Option Investor

Daily Newsletter, Saturday, 6/16/2012

Table of Contents

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

Market Wrap

Final Countdown

by Jim Brown

Click here to email Jim Brown

The countdown clock is ticking on the Greek elections and the major parties are not letting up on their campaigns.

Market Statistics

I am sure everyone reading this commentary is as sick of the Greek tragedy playing out in Europe as I am. Unfortunately we remain hostage to their headlines. I will try to keep this brief. The Greek elections are Sunday and the leading parties are neck and neck. This would normally be ignored by the rest of the world but this time around it is seen as a referendum on remaining in the euro.

The New Democracy party is pro-bailout and would uphold the agreement signed by the prior administration. Their leader, Antonis Samaras, has a degree in economics and was educated at Harvard.

The Syriza party is anti-bailout and would "tear up" the bailout agreement, which would likely force an eventual exit from the euro zone single currency group.

Neither party has enough votes to cinch the election and end up in power. Both the major parties won less than 20% of the vote in May. That means the winning party will have to form a coalition with another party or more than one in order to get the required majority to form a government. In the May election the winning parties could not form a coalition and a new election was required by the Greek constitution. If a coalition cannot be formed this time then another election will be called for 30 days from now.

Unfortunately Greece will be broke before that election can be held and a default on their debt is likely. It is imperative for Greece that the New Democracy party wins the election and forms a coalition with the Pasok party and affirms the bailout agreement in order to get the next round of payments from the troika consisting of the ECB, EU and IMF. A win by the Syriza party and rebuke of the bailout agreement means no further financial help from the troika and a Greek default.

The graphic below shows the major parties in Greece and their stance on the bailout and their percentage of the vote in the May elections.

Greek Political Parties

For the euro this election is critical for avoiding a lot of pain should Greece default and leave the euro. For the Greek people this is a matter of financial life and death. If the Syriza party wins and cancels the terms of the bailout, which include severe austerity for years to come, the country will crash. Greece will default and most likely reinstate the Drachma as the official currency. Whatever peg they put on the drachma, say 1:1 to the euro, will immediately be trashed. The new drachma will likely slip to 50% or less of the euro within days because everyone knows Greece is bankrupt and is going to be printing drachma's by the truckload.

For an individual this will be a disaster. Let's say you have a job making 60,000 euros a year and have 20,000 euros in the bank with debt of 20,000 euros. When the drachma falls to 50% of the euro your savings is now worth 10,000. Your 60,000 drachma salary is now worth the equivalent of 30,000 euros. However, your debt is denominated in euros. That means you now have to pay back your debt using twice as many drachmas. Your income and savings was cut in half and your debt basically doubled. Voting for Syriza is financial suicide.

In Greece 50% of voters are between age 30-65 and have jobs and assets of some kind. In theory they understand the dramatic consequences of rejecting the austerity. Overall unemployment is 21.9% but youth employment, those 25 and under, is over 50%. This group has no job, no money and no assets. They could care less if their money was worth 50% less next week because they don't have any and they don't have any real world experience to know that the economic choice they are making is disastrous. They are swayed by the powerful rhetoric of Alexis Tsipras promising them an end to austerity and reinstatement of their government jobs and salaries. He has a persuasive argument for young rebel minds who don't really understand the consequences.

Greek laws forbid official polls in the last two weeks before an election but the last polls released showed the New Democracy party and Syriza in a dead heat. Unofficially the New Democracy party appears to be pulling ahead as citizens are forced to weigh the potential outcomes. Two recent surveys found that 77% to 80% of Greeks want to remain in the euro. That should spell doom for Syriza. The Greek stock market was up +14% for the week on hopes a pro-bailout coalition can be formed.

Global markets seemed to be accepting the same outcome as the indexes rallied in the face of what could be a disaster. Basically investors looked into the face of disaster and decided the Greek people were not that stupid.

However, there are quite a few people who believe the Greek election outcome has already been decided by events in Spain. Last week Spain received a bailout commitment of 100 billion euros for its banks on relatively easy terms and with no austerity. The leader of the Syriza party, Alexiz Tsipras, has used the Spanish bailout as evidence he can void the existing terms of the Greek bailouts including the austerity and keep Greece in the euro at the same time. This will have a very big pull for those voters currently feeling pain from the Greek austerity.

The assurances by the various governments and central banks that they stood ready to provide emergency liquidity "if needed" put a bottom under the markets. Whether this promise of liquidity is going to be enough to rescue the markets from disaster on Monday if the wrong party wins is unknown.

Greek banks are already insolvent and cash is being withdrawn at the rate of one billion euros a day. If Syriza wins this is going to be immediately become worse as citizens try to avoid disaster by cashing out in euros. If Syriza wins there will be bank runs in Spain, Italy, Portugal, Ireland, etc as customers worry about what the impact of a Greek exit will have on their bank and on their country. Yields on sovereign debt for those countries will rocket higher on worries they will follow Greece out of the euro zone.

The ECB said it was ready to provide liquidity "as necessary" to "solvent banks" in the event of a Greek disaster. The keyword there is solvent since quite a few European banks are insolvent or soon will be once the euro dominos begin to fall. With nearly one trillion euros of sovereign debt spread around in European banks the damage would be dramatic. Spain and Italy are already on the verge of 7% debt yields and further credit downgrades are on the way if Greece implodes.

In order to kick this can far enough down the road to head off a disaster in 2012 the pro-bailout parties will have to win and form a coalition of at least 151 of the 200 seats in Parliament. A win by Syriza or the inability to form a pro-bailout coalition will plunge the country into default and probable exit from the euro.

While the Fed has been quiet on this matter ahead of its meeting next week you can bet the odds are high they will take some form of action to offset the weakness in Europe if Syriza wins. In fact, should Syriza win there will likely be major European QE programs announced of as much as one trillion euros. The Fed will probably coordinate with the ECB and others in that program with additional currency swaps and guarantees.

That suggests there are two alternatives for next week. One, the New Democracy party wins and forms a coalition. Europe will rally because they dodged another bullet. The second option is a Syriza win and massive liquidity events are announced including some form of support for European banks and the market discounts a Greek exit as a done deal and rallies.

One thing for sure is that Monday is going to be a volatile ride in the markets. The European debt crisis will still exist and Spain and Italy will eventually come back into the headlines but Monday will be Greece 100% of the time.

In the U.S. the economic reports on Friday were terrible. The NY Empire Manufacturing Survey fell to 2.3 for June from 17.1 in May. This is not good news. New orders declined to 2.2 from 8.3 and backorders declined even further from -4.8 to -5.2. They have been negative now for the last 12 months. Inventories fell dramatically from 4.8 to -8.3. Employment fell sharply from 20.5 to 12.4 and the average workweek fell from 12.1 to 3.1. The six-month outlook declined from 29.3 to 23.1.

This report showed a dramatic change in business conditions in the NY area. Another indicator showing the decline in demand is the sharp drop in prices. Prices paid declined from 37.3 to 19.6 and prices received fell from 12.1 to 1.0. This means demand has fallen sharply and manufacturers are discounting products to move inventory.

This report should cause investors to use more caution ahead of the Philly Fed report next Thursday. The Philly report fell into contraction territory last month at -5.8.

NY Empire Manufacturing Chart

Consumer sentiment for June declined more than -5 points from 79.3 to 74.1 and well below consensus for 77.5. This is the lowest level for the year. This is surprising given the falling gasoline prices and strengthening housing market.

This drop in the headline number ended a nine month streak of gains. The declines were evident in both the main components. The present conditions component fell from 87.2 to 82.1 and the expectations component declined to 68.9 from 74.3.

Confirming the decline in the Michigan Sentiment the daily Rasmussen Index fell by half a point on Friday to 84.5 and the lowest level since February.

Consumers are more than likely becoming concerned about the fiscal cliff being mentioned in the headlines almost daily as well as the problems in Europe and the Greek headlines. Slowing job growth as reported in the nonfarm payrolls and rising jobless claims are also a drag on sentiment.

Consumer Sentiment Chart

Industrial production declined -0.1% in May compared to a +1.1% gain in the prior month. Analysts had expected a small gain. Manufacturing output declined -0.4% driven by a -1.5% drop in output in auto manufacturing. Nonauto production fell -0.3% and is now down an annualized -2.5% over the last three months. That is the weakest period since the recession. Weaker exports to Europe were likely the factor.

Industrial Production Chart

The regional employment data released on Friday showed employment declined in 22 states in May compared to 19 declines in April. Unemployment in the West rose to 9.4% and the highest region in the US. The Midwest was 7.2% and the lowest region.

The biggest report for next week is the Philly Fed Manufacturing Survey on Thursday. The biggest economic event is the two day FOMC meeting on Tuesday and Wednesday. The Fed is expected to announce an extension of Operation Twist and depending on the outcome in Greece there could be multiple policy changes.

The U.S. economy is definitely slowing. The Fed has said they stand ready to take action if needed. If not now, when? I doubt they want to wait until the economy falls back into recession before taking additional action. Since the impact of future actions could be less than in the past there is a need to be proactive rather than reactive. The market is coming down off progressive sugar highs from prior programs and with rates near zero they are limited on what they can do. It may take a large change in policy to have any material impact. Unfortunately the Fed does not appear ready to pull out the bazooka just yet but a Syriza win in Greece could give them the cover they need to reach for the big gun. They are facing a political quiet period where they can't make any changes without being seen as helping the current administration. With 143 days until the election their time to act is running short.

Also running out of time is the Supreme Court. They are committed to rendering their verdict on the Affordable Care Act before the end of June. They typically release decisions on Mondays. There are only two Mondays left in June. Time is growing short and you know that whatever decision is reached it will be controversial.

Economic Calendar

There was actually some stock news that slipped in between the headlines on Greece on Friday. Facebook (FB) filed a motion with a judicial panel to consolidate more than 40 suits covering the losses in the Facebook IPO. In the filing the company threw the Nasdaq under the bus claiming it was technical problems at the Nasdaq that caused all the losses in the IPO. The Nasdaq has admitted it was at fault for some of the problems so it is a safe bet the biggest winners here will be the lawyers in all the suits.

FB also defended its pre IPO disclosure on mobile user revenue growth and said it was not to blame for the analysts disclosing the lowered revenue numbers to selected clients. The SEC also admitted they had questioned Facebook before the IPO on the timing of its disclosures.

Facebook's Chief Technology Officer (CTO), Bret Taylor, announced he was leaving to start his own company. This was the first high profile exit of talent at Facebook but it shows the problem the company will have holding its key people now that they are all millionaires. Taylor left Google after that company went public in 2004. He started his own social networking company FriendFeed, which Facebook eventually acquired in 2009. He said he is starting a new company (no info) with his friend Kevin Gibbs, currently still at Google. I am sure Taylor is the first in a long line of exits as more stock unlocks in August.

FB shares spiked +6% on Friday to close at exactly $30. Several analysts claimed this was due to the high volume of puts and calls at the $30 strike going into expiration. This "pinned" the stock at the $30 strike price as investors bought/sold shares to cover their short option positions.

Facebook Chart

Microsoft (MSFT) sent out invitations to a "major" event on Monday afternoon without disclosing the topic of the event. Normally they mention the details like a new operating system or a new platform for developers. Worst case they would give reporters some background on what to expect so the event could be reported correctly. This time it is total secrecy. Microsoft is taking a page out of the Apple playbook and it may be more than just a page. That means tech reporters from all over the country will have to book last minute expensive flights to LA without a clue why they are going.

There are strong rumors that Microsoft might be planning to announce a new tablet to compete with the iPad. Since Microsoft already partners with Samsung and Hewlett Packard a standalone Microsoft product could compete with its partners. It is still possible since Windows 8 is very tablet friendly and Apple's success is begging for competitors.

Microsoft could be announcing a tablet based on the ARM processor. That would be a move away from Intel chips in the Wintel model. Microsoft has not been successful with hardware products. The Zune music player was a flop. The Kin phone was dropped soon after its introduction. Even the Xbox was a challenge and suffered from a high rate of faulty units before catching on and turning profitable. The company had a "slate" prototype called Courier in 2010 that was dropped saying the technology may be reintroduced in a different form later.

Microsoft Chart

Research in Motion (RIMM) proved once again it can still aggravate shareholders. Shares are down more than 70% thanks to the incompetence of the co-CEOs, Mike Lazaridis and Jim Balsillie. The two were ejected from the company recently and RIMM just announced Lazaridis got a severance package of $4 million and Balsillie's was worth $8 million. Actually these two people probably deserved more than that since the Blackberry revolutionized the wireless industry under their reign. Sales rose from $294 million to more than $20 billion before Apple exploded on the scene with the iPhone. It is easy to be daring and brilliant when you have the only product of its kind but when competitors appear with a revolutionary product it requires fast action and out of the box thinking. The pair were heroes years ago and now they are castoffs on the pile of broken dreams. If you don't stay in front of the pack you get run over.

RIMM Chart

Apache Corp (APA) is probably embarrassed with their abundance of riches. They already have one of the strongest portfolios of oil and gas reserves and they are active explorers. They announced on Friday they made a monster discovery in Canada that is so big they don't even know what to do with it. They drilled three wells in the Liard Basin in British Columbia just south of the Yukon and Northwest Territories. They found "recoverable" gas reserves of as much as 48 trillion cubic feet. That is enough to power the entire USA for two years. The company's VP of worldwide exploration said, "This is probably the best shale gas reservoir in the world."

Only one of the three test wells was fracked using a multistage process to perform a production test. The well produced an average of 21.3 million cubic feet (MMCF) per day over the first 30 days of production. Apache said this was the most prolific shale-gas test well ever drilled. The other two wells confirmed the formation but were not completed.

Apache owns 430,000 acres surrounding this new find and the wells have already been connected to existing pipelines in the area. However, Apache is not planning on rushing into development of this field due to the surplus of gas today. They said this will be a "huge resource for the future." It could eventually be connected to the Kitimat LNG facility currently planned by EOG and Encana on the northern coast of BC.

As if that was not enough Apache told investors it now controlled 580,000 acres in the Mississippian Lime field in Kansas and Nebraska and those reserves could hold an additional two billion barrels of oil. Leased acreage in the Bakken is estimated to contain another billion barrels, western Oklahoma 5.4 billion and their Permian assets are estimated to contain 3.4 billion barrels.

Apache has been known as a serial acquirer but with these high quality assets they are moving into more of a production focused company with decades of drilling opportunities ahead. They literally have more than 100,000 drilling locations plotted. That is a lot of pipe and a lot of hours and they will produce a lot of oil. Friday was a good day to own Apache shares but the sector is so beaten down the stock only gained +1.79 but this is a keeper for the long haul.

Apache Chart

OPEC met on Thursday and maintained their "official" production quota at 30.0 mbpd. Unofficially they are currently producing as much as 32.6 mbpd. Reportedly "all" the participants agreed to cut out excess production in order to bring global inventories back in line and provide a bottom for prices. While that makes a good sound bite for the news it is probably not going to happen until after the six nation meeting with Iran on Monday. This is the last meeting before the EU embargo on Iranian oil goes into effect on July 1st. Once the damage to Iran's sales is known we can expect Saudi Arabia to decrease production slightly to just what is needed to keep a small excess in the market and prevent any shortfalls in supply.

Iran's president has already said the meeting will fail because Iran is not willing to give up its sovereignty and its nuclear ambitions. The embargo along with the U.S. sanctions is expected to cut Iran's exports to 1.5 mbpd, down from 2.6 mbpd.

I believe we have seen the bottom in oil prices. It is always possible we could see $75 but that depends on data from Europe and China. Demand will increase over the summer as various countries burn oil to generate summer electricity. Summer driving will also boost demand. Cheap gas should reinvigorate vacation travel.

I believe this is a buying opportunity for oil. This will be especially true if the New Democracy party wins in Greece and the threat of EU disruption dissipates.

Crude Oil Chart

Gold prices rallied on worries Greece will chose the wrong path and collapse the euro. If Greece did chose wrong the central banks have pledged to provide oceans of liquidity and probably much of that with QE programs. That would be bullish for gold. However, even if Greece chooses the right path the euro will rally, pushing the dollar lower and gold higher by default. In theory this is a win-win for gold unless some combination of events spikes the dollar. Gold has risen six straight days.

Gold Chart

If you ignore all the overseas headlines and crummy economics in the U.S. you are left with the real fundamentals. Those will be headlined by the Q2 earnings which start in a little more than two weeks. We are heading into the warning cycle next week and companies with major exposure to Europe could be in line to miss estimates. For instance McDonalds (MCD) gets 40.3% of their revenue from Europe. Kraft (KFT) gets 31.7%, Johnson & Johnson (JNJ) +26.3% and Alcoa (AA) +2.46%. McDonalds has already warned. In fact there have been numerous warnings but they were ignored because of the European crisis headlines.

These warnings may have depressed earnings estimates and the reporting cycle will end up with a decent beat because of over compensation by analysts to the downside. However, there is also the risk that too few companies warned on the hopes that business would suddenly improve in the last half of June. This is a tossup but once past the Greek side show and the Fed meeting the earnings cycle will take center stage.

One factor impacting the market could be quarter end and the end of the first half. Funds riding short positions down from the early May peak will need to reverse course and go long ahead of the quarter end. Consumer investors don't like shorts and they want to see long positions in the quarterly statements. The calendar could be another reason the market might rally once Greece has voted.

I believe the concept of shorting the Greek election was crippled when the Greek market began rebounding and the central banks started talking about a massive coordinated injection of liquidity. Resistance levels on the Dow and S&P fell as shorts scrambled to cover but the same resistance on the Nasdaq and Russell remains solidly in place. The highly liquid blue chips were finding buyers while the techs and small caps were being ignored.

Investors began exiting shorts and setting up for a liquidity bounce once resistance broke to the upside.

The S&P broke over two important resistance levels at 1325 and 1335 to stop abruptly just below 1345. The 50-day average is 1348 and the 100-day at 1358. The next minor resistance is 1355. This entire range from 1339 to 1358 is congestive but I seriously doubt technical levels will have any impact on Monday's trading.

Monday will be all about Greece and the central banks and nothing else will matter. Volatility should be high regardless of the vote outcome.

S&P Chart

S&P Chart - Long Term

The Dow eased over resistance at 12,750 on short covering into the close. This represents a new four week high and in theory the Dow would be poised to move higher if there were no pitfalls in our path. The biggest is of course Greece. Like the S&P the technicals for the Dow will not matter on Monday.

The next material resistance is 12,900 and then 13,000. We could easily blow through both of those levels in a reaction move depending on the results in Europe. Support is well below at 12,400 and short of a terrorist attack on the Greek parliament I seriously doubt we will see that level again on Monday.

Dow Chart - Short Term

Dow Chart - Long Term

The Nasdaq has underperformed the blue chips. Despite a decent gain on Friday of +36 points it failed to break out to a new four week high or even test strong overhead resistance at 2880. Apparently investors are looking for safety in the blue chip dividend payers rather than growth in the tech sector.

The Nasdaq has strong resistance at 2880 that dates back to April and July of 2011. A break over that level should trigger some short covering but Monday is not going to be a technical trading day. Support is 2805.

Nasdaq Chart - Short Term

Nasdaq Chart - Long Term

The Russell 2000 is another example of risk aversion ahead of the Greek vote. The index has failed to even retest the strong resistance at 880 but it did close near the top of its recent range.

Russell 2000 Chart - Weekly

The NYSE Composite Index broke out of congestion on Friday to close above the 200-day average. Under normal circumstances this would be a bullish signal. The NYSE has a lot of ADRs and ETFs and the market gains in Europe on hope for a positive outcome probably lifted the ADRs and the ETFs were boosted by short covering.

NYSE Composite Index

The TSMI rallied to resistance at 13,975 and has a very good chance of breaking through on any good news from Europe.

Dow Total Market Index

Do you remember last Monday? On Friday the market spiked on expectations for a bailout for Spanish banks. The S&P futures were up +16 points on Sunday night. On Monday the Dow spiked +97 at the open and then proceeded to sell off sharply for a -147 point loss. The good news was already priced in on Friday and there was plenty of bad news to go around on Monday.

It is entirely possible we could see the same trend this Monday. Over the last two days the markets have rallied on hope for a Greek revival and a pro-austerity win. Since the parties have about two weeks to form a post election coalition we might not have a decision for more than a week. We could easily get another sell the news event on Monday even if the pro-austerity parties win.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

"You have brains in your head. You have feet in your shoes. You can steer yourself any direction you choose."
Theodor Seuss Geisel (Dr Seuss)

Index Wrap

Climbing a 'Wall of Worry'

by Leigh Stevens

Click here to email Leigh Stevens

An old saying is that the Market (sometimes) "climbs a 'Wall of Worry'", which seems to fit the recent advance perfectly. This is the 3rd summer when investors find more to worry about than not. And, sure as its summer, market volatility (VIX) increases along with the heat!

Here's an interesting first chart. I'll call it chart 'X'. Followers of chart patterns and/or my work will recognize this pattern (without an identifying index name or time frame) as a Head & Shoulder's TOP; a pattern that's seen from time to time and will be familiar to many. Also familiar may be the measuring implication implied in a 'minimum' downside target or objective. The objective is based on distance 'A' being (at least) equal to distance 'B'; i.e., take the highest high of the middle top (the 'Head'), measure down to the so-called 'neckline'... this distance is then subtracted from the point where the neckline is pierced after the third top forms. Next up is to unveil the 'true' identity of this chart pattern.

Providing the true meaning of an INVERSE Head & Shoulder's, my chart above is an image that was 'flipped' from what has been traced out to date in the hourly S&P 500 (SPX) chart seen below. My next chart suggests in fact a Head & Shoulder's BOTTOM formation in SPX, with an implied UPSIDE objective to around 1390. Pardon my little 'trick' here but the H&S bottom pattern highlighted below was such a good mirror image of an H&S top pattern that it has a striking effect in showing it first above in a 'flipped' (mirror) image since the H&S 'top' is more commonly seen and understood.

My chart highlights are NOT meant to imply that this minimum upside objective, that may or may not be realized (or, could be exceeded) will happen in any implied time frame based on where the target (X) is placed. If the objective is realized it could be in the coming week or a following week(s). Still, the Head & Shoulder's pattern, in both top and H&S bottom variations, tend to be one of the more reliable 'outcomes' as chart patterns go. [Note: there is a somewhat greater probability of downside objectives based on H&S tops being met versus upside targets based on the inverse H&S bottom pattern.]

The aforementioned bullish interpretation for SPX and for the Market as a whole fits with my prior week's bullish view based on various technical considerations. I went into an expanded forecast for a significant further up leg in my last (Sunday, 6/10/12) Trader's Corner article which can be viewed by clicking this LINK.

The same inverse Head & Shoulder's hourly chart pattern in the Nasdaq 100 (NDX), given the breakout above a well-defined 'neckline' suggests an upside target to around 2677; in QQQ the H&S bottom formation and subsequent upside (neckline) breakout, suggests potential to 66; in the Dow 30 (INDU) potential is seen to around 13170; in the S&P 100 (OEX) possible upside is suggested to 633.

Bullish to me also is that my CPRATIO 'sentiment' indicator (seen with the SPX and COMP charts) has actually FALLEN this past week on a 5-day moving average basis even though price action was bullish technically. I'll bet on what the chart suggests or 'tells' me versus all the catastrophic WORRY out there.

I don't minimize the dangers of a significant downturn in US stocks. More authoritative voices than mine (analyzing underlying economic fundamentals) are pointing out the dangers to our economy of a global recession or just a deep and prolonged downturn in Europe and/or an international banking crisis.

Nevertheless, over many years and market cycles I've found that the market itself by the chart patterns it traces out, tends to predict where stocks are headed. Interpretation of those (chart) patterns can of course be correct or incorrect. By inference, overall market patterns point to where the economy is headed. Regardless of the whether the market is in the early stages of a further overall advance, near-term still looks bullish. I hope to ride a 2-3 week upswing off the early-June bottom but also trade lightly in summer; I'll exit calls on signs of a near-term downside reversal such as a break below SPX 1325 in the week ahead.



I wrote last week that the S&P 500 (SPX) "appears to have completed its correction as its popped back up above its 21-day moving average." The bullish price/RSI divergence was especially telling in this regard and I was anticipating near support in the 1300 area (my typo last week said 13000).

SPX has resumed a bullish uptrend; the near-term trend is now up. Favorable action this past week was basing in the area of the 21-day moving average. Please read my initial 'bottom line' comments above for my discussion of the upside breakout regarding a Head & Shoulder's (H&S) bottom formation, which was especially apparent on the SPX hourly chart (seen above). A 'minimum' and eventual upside objective is for a move to the 1390 area. [Downside objectives for H&S tops tend to be the most accurate versus upside objectives based on H&S bottoms.]

SPX rallied above near resistance at the prior 1335 high. Next resistance looks like 1360, extending to 1373.

Support should be also noted at 1325, representing a return to the H&S neckline, not just my chart notations of 1308 support, then in the 1292-1290 area.

Bullish to me in my key indicators is that my CPRATIO 'sentiment' model has actually FALLEN this past week on a 5-day moving average basis, even given bullish price action. I'll go with what the chart suggests versus all the worry that's out there.


[NOTE: If you haven't read it, my initial 'bottom line' comments seen above is relevant for ALL the indexes relating to an upside breakout above the 'neckline' of a Head & Shoulder's (H&S) BOTTOM formation. A clear cut example was especially apparent on the S&P 500 hourly chart, but the SAME bottom type formation is seen with ALL the major indexes.]

The big cap S&P 100 (OEX), which had regained some bullish 'footing' as I noted last week, continued with further bullish action this past week. The basing action around the 21-day moving average followed by the upside breakout above its line of prior highs should have served to keep traders from adopting further bearish strategies. Regarding the H&S bottom pattern, the breakout to above the 'neckline' resistance in 606 area suggests possible further upside to around 633.

Anticipated near-resistance in the coming week is raised to 620, extending to 625.

Near support is highlighted at 598, extending to 590. In addition to my notated supports, a bullish chart is maintained if pullbacks hold the 606 area, at the recent breakout point.


[NOTE: If you haven't read it, my initial 'bottom line' comments seen above is relevant for ALL the indexes relating to an upside breakout above the 'neckline' of a Head & Shoulder's (H&S) BOTTOM formation. A clear cut example was especially apparent on the S&P 500 hourly chart, but the SAME bottom type formation is seen with ALL the major indexes.]

The Dow 30 (INDU) extended its bullish rebound with the basing action of the past week in and around 12400 support, followed by a breakout above 12600 resistance. The near-term trend has now reversed to up. The close above 12700 was noteworthy in that it was an area of prior support and could have been a later resistance.

Resistance is noted on my INDU daily chart in the 12800 area, then at 12900.

Near support is highlighted at 12400, extending to 12300, although the most bullish chart action occurs if daily Closes are maintained or mostly maintained at and above 12600, the prior recent 'breakout' point.

Based on the upside potential of the Head and shoulder's bottom pattern I've discussed at length, INDU upside potential is suggested to 'at least' 13170 but should also be seen as an ideal target.


[NOTE: If you haven't read it, my initial 'bottom line' comments seen above is relevant for ALL the indexes relating to an upside breakout above the 'neckline' of a Head & Shoulder's (H&S) BOTTOM formation. A clear cut example was especially apparent on the S&P 500 hourly chart, but the SAME bottom type formation is seen with ALL the major indexes.]

The Nasdaq Composite (COMP) which had regained what I described as "some bullish footing" last week has then seen upside follow through this past week after well-defined basing action in the 2800 area kept COMP's chart bullish, especially when basing was followed by a minor chart breakout above 2850. Yet to come to maintain upside momentum is a decisive upside penetration above resistance at the line of prior highs at 2882; resistance then extends to 2900 with fairly major resistance at 2950.

Near support is (again) seen at 2800, extending to around 2780.

As I wrote with my S&P 500 commentary, I took it as bullish in terms of my key technical indicators that my CPRATIO 'sentiment' model actually fell this past week on a 5-day moving average basis. Given the backdrop of at least mildly bullish price action in COMP (more bullish in the S&P and Dow), this bodes well for more upside in Nasdaq. Bellwether tech stock Apple Computer (AAPL) has been trending sideways which I figure has a dampening effect on the two key Nasdaq indices.


[NOTE: If you haven't read it, my initial 'bottom line' comments seen above is relevant for ALL the indexes relating to an upside breakout above the 'neckline' of a Head & Shoulder's (H&S) BOTTOM formation. A clear cut example was especially apparent on the S&P 500 hourly chart, but the SAME bottom type formation is seen with ALL the major indexes.]

The Nasdaq 100 (NDX) Index continues its bullish chart action; the Index hasn't cleared its prior intraday high at 2579, but most importantly went to a new Closing high for the current rebound. Another upside move versus AAPL's recent sideways trend should help boost NDX also.

Near resistance is at 2579-2586, next at 2615, extending to 2650.

Near support is at 2520, extending to 2490. The recent 'breakout' point in NDX was at 2560 and if NDX were to maintain or mostly maintain Closes above this prior chart resistance this would be a bullish plus.

If NDX fulfills a 'minimum' upside target implied by its inverse Head and Shoulder's bottom formation it could reach 2677; higher is possible this level looks like an achievable target ahead, not to say when. Stay tuned on that and there are a lot of potential bearish influences to be navigated. The market is in summer worry mode, this year with Eurozone crisis concerns.


[NOTE: If you haven't read it, my initial 'bottom line' comments seen above is relevant for ALL the indexes relating to an upside breakout above the 'neckline' of a Head & Shoulder's (H&S) BOTTOM formation. A clear cut example was especially apparent on the S&P 500 hourly chart, but the SAME bottom type formation is seen with ALL the major indexes.]

The Nasdaq 100 tracking stock (QQQ) chart continues to be mildly bullish as the stock has at least Closed above prior resistance at 62.9. Not a big decisive upside penetration there but it's better than a kick in the head (to the bulls), who seem to be in relatively short supply. Certainly, daily trading volume on Friday's concluding rally was pretty dismal!

There potential for the Q's to advance to the 66 area if QQQ can climb further above 63. I've noted near resistance at 63.2, next at 64 and finally at 64.6.

Near support/buying interest looks like 61.8, with next support at 61.2.

The chart looks bullish but QQQ could get derailed easily also. The stock needs to make upside progress above 63 to suggest that the recent advance has 'legs'. Stay tuned on that!


[NOTE: If you haven't read it, my initial 'bottom line' comments seen above is relevant for ALL the indexes relating to an upside breakout above the 'neckline' of a Head & Shoulder's (H&S) BOTTOM formation. A clear cut example was especially apparent on the S&P 500 hourly chart, but the SAME bottom type formation is seen with ALL the major indexes.]

Key chart/technical resistance in the Russell 2000 (RUT) is in the 778-802 price zone. Next resistance looks like 795.

Support is suggested at 760, extending to 750.

RUT has the same Head and Shoulder's type bottom pattern as seen with the other major indexes. This formation can be easily seen on RUT's daily chart with the 'head' traced out at the recent bottom and the two cluster of lows on the left and right side of that forming the twin (left and right) 'shoulders' in this pattern.

Based on the hourly chart (not shown here) RUT achieved an initial upside breakout above its H&S 'neckline' at 765-766, suggesting upside potential to around 818. Stay tuned on that but it looks like a doable target based on the current chart pattern; especially so if RUT holds above 765 on a Closing basis. Not as much otherwise.


New Option Plays

Oil & Auto Parts

by James Brown

Click here to email James Brown


Anadarko Petroleum - APC - close: 65.37 change: +1.41

Stop Loss: 63.40
Target(s): 69.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
APC is an oil and natural gas producer. After a very painful three and a half month plunge, shares of APC have finally bounced near their 2011 lows. The stock has been consolidating under resistance near the $65.00 level these last few days.

We're going to hear more about the oil industry soon as we get closer to the July 1st EU oil embargo against buying Iranian oil. That could help put a bottom under oil prices.

APC's bullish breakout past $65.00 on Friday looks like a new entry point to buy calls. The high on Friday was $65.41. I am suggesting a trigger to buy calls at $65.55. We'll use a stop loss at $63.40. Our target is $69.75.

Trigger @ 65.55

- Suggested Positions -

buy the Jul $67.50 call (APC1221G67.5) current ask $2.08

Annotated Chart:

Entry on June xx at $ xx.xx
Earnings Date 07/23/12 (unconfirmed)
Average Daily Volume = 5.2 million
Listed on June 16, 2012


Advance Auto Parts - AAP - close: 69.74 change: -0.92

Stop Loss: 71.05
Target(s): 65.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The big gap down on AAP's chart on May 17th is the reaction to the company's earnings report. Investors were not happy to hear that AAP missed both the earnings and revenue estimates. Many of the auto part stocks had been rising on the expectation that the U.S. consumer was keeping their car longer and thus spending more on maintenance and repair. Looks like they aren't spending as much as Wall Street thought.

The oversold bounce in AAP seems to have failed. Now the stock is breaking down under $70.00 again. The low on Friday was $69.39. I am suggesting a trigger to buy puts at $69.25. We'll aim for $65.25. More aggressive traders could aim lower. FYI: The Point & Figure chart for AAP is bearish with a $40 target.

Trigger @ 69.25

- Suggested Positions -

buy the Jul $65 PUT (AAP1221S65) current ask $1.10

Annotated Chart:

Entry on June xx at $ xx.xx
Earnings Date 08/08/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on June 16, 2012

In Play Updates and Reviews

No Fear Ahead of the Greek Vote

by James Brown

Click here to email James Brown

Editor's Note:

Investors were not showing any fear on Friday ahead of the Greek vote on Sunday.

Current Portfolio:

CALL Play Updates

Cerner Corp. - CERN - close: 82.64 change: +1.11

Stop Loss: 79.45
Target(s): 84.85 & 87.50
Current Option Gain/Loss: + 20.8%
Time Frame: 3 to 4 weeks
New Positions: see below

06/16/12 update: Friday was another strong day for CERN with shares adding +1.3%. The stock looks poised to test its early May highs soon. If you're looking for a new entry point readers may want to wait for a little dip first.

We have two different targets. Our conservative target is $84.85. Our more aggressive target is $87.50.

- Suggested Positions -

Long Jul $85 call (CERN1221G85) Entry $1.20


Entry on June 15 at $81.75
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 1.25 million
Listed on June 14, 2012

Dollar Tree, Inc. - DLTR - close: 110.34 change: +2.43

Stop Loss: 104.45
Target(s): 112.50
Current Option Gain/Loss: +43.4%
Time Frame: exit prior to the stock split on June 26th
New Positions: see below

06/16/12 update: The market's bullish tone on Friday helped DLTR surge to a new high with a +2.2% gain. Our exit target is $112.50. More aggressive traders could aim higher but remember we want to exit prior to the stock split on June 26th. More conservative traders may want to take profits now and/or raise their stop loss. I am not suggesting new positions at this time.

- Suggested Positions -

Long Jul $110 call (DLTR1221G110) Entry $2.37

06/12/12 new stop loss @ 104.45
06/11/12 trade opened with DLTR gapping higher at $107.42


Entry on June 11 at $107.42
Earnings Date 08/16/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on June 09, 2012

Monster Beverage - MNST - close: 78.64 change: +2.33

Stop Loss: 73.25
Target(s): 79.50
Current Option Gain/Loss: + 88.2%
Time Frame: 3 to 6 weeks
New Positions: see below

06/16/12 update: MNST has also been able to surge to a new closing high on Friday. Shares were up big with a +3.0% gain. More conservative traders may want to take profits now (currently +88%). We're planning to exit at $79.50. I am not suggesting new positions at this time.

- Suggested Positions -

Long Jul $80 call (MNST1221G80) Entry $1.70

06/09/12 new stop loss @ 73.25
06/06/12 new stop loss @ 70.75
06/06/12 triggered at $74.25


Entry on June 06 at $74.25
Earnings Date 08/02/12 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on June 04, 2012

Ross Stores Inc. - ROST - close: 66.61 change: +1.09

Stop Loss: 63.45
Target(s): 68.50
Current Option Gain/Loss: +40.4%
Time Frame: 3 to 5 weeks
New Positions: see below

06/16/12 update: Many of the retail names were showing strength on Friday. ROST outperformed the major indices with a +1.6% gain. Friday also represents a more convincing breakout past resistance near $65.00. I am not suggesting new positions at this time.

- Suggested Positions -

Long Jul $65 call (ROST1221G65) Entry $2.10

06/12/12 new stop loss @ 63.45
06/07/12 triggered on gap higher at $64.47


Entry on June 07 at $64.47
Earnings Date 08/16/12 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on June 06, 2012

Whole Foods Market, Inc. - WFM - close: 94.47 change: +2.93

Stop Loss: 89.60
Target(s): 95.00 & 98.50
Current Option Gain/Loss: Jul $92.50c: +30.3% & Aug $95c: +14.7%
Time Frame: 3 to 6 weeks
New Positions: see below

06/16/12 update: Well that was quick!

WFM hit our trigger to buy calls at $92.05 and then hit our first exit target at $95.00, all on Friday's big move higher (+3.2%). We have two exit targets, one at $95.00 and another at $98.50. The July $92.50 call bid was $4.50 (+36.3%) and the Aug. $95 call bid was at $5.05 (+14.7%).

At this point, if you're looking for a new entry point I'd consider waiting for a dip or a bounce in the $93-92 area.

- Suggested Positions -

Long Jul $92.50 call (WFM1221G92.5) Entry $3.30

- or -

Long Aug $95 call (WFM1218H95) Entry $4.40

06/15/12 first target hit at $95.00, options values at:
Jul $92.50 call @ $4.50 (+36.3%)
Aug $95.00 call @ $5.05 (+14.7%)
06/15/12 triggered at $92.05


Entry on June 15 at $92.05
Earnings Date 07/25/12 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on June 12, 2012

PUT Play Updates

Anixter Intl. - AXE - close: 53.03 change: -0.08

Stop Loss: 56.05
Target(s): 48.50
Current Option Gain/Loss: -20.5%
Time Frame: 3 to 4 weeks
New Positions: see below

06/16/12 update: AXE did not participate in the market's widespread rally on Friday, which is good news if you're bearish! I would still consider new bearish positions now or you could wait for a new failed rally in the $54-55 zone.

Earlier Comments:
We want to keep our position size small because AXE has above average short interest. The most recent data listed short interest at 15% of the small 27.6 million share float.

*Small positions* - Suggested Positions -

Long Jul $50 PUT (AXE1221S50) Entry $1.07


Entry on June 14 at $53.35
Earnings Date 07/24/12 (unconfirmed)
Average Daily Volume = 339 thousand
Listed on June 13, 2012

Baxter Intl. - BAX - close: 49.30 change: +0.27

Stop Loss: 51.51
Target(s): 48.00
Current Option Gain/Loss: (Jun$50p: +40.9%) & Jul50p: + 1.9%
Time Frame: 3 to 6 weeks
New Positions: see below

06/16/12 update: BAX also underperformed the market on Friday. Shares gapped higher and then spent the day churning sideways in a narrow range. Readers may want to lower their stops closer to the $50 level. I am not suggesting new positions at this time.

- Suggested Positions -

(exit on Thursday, June 14th @ the close)
Jun $50 PUT (BAX1216R50) Entry $0.66 exit $0.93 (+40.9%)

- or -

Long Jul $50 PUT (BAX1221S50) Entry $1.55

06/14/12 planned exit for Jun $50 puts at the close (+40.9%)
06/13/12 prepare to exit our June $50 puts at the close on Thursday
06/02/12 new stop loss @ 51.51
05/31/12 triggered at $50.95


Entry on May 31 at $50.95
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 2.4 million
Listed on May 29, 2012

NASDAQ OMX Group - NDAQ - close: 21.48 change: +0.21

Stop Loss: 22.55
Target(s): 20.15
Current Option Gain/Loss: -29.4%
Time Frame: 3 to 4 weeks
New Positions: see below

06/16/12 update: The strength in NDAQ is a little bit surprising on Friday considering the headlines. The disastrous Facebook (FB) IPO continues to haunt the NASDAQ. FB is pointing the finger at NDAQ as investors plan lawsuits over the event. Both stocks did close up on Friday.

NDAQ remains inside its bearish channel but I'll admit that Friday's session looks like a potential bullish reversal pattern. NDAQ should have resistance at the top of its bearish channel near $22.00. I am not suggesting new positions at this time.

(SMALL Positions) - Suggested Positions -

Long July $21 PUT (NDAQ1221S21) Entry $0.85


Entry on June 06 at $21.95
Earnings Date 07/25/12 (unconfirmed)
Average Daily Volume = 3.8 million
Listed on June 05, 2012

Netflix, Inc. - NFLX - close: 65.79 change: +3.13

Stop Loss: 67.25
Target(s): 60.25
Current Option Gain/Loss: -36.4%
Time Frame: 3 to 4 weeks
New Positions: see below

06/16/12 update: The market's recent bounce may have spooked some shorts in NFLX on Friday. The stock outperformed the market with a +4.9% bounce. Technically shares did break one trend line of lower highs but the overall trend remains lower. I am not suggesting new positions at this time.

Earlier Comments:
I am suggesting we keep our position size small because NFLX can be volatile at times and being short the stock is a popular position with short interest at 20% of the 54 million share float. Our first target is $60.25. More aggressive traders could aim a lot lower. The Point & Figure chart is suggesting a $48 target although I suspect the $50 level could be significant support.

(Small positions) - Suggested Positions -

Long Jul $60 PUT (NFLX1221S60) Entry $3.57


Entry on June 08 at $64.37
Earnings Date 07/23/12 (unconfirmed)
Average Daily Volume = 4.9 million
Listed on June 07, 2012


Oil States Intl. - OIS - close: 68.32 change: +1.30

Stop Loss: 68.55
Target(s): 61.50
Current Option Gain/Loss: -64.4%
Time Frame: 3 to 4 weeks
New Positions: see below

06/16/12 update: On Thursday night we decided it was time to exit our OIS trade. The plan was to exit at the open on Friday morning. Shares opened at $67.69 before climbing to a +1.9% gain.

- Suggested Positions -

Jul $60 PUT (OIS1221S60) Entry $2.25 exit $0.80 (-64.4%)

06/15/12 early exit at the open
06/14/12 prepare to exit positions at the open tomorrow


Entry on June 08 at $66.04
Earnings Date 07/30/12 (unconfirmed)
Average Daily Volume = 720 thousand
Listed on June 07, 2012