Option Investor

Daily Newsletter, Saturday, 3/3/2012

Table of Contents

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

Market Wrap

Runaway Bride

by Jim Brown

Click here to email Jim Brown

The Dow continues to flirt with 13,000 but can't seem to make a serious commitment to a long term relationship.

Market Statistics

There was very little in the way of economic news to power the markets on Friday. They mostly took a cue from Europe where Spain pulled a rope-a-dope on the EU. Spain was one of the countries that signed the fiscal pact this week pledging to maintain certain deficits and fiscal rules in the future. Then on Friday they announced they were not going to meet the fiscal promise for 2012 of a 4.4% deficit but would see a deficit of 5.8%. In 2011 Spain had agreed to a deficit of 6.0% but after the smoke cleared they actually had a budget deficit of 8.5%. This promise and renege syndrome seems to be the common strategy of the European countries with the highest debt. Greece has pushed it to an art form.

Yields on Spanish debt rose sharply higher while Italian yields improved. Spain is rapidly moving to the top of the list of problem countries. The market did not like the worry that another European country was starting to exhibit deeper problems. Spain is too big to save so a spiral into the economic abyss would be a serious challenge for Europe. Unemployment in Spain rose +2.4% in February, up from 22.85% at year end and under 25 youth unemployment is more than 50%. The young 20 something population just happens to be the ones that riot and protest in the streets. With this many 20+ people out of work can increased civil unrest be far behind? Tens of thousands of students demonstrated in 20 cities last week. What company would ever want to hire anyone when government mandated severance pay is 45 days for every year worked up to 24 years? There was a reform proposal in February to cut that back to 33 days per year.

In the U.S. the only economic report was the ISM New York and that was very positive. Activity in New York City expanded at its fastest pace in nearly a year in February. The ISM Index for NY rose by +6.6 points to 543.1 and the fastest rate since March 2011. The six-month outlook component rose +12.8 points from 64.5 to 77.3. The employment component rose more than 20% from 45.8 to 54.4. The rise in the employment component and the index as a whole suggests the rest of the New York economy is recovering nicely and not being dragged down by the layoffs in the financial sector as a result of new burdensome regulations. The decline in the index to 530.6 in Oct/Nov has been erased and is now hitting a new high.

Moody's ISM-NY Chart

The economic calendar for next week is dominated by employment reports. The ADP report on Wednesday is the first major report followed by the Challenger report on Thursday and Nonfarm Payrolls on Friday. The ADP report showed a gain of +170,000 jobs in January. The Nonfarm Payrolls showed a gain of +243,000 in January and the expectation is for a smaller gain of +210,000 for February. Investors would love to see those jobs numbers continue rising instead of weaken. The employment components of the regional activity reports have been rising dramatically but it remains to be seen if that will translate into Nonfarm Payroll hiring.

On Tuesday the results will be in on the Greek PSI vote. Private sector investors will have voted to accept the 53.5% face value haircut and -70% present value cut on the 200 billion euros of debt. This would reduce Greek's debt by 107 billion euros. If enough voted to accept then Greece can enact the "Collective Action Clause" to force all the others to take the same deal. That threshold is said to be 66% acceptance. If Greece enacts the CAC then the ISDA could declare a credit event that would trigger the $3.25 billion of credit default swaps.

If the swaps are not triggered because of the cleverly worded Greek legislation passed last week then the validity of any credit default swap for sovereign debt would be questioned. That could be bad news for the European sovereign debt market. Private investors may no longer be interested in buying the debt of weak countries if they can't insure it.

Economic Calendar

With Q4 earnings basically over the stock news was generally focused on individual news events like the YELP IPO. That company is a social media darling that has not yet posted a profit. Yelp makes money by selling advertising on its website where it has more than 25 million reviews of businesses like plumbers, shoe-repair stores, restaurants and nightclubs. Yelp competes with Angie's List but Angie charges for membership and Yelp does not. Analysts believe Google will be a major competitor after its acquisition of restaurant reviewer Zagat. The founder of Yelp said he was not fazed by competition from Google. Of course on the day of a very lucrative IPO what would you expecting him to say?

Shares of YELP priced at $15, well above its expected range and then opened at $22 and closed at $24.50. More than 17 million shares traded and YELP only sold 7.0 million. Clearly there was some churning in progress. YELP raised $96 million and the IPO results values the company at $900 million. Can you say takeover target? Even Yahoo could afford them. Insiders can't sell their shares for six months and their average cost is $1.21 per share. There is going to be a lot of new millionaires six months from now if YELP can hold its gains.

Yelp Chart - 3 Min

Eddie Lampert, the majority shareholder of Sears Holding (SHLD) must not be concerned about his future income potential. It was announced on Friday he bought the Paul Cejas mansion on Indian Creek Island in Biscayne Bay Florida. The cost was just under $40 million. It has 17,000 square feet on 2.7 acres. Indian Creek Island has 41 residential addresses, each a mansion, with the majority of the island a golf course. Lampert is listed as the 117th richest man by Forbes with a net worth over $3 billion. I am sure he was a happy camper on Friday because SHLD shares rallied another +10% to $76. Shares are up +150% since the January low. Lampert owns 22.7 million shares outright as of Jan 12th and his fund RBS Partners owns 48 million. His personal gain on Friday's spike in SHLD was roughly $150 million so dropping $40 million on a vacation home does not seem so extreme. He was reportedly buying shares hand over fist in late January after the stock bottomed at $30 so he probably owns more than the currently reported 22 million shares.

SHLD Chart

Lampert's New Home

Indian Creek Island

GM reported on Friday they had suspended production of the Chevy Volt for five weeks because dealers were currently overstocked. GM will lay off 1300 workers for five weeks starting on March 19th and running to April 23rd. Sales of the plug-in hybrid fell below estimates in 2011 and GM had estimated they would sell 45,000 Volts in 2012. That estimate has now been changed to "production will match demand." GM only sold 7,671 in 2011 and well below estimates. This year GM sold 603 in January and 1,023 in February. Using the February sales rate would put sales for 2012 at just over 12,000 and well below the initial 45,000 estimate. GM claims it has 3,600 Volts in inventory. The car costs $41,000 before a taxpayer supported $7,500 Federal tax credit. I think it is going to take oil prices well over the current $106 per barrel to make consumers interested in buying this car. GM shares closed flat.

Chevy Volt

Despite the down market Dow component AT&T (T) rallied nearly +1% to a seven month high on news they were going to clamp down a little more on usage hogs. AT&T is going to throttle down transfer speeds on those users that exceed 3GB of data during the month. This is not news but AT&T is being more vocal about it in an effort to talk down those heavy users. AT&T is hoping the threat of slower transfer speeds will cause many users to go on a self imposed diet. In theory a power user will stay under the 3GB threshold unless they download movies. Users that want to stream movies should try to do it when they have a WiFi network available. Verizon also has instituted a throttle down limit of 5GB. Sprint has no limit because they have no traffic. They are hoping to seduce some of the users away from AT&T and VZ with their no limit plan.

Coal stocks were crushed after Nomura initiated coverage on the US coal sector with a "bearish" view. The analyst said weak gas prices would cause more power plants to switch from coal to gas this summer and that switch could reduce coal demand by 50 million tons in 2012. The analyst started Arch Coal (ACI) and Patriot Coal (PCX) as high-conviction shorts. He still likes coal and gas producer Consol Energy (CNX) and miner Vale (VALE) as high-conviction buys. Peabody Coal (BTU) was not mentioned but it lost -6% on the coal sector negativity. In other news Midwest Generation agreed to shutdown two coal fired power plants in Chicago. They were big polluters because they were built back in the early 1900s and were grandfathered into the Clean Air Act.

Peabody Energy Chart

Shares of Wynn Resorts had a volatile day after a mistakenly filed 8K. The form filed by an "agent" of WYNN stated the casino firm had contracted for a 51 acre plot in Macau to build a new luxury casino complex. Shares spiked $8 but then trading was halted. Wynn filed another 8K claiming the first one was in error and the contract had not yet been published in the official gazette of Macau, which is a prerequisite to getting it approved. Trading was restarted and shares lost -$6 of their gain but almost immediately headed higher as speculators figured the deal was ready to be completed and the official filings had just been done out of order. Wynn is proposing to develop 51 acres of land in the Cotai area of Macau into a complete resort with five-star hotel, gaming areas, retail, entertainment, restaurants, spa and convention center. It is expected to contain 1,500 rooms and 500 gaming tables. Subsidiary Wynn Macau said in September it had accepted the terms and conditions of the Macau government regarding the land for the complex.

Morningstar analyst Chad Mollman said he has a $175 target on WYNN shares. That target goes to $200 if the redemption of the Okada shares is completed. Wynn and Japanese billionaire Kazuo Okada have been battling in the court over Okada's demand to see the internal books on Wynn Resorts. Wynn accused Okada of criminal acts and forcibly redeemed his shares representing roughly 20% of the company. If Wynn can win the court fight over the forced redemption Mollman thinks the company will be much better off.

WYNN Chart

The biggest news of the day came well after the close at roughly 10:PM Friday night. Judge Carl Barbier said Britain's energy-giant BP and a committee representing more than 100,000 plaintiffs suing over the 2010 Gulf oil spill have reached an agreement although specific terms have not been released. The judge said as a result of the agreement the trial has been postponed again with no date set for a new start. The judge said the settlement will require substantial changes to the current trial plan but he did not elaborate. Barbier did not mention anything about BP talks with the various government agencies about a settlement of the various fines and penalties.

The settlement with the thousands of plaintiffs suing BP will remove a large burden from the trial process. The headlines claim the settlement will cost BP $7.8 billion, be paid out of the existing victims compensation fund and the remainder of the fund money would be returned to BP. Last week the Wall Street Journal said BP was willing to sign over the remaining $14 billion in the victims fund to the plaintiff's committee in exchange for a settlement. On the surface that would appear to be a much better deal for BP and could spike the stock on Monday. BP has already paid out $6.1 billion to more than 220,000 claimants from the $20 billion claim fund.

That does not get BP off the hook for the billions of dollars in fines and penalties related to the oil spill. The initial fine for spilled oil is $1,100 per barrel. If the government can prove gross negligence that rises to $4,300 per barrel. More than 4.1 million barrels of oil leaked from the Macondo well so BP desperately needs to avoid that gross negligence finding. Bloomberg reported on Feb 9th the government did not want to settle for less than the $4,300 number.

Transocean and Halliburton could also see a bounce on Monday but until we know the terms of the settlement the bounce may be muted.

BP Chart

Transocean Chart

Gold prices imploded last week after Bernanke failed to mention the possibility of QE3 in his testimony on Wednesday. Gold closed on Friday just over $1700 but still in the long term uptrend. There is strong support at $1685 and again at $1600. There is almost no scenario where the Fed won't continue some form of QE program. With the average interest rate on the Federal debt at 2.3% the Fed can't afford to let rates rise. Every point higher costs the U.S. tens of billions of dollars per year more in interest. If the Fed lets rates rise uncontrollably the U.S. becomes Greece in a very short period of time. The Fed must keep rates low to protect mortgage rates until the housing sector has recovered. The Fed is in a rate trap. They can't allow rates to move higher and the only way they can do that is with some additional form of QE. The U.S. needs an inflationary environment to inflate wages and taxes and produce revenue to offset the deficit. I started to say pay down debt but I don't see how that is possible without a monumental change in the economy and government spending. For the next several years the goal is to reduce the size of the annual deficit. All of these factors will continue to make gold and silver good long term investments. Once the Greece problem disappears from the headlines the euro will rise and the dollar decline.

Gold Chart

Silver Chart

Crude prices declined on Friday after spiking over $110 late Thursday on news of a pipeline explosion in Saudi Arabia. Arch enemy Iran was the one that broke the news complete with pictures. Crude went ballistic until Saudi Arabia said the report was untrue. Iran has a habit of weekly news reports that are bullish for oil. They can claim war games to practice blockading the Strait of Hormuz and get a $2 spike in crude prices almost at will. With the Iranian oil embargo gaining speed we can expect Iran to ratchet up their news events. They would like to scare the U.S. and EU with visions of high prices causing economic collapse in an effort to weaken the coalition sanctions.

Gasoline prices in the U.S. rose to $3.74 on Friday and odd are very good they will be over $4 in the weeks ahead.

WTI Chart

Brent Crude Chart

The ECB's LTRO-2 announcement and the Bernanke testimony on Wednesday really roiled the currency markets. The ECB loaned another 529.5 billion euros for three years at 1% to more than 800 European banks. The first LTRO loaned 489 billion to 523 banks. That brings their QE total over the last 90 days to 1.02 trillion euros. The dollar index rallied +1.6% and the euro declined -1.9%. This depressed the U.S. equity markets and commodity futures of all flavors. You saw the impact on gold and were it not for the bogus news on the Saudi pipeline it would have crushed oil as well even more than the decline we saw.

Dollar Index Chart

Euro Chart

Turn out the lights, the party is over. That is what the Russell 2000 is telling us this weekend. The Russell failed to follow the other big cap indexes higher and remained in a very narrow consolidation range since early February. It tested the top of that range at 830 as recently as Wednesday's open but when that test failed the bulls left the building.

We always refer to the Russell 2000 as the fund manager sentiment indicator. Apparently that sentiment suddenly soured with the Russell losing -3% for the week while the Nasdaq and S&P posted gains. The Dow was flat.

After failing to make any forward progress for the last month it appears fund managers began taking their chips off the table. The Dow's failed flirtation with 13,000 for the last nine days without any material progress was a sign to small cap investors to lighten the load.

This is a serious warning sign for the market. The decline in the Russell could be the start of the profit taking analysts have been expecting for weeks.

Russell 2000 Chart - 90 Min

Russell 2000 Chart - Daily

The S&P lost -4 points on Friday but gained +4 for the week. It was not a rousing performance but at least it was able to set a new three year high earlier in the week at 1378. It was not able to hold the gains and the S&P is having the same problem with 1370 as the Dow is with 13,000.

The gains have been choppy and minimal and on low volume. Wednesday saw a spike in volume to 8.0 billion shares but Friday declined to 5.9 billion. Declining volume was 3:1 on Wednesday on a high volume day. On Friday it was 2:1 in favor of declining volume.

Uptrend support failed on Friday but it was more of a sideways move than an actual breakdown. The S&P has been moving towards the bottom of the channel for the last two weeks by failing to maintain forward motion. Sideways movement can be a consolidation pattern but we saw what happened to the Russell's month long consolidation.

The S&P has risk to 1340 but it may not be an elevator ride lower. It is said that "markets take the stairs to higher levels but the elevator down." With the active dip buying we have seen lately any further declines could be slow and boring rather than a short, sharp, painful elevator drop. Every dip is going to be seen as a buying opportunity by someone.

S&P Chart - 90 Min

The Dow has collapsed into a very narrow range of 12,935 to 13,015. This 80 point range has seen more traffic over the last two weeks than the American Idol stage. I can't remember when the Dow has been so range bound. Triple digit moves are instantly erased but it is tough going for both buyers and sellers between those boundary markers.

I believe the Dow has risk to 12,750 but I think it would take a new set of negative headlines to push it much lower. A miss on the Nonfarm Payrolls could be that headline.

Dow Chart - 60 Min

Dow Chart - Weekly

If only Jules Verne had actually invented a time machine I would be standing in line for a ticket today. Many times in the market we say "if only" or shoulda, woulda, coulda in reference to some event. I would like to take Mr. Verne's time machine back to December 19th and my only baggage would be a suitcase full of money.

Jules Verne

Nasdaq 100 Chart

This has been a big cap rally and especially big cap techs. All of that may come to an end next Wednesday or we could blast off on that date. Apple shares declined -$27 to $374 in the five days prior to the Oct-4th iPhone 4S announcement. There was not nearly as much buzz about the iPhone ahead of that announcement as there is for next Wednesday's event. Everyone thought the October announcement would produce the iPhone 5 but instead we got the 4S. That should have been a disappointment but after dropping -$20 on the news to $354 Apple roared right back to hit $426 only nine days later.

There have been some major moves in Apple shares surrounding their press conferences. This one should be no exception. The topic of this event is expected to be the iPad 3. Rumors say it will sport a quad core processor, possibly an A6, plus 4G LTE communications, higher resolution of 2,048 x 1,536 pixels, a much improved rear facing camera and a larger, longer life battery. I am not an Apple aficionado but with those features I might have to break down and buy one.

The specificity of the rumors has increased the hype over this announcement. Of course that sets up Apple for a major decline if those rumors are not met. Apple shares have been perfectly flat for the last three days at $545.

Apple Chart - 15 Min

Apple Chart - 180 Min

Clearly I would have put part of my suitcase of cash to work in Apple shares on Dec 19th. Since Apple is the major driver with a 15% weighting in the Nasdaq 100 whatever Apple shares do will have a serious impact on the Nasdaq.

Eventually this Apple induced Nasdaq rally will hit a pothole. Next week would be a prime opportunity because the iPad 3 news is definitely already in the market. However, Apple shares have surprised investors so many times to the upside is there anyone left that is willing to sell? With price targets as high as $800 you would have to be thinking "bubble." Qualcomm at $1000 back in the Nasdaq bubble a decade ago is a memory that comes to mind. However, Apple has real earnings, $100 billion in cash and killer products.

I don't want this to turn into an Apple love fest, especially not from me, a confirmed non-Apple techie. I don't own a single Apple product. No iPod, no iPhone. I don't even have an iTunes account. While I may be ready to convert I still have to see the new iPad 3 first. If I am ready to convert there must be millions of other holdouts that will throw in the towel and head out to the Apple store if this iPad meets expectations. Ass to that the millions who will rush to upgrade from the iPad 2 and that will be billions more in sales and it could be enough to send Apple shares over $600.

While the Russell is tanking and the Dow flirting with 13,000 the rest of the market will be waiting for the Apple announcement and the resulting move in the stock as the leader of the Nasdaq.

The Nasdaq could be well over 3,000 by Friday or back at support at 2,900 depending on investor reaction to Apple's news.

Nasdaq Chart

Other than Apple, investors will be worried over the Nonfarm Payrolls. Whisper numbers seem to be weakening but I don't understand the reasoning. Weekly jobless claims are at four year lows and regional activity reports show sharp increases in the employment components. Maybe analysts are just afraid of too much hopium in the market and want to hedge their bets.

The Q4 earnings cycle is over and after this week we need to begin stacking the sand bags in anticipation for Q1 earnings warnings. So far there has not been any material changes in analyst earnings estimates although 64% of the S&P lowered estimates for 2012 in their Q4 earnings reports. Maybe those lowered estimates will get us through March without a barrage of bad news and maybe pigs will fly over the Apple product announcement. I would love to see earnings continue on their current track to $105-$110 for the S&P 500 for 2012 but the year is only two months old. I am not from Missouri but I would like to see some proof before I start betting on those earnings.

I heard several analysts last week upping their S&P targets for year end. That is pretty brave given the lowered guidance and rising oil prices. About the only forecasts I would be willing to make would be $120 for WTI oil by July and gold over $2000 by year end. I would love to hear your predictions for 2012. Use the email link below and tell me what you think and no subject is taboo. For all you closet Mayans, this is your chance.

Last weekend I closed with a wish to see the Russell 2000 confirm the rally with a move over 830 and that did not happen. I did not get that 100 pound bag of $100 bills either. Looks like I need a new rabbit's foot.

Jim Brown

Send Jim an email

"Black holes are where God divided by zero."
Steven Wright

Index Wrap

Big Caps Doing Fine, Others Not So Much

by Leigh Stevens

Click here to email Leigh Stevens

The big cap S&P 100 (OEX) index and the Nasdaq 100 (NDX), continue in strong uptrends, while the broad based S&P 500 (SPX), the Nasdaq Composite (COMP) and Dow 30 (INDU) have been going sideways for the past 2 weeks, backing off from some key resistances. The small cap Russell 2000 (RUT) is already in a correction and could be the canary in the coal mine. Action in RUT may be signaling that the major indexes could also experience the kind of 'normal' but significant pullbacks last seen in November-December.

It takes a lot of buying to keep this kind of rally going the way it has been for the last 11 weeks. The 'average' individual investor has decided that they won't be fooled by another apparent bull market only to then see big downswings.

As the Journal reported the other day, many individual investors, remembering the dot-com collapse, the 2008-09 financial crisis and volatility since then have viewed the latest rally not as a 'buy signal' but as an opportunity to raise some cash. According to mutual-fund flow tracker EPFR Global, individual investors have pulled $8.3 billion out of U.S. stock funds since January 2nd and have sunk almost $10.6 billion into bond funds.

Hey, great choice! Go from stocks, a standout performer, to bond funds, which are paying 2 percent, at least for the 10-year note. Hey, go out to 30 years, what used to be called the 'long bond' and you can pick up a whooping 3%. Meanwhile, when rates start going up again, fund (redemption) values will start going down. Brilliant choice! But, investors do tend to fight the last war.

The S&P 500 has doubled since bottoming in March 2009 but of course it's had some roller coaster rides, most recently stemming from the Greek debt crisis and causing many individual investors to look at this year's run up with skepticism.

Going back to the fund tracking EPFR firm, it hasn't found a single week since July in which individual investors put a net amount of new money into stocks. In the entire period since the March '09 bottom, there's been just TWO months of net inflows from individual investors.

Institutional investors, on the other hand, are buying. Well, they HAVE to when the market goes up or they will underperform other funds. If you take individual AND institutional investors, U.S. stock funds have seen inflows of nearly $600 million this year. That's not small change of course but it's not much compared to the aforementioned figures on net outflows from equities at $8.3 billion.

Without individual investors coming into the market with new money, it will be difficult for the rally to continue. Consumer confidence is up of course, but individual investors remember seeing fund values dive in roller coaster periods.

As to the Dow 30, which many media commentators equate with 'the' market, there is some cause for cynicism as INDU has closed above 13000 a number of times since the Dow first crossed above 13k in April 2007. I'll take an opposite bet and say that after a correction runs its course and one seems due, bet on more upside. Meanwhile take some profits off the table like individual investors are doing. I'd expect the red-hot Nasdaq 100 to correct last.

Watch Apple (AAPL) for early clues to an NDX correction. It's possible AAPL reaches the $590-600 area or a bit higher (640-650) before coming down. Hey, a bearish story or stories on Apple are due, especially by those who would are short the stock or would like to short it!



The S&P 500 (SPX) chart is bullish but the Index has encountered resistance in the 1370=1375 area recently. Given the prolonged overbought condition suggested by the 13-day RSI, a pullback is a risk at this juncture. For example, if SPX retraced a nominal 38% Fibonacci correction from its recent high relative to its December low, this would result in a pullback to the 1310 area.

Meanwhile, SPX has continued to advance within its uptrend channel and it's up trendline has held to date. A decisive downside penetration of SPX's up trendline, currently intersecting at 1365 would suggest potential to test 1355-1350 support, which extends to 1340. 1330 is a next support, with significant technical support in the 1310-1300 price zone.

Resistance above 1375 is suggested at 1400, extending to 1418. I mentioned the relatively high 13-day Relative Strength Index/RSI. However, in terms of bullish/bearish sentiment, there is no 'extreme' in bullishness. As with investors, options traders are not going overboard in buying equities call options.


The S&P 100 (OEX) chart has maintained a bullish uptrend line for many weeks now. This is a 'problem' in terms of the length of time without more than minor short-lived dips. A problem in the sense that if not in it already, its high risk to take to the long side. Buying puts? I don't anticipate a deep correction, but it depends on how short-term oriented you are.

A correction that retraced a Fibonacci 38 percent of the last advance, would take OEX back to the 595 area. 600-595 is about the 'worst case' I envision for a pullback currently, although a further dip to 585, representing a 50% correction, is a possibility if 600 gave way. Just saying ...

Technical support is seen at the 21-day moving average around 613-612, with next support at 605. Resistance is highlighted (by the red down arrow) at 630, then up in the 645 area.


The Dow 30 (INDU) continues overall bullish in terms of its chart but the recent sideways trend has formed a minor sideways rectangle formation which could warn of an interim top. The rectangle formed after INDU fell under its prior up trendline.

13000 is seen by the media and many market pundits as 'THE' key resistance. I don't see it as so important given the strong uptrends in many of the 30 stocks of the Dow. Still, technically, big even round numbers are often not insignificant in terms of potential resistance.

AXP, PFE, HD, IBM, INTC, KFT, MCD and MSFT are particularly strong and if you wanted to watch these 8, weakness in this set would exert a strong bearish influence. 5 of the 8 are consumer defensive type stocks so the market is not going wild here. 3 are tech and that's the other strong component of this bull market.

Resistance is seen at 13000-13050, then back at the previously broken up trendline, currently intersecting at 13240. This previously pierced up trendline becomes the so-called (as coined by Michael Jenkins) 'kiss of death' trendline, which suggests simply that a return to it often represents tough resistance.

Support is suggested by the 21-day moving average in the 12900 area, with next support at 12750. An eventual decline to 12553 would represent a 38% retracement of the last big up leg from the mid-December bottom. INDU is overbought but that's been the case in terms of the 13-day RSI for weeks now. Bull markets get overbought and stay overbought. Still, this situation warns of eventual shake-out potential after a prolonged period.


The Nasdaq Composite (COMP) chart is bullish and the Index is in the middle of its broad multimonth uptrend channel, which sometimes is the place where corrections develop, absent a push to the HIGH end of the price channel. The Index has hit resistance recently at 3000, which represents a major upside objective and milestone for COMP.

The declining Relative Strength Index (RSI), as prices trended higher, is a bearish divergence that suggests potential for a more substantial pullback than has been seen since the early to mid-December correction. If however COMP pierces 3000 decisively, there's no real technical resistance I can point to shy of the 3100 area, at COMP'S upper trend channel boundary.

Initial support is suggested at the 21-day average, currently at 2938, with support extending to 2900. If 2900 is pierced, there's potential for a fall to the low-2800 area, with 2815 representing a Fibonacci 38% retracement of the last up leg, dating from the mid-December low.


The Nasdaq 100 (NDX) chart continues to look quite bullish and NDX has climbed steeply higher, staying within its well-defined uptrend price channel for some 11 weeks now, with only very minor corrections. When bellwether Apple (AAPL) starts faltering, expect the same of NDX. AAPL has continued to race higher even after clearing $500. No trend lasts forever, it just seems that THIS stock will! I project AAPL resistance at 590, extending to around 640 currently. An amazing run from the $250 area in August-September!

As to 'resistance' in NDX, it's hard to figure except at its upper trend channel boundary in the 2700 area. NDX technical support is at expected initially at its up trendline, currently intersecting at 2611; next support is implied by its 21-day moving average at 2578.

If NDX retraced a quarter/25% of its run up from its mid-December low, the Index would fall to the 2540 area. The very strongest uptrends rarely retrace more than this; a 38% retracement would be to be to 2481.


The Nasdaq 100 tracking stock is in a very strong uptrend but has recently hit some resistance/selling pressure at 65. Next resistance is up in the 66 area; 66.3 is the current intersection of the upper channel line, where QQQ would again get close to my upper moving average envelope line set at 5% over the 21-day moving average and representing another type of 'overbought' extreme; e.g., compared to such measures as RSI, stochastics and MACD.

Support is at 64 even, then at 63.3. The same 25% retracement in QQQ as discussed for the underlying NDX, would be to 62.3. This is somewhat of a 'worst case' downside target for the stock currently, although a move to 60.9 (and a still-nominal 38% retracement) is another possibility as a target for a deeper pullback/correction.


The Russell 2000 (RUT) has turned at least short-term bearish as RUT has fallen from a recent line of resistance that formed at 833. The Index pierced its up trendline, rallied back to that line which has 'become' resistance, then dropped to technical support at 800. Next support looks like 780.

A decline to 769 would represent a 50% retracement of RUT's last up leg dating from its mid-December low. Given that the Russell has been lagging the rest of the market for some time now, a retracement of at least 50% wouldn't be surprising.

'Setting up' or setting the stage so to speak for the recent decline was a period where prices were trending sideways, whereas the Relative Strength Index was drifting lower, making for a classic bearish RSI/price divergence.


New Option Plays

Relative Weakness & Reversals

by James Brown

Click here to email James Brown


Cliffs Natural Resources - CLF - close: 64.02 change: -0.85

Stop Loss: 66.25
Target(s): 57.50
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Metal and steel stocks have been underperforming. This relative weakness could definitely accelerate if the major indices break down. Shares of CLF broke down under support near $65.00 this past week. Now the stock is resting on one trend line of higher lows.

After Thursday's inside day and Friday's decline, I am suggesting small bearish put positions now with a stop loss at $66.25. More conservative traders may want to wait for CLF to trade under Wednesday's low at $62.91 before opening positions.

The $60.00 level could offer some support but we are aiming for $57.50. FYI: The Point & Figure chart for CLF is bearish with a $52 target.

- Suggested (Small) Positions -

buy the Mar $65 put (CLF1217o65) current ask $2.31

- or -

buy the Apr $60 put (CLF1221p60) current ask $1.81

Annotated Chart:

Entry on March xx at $ xx.xx
Earnings Date 04/30/12 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on March 03, 2012

Polaris Industries Inc. - PII - close: 66.32 change: -2.62

Stop Loss: 68.05
Target(s): 60.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
PII is reversing at resistance again. The stock was showing relative strength on Thursday with a big rally on strong volume. Unfortunately, Thursday's rally stalled at resistance near $70.00. Making matters worse was Friday's sell-off with a -3.8% decline on above average volume. The larger, longer-term trend for PII is up but shares could correct lower toward $60.00 or its 200-dma.

I am suggesting we open small bearish put positions if PII trades at $65.45. We will use a stop loss at $68.05 if triggered. Our exit target is $60.25.

Trigger to buy puts @ 65.45 (stop loss 68.05)

- Suggested Positions -

buy the Mar $65 PUT (PII1217o65) current ask $1.15

- or -

buy the Apr $65 PUT (PII1221P65) current ask $2.85

Annotated Chart:

Entry on March xx at $ xx.xx
Earnings Date 04/19/12 (unconfirmed)
Average Daily Volume = 580 thousand
Listed on March 03, 2012

In Play Updates and Reviews

S&P 500 Inched Higher for the Week

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 and the NASDAQ inched higher for the week but leadership is narrowing. Our new WFM trade has been opened. I removed MMM as a candidate. CAT and EMN were stopped out.

Current Portfolio:

CALL Play Updates

Alexion Pharma. - ALXN - close: 85.26 change: +0.72

Stop Loss: 82.75
Target(s): 89.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

03/03 update: Unfortunately our ALXN trade is still not open yet. The S&P 500 index opened flat and ALXN opened down, which negated our new entry point. Trades did buy the dip in ALXN again and shares outperformed the major indices with a +0.8% gain.

ALXN definitely looks poised to move higher. We will adjust our entry point strategy to use a trigger at $85.55 with a stop loss at $82.75. Our target is unchanged at $89.50.

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

Trigger - buy calls at $85.55

- Suggested (SMALL) Positions -

buy the Apr $85 call (ALXN1221D85)

- or -

buy the Apr $90 call (AXLN1221D90)

03/03/12 adjust entry strategy: buy calls at $85.55, stop loss @ 82.75
03/01/12 adjust entry strategy. buy calls if both ALXN and S&P 500 open positive tomorrow
02/29/12 trade not open yet. Adjust entry to use a buy the dip trigger at $82.50 with a stop loss at $81.45


Entry on February xx at $ xx.xx
Earnings Date 04/23/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on February 28, 2012

Airgas Inc. - ARG - close: 82.24 change: -0.07

Stop Loss: 79.90
Target(s): 87.00
Current Option Gain/Loss: -25.0%
Time Frame: 3 to 4 weeks
New Positions: see below

03/03 update: ARG has spent the last couple of days quietly consolidating sideways. If the market cooperates we should see ARG rally off its 10-dma and rise to new highs. However, given that the market's advance looks a little tired I am not suggesting new positions at this time. We will raise our stop loss up to $79.90.

FYI: The Point & Figure chart for ARG is bullish with a $92 target.

- Suggested Positions -

Long Mar $82.50 call (ARG1217C82.5) Entry $1.00

03/03/12 new stop loss @ 79.90
02/28/12 trade opened @ 82.21
02/27/12 not open yet, buy calls at the open tomorrow
02/24/12 not open yet, try again.


Entry on February 28 at $82.21
Earnings Date 05/07/12 (unconfirmed)
Average Daily Volume = 528 thousand
Listed on February 23, 2012

American Express Co - AXP - close: 52.99 change: -0.58

Stop Loss: 51.40
Target(s): 57.50
Current Option Gain/Loss: -23.7%
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

03/03 update: The rally in AXP lost a little steam this week. Shares have been consolidating sideways near $53.00 and the middle of its rising channel. If the market does see a decline we could see AXP dip toward $52.00 or its 30-dma. I am inching our stop loss up to $51.40. I'm not suggesting new positions at this time.

The plan was to keep our position size small. Our multi-week target is $56.50. Keep in mind that AXP doesn't move super fast. FYI: The Point & Figure chart for AXP is bullish with a $75 target.

- Suggested Positions - (Small Positions)

Long Apr 52.50 call (AXP1221D52.5) Entry $2.40

03/03/12 new stop loss @ 51.40
02/29/12 AXP gapped down at $53.46
02/28/12 not open yet. buy calls at the open tomorrow.
02/27/12 not open yet, try again.


Entry on February 29 at $53.46
Earnings Date 04/19/12 (unconfirmed)
Average Daily Volume = 5.7 million
Listed on February 25, 2012

BorgWarner Inc. - BWA - close: 85.42 change: +1.23

Stop Loss: 79.25
Target(s): 89.00
Current Option Gain/Loss: +19.3%
Time Frame: 3 to 6 weeks
New Positions: see below

03/03 update: BWA displayed plenty of relative strength on Friday morning with a rally to new highs at $86.98. The stock pared its gains to close up above the $85 level with a +1.4% gain on the session.

I am raising our stop loss to $81.25. Our exit target remains $89.00.

Earlier Comments:
A breakout would mean new record highs and could produce a some short covering in BWA. The most recent data listed short interest at 14% of the 108 million share float. FYI: The Point & Figure chart for BWA is bullish with a $108 target.

- Suggested Positions -

Long Mar $85 call (BWA1217C85) Entry $1.55

03/03/12 new stop loss @ 81.25
02/25/12 new stop loss @ 79.25
02/17/12 trade opened on BWA's gap open higher at $82.49


Entry on February 17 at $82.49
Earnings Date 04/30/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on February 16, 2012

Capital One Financial - COF - close: 49.89 change: -0.35

Stop Loss: 47.75
Target(s): 54.75
Current Option Gain/Loss: Mar$50c: -31.5% & Apr$50c: -14.3%
Time Frame: 3 to 4 weeks
New Positions: see below

03/03 update: Hmm... now it's time we get a little concerned about COF. Broken resistance near $50.00 should have been support. Friday's close under this level is a warning sign. The larger trend of higher lows is still bullish but I am not suggesting new positions at this time. I am inching our stop loss up to $47.95. More conservative traders may want to move their stop closer to the $49.00 level instead.

Earlier Comments:
We want to keep our position size small to limit our risk. Our multi-week exit target is $54.75.

(small positions)

- Suggested Positions -

Long Mar $50 call (COF1217C50) entry $1.30

- or -

Long Apr $50 call (COF1221D50) entry $2.30

03/03/12 new stop loss at $47.95
02/28/12 triggered at $50.25


Entry on February 28 at $50.25
Earnings Date 04/23/12 (unconfirmed)
Average Daily Volume = 6.4 million
Listed on February 15, 2012

Coach, Inc. - COH - close: $76.49 change: -0.25

Stop Loss: 73.75
Target(s): 82.50
Current Option Gain/Loss: Mar$75c: -14.2% & Apr$77.50c: - 8.3%
Time Frame: 3 to 6 weeks
New Positions: see below

03/03 update: The threat of rising gasoline prices has not scared investors out of the retail stocks yet but it remains a risk. COH tagged a new record high at $77.30 before paring its gains. On a short-term basis, if the market is weak, look for a dip into the $75.50-75.00 zone.

Earlier Comments:
Our target is $82.50 although don't be surprised if shares pause and pull back a bit when they initially test $80.00. FYI: The Point & Figure chart for COH is bullish with a long-term $109 target.

- Suggested Positions -

Long Mar $75 call (COH1217c75) entry $2.45

- or -

Long Apr $77.50 call (COH1221D77.5) entry $2.40

03/01/12 COH hit our trigger at $76.75


Entry on March 01 at $76.75
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 2.7 million
Listed on February 27, 2012

Goldman Sachs - GS - close: 119.96 change: -1.17

Stop Loss: 116.40
Target(s): 125.00
Current Option Gain/Loss: +76.1%
Time Frame: 3 to 4 weeks
New Positions: see below

03/03 update: After Thursday's big gain GS hit some profit taking on Friday. The pullback wasn't that bad. Readers can look for a new dip and bounce in the $118.00-119.00 zone as a new entry point. Please note that I am raising our stop loss to $116.40.

Our exit target is $125.00 but more aggressive traders may want to aim for the $127.50-130.00 zone instead.

Earlier Comments:
GS can be a volatile stock at times so we want to keep our position size small.

(small positions) - Suggested Positions -

Long Mar $120 call (GS1217C120) Entry $2.10

03/03/12 new stop loss @ 116.40
02/28/12 GS disclosed it has received a Wells Notice from the SEC
02/28/12 triggered at $118.25


Entry on February 28 at $118.25
Earnings Date 04/19/12 (unconfirmed)
Average Daily Volume = 6.2 million
Listed on February 21, 2012

Chart Industries - GTLS - close: 67.96 change: -2.07

Stop Loss: 66.40
Target(s): 78.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

03/03 update: There was no follow through on Thursday's bounce and our new trade on GTLS did not open on Friday. The stock underperformed the major indices with a sharp -2.9% decline. Readers might want to consider buying calls on a dip near the $65-64 zone with a tight stop under $64.00. I am tweaking our entry point to a breakout trigger to buy calls at $70.75 and setting our target at $78.50.

FYI: The Point & Figure chart for GTLS is bullish with an $82 target.

Trigger to buy calls @ 70.75

- Suggested Positions -

Buy the Apr $75 call (GTLS1221D75)

03/02/12 trade did not open. Use a trigger at $70.75


Entry on March xx at $ xx.xx
Earnings Date 05/03/12 (unconfirmed)
Average Daily Volume = 665 thousand
Listed on March 01, 2012

Herbalife Ltd. - HLF - close: 67.46 change: -0.24

Stop Loss: 65.45
Target(s): 72.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

03/03 update: Our new trade on HLF is not open yet. Shares opened lower on Friday, which negated our entry point. The stock did try and breakout past $68.00 but failed given the market's sour nature on Friday. I am adjusting our entry strategy. We only want to buy calls (and small positions at that) if HLF can trade at $68.25. We will adjust our stop loss to $65.45.

Our target is $72.50. FYI: The Point & Figure chart for HLF is bullish with a long-term $100 target.

NOTE: HLF is due to trade ex-dividend on March 5th. We should expect shares to gap down at the open by 40 cents as a result.

Trigger to buy calls @ $68.25 (small positions)

- Suggested Positions -

buy the Mar $70 call (HLF1217C70)

- or -

buy the Apr $70 call (HLF1221D70)

03/02/12 trade did not open. Adjust strategy to buy calls at $68.25 with a stop at $65.45.


Entry on March xx at $ xx.xx
Earnings Date 05/02/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on March 01, 2012

Noble Corp. - NE - close: 40.29 change: -0.61

Stop Loss: 38.45
Target(s): 44.75
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 6 weeks
New Positions: see below

03/03 update: NE opened higher on Friday but quickly reversed. Shares gave up -1.5% but still managed to close above the $40.00 level. If the stock market declines again we might see NE test its 10-dma again. Readers may want to wait for another bounce near the 10-dma before considering new positions.

Earlier Comments:
Our multi-week target is $44.75. FYI: The Point & Figure chart for NE is bullish with a long-term $61 target.

- Suggested Positions -

Long Apr $40 call (NE1221D40) Entry $1.89


Entry on March 01 at $40.24
Earnings Date 04/19/12 (unconfirmed)
Average Daily Volume = 4.4 million
Listed on February 29, 2012

Sherwin-Williams - SHW - close: 102.44 change: -1.12

Stop Loss: 99.40
Target(s): 104.75
Current Option Gain/Loss: +38.0%
Time Frame: 3 to 5 weeks
New Positions: see below

03/03 update: SHW hit some profit taking on Friday. This left shares essentially chopping sideways the last four sessions. SHW should find support near $100 but readers may want to go ahead and take profits early. I am not suggesting new positions at this time.

- Suggested Positions -

Long Mar $100 call (SHW1217C100) Entry $2.10

02/28/12 new stop loss @ 99.40
02/27/12 readers may want to take profits now (@ +80.9%)
02/25/12 new stop loss @ 98.90
02/22/12 new stop loss @ 98.25


Entry on February 17 at $100.25
Earnings Date 04/23/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on February 14, 2012

Whole Foods Market - WFM - close: 82.81 change: +0.64

Stop Loss: 79.95
Target(s): 87.50
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 6 weeks
New Positions: see below

03/03 update: WFM displayed relative strength on Friday with a breakout from its three-week trading range and a rally to new highs. Shares hit our trigger to buy calls at $82.55. Our target is $87.50. FYI: The Point & Figure chart for WFM is bullish with a $103 target.

- Suggested Positions -

Long Apr $85 call (WFM1221D85) Entry $1.88


Entry on March 02 at $82.55
Earnings Date 05/03/12 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on March 01, 2012

Weight Waters Intl. - WTW - close: 78.03 change: -0.82

Stop Loss: 77.45
Target(s): 86.50
Current Option Gain/Loss: -82.1%
Time Frame: 3 to 4 weeks
New Positions: see below

03/03 update: WTW erased most of Thursday's bounce with a -1.0% decline on Friday. Shares hit an intraday low of $77.62 and our stop loss is at $77.45. If the market declines again on Monday, WTW could hit our stop loss. More conservative traders may want to exit at the opening bell. I am not suggesting new positions at this time.

Earlier Comments:
WTW could see a potential short squeeze. The most recent data listed short interest at 24.6% of the relatively small 35.1 million-share float. The stock has rallied to significant resistance near $80.00. A breakout could spark some short covering.

- Suggested Positions -

Long Mar $80 call (WTW1217C80) Entry $1.40

02/24/12 WTW gapped open higher at $80.26, which was above our trigger at $80.25.


Entry on February 24 at $80.26
Earnings Date 05/07/12 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on February 23, 2012

S&P Oil ETF - XES - close: 38.60 change: -0.57

Stop Loss: 36.90
Target(s): 43.00
Current Option Gain/Loss:(Feb37c: -48.1%) & Mar36c: - 2.0%
Time Frame: 4 to 8 weeks
New Positions: see below

03/03 update: Crude oil hit some profit taking on Friday thanks to another bounce in the U.S. dollar. This helped fuel declines in the oil and energy stocks. The XES lost -1.4%. This ETF should have some support near the $38.50-38.25 area and the $37.25 area. I am not suggesting new positions at this time.

Earlier Comments:
The option spreads on the XES a bit wide, which makes this a higher-risk trade. I am suggesting we keep our position size small to limit our risk. Our multi-week exit target is $43.00.

(small positions) - Suggested Positions -

Long Mar $36 call (XES1217C36) Entry $2.45

02/18/12 new stop loss @ $36.90
02/14/12 exited Feb. calls at the close: bid @ $0.70 (-48.1%)
02/13/12 prepare to exit our Feb. $37 calls at the closing bell tomorrow.


Entry on February 06 at $37.75
Earnings Date --/--/--
Average Daily Volume = 177 thousand
Listed on February 04, 2012

Oil & Gas Exploration ETF - XOP - close: 59.05 change: -1.30

Stop Loss: 57.45
Target(s): 63.00
Current Option Gain/Loss: Mar$60c: -46.4% & Jun$60c: -13.4%
Time Frame: 4 to 8 weeks
New Positions: see below

03/03 update: The pullback in oil and energy stocks also hit shares of the XOP, which fell -2.1%. Look for support in the $58.00-57.50 zone. After Thursday's "inside day" the action on Friday is bearish. I am not suggesting new positions at this time. FYI: The Point & Figure chart for XOP is bullish with a $74 target.

- Suggested Positions -

Long Mar $60 call (XOP1217C60) Entry $1.70

- or -

Long Jun $60 call (XOP1216F60) Entry $4.10

02/29/12 adjusting stop loss to $57.45
02/23/12 new stop loss @ 57.85


Entry on February 14 at $58.75
Earnings Date --/--/--
Average Daily Volume = 3.8 million
Listed on February 13, 2012

PUT Play Updates

Currently we do not have any active put trades.


Caterpillar, Inc. - CAT - close: 112.49 change: -0.90

Stop Loss: 112.75
Target(s): 122.50
Current Option Gain/Loss: -79.1%
Time Frame: 3 to 4 weeks
New Positions: see below

03/03 update: CAT has been underperforming the last couple of days. We were concerned that if the market was weak that CAT would hit our stop loss on Friday. Sure enough CAT continued to underperform and hit our stop at $112.75. After failing to breakout past its 2011 highs for almost a week the stock could be headed for a significant correction. I would not be surprised to see CAT drop back into the $106-100 zone.

- Suggested Positions -

Mar $120 call (CAT1217C120) Entry $1.15 exit $0.24 (-79.1%)

03/02/12 stopped out at $112.75
02/29/12 CAT produced a bearish engulfing candlestick pattern
02/25/12 adjusted exit target to $122.50
02/23/12 new stop loss @ 112.75


Entry on February 21 at $115.25
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 7.5 million
Listed on February 14, 2012

Eastman Chemical Co. - EMN - close: 53.55 change: -0.24

Stop Loss: 53.25
Target(s): 59.00
Current Option Gain/Loss: -31.4%
Time Frame: 3 to 4 weeks
New Positions: see below

03/03 update: EMN tagged our stop loss at $53.25 on Friday afternoon. Shares had been struggling. The intraday spike above resistance that hit our trigger to buy calls in the first place wasn't that convincing. Now after four weeks of failing to breakout past resistance near $55.00 EMN looks poised to correct lower.

(small positions) - Suggested Positions -

Apr $55 call (EMN1221D55) Entry $1.75 exit $1.20 (-31.4%)*

03/02/12 stopped out at $53.25
*exit price is an estimate since the option did not trade at the time our stop was hit.
02/29/12 triggered at $55.05
02/27/12 adjusted suggested call from March to April.


Entry on February 29 at $55.05
Earnings Date 04/30/12 (unconfirmed)
Average Daily Volume = 2.6 million
Listed on February 18, 2012

3M Co. - MMM - close: 87.52 change: +0.03

Stop Loss: 86.75
Target(s): 94.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

03/03 update: We have been patiently waiting for MMM to breakout higher for a while now. While the major indices hit new highs MMM has been unable to breakout of its trading range. On Thursday I suggested we would drop MMM as a candidate if shares didn't improve. Our trade never opened. Readers may want to keep MMM on their watch list. After more than a month of churning sideways if the stock does manage a breakout it could see a strong move.

Breakout Trigger (buy calls) @ $88.75 (small positions)

Trade never opened.

03/03/12 removed MMM from the newsletter for lack of movement.
03/01/12 about to drop MMM for lack of movement.
02/25/12 adjusted trigger to $88.75 and stop to $86.75
Added the April $90 call
02/09/12 removed the February call.


Entry on February xx at $ xx.xx
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on February 07, 2012