE1 assets. When their short term investments end and they are paid off they will take that money and buy treasuries. That is what is happening now. QE2 is buying roughly $60 billion in treasuries every month and QE1 payoff proceeds are buying another $20-$35 billion. This is the safety valve that will keep interest rates from rocketing higher.

Eventually they will have to end that process as well. They will have to give notice of their intent to end the process and probably wait for two meetings for that notice period to sink in to the market consciousness.

Last week the talk about QE3 accelerated. The closer we get to year-end the more financial headwinds we will face. The 2011 social security tax cut will end and wage taxes will rise by 2%. The slowdown in stimulus spending will accelerate as more stimulus programs end. In theory there will be budget cuts of some form in the 2012 budget that begins in October. That will also produce a drag on the economy of 1.0% to 1.5% of GDP according to some estimates.

Some analysts believe interest rates will remain low for an extended period of time despite QE2 coming to an end. The economy is not moving fast enough to support higher rates. Some believe inflation is unavoidable. It may be but with the economy slipping back into neutral there is nothing to power the inflationary curve. When companies are slashing prices in hopes of getting a tight fisted consumer to spend some money there is no inflation. We are already seeing commodity prices decline due to slowing demand.

The Taylor Rule is an economic formula that the Fed uses to model the appropriate Fed funds target rate. Today the Taylor rule says the Fed funds rate should be a -1.65%. A negative interest rate is obviously not practical so this suggests the Fed may need to take additional action of some sort to further stimulate the economy. Whether that means QE3 or some other form of stimulus is unknown.

The Fed's dual mandate includes low unemployment. In theory the Fed should not raise rates or do anything restrictive until the unemployment rate, currently 9.0% declines to below 7.0%. That is not going to happen for a long time. Get used to that extended period language.

Lastly Bernanke himself said that should the Fed do nothing at the end of QE2 that in itself would be an implied tightening of Fed bias. He has to continue at a minimum the QE1 payoff purchases and if the economy continues to weaken he will have to take some other step. He can't continue to load up on treasuries with the balance sheet already at $2.6 trillion and growing. The Fed balance sheet already represents 18% of GDP. They can't exit in a hurry and especially if the economy is not growing. Expect a new program if economic weakness continues.

The government cannot announce or fund any new stimulus programs. The people are already in revolt with the tea party demanding budget cuts and a new election cycle in full swing. Bailouts and pork projects were never liked by the populace. Stimulus is now a four-letter word for voters. If the economy is still in trouble it will be up to the Fed to provide the stimulus. They better hurry because this current business cycle should run its course and expire just after the 2012 elections. Fortunately an election year is normally positive for the markets. The keyword there is "normally" since this is not likely to be a normal election cycle.

That still leaves us with the market question for next week. Up, down or sideways? Trying to analyze it week to week in this environment is a task left to those braver than me. The charts appear to be pointing lower. We have only declined a little more than 2% from the highs so there has been no real correction yet. Since QE2 was announced there has been an 80% correlation between the market gains and QE programs. That would seem to suggest that the expiration of those programs would produce some negative reactions from the markets. However, the end date for QE2 has been known since November. It may have been debated in the press but the Fed has confirmed it more than once so unlike the uncertainty around the end of the world on May 21st the end of QE2 is certain.

If we are dealing with the herd mentality of the investing public then I think it is safe to assume that 99% of investors have not thought this through. By reading the prior paragraphs you are now more educated than 99% of the investing public. I believe we should anticipate their exit from the market. That does not mean we should rush out and short everything. There is never a sure thing in the market.

I believe we should simply anticipate a potential decline and take smaller positions and exit them early. For the last several weeks I have been signing my commentaries with the "enter passively, exit aggressively" sentence. I mean just that. We should double think any new position either short or long and only make the play if we are somewhat confident of the outcome. Once in a trade we should take profits early and keep tight stops. That is good advice in any market but even more appropriate for the next six weeks.

The S&P bounced off downtrend resistance twice in the last three days and 1340 is now the magic number on the upside. Initial support is the 50-day average at 1325 followed by the 100-day average at 1313. Long-term support is at 1295-1300. Those levels are well above what would be considered a real 10% correction to 1225. That means we can chop around above 1300 for a couple weeks and not break the current trend. A move below 1295 would be a dramatic change in market sentiment.

S&P Chart - 90 Min

S&P Chart - Daily

The Dow has a similar pattern of lower highs and lows. However, support at 12,400 was rock solid on the first test. The 50-day average at 12,383 in conjunction with the round number support at 12,400 could be decent support. The Dow, because it is a blue chip index, is showing more strength than the other indexes. It is defensive in nature to some extent. That won't protect it completely if the uncertainty continues but it should help. The closing lows from April at 12,200 also coincides with the 100-day average at 12,185 so that would be another level where I would expect to see a bounce.

Dow Chart

The Nasdaq tried twice to break through the resistance at 2861, which was the 100% gain from the March 2009 lows. Both times it failed. The last failure dipped to 2760 on Tuesday, which just happened to be the 100-day average. The rebound lasted two days before running into what appears to be rock solid resistance at 2825. The Nasdaq chart is slightly different from the Dow but still the same outlook. Support should be the 100-day at 2762 followed by 2700.

The Nasdaq is suffering from big cap shock. Apple lost -5.50, Google -7, ISRG -5, etc. Tech stocks have suddenly fallen out of favor after the mid May rally failed. The Goldman downgrade of the semiconductor sector did not help. Hewlett's ugly earnings also depressed sentiment about PC sales. Cisco trashed the router sector. If it were not for Dell last week I feel pretty sure the Nasdaq would have spent this weekend well under 2800.

Nasdaq Chart

The Russell worries me. The 50-day average has already failed and the 100-day is on the verge of failing with a break of support at 820. A break there could easily retest 780. I drew a head and shoulders in pink on the chart but I really don't think that is a valid formation here. I don't think it was distinct enough to qualify but I am showing it for reference. Normally the head is more pronounced and the shoulders wider apart. However, the volume component definitely fits. Volume was low on the left shoulder in the high 800 million share range. It rose to 1.1-1.2 million shares on the head it has fallen back to the high 800s on the right shoulder. Declining volume on the right shoulder is a symptom of exhaustion.

If the Russell falls below the 100-day at 817 I think it will test 780. Fund manager sentiment has not really changed on the small caps any more than it has on the Nasdaq so I don't think there is anything newsworthy here until support at 820 breaks. However, because that would also be a break of the 100-day average I think it would be a market sell signal.

Russell Chart

In summary I believe there will be more weakness ahead. I am not looking for a sudden washout but more of a choppy market with minor rebounds and declines. The trend appears to be heading slightly lower. Option expiration pressures last week may have influenced the charts so the next couple days should be crucial.

European event risk will continue to be a nuisance more than a serious problem. The economic reports next week are not specifically market movers but should they continue to confirm a slowing economy the preponderance of the evidence will eventually convict investors to move to the sidelines.

We are at that point on the calendar where I like to use the term "why buy?" Investors, as opposed to traders, have no real incentive to put additional money at risk ahead of the summer doldrums. This year they have even less reason because of the uncertainty surrounding QE2 and the economy. The bad news bulls seem to have gone to the barn because bad news is no longer being bought. Until that trend returns there is no incentive to add to long positions.

I would continue to be cautious. Enter passively, exit aggressively.

Jim Brown

Send Jim an email

"Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth."
Sherlock Holmes

Index Wrap

Slowing Momentum

by Leigh Stevens

Click here to email Leigh Stevens

Now that the summer doldrums are almost upon us, the market is showing some signs of slowing upside momentum. There's no 'confirmation' of a trend reversal unless the major indexes pierce prior downswing lows but bullish traders should be cautious.

Big upside moves are getting fewer and far between and the market acts 'tired' so to speak. The weekly MACD (Moving Average Convergence Divergence) technical indicator of momentum has been on a 'sell signal'(i.e., showing declining momentum) since the week ending 3/18. This indicator will be shown on my first chart with the weekly S&P 500 index (SPX).

What may be bellwether patterns relative to this market is the major double top that could be developing in the Nasdaq Composite (COMP) relative to the COMP highs of October-November 2007 and on a smaller scale relating to the S&P is Exxon's (XOM) recent double top (at 88). On a shorter-term basis, the key 21-day moving average, has now recently been 'acting as' resistance as you'll see especially in the S&P 500, Dow and Nasdaq Composite charts.

I'm always looking to see if the key trendlines I've been working with are still valid, or should be re-drawn. Going back to the late-August 2010 lows as an 'anchor' point(s), its become apparent to me that the lows of mid-March and mid-May have formed NEW up trendlines as can be seen on my S&P and Nasdaq index charts. I had been working already for awhile with an emerging up trendline for the Nasdaq 100 (NDX) and this most recent low in NDX rebounded right from support implied by that trendline. If these support trendlines get pierced, this will suggest the market has tipped bearish.

A caveat to a big bear take on this market is that tops can be quite tough to trade on an outright position basis such as buying and holding puts. A top here might not be a major one as buying rotation among sectors goes on, providing overall support. We could just get choppy back and forth trading swings for weeks ahead. While I tend to concentrate on the indexes and this column is all about them, there are always opportunities in trading individual stocks, such as those in the Dow 30. My most recent Trader's Corner piece of Wed, 5/18 highlighted trading opportunities in individual stocks that were at least partially sussed out by seeing where and how upside and downside chart gaps developed.

I feature the weekly chart of the S&P 500 first for two reasons. One is to highlight the up trendline with key support noted in the 1325 area. A weekly close below this line is not conclusive for a top but it could warn of an eventual test of 1250 support, or even the low end of the broad uptrend channel, currently intersecting around 1220.

The other, indicator aspect of the chart seen above, shows declining MACD values for the past 2+ months as mentioned above. The MACD indicator has been showing downside momentum on balance since the downside crossover of the two lines in mid-March. The blue vertical bars that point downward from the zero level are for each week that the heavier black MACD (mackdee) has a value that is below the thinner (magenta) MACD average line.

One to two strong rally weeks will bring a reversal of this downward (MACD) drift, which is certainly not a pronounced trend. Such longer term momentum indicators provide a cautionary note only. Bullish sentiment has already fallen from what it was as traders have seen the sort of muddled trend in economic data and are not buying every dip any longer.



The S&P 500 (SPX), while still in its broad uptrend channel, has lost the strong upside momentum leading up to the February peak. This loss of momentum is apparent in that we're seeing more two-sided trading swings. Nevertheless, there has continued to be a bullish pattern of higher rally peaks and higher correction lows. If the last (down) swing low is penetrated at 1300-1295, this bullish picture shifts and becomes another story.

This past week's low occurred in the area of SPX's 50-day moving average and above its up trendline, although the most recent minor rebound hasn't gotten very far. The 21-day moving average appears to be acting as resistance recently, which in the indexes usually suggests lower prices ahead although in the last instance a sell off was short-lived and another rally ensued.

Pivotal support is first at 1320, then at 1300-1295. If 1300 is pierced, this could set up a test of support in the 1250 area.

Resistance is apparent at 1360, extending to 1370.


A noteworthy feature is provided by my sentiment indicator which is seeing single-day readings dipping into 'oversold' territory where traders have gotten more bearish, less bullish. The 5-day average is almost also at the low end of my CPRATIO indicator above. If the 13-day RSI were to also reach an oversold level by another shot down, SPX and the overall market would be in a position to launch another tradable rally.


The S&P 100 (OEX) this past week dipped to and then rebounded from, an up trendline dating from its late-August lows. OEX's most recent low held above the prior OEX pullback low which keeps a bullish pattern going. Still, there's some question as to whether a next rally is going to get off the ground here. If support at 586-587 gives way then 580-577 should get tested as next support. Next support is assumed to then lie in the 560 area.

Conversely, a move above 600 would be a bullish plus where 610 would then be a next key test of buying interest in the big cap S&P stocks. A possible trading range in the next 1-2 weeks is between 580-575 on the downside and 610 on the upside.

Another decline would again put the index into oversold territory and good-sized rallies from at or near the RSI 35-30 zone has been a feature of this market. If that didn't happen, it suggests that the market has become more vulnerable to bigger declines just as seen with the sizable sell off of late-February into mid-March.


The Dow 30 (INDU) average saw its most recent rebound from the area of its 50-day moving average stop short at resistance implied by the 21-day average. The pattern here suggests some weakness to come, perhaps back to the 12200 area or a bit lower, such as to around 12100. I also noted possible near support implied by this past week's 12378 intraday low. As long as the low end of the current broad uptrend channel doesn't give way the chart remains bullish.

Resistant is first suggested for the 12600 area, then approximately 200 points higher, at 12800, extending to 12876.

As to the individual 30 Dow stock charts, what I'm struck by is the strongest remain the consumer 'defensive' type names like KFT, KO, MCD and PG. The stocks still being bought are narrowly focused on basic consumer purchases and not suggestive of an overall strong Dow ahead.


The Nasdaq Composite (COMP) chart is mixed. It has the overall pattern of higher highs and higher reaction lows that is the hallmark of an uptrend. On the other hand, the 21-day average now seems to be 'acting as' resistance, which suggests the index involved is heading lower. As to moving averages, another key one, the 50-day, has so far held as support, intraday dips below it not withstanding. Hey, the battle of the moving averages!

If prices break below COMP's up trendline, currently intersecting at 2767 it would suggest that the prior 2706 low could be tested. Therefore support levels suggested are 2767, extending to 2759; even more pivotal support comes in around 2706-2700.

Immediate overhead resistance is at 2883, with the most pivotal resistance apparent in the 2884-2887 area.


The Nasdaq 100 (NDX) has a mixed chart and technical pattern. The chart is not confirmed bearish until/unless the 2255 low is pierced, but I've highlighted in the yellow circle what could be an 'island' top; this pattern forms with an upside price gap or two (or three), followed by a sideways move and then a gap down below that price cluster. I'm talking possibilities only as, so far, NDX has 'held' its up trendline.

I've noted a key support around 2331, at the current intersection of the up trendline. If the island top pattern is true, NDX is headed to retest its prior low in the 2255 area. I'm waiting to see how things unfold and am not assuming anything just yet.

NDX resistance is pretty clear given the numerous highs at 2417. I always find it interesting how sometimes the same exact index high or close to it comes up again and again until f-i-n-a-l-l-y there's a breakdown. Tops often take this form, unlike the V-shaped bottoms we so often see.


The Nasdaq 100 tracking stock (QQQ) has a mixed chart. I wouldn't say bearish; a break below 55.3, the prior downswing low would be another story. The Q's recently rebounded some from its up trendline but it was a weak rally and almost immediately more selling came in (Friday). The pattern to me suggests that the stock could be headed back to a retest of its 55.3 prior low; that outcome is to be determined by whether QQQ will again find support at its up trendline.

If the stock mounts another rally, there's a substantial line of resistance at 59.3 to be overcome. We have the possibility of a significant double top given that the recent rally peak was quite close to the mid-February high at 59.0. A .3 spread is mere 'noise'. It's a top in the same area and there ware many failed attempts to better the 59.3 high.

I've highlighted potential support at 57.3, as suggested by the up trendline intersection early this coming week and by the 50-day moving average.


The Russell 2000 (RUT) has been loosing momentum since it made a new relative high at 868 recently and came within a hair's breath of piercing its previous downswing 816 downswing low. It got to 815 but then rebounded some. RUT is trading below its 50-day moving average, which is a visual on the momentum aspect. The up trendline that I started working with less than an optimal number of lows to use in drawing it, suggests possible upcoming support at 823. Overall, I'd rate the chart as mixed as the trend is at best sideways right now.

There's also a possible Head & Shoulder's (H&S)top formation here with the Left Shoulder at the first peak at 859, the Head being the middle rally to 868 and the Right Shoulder having formed at the recent rally to 856. If this is the correct interpretation, the recent break of the 'neckline' of the H&S pattern suggests a 'minimum' downside objective to 796.

Potential support at 823 extends to 813 with more significant support at 800. I wouldn't be surprised to see the 800 area tested and weakness might carry to around 780. Resistance looks like 860, extending to the 868 area.


New Option Plays

Tech and Financials

by James Brown

Click here to email James Brown


Goldman Sachs - GS - close: 134.99 change: -4.35

Stop Loss: 128.45
Target(s): 134.00, 137.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
Adventurous traders only need apply! We are going to try and catch the falling knife that is GS' stock price. There are plenty of investors and analysts that are worried about the U.S. government Department of Justice investigation into Goldman. While this remains a very dark cloud over the stock I would still expect a bounce from support. Naturally trying to catch falling knives is a dangerous game. Bear that in mind as you consider this trade.

GS found support near $130 back in July 2010. The intraday low was $129.50. I am suggesting we buy calls on a dip at $130.25 with a stop loss at $128.45. If triggered our targets are $134.00 and $137.50. Hopefully this will be a quick in and out kind of trade. Very small positions only!

Trigger @ 130.25 (very small positions)

- Suggested Positions -

buy the June $135 call (GS1118F135) current ask $4.00 (they should be around $2 at our entry point)

Annotated Chart:

Entry on May xxth at $ xx.xx
Earnings Date 07/19/11 (unconfirmed)
Average Daily Volume = 6.5 million
Listed on May 21st, 2011


Roper Industries - ROP - close: 83.38 change: +0.00

Stop Loss: 84.05
Target(s): 78.00, 75.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
The rally in this technology stock has run out of steam. ROP has formed a triple top over the last few months. Now the stock has broken at least one trend of higher lows. Shares are precariously perched on their 100-dma. A breakdown here could lead to a drop toward the simple 200-dma. Nimble traders could try and open positions on a failed rally near $85 and its 50-dma. I am suggesting a trigger to buy puts on a breakdown at $81.75. If triggered our targets are $78.00 and $75.50. The $80 level might offer a little support so don't be surprised to see a bounce. I would keep our position size small to limit our risk. Currently the Point & Figure chart is bearish with a $75 target.

Trigger @ 81.75 (small positions)

- Suggested Positions -

Buy the June $80 PUT (ROP1118R80) current ask $0.85

Annotated Chart:

Entry on May xxth at $ xx.xx
Earnings Date 07/26/11 (unconfirmed)
Average Daily Volume = 570 thousand
Listed on May 21st, 2011

In Play Updates and Reviews

Markets Lack Direction

by James Brown

Click here to email James Brown

Editor's Note:

May's option expiration was a disappointing one. The major indices settled lower. Stocks look vulnerable here. Our plan was to close our FAST trade on Friday. Meanwhile our ORLY trade was stopped out.


Current Portfolio:

CALL Play Updates

Apple Inc. - AAPL - close: 340.53 change: +0.66

Stop Loss: 339.40
Target(s): 374.00, 395.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see trigger

05/21 update: The bounce in AAPL appears to be fading. Shares lost -1.5% and closed on their lows for the day this Friday. News that AAPL had its price target upgraded to $460 was overshadowed by headlines that a manufacturing plant in China suffered an explosion. This plant makes AAPL's iPads and other devices. There is no word yet if the incident will affect production of AAPL's products.

Overall there is no change from my prior comments. If AAPL sinks there is support near $330 and $320. I'd rather buy calls at $320. If AAPL rallies then we want to see a breakout and we already have a triggered listed to buy calls at $352.50.

Aggressive and nimble traders may want to consider buying puts with a stop loss above this week's high and target a drop toward the $320 area.

Buy-the-breakout Trigger @ $352.50

- Suggested Positions -

Buy the June $370 calls (AAPL1118F370)

- or -

Buy the July $380 calls (AAPL1116G380)


Entry on May xxth at $ xx.xx
Earnings Date 07/20/11 (unconfirmed)
Average Daily Volume = 16.6 million
Listed on May 2nd, 2011

Boeing Co - BA - close: 77.52 change: -0.50

Stop Loss: 73.60
Target(s): 79.75, 84.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see Trigger

05/21 update: The bounce in BA has also stalled. Prior support near $78.00 is acting as new resistance. There is no change from my previous comments. We do not want to open positions at current levels. Our buy-the-dip entry point is at $75.00. If triggered our targets are $79.75 and $84.50. The Point & Figure chart for BA is bullish with an $87 target.

Trigger @ $75.00

- Suggested Positions -

Buy the June $80 call (BA1118F80) current ask $0.80


Entry on May xxth at $ xx.xx
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 4.8 million
Listed on May 17th, 2011

Estee Lauder Companies - EL - close: 100.65 change: -1.15

Stop Loss: 98.75
Target(s): 107.00, 109.95
Current Option Gain/Loss: -46.1%
Time Frame: 3 to 4 weeks
New Positions: see below

05/21 update: Hmm... lack of follow through on Wednesday's breakout higher is worrisome. EL looks headed for the $100 level again and possibly short-term support near $99.00. I would wait for a dip to these levels or better yet wait for a bounce from these levels before considering new bullish positions. Our targets are $107.00 and $109.95.

- Suggested Positions -

Long the June $105 call (EL1118F105) Entry @ $1.95


Entry on May 19th at $102.10
Earnings Date 08/11/11 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on May 18th, 2011

Express Scripts - ESRX - close: 59.98 change: -0.68

Stop Loss: 56.75
Target(s): 64.00, 68.50
Current Option Gain/Loss: - 7.1% & - 4.7%
Time Frame: 4 to 6 weeks
New Positions: see below

05/21 update: After hitting new all-time highs on Thursday the stock was downgraded on Friday morning. ESRX opened lower and dipped toward its rising 10-dma. The trend is still up but if the pull back continues we can look for additional support in the $59-58 zone. Considering the market's weakness on Friday I'd take a step back and wait before launching new bullish positions. Our targets are $64.00 and $68.50. FYI: The Point & Figure chart for ESRX is bullish with a $72 target.

- Suggested Positions -

Long the June $60 call (ESRX1118F60) Entry @ $1.53

- or -

Long the August $60 call (ESRX1120H60) Entry @ 3.15


Entry on May 10th at $59.21
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume = 4.6 million
Listed on May 9th, 2011

Freeport McMoran - FCX - close: 48.38 change: +0.41

Stop Loss: 45.99
Target(s): 53.50
Current Option Gain/Loss: - 12.5%
Time Frame: 3 to 4 weeks
New Positions: see below

05/21 update: I was ready to drop FCX for not performing but shares outperformed the major indices on Friday. A bounce in the U.S. dollar was not enough to stop a rally in copper and gold on Friday. FCX delivered a +0.8% gain. We do need to keep a wary eye on the dollar. If the dollar continues to rise it will put more pressure on commodities and FCX will likely fall.

This has always been a higher-risk trade. I am not suggesting new positions at this time. A close over resistance at $50.00 and the 200-dma could inspire new buying interest. Earlier comments:
I consider this a very aggressive and higher-risk trade. We want to keep our position size very small.

- Very Small Positions -

Long the June $50 call (FCX1118F50) Entry @ $1.52


Entry on May 19th at $48.72
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 21.8 million
Listed on May 18th, 2011

Forest Labs Inc. - FRX - close: 35.37 change: +0.09

Stop Loss: 33.25
Target(s): 39.00, 42.50
Current Option Gain/Loss: -15.3% & -10.7%
Time Frame: 4 to 6 weeks
New Positions: see below

05/21 update: Friday proved to be a very quiet day for FRX. The stock drifted sideways in a narrow range but did manage a gain. Investors are looking for safe haven stocks and the healthcare and drug sectors used to be traditional safe-haven trades. I don't see any changes from the Thursday night updates. We can buy calls now or wait for a dip into the $34.50-34.00 area. Our target is the $39.00 level and the $42.50 mark. We'll start with a stop loss at $33.25. FRX's point & figure chart has a triple-top breakout buy signal with a $53 target.

- Suggested Positions -

Long the June $37 call (FRX1118F37) Entry @ $0.65

- or -

Long the August $37 call (FRX1120H37) Entry @ $1.40


Entry on May 20th at $35.29
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 3.2 million
Listed on May 19th, 2011

International Business Machines - IBM - close: 170.16 change: -0.43

Stop Loss: 165.90
Target(s): 174.75, 179.50
Current Option Gain/Loss: + 15.3%
Time Frame: 6 to 9 weeks
New Positions: see below

05/21 update: I'm glad that May's option expiration is over. IBM has been pinned to the $170 strike price for three days in a row. Maybe now it will see some movement. Readers might want to consider waiting for a rise past $171.50 before initiating new positions.

Our first target is $174.75. Our second and final target remains $179.50. FYI: The Point & Figure chart for IBM is bullish with a $208 target.

- Suggested Positions -

Long the June $170 calls (IBM1118F170) Entry @ $2.60

05/12 Adjusted first target to $174.75
05/10 New stop loss @ 165.90


Entry on May 5th at $167.50
Earnings Date 04/19/11
Average Daily Volume = 4.8 million
Listed on April 27th, 2011

Illumina Inc. - ILMN - close: 72.86 change: -0.03

Stop Loss: 69.90
Target(s): 79.50, 84.00
Current Option Gain/Loss: -49.0%
Time Frame: 4 to 6 weeks
New Positions: see below

05/21 update: ILMN recovered off its intraday lows on Friday but shares are developing a short-term bearish trend of lower lows. I am still expecting a drop toward the $71-70 zone. Wait for that dip before considering new bullish positions.

Our targets are $79.50 and $84.00. The Point & Figure chart for ILMN is bullish with a $90 target.

FYI: The most recent data listed short interest in ILMN at 22% of the 121 million-share float.

- Suggested Positions -

Long the June $75 call (ILMN1118F75) Entry @ $2.75


Entry on May 11th at $74.50
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on May 10th, 2011

Jos. A Bank Clothiers - JOSB - close: 54.98 change: -1.53

Stop Loss: 52.90
Target(s): 59.50
Current Option Gain/Loss: +22.8%
Time Frame: 4 to 6 weeks
New Positions: see below

05/21 update: Another day of disappointing earnings releases elsewhere in the retail sector sent the group lower. Shares of JOSB suffered some profit taking with a -2.6% drop. Traders bought the dip at short-term support near $54.00. While the trend is up the action this past week has formed what might be a topping pattern on the weekly chart. I am not suggesting new positions at this time. More conservative traders might want their stop closer to the $54.00 level.

FYI: The most recent data listed short interest in JOSB at more than 21% of the small 27.3 million-share float. The risk of a short squeeze is pretty high.

- Suggested Positions -

Long the June $55 calls (JOSB1118F55) entry @ $1.75

05/18 new stop loss @ 52.90
05/14 Exit the May calls. May $55 call @ 0.90 (+28.5%)
05/12 New stop loss at $51.75


Entry on April 26th at $52.75
Earnings Date 06/02/11 (unconfirmed)
Average Daily Volume = 510 thousand
Listed on April 25th, 2011

NetApp, Inc. - NTAP - close: 53.70 change: -0.75

Stop Loss: 51.75
Target(s): 58.00
Current Option Gain/Loss: -18.9%
Time Frame: about 3 weeks
New Positions: see below

05/21 update: We only have three days left for this NTAP trade. Earnings are due on May 25th after the closing bell. We'll plan on exiting on Wednesday at the close to avoid holding over the report. More conservative traders may want to exit right now. NTAP looks like it's ready to dip back toward the $53-52 area. I am not suggesting new positions tonight.

- Suggested Positions -

Long the June $55 calls (NTAP1118F55) Entry @ $1.90

05/19 Plan on exiting May 25th at the close
05/18 New stop loss @ 51.75


Entry on May 9th at $53.33
Earnings Date 05/25/11 (confirmed)
Average Daily Volume = 5.8 million
Listed on May 7th, 2011

Sherwin-Williams Company - SHW - close: 85.79 change: -0.72

Stop Loss: 83.95
Target(s): 92.25, 98.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see Trigger

05/21 update: Little has changed for SHW. The stock is consolidating sideways under resistance. Friday's session did produce a bearish engulfing candlestick pattern but these patterns need to see confirmation. Our plan is unchanged. We're waiting for a breakout higher. I'm suggesting a trigger at $87.00. If triggered our first target is $92.25. Our second, much more aggressive target is $98.50. I would not be surprised to see some resistance near the $90 and $95 levels. The Point & Figure chart for SHW is bullish with a $99 target. If the stock can rally past $87 it will produce yet another buy signal.

Trigger @ $87.00

- Suggested Positions -

buy the June $90 call (SHW1118F90) current ask $0.65

- or -

buy the Sept. $90 call (SHW1117I90) current ask $2.50


Entry on May xxth at $ xx.xx
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on May 14th, 2011

ProShares Ultra(long) S&P 500 - SSO - close: 53.98 change: -0.84

Stop Loss: 52.75
Target(s): 59.00
Current Option Gain/Loss: -58.1% and -37.5%
Time Frame: 8 to 10 weeks
New Positions: see below

05/21 update: Warning! The bounce has failed. The SSO has rolled over under its short-term trend of lower highs. This would suggest the stock will see a new lower low soon. I would expect a dip toward the rising 100-dma. Yet until the SSO breaks down under this past week's low the intermediate trend is still higher (even though the short-term trend is lower). More conservative traders may want to abandon ship. I am not suggesting new positions at this time.

The SSO is twice as volatile as the market so we want to keep our position size small. Our multi-week target is the $59.00 level.

Small Positions Only - Suggested Positions -

Long the June $56 call (SSO1118F56) Entry @ $1.60

- or -

Long the September $60 call (SSO1117I60) Entry @ $2.00


Entry on May 5th at $54.39
Earnings Date --/--/--
Average Daily Volume = 11.3 million
Listed on May 4th, 2011

Tiffany & Co. - TIF - close: 69.24 change: -1.02

Stop Loss: 67.70
Target(s): 74.50
Current Option Gain/Loss: -28.3%
Time Frame: about five days
New Positions: see below

05/21 update: TIF suffered some profit taking on Friday with a -1.4% decline. The close under $70 is disappointing but shares still have a bullish trend of higher lows. Keep in mind that we only have three days left! We want to exit ahead of the May 26th earnings report. I'm suggesting a target at $74.50.

- Suggested Positions -

Long the June $72.50 call (TIF1118F72.5) Entry @ $1.48


Entry on May 19th at $70.45
Earnings Date 05/26/11 (unconfirmed)
Average Daily Volume = 1.49 million
Listed on May 18th, 2011

Union Pacific - UNP - close: 101.99 change: -0.80

Stop Loss: 98.95
Target(s): 109.00, 114.00
Current Option Gain/Loss: -35.1%
Time Frame: 4 to 8 weeks
New Positions: see below

05/21 update: Friday's drop in UNP erased Thursday's gain. After Thursday's failed rally at $104 I am still expecting a dip into the $101-100 zone. Wait for the dip or a bounce from that area before considering new positions.

- Suggested Positions -

Long the June $105 call (UNP1118F105) Entry @ $1.62


Entry on May 9th at $102.19
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on May 7th, 2011

United Technologies Corp. - UTX - close: 87.50 change: -0.60

Stop Loss: 83.49
Target(s): 89.50, 94.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see trigger

05/21 update: Little has changed for shares of UTX. The stock is consolidating sideways under previous support and now new resistance at $88. I am expecting a dip near $86.00, which is why we have a buy-the-dip entry point to buy calls at $86.50. More conservative traders could wait for a dip near $85 and its 50-dma instead. If UTX hits $86.50 first then our targets are $89.50 and $94.75.

Buy-the-dip Trigger @ $86.50

- Suggested Positions -

Buy the June $90 calls (UTX1118F90)


Entry on April xxth at $ xx.xx
Earnings Date 04/20/11
Average Daily Volume = 3.7 million
Listed on April 27th, 2011

Wynn Resorts Ltd. - WYNN - close: 144.98 change: -2.03

Stop Loss: 146.40
Target(s): 159.75, 169.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see Trigger

05/21 update: There is no change from my prior comments on WYNN. The stock is chopping around the $140-152 trading range. Nimble traders could buy dips near $140 with a tight stop. Actually we might consider that idea if we see WYNN bounce from $140 again. However, at the moment our plan is to buy calls on a breakout with a trigger at $152.00. If triggered at $152.00 our targets are $159.75 and $169.00. The $160 and $170 levels look like potential resistance.

Trigger @ $152.00

- Suggested Positions -

Buy the June $160 calls (WYNN1118F160) current ask $2.15


Entry on May xxth at $ xx.xx
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume = 2.1 million
Listed on May 11th, 2011

PUT Play Updates

Pioneer Natural Resources - PXD - close: 90.94 change: -0.04

Stop Loss: 96.15
Target(s): 85.25
Current Option Gain/Loss: -13.3%
Time Frame: 4 to 6 weeks
New Positions: see below

05/21 update: PXD did not see much movement on Friday. A bounce in the dollar did not stop oil from rebounding too. Yet oil stocks were mixed. PXD recovered from its morning lows but closed virtually unchanged on Friday. Shares have a short-term trend of lower highs but I'm hesitant to launch new positions here. Hopefully we'll have more clarity this week.

Earlier Comments:
We want to keep our position size small to limit our risk because oil and oil stocks have been increasingly volatile lately. Our target is $85.25. More aggressive traders could aim for the rising 200-dma instead. FYI: The Point & Figure chart for PXD is bearish with a $72 target.

-Small Bearish-

Long the June $90 PUT (PXD1118R90) Entry @ $3.30


Entry on May 16th at $91.64
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on May 14th, 2011


Fastenal Co. - FAST - close: 65.71 change: -0.63

Stop Loss: 64.75
Target(s): 69.50, 74.00
Current Option Gain/Loss: -73.3%
Time Frame: 3 to 6 weeks
New Positions: see below

05/21 update: FAST has been a big disappointment. The stock has gone nowhere the last three or four weeks. Yet the long-term trend is still higher. It will be interesting to see if FAST rallies or breaks down at its 50-dma near $65.00 next week. Of course it won't be $65 it will be $32.50 as FAST splits 2-for-1 on Monday. It was our plan to exit our call positions on Friday at the closing bell.

- Suggested Positions -

June $70.00 calls (FAST1118F70) Entry @ $0.75, exit 0.20 (-73.3%)

05/20 Exit. FAST @ 65.71. Option @ -73.3%
05/18 Plan on exiting Friday at the close.
05/17 New stop loss @ 64.75
05/16 Exit May $65 calls ASAP. Bid @ 1.40 (-36.3%)


Entry on April 26th at $66.25
Earnings Date 04/12/11 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on April 23rd, 2011

O'Reilly Automotive - ORLY - close: 57.89 change: -0.70

Stop Loss: 57.75
Target(s): 62.75, 67.25
Current Option Gain/Loss: -69.6%
Time Frame: 4 to 8 weeks
New Positions: see below

05/21 update: Thursday's sell-off continued on Friday morning. Shares traded below support near $58 and its 50-dma. Our stop loss was hit at $57.75 closing this trade. The stock has erased about three weeks of gains with this week's decline.

The plan was to keep our position size small to limit our risk.

- Suggested (Small) Positions -

June $60 calls (ORLY1118F60) Entry @ $1.65, exit 0.50 (-69.6%)

05/20 Stopped out. June call @ -69.6%
05/19 Scheduled exit May calls. Closed @ $0.00 (-100%)
05/18 Prepare to exit May calls tomorrow
05/14 Consider exiting the May calls now!


Entry on May 4th at $60.15
Earnings Date 04/27/11
Average Daily Volume = 1.1 million
Listed on April 30th, 2011