Option Investor

Daily Newsletter, Saturday, 8/18/2012

Table of Contents

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

Market Wrap

Whatever It Takes

by Jim Brown

Click here to email Jim Brown

German Chancellor, Angela Merkel, joined the "Whatever it takes" club on Thursday and the markets celebrated by moving ever closer to new four-year highs.

Market Statistics

Merkel said "European heads of government have a duty to do everything possible to preserve the Euro." With that statement she seemed to back the past statement by ECB head Mario Draghi to do "whatever it takes" to save the eurozone. Unsaid by Merkel but implied is the blessing for the ECB to buy bonds of weak countries like Spain and Italy in order to hold down borrowing costs and prevent a eurozone meltdown. The Spanish market is at four month highs because of the ECB pledge.

Germany has been the sticking point in the ECB plans to buy those bonds. German approval has been lacking with the hawks speaking out against funding the weaker countries. Merkel has not specifically said she supports the bond buying but in politics sometimes what is not said is just as important as what is said.

Merkel has refrained from making negative comments about the ECB plan to buy sovereign bonds. One reporter called it a benign attitude on ECB bond buying because the alternative would be more expensive and detrimental to the rest of the eurozone countries. They have already committed hundreds of billions to the EFSF and ESM so allowing the ECB to buy bonds (QE) is basically a free move and does not require any further donations by member countries.

Merkel will be the center of attention late next week when French President, Francois Hollande, visits Merkel in Berlin on Thursday and Greek Prime Minister, Antonis Samaras, visits on Friday. The result is expected to be a relaxation of the harsh conditions imposed on Greece in the last bailout agreement. There is no upside to not relaxing the conditions. Greece can't meet them and they are going to default regardless of the rules so giving Greece breathing room today is essentially kicking the can farther down the road once again.

At this point the future of Greece in the eurozone appears to be improving. Conditions can't get any worse in Greece and the eurozone has already factored in the prospect of future defaults. It is like finally accepting your weird uncle and realizing he is never going to change. In a Bloomberg survey of 64 economists, 45 of them now believe Greece will still be in the eurozone 12 months from now.

European leaders are giving the outward appearance they have decided to join hands and sing Kumbaya as though all their problems were behind them. That is far from the truth but all the cans have been kicked so far down the road that negative headlines are practically nonexistent or are being ignored. The exception would be Finland. The Nordic state is digging financial moats and strengthening fortifications in anticipation of a breakup of the eurozone. The Finnish Finance Minister, Erikki Tuomioja, said Finland is preparing for the breakup of the eurozone. Finnish officials have warned they will not tolerate further bailout creep or fiscal union by stealth. He said "Finns are not advocating a breakup but we have to be prepared… It is a total catastrophe. We are going to run out of money the way we are going. But nobody in Europe wants to be first to get out of the euro and take all the blame." Finland has risen to be the harshest critic of bailouts and said a future breakup may be preferable to the alternative of continued bailouts and it could make the eurozone stronger by allowing the weaker countries to leave. Other countries may be thinking the same thing but Finland is the only one to express it outright.

The global markets crept higher this week simply because there were no dramatic headlines and everyone is waiting for the ECB announcement on a new bond buying program. That announcement may not come until after Germany votes on September 12th on the constitutionality of the ESM bailout fund.

In the U.S. the economic indicators are actually improving slightly and that "less bad" data helped lift stocks a little higher on the wall of worry. Consumer sentiment for August rose from 72.3 to 73.6 in the first half of the month. Analysts were expecting no change. The rising stock market and better than expected payroll numbers were the likely reasons for the gain.

The present conditions component bore out that theory with a sharp jump from 82.7 to 87.6. The expectations component declined from 65.6 to 64.5. Worry over the fiscal cliff and post election changes could be weighing on expectations.

Inflation expectations rose significantly from 3.0% to 3.6% and that was probably related to higher gasoline prices and the constant warnings about high food prices as a result of the drought. Gasoline prices have risen 45 cents from the year's lows and 29 cents in the last six weeks.

Consumer Sentiment Chart

The rising sentiment was not showing in the regional employment numbers on Friday. Unemployment rates rose in 44 states in July. That is the most states to show an increase in unemployment in more than three years. Unemployment rates only fell in two states and were flat in four. Unemployment rose in nine battleground states considered essential for the presidential election. Unemployment increased in Florida, Virginia, North Carolina, Iowa, Pennsylvania, Michigan, Colorado, Wisconsin and New Hampshire.

We had a very weak economic calendar last week and next week is not much better. The FOMC minutes dominate on Wednesday with the home sales the next most watched reports.

The last two major tech companies to report earnings are Dell on Tuesday and Hewlett Packard on Wednesday. Both earnings reports are after the close.

The end of the week has the potential for some headlines out of Europe with Merkel meeting with the French president and the Greek prime minister.

We are moving closer to the Bernanke speech on August 31st and expectations are high. The odds are good the market will be disappointed. The FOMC minutes on Wednesday should give analysts a better clue for what to expect from the Bernanke speech.

Economic Calendar

It was a summer Friday in the markets with volume low at 5.2 billion shares despite being option expiration. Thursday's opex volume of 5.8 billion shares helped raise the average daily volume for the week to 5.06 billion shares. I thought for sure the average would start with a 4 after the slow start this week but Thursday pulled it out. 5.06 billion is still very weak volume. Art Cashin called it "tiptoeing into the weekend."

The Dow traded in a very narrow 36 point range. That is the lowest range for the Dow in more than five years. The S&P traded in a similar 4 point range. The Nasdaq was only slightly better at 16 points. The Nasdaq gained +14 for the day so there was not a lot of room for volatility there. The eight trading days starting on August 6th had the lowest Dow range in more than 60 years of only 128 points.

The Dow actually traded above the high close for the year at 13,279.32 but could not hold that high at the close with a minor slippage to 13,275. The S&P closing high for the year is 1419.04 back in April and it closed on Friday at 1418.16.

The Nasdaq rallied on the strength in Apple. The stock gained +12 points to close right at the high of the day at $648.11. Jefferies raised its price target from $800 to $900 and gave it a buy rating. Peter Misek, an analyst at Jefferies, said the Apple TV product is already in production and could be in stores this fall. He also said a mini iPad is also in production with a 7.85 inch screen. Misek believes the iPhone 5 launch in early September will be the biggest product launch in history. Misek said there are more than 170 million smartphone owners that have expired contracts and quite a few of those are waiting for the iPhone 5. More than 38 million have iPhones with expired contracts and they can upgrade at the subsidized price. The new iPhone is expected to be thinner, taller, faster and with better graphics and run on 4G-LTE. Apple's market cap moved over $600 billion for the first time on Friday.

Apple Chart

Stock news was almost nonexistent but we can rely on Facebook to keep the reporters busy during the day. Facebook (FB) shares declined another -4% to $19.07 the day after a lockup expired for 268 million shares. That increased the number of shares available for trading by roughly 40%. Unfortunately for shareholders there is still another 1.5 billion shares still locked up. I expect we will see a bounce here shortly as the herd starts thinking FB selling is over and it is time for a bounce. Traders paying attention will look for that bounce to fail in order to get short again ahead of the Oct 15th lockup expiration of another 247 million shares and the Nov 15th expiration of 1.3 billion shares. That November lockup is the big one where Zuckerberg will be free to sell his shares. Since he has already lost $10 billion from his $20 billion face value at the IPO you can bet he will be selling some to pay his taxes and raise some money for some new toys.

Troubling for Facebook employees is that the stock is now below the price where they were granted the stock many months ago. Employees that were granted thousands of shares of stock at $20 or $22 or even $25 are now underwater. Since stock based compensation is probably higher than their regular pay they are counting on selling that stock to buy things like houses, cars, boats, etc. Every dollar the stock declines is forcing morale lower for employees. With FB trading at 31 times 2013 earnings it is still expensive. Google and Apple trade closer to 15 times. Even if FB declined to 20 times it would still be expensive for a company where earnings are declining and expenses are rising. We really don't know what FB earnings will be in future quarters and they already warned that expenses would double.

Facebook Chart

Groupon (GRPN) lost another 5% so investors interested in a real discount special could pick up a few shares here. That would be a bad idea according to Evercore Partners. They put an underweight rating on the stock with a price target of $3. Evercore is concerned Groupon is facing some "working capital" problems and was burning through available cash. Consumers are being bombarded with dozens if not hundreds of discount deals from anyone with access to a mailing list. Banks, AAA, insurance companies and anyone else with an email list for routine customers is mailing discount offers. They see it as a way to generate some additional revenue and offer a service to their customers. Unfortunately the consumer is flushing the deals and sending them straight to the spam folder.

I have an email screening program that compares email I receive to a databank of emails that thousands of other users have reported as spam. If the email matches a database entry that email is routed straight into the spam folder. I never see it until I scan the spam folder before I delete the messages about once a week. I am seeing more and more of discount offers showing up in the spam folder, which means other customers are clicking "spam" when the email shows up in their inbox. After enough customers click the spam button the software starts to assume it is spam for everyone.

That automatic flush to the spam folder is a sign the discounting companies are in trouble. Subscribers are not reading their email offers. Companies like Groupon are also finding that merchants are no longer interested in doing deals. They have to discount too heavily and then Groupon gets a portion of the remaining price. If a business has a $100 service and they have to discount it to $25 to get any takers they only get $12.50 after Groupon takes their cut. If they have any cost in the product then odds are good the seller is losing money. Secondly offering a Groupon at a highly discounted price cheapens the value of that service. Customers who paid $25 today will not want to pay $100 a month from now if they liked the service. They will want to pay $25 again.

Groupon shares are down -77% since the IPO. Facebook is catching up fast at -50% below the IPO price.

Groupon Chart

Some retailers reported earnings on Friday and the results were surprising. Ann Inc (ANN) reported earnings that rose +27% and same store sales that increased +4.7%. Earnings were 63 cents compared to estimates of 51 cents. Ann's CEO said the chain had moved to smaller stores with less expensive clothing and the formula was working. The company raised full year guidance and shares rallied +20%.

ANN Chart

Gap (GPS) reported a 29% rise in earnings to 49 cents that beat estimates by a penny. New merchandise and marketing in North America produced the best first half sales since 2003. Same store sales rose +5.6% to $3.58 billion for Q2 and the best in five years. Gap raised its forecast to $1.95-$2.00 from $1.78-$1.83. That was still below analyst estimates of $2.08. Gap shares rallied +5% on the news.

Gap Chart

Other retailers posting gains included Ralph Lauren (RL) +5%, Abercrombie (ANF) +1.5% and Foot Locker (FL) +1.74%. I am surprised Foot Locker did not do better. They increased their Q2 profits by 59% to 38 cents. Analysts were expecting 33 cents. Same store sales rose +9.8% and inventory declined -3%. Shares only gained 60 cents but they are up more than 100% since last August.

Foot Locker Chart

Not all retailers were in rally mode. Aeropostale (ARO) pulled another guidance warning out of inventory and reported earnings that were a breakeven on a +4% increase in sales. ARO has a long track record of guidance warnings. Just to keep that record intact they cut guidance for Q3 to a range of 25-30 cents and analysts were expecting 38 cents. With such a history of warnings and missing earnings I don't understand why anyone would want to own this stock. Shares declined -11% and would have gone lower but the market closed.

ARO Chart

In an example of political electioneering the White House said it was considering releasing oil from the Strategic Petroleum Reserve. Quite a few analysts called this press release what it is and that is an excellent use of the bully pulpit and all the tools at the president's disposal to win an election. Just to recap, the strategic petroleum reserve is a "strategic" stockpile of 727 million barrels of crude oil stored underground to be used in case of an emergency like war, hurricanes or a disruption of supplies. An emergency is NOT an average gasoline price of $3.71 two months before an election.

The White House said they were monitoring gasoline prices to see whether they fall in September before making a decision to release oil from the reserve. Since crude oil supplies in the U.S. are currently more than 366 million barrels and +3.4% higher than this time last year and considerably higher than the five year historical average, any release of oil would have zero impact on prices. The red line in the chart below is the current inventory level. The blue shaded area is the five year average.

Crude Oil Inventory Chart

The International Energy Agency (IEA), the agency responsible for the reserves of the 28 member nations, immediately rejected the possibility. The Executive Director said bluntly the IEA "bases its actions on data and reality. The market is sufficiently supplied. There is no reason for a release." A Japanese official said, "Stock releases are not done when the price is high but when supply is inefficient. Supplies are sufficient now." Officials in South Korea said basically the same thing.

The director of the IEA said the U.S. had "excess oil in storage" and nothing prohibited the president from acting unilaterally to release any excess oil. When asked if any other IEA members were considering tapping their supplies as a result of the president's comments she answered a simple "No." Going against the IEA recommendations would subject the president to more political trouble. This was clearly election year politics.

The last time the president released oil from the SPR the price dropped -$4 on the announcement but returned to trade higher only a week later. The markets understand supply and demand and politics. Even if a release was approved it would be a couple months before that oil actually got into the supply chain. Bids have to be requested from refiners interested in purchasing the oil. The bidding process takes several weeks. Once bids are presented, analyzed and then awarded the payment and delivery process has to be worked out. You can't just open a valve and have a million barrels flow into refiner storage. The refiners can be hundreds of miles from the SPR. Arrangement have to be made to pipe the oil from the SPR to the refiner. Since there are no empty pipelines just waiting to take SPR oil somewhere the delivery has to be scheduled by the pipeline operators. All of these processes each take weeks to be completed.

Since crude prices and fuel prices normally decline in late August and early September as the driving season ends the prices would probably be significantly lower by the time any SPR oil was delivered. This announcement from the White House is simply election year politics.

Crude prices have rallied over the last six weeks on expectations for new QE programs from various central banks including the ECB and the Fed. Prices rallied on the increased violence in Syria and the potential for that violence to spread across the Middle East and northern Africa. Syrian operatives have been captured in Lebanon trying to incite civil war. Syrian troops have crossed the border into Jordan and fought with Jordanian troops. Analysts worry that the sectarian violence that has erupted from the Syrian civil war could spread to oil producing nations like Saudi Arabia.

Lastly there are increasing tensions over Iran and the potential for an Israeli attack. Recent news reports and comments from Israeli officials suggest an attack will occur in the next six weeks if it is going to happen. Israeli officials have said any attack should take place before the U.S. elections. There is also a timing issue based on weather patterns and Israel would want to attack before the weather declines in the fall months.

There were a couple of news threads that suggested the presidents SPR announcement could have been a trial balloon ahead of a coordinated attack in the near future. I completely discount that train of thought. If the president was planning on assisting in an Israeli attack I seriously doubt he would deplete the SPR ahead of what could turn into a really messy oil supply problem. Iran has pledged to block the Strait of Hormuz choke point for oil shipping if they are attacked.

This was announced for political gain with the president's advisors knowing full well that prices would decline anyway over the next four weeks due to the end of the driving season. This was a free throw and they took it knowing in advance there would never be a release. Nobody ever said politics were fair.

Crude Oil Chart

I wrote the last couple weeks about the non-confirmation of the rally by the Russell 2000 and the Dow Transports. That situation has changed dramatically. The Russell gained +2.3% for the week when the Dow only gained +0.5%. The Dow Transports gained +2.6%. There was a sudden shift in small cap sentiment as though fund managers finally came to a realization there was a real rally in progress. We could debate until Christmas on why that rally exists but it does exist.

The Russell 2000 catapulted from 791 on Monday to 819.89 on Friday and it closed at the exact high for the day. Whatever happened to shift sentiment on the Russell started at the open on Wednesday. It was straight up from that point forward.

The Russell rallied to exactly the resistance high from early July at 820. A break over that level targets 832 but once over 820 the bull run could turn into a stampede. Support is now well back at 800 so you could make a case for overbought.

Russell Chart

The Dow Transports made the low for the week on Monday's dip and never looked back. Even with oil prices rising daily the Transports made a vertical run to higher ground. The Transports have not yet broken out to new highs and they have reached downtrend resistance so next week will be critical.

Dow Transports Chart - 15 Min

Dow Transports Chart - Daily

The S&P emerged from more than a week of horizontal consolidation to ease above the high close from May at 1405. The spike higher on Thursday came on the Merkel comments apparently backing the ECB on buying sovereign bonds, comments from China on stimulus and the better than expected earnings from Cisco. The sudden spike higher simply confirmed the old adage about never shorting a dull market. Up until Thursday the market had been exceedingly dull for over a week.

The strong move over 1405 coupled with the Dow's touch over 13,279 seems to suggest the S&P will test stronger resistance at 1422-1426 next week. That four year high on the Dow and S&P will be a critical test of the rally's staying power. There is always the potential for a double top at those levels and a decline into October but so far that possibility looks slim. If we do breakout to new highs in an election year we could see a serious move higher.

There have been several commentaries by analysts lately suggesting this was the most hated rally in recent memory. Retail investors are almost all afraid of it because of the looming fiscal cliff and weak economy. They have been burned so many times that they don't want to trust it in a month known for big declines.

If we do move higher it will have to be due to the retail investor coming back into the market. Equity funds only have a 3.7% cash position according to David Darst from Morgan Stanley. The record low cash position is 3.3% so they are very close to record levels. They have to keep some cash on hand for withdrawals and clearing purposes. With only 3.7% on hand that means their buying power is nearly gone. It also means they may be a little nervous if it looks like a double top is forming. If they have positions they bought last August on that big credit downgrade dip then they are up 40% or better and they should be thinking about taking profits ahead of their fiscal year end, which is not far away.

It has been over three weeks since we saw a decent dip. Nothing goes up forever but in some cases we can see streaks that seem to defy the law of gravity.

I can't tell you how many times I have said next week will be a pivotal week but this will be a pivotal week. If the indexes fail at the new high resistance then we could have a textbook double top and we could see a significant decline. If the indexes manage to break through that resistance to new four-year highs then we could see a race to much higher levels on short covering and price chasing. Anyone not in the market at a new high will immediately buy something. Nobody likes to be left behind.

From Friday's close every point higher will be critical as the S&P nears that 2008 high.

S&P Chart - Daily

The Dow completed six consecutive weeks of gains and it has not done that since January 2011. It also touched that May closing high at 13,279 and closed just below it but the resistance still exists. If we move over that level next week by a couple dozen points we could be off to the races. New Dow highs will attract new buyers like a moth to a flame.

If we do move higher the next material resistance is 14,164 and the all time closing high from October 9th, 2007. There is a lot of air between 13,279 and 14,164 so the monthly high close at 13,924 will probably be a decent target and a staging area for any attack on the 14,164 summit.

Talking about new historic highs is a long way from actually getting there. A lot of things have to go right and very few things go wrong for this to happen. I am not convinced it will happen but it is a possibility to be considered. First we need to get over 13,279 with authority and volume in order to cement that milestone and then focus on the next targets. Every journey consists of a lot of small steps.

Dow Chart - Daily

Dow chart - Monthly

The Nasdaq blasted off from the support at 3,000 thanks to a $27 gain in Apple and a $35 gain by Google. Those two stocks accounted for the majority of the Nasdaq rally but the higher the index went the broader the rally became.

The next resistance level at 3,085 is only +9 points higher and then we start targeting the 3,122 high close from March 26th. The Nasdaq posted the majority of its gains over the last two days just as the Russell sentiment changed.

Something changed in the mindset of fund managers for the Nasdaq and Russell to both sprint higher on almost no news. Cisco and the retailers were the only material stock news in that period. I doubt that Merkel's comments turned our market around that strongly but then her support of the ECB buying Spanish bonds is critical. That may have been the green light for some funds to take the plunge.

Nasdaq Chart - Daily

While the markets may continue higher next week there are still a lot of factors that investors need to take into account. Bernanke is not likely to promise QE3 in the August 31st speech. The Nonfarm Payrolls for July rose to 163,000. He will probably want to see the August report on Sept 7th before making a QE decision. The market will not be happy if his speech is devoid of any QE tease. Goldman Sachs said last week they believe the economic data is not weak enough to justify a new QE program in September. Retail sales showed a dramatic improvement and GDP estimates for Q3 have risen from +1.5% to +2.3% over just the last two weeks. Bottom line, don't bet on the Fed.

NYSE trading volume last week declined to average 2.9 billion shares compared to the 3.3 billion average for the entire month. That is the lowest volume for August since 2006 when volume averaged 2.2 billion shares. New highs on six year lows in volume should be viewed with caution. There is nothing that says markets can't make new highs on low volume and then trigger a larger volume follow through but the low volume is a reason to be wary.

NYSE Average Daily Volume

Aug 2006 2.2 billion
Aug 2007 4.1 billion
Aug 2008 4.2 billion
Aug 2009 5.8 billion
Aug 2010 4.0 billion
Aug 2011 5.7 billion
Aug 2012 3.3 billion
Last week 2.9 billion

The market is ignoring bad news. The Philly Fed survey was negative for the fourth month. The NY Empire survey was negative for the first time since October. The MBA Mortgage Purchase Index declined for the fifth consecutive week and dropping -8.6% in just the last four weeks. Home purchases are declining rapidly. The fiscal cliff moves closer as each day passes. China's Q2 GDP was reported at 7.6% but numerous analysts believe it is a lot worse. Electricity usage has fallen off a cliff in a country where brownouts are a fact of life. Now plants are running at minimum levels and unused coal is piling up so fast at the plants there is no place to store it. The UK GDP fell -0.7% and the Eurozone GDP declined -0.2% in Q2.

Some would call this a wall of worry while others could call it denial.

On the positive side the risk of a Lehman event in the European sovereign debt crisis appears to be fading. Public debt is slowly moving from the private sector to the public sector. Over the next couple of years the toxic debt will continue migrating to the EFSF, ESM and ECB leaving the weaker countries in a more stable condition. Without the cloud of a potential Lehman event we should see European economics and outlook begin to improve. There are still more than one trillion euros of bad loans held by banks in Europe according to a study last week by Price Waterhouse Coopers. Those will eventually have to be written off.

Interest rates are at a three month high and rising. This would seem to suggest the Fed would take additional action in the months ahead. After all the FOMC statement claims rates will be kept low until 2014. What is "low?" Most would think 1.8% on the ten year note was still low. When will the Fed decide rates are higher than desired and take action? Will that anticipation counteract the negative factors I mentioned above?

10-Year Yield Chart

The Volatility Index closed at a six year low at 13.45 on Friday. Investors are unusually complacent and that is never a good sign. Long term lows are usually followed by abrupt moves to the upside and sharp market declines. It does not happen like a sudden reaction to touching an electric fence but more like the increasing tension in a coiled spring. The VIX can stay low for some time as the tension on that spring increases but when it finally releases it can be dramatic.

Volatility Index Chart

I tried to point out some of the factors on both sides of the market argument. It would appear the trend will attempt to move higher next week but the complacency is extreme. That is strange since this is being called the most hated bull market in recent years but you can't argue with the result. Somebody is buying equities or maybe a better excuse would be that nobody is selling equities. The trend is your friend until it ends and the Russell 2000 and Dow Transports suggest that trend may be ready to accelerate.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

"Those who believe in telekinetics, raise my hand."
Kurt Vonnegut

Index Wrap

Relentless Run-Up With Few 'Believers'

by Leigh Stevens

Click here to email Leigh Stevens
Something I hear most often is that this continued advance is on very LOW VOLUME. In technical analysis terms the lack of much volume confirmation is worth noting but doesn't necessarily make the rally about to fail or 'suspect'. What we do see frequently in terms of 'confirming' type events is that the rally keeps going until bullish sentiment hits an extreme in my CPRATIO indicator; this indicator is shown always both with the SPX and COMP daily charts further on.

As has been my practice in recent weeks, my first chart is the longer-term hourly index chart that best demonstrates technical aspects of the overall market, especially one showing whether any major index is overbought or oversold on a 21-hour basis. In the case of the S&P 500 (SPX) chart, SPX remains within its broad uptrend channel and has not yet quite reached an overbought extreme in the 21-hour RSI.

The upper and lower channel (trend) lines suggest potential resistance coming in around 1440 and support around 1370 currently in SPX. This isn't a prediction for a rise to or pullback to either level. These highlights do give an idea of extremes that might be hit if SPX continues to maintain its same trajectory or rate of upside momentum. As to SPX being 'overbought' on an hourly chart basis, it is only NEAR such an extreme. The recent sideways trend 'threw off' or mitigated what could have been just such an overbought extreme.

The S&P and Nasdaq indices are registering a definite overbought extreme on a 2/2+ week basis as will be seen with the 13-day RSI on those charts further on.

What we have NOT seen as an EXTREME is bullish trader sentiment on even a single-day basis at least as I measure it on a daily basis. My sentiment indicator, CPRATIO, is shown per usual with the S&P 500 and Nas Composite charts. Regarding any sentiment 'extremes' (i.e., extreme bullishness or extreme bearishness), we're far from such a reading on my particular indicator, which is seen with the SPX and COMP charts. There is a tendency for the market to keep going without much of a correction UNTIL 1-5 days after there is such an extreme; i.e., when CPRATIO reaches the 1.9 to 2.1 zone or above on 1-day basis and/or sometimes on a 5-day moving average basis.

One more special-feature chart here. The red hot big cap Nasdaq 100 (NDX) index has broken out above the top (nominal resistance) end of what I had been showing as its broad daily chart uptrend channel. NDX is however still well within its WEEKLY chart uptrend channel as seen next. While this recent move may be a low-volume short squeeze, it doesn't mean they won't/can't keep this rally going. NDX should hit major technical resistance if it reaches the pivotal 3000 level.

Last but not least, can we put to bed the simplistic slogan to "sell in May and go Away"? Yeah, and miss a 10% gain! As one famous market pundit used to say about the stock market: "If it's obvious, it's obviously wrong!" It's a way of saying that the market doesn't act the same way all the time.



The S&P 500 (SPX) chart remains not only bullish but the advance accelerated this past week. It now appears that SPX can advance to beyond the 1420-1427 price zone that I had been forecasting as a 'maximum' upside for awhile. I'm expanding my upside resistance zone to 1435-1440; 1335 is the current intersection of SPX's upper trend channel boundary.

Near support begins in the 1400 area, extending to 1385 at SPX's 21-day moving average. Major support begins around 1360.

In terms of the 13-day Relative Strength Index or RSI, the S&P is now at an overbought extreme. This indicator has gotten to somewhat higher levels than seen currently before the Index has had a substantial correction. Just a bit of a sideways move also will cause the RSI to back off from its current high levels which tends to moderate the extreme RSI.

Judging by the hourly SPX chart pattern and the 21-hour Relative Strength Index, which I show above in my initial 'bottom line' comments, the Index can move still higher before I'd say that we're in the highest-risk area of a correction.

An interesting fact is that when the S&P has shown the kind of rally strength seen in recent months, quarterly GDP has done better than the consensus of economist's forecasts. Since Charles Dow's time, how the major market indexes do has been known to be a superior forecaster of how well the economy does.

My bullish sentiment indicator jumped on Friday but the level of 'belief' in this rally is still not at a high extreme. Which, perversely suggests that this rally probably has more to go, although is certainly vulnerable to a short-term correction.


The S&P 100 (OEX) chart continues bullish and upside momentum took a spurt on Thursday, on the back of bellwether Cisco's better than expected earnings. Technically, the last spurt to the upside was 'predicted' by the prior formation of a bullish flag pattern.

In terms of the top end of OEX's broad uptrend channel, I've noted key resistance as starting in the 660 area and extending to 665 over the coming week. In terms of the OEX weekly chart (not shown), I'd peg major resistance at 685 currently.

Near support looks like 642, extending to the 637 area. Major support begins around 630.

As with the S&P 500, OEX is in what I would call a 'fully' overbought zone. I generally put overbought/oversold in italics or in quotes because this concept (of 'overbought' or 'oversold') is always a relative term. An index or a stock that's considered at such extremes can always get to GREATER extremes before there's even a minor reversal. A very high or very low RSI does suggest that the risk of a trend reversal is GROWING no doubt. Do you get into a counter-trend options strategy just based on such extremes? I don't, but I do pay attention to the growing risk of a correction or trend reversal.


The Dow 30 (INDU) Average, which is lagging the broader S&P indexes, is only now approaching its prior highs in the 13280-13338 area. I noted last week that I didn't see enough Dow stocks in strong uptrends to propel the Average to new 12-month highs. I would shift CSCO to one of the 30 that went beyond hiving only mild to moderate upside potential. HD did better than the chart would have suggested also as it went to a decisive new high above a prior cluster of highs. MMM also came on strong this past week, accelerating its advance.

All in all, CSCO, HD and MMM join CVX, DIS, KFT, MRK, PFE, T and WMT in fairly strong uptrends; although, WMT looked 'toppy' given its latest weekly performance. Based on my bottoms up approach to analyzing the 30 individual charts, the Dow looks like it is capable of continuing to work higher but the Dow Index calls would be the first ones I'd abandon when the market gets into a lull or downdraft again. As I noted last week "I'm lukewarm bullish on INDU."

INDU has resistance in the 13280-13340 area, then around 13400 although I didn't highlight this level with my usual red down arrow. Next resistance then looks like 13550, at the high end of INDU's uptrend channel.

As the Dow has lagged the S&P and Nasdaq it's also not at the kind of 'overbought' RSI extremes as seen with these other key indexes.


I noted last week the bullish flag that was traced out with the Nasdaq Composite (COMP), that suggested further upside potential to the 3070-3090 area As suggested by this bullish chart pattern, COMP got into the anticipated price zone, closing at 3076. Immediate overhead resistance lies at 3085 and extends to the 3100 area.

A next zone of resistance implied by prior 12-month highs is at 3122-3134. If COMP does move above 3100 near-term it will break out above the high end of the uptrend channel I've been working with. 3100, if reached in the coming week, definitely might slow down or 'arrest' COMP's advance, at least short-term.

In terms of support, prior resistance at 3000 is the level to watch as once exceeded prior resistance tends to 'become' subsequent support. This is my sort of mantra of support becoming resistance and vice versa. This principle does tend to work a lot. Next lower support is most likely at the 21-day moving average. If the average gives way at least for more than a day, 2900 would be next support, extending to 2850.

Like the S&P, COMP is at an overbought extreme but can get even more extreme before a correction sets in. Corrections eventually follow from such extremes but this indicator says little about HOW SOON. As noted with the S&P 500, bullish sentiment may build up more than has been seen to date. In a market like this, I'd be surprised to see any sizable pullback BEFORE traders get MORE bullish than is evident currently.


The Nasdaq 100 (NDX) Index broke out above what I was seeing as key resistance at 2750. This, because the index pierced the upper end of the broad daily chart uptrend channel I was working with. As I sometimes say, trendlines are potent but expectations based on patterns and principles that normally 'work' don't work ALL the time. In my second chart above, which is of the NDX weekly (part of my initial 'bottom line' comments), we see a different picture with NDX's uptrend channel. There are channels that can be traced out on daily and weekly charts that sometimes, if not often, differ.

In terms of the upper end of the weekly chart uptrend channel, NDX resistance might not come into play before 3000. Those even big round numbers are important as was the case when the Composite ran up above 3000 recently; this event foreshadowed a sharp further COMP advance.

There is potential further resistance at prior NDX 12-month highs at 2785-2795. Above 2800 I can estimate resistance as coming in around 2850 but with not with more proven methods I usually can work with. Better perhaps to focus on NDX bellwether Apple Computer which has potential chart/technical resistance around 675-677; AAPL closed Friday at 648.

Near support looks like 2750, next support at 2700, then at 2670. Major support begins around 2600.

As with the other major indexes, (except INDU), NDX is at an 'overbought' extreme. That knowledge AND subway fare will get you on the Lexington Ave Express going to Wall Street. We know there's higher risk than usual of a shakeout; we don't know just WHEN this will occur. Market tops are tricky to 'time' based on the way prices 'hang' for some time and get more and more extended in terms of overbought/oversold indicators like the RSI.


The Nasdaq 100 tracking stock (QQQ) chart pattern is bullish iof course like the underlying NDX. Almost contrary to how volume typically works with price action in QQQ, there was a minor volume expansion on the rally into Thursday which is a rare volume confirmation; I suspect short-covering volume however. On Balance Volume (OBV) continued to rise as expected.

Near resistance looks like 68.5, at the prior 12-month intraday high, then at 69 and finally at 70.

Near support is now up to 67.5, then down at 66.4, extending to 64 even.


the Russell 2000 (RUT) is bullish and still lagging the rest of the market significantly. 820 is still key near resistance, then at 830. Above 830, technical resistance based on the upper channel line on my daily chart intersects around 855. Between 830 and 855, resistance based on prior weekly highs (not seen on this daily chart) is at 843-848.

Near support is at 810, then comes in at 800-795, extending to around 786. Major support begins in the 770 area.


New Option Plays

Approaching New Record Highs

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate, consider these stocks as possible trading ideas and watch list candidates. Many of these need to see a break past key support or resistance:


(bearish ideas) BPL, SRE, MCD,


Philip Morris Intl. - PM - close: 93.38 change: +0.09

Stop Loss: 91.40
Target(s): 99.00
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of cigarette maker PM have consistently marched higher. The stock currently has a 3.4% yield and shares just closed near all-time highs. We want to jump on board. I am suggesting a trigger to buy calls at $93.60. If triggered we'll use a stop loss at $91.40. Our multi-week target is $99.00. FYI: The Point & Figure chart for PM is bullish with a $106 target.

Trigger @ $93.60

- Suggested Positions -

buy the 2013 Jan $95 call (PM1319A95) current ask $2.78

Annotated Chart:

Entry on August xx at $ xx.xx
Average Daily Volume = 4.2 million
Listed on August 18, 2012

Under Armour, Inc. - UA - close: 57.73 change: +1.23

Stop Loss: 55.70
Target(s): 64.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
UA is known for its athletic apparel but they're also in the athletic shoe business. The company competes with Nike (NKE) on both fronts. The stock is a popular short due to its rich valuations. The current P/E is 60. Yet that hasn't stopped UA from climbing to new all-time highs this month.

I suspect UA could see another short squeeze. The most recent data listed short interest at 24% of the 78 million share float. The August high was $58.48. I am suggesting a trigger to buy calls at $58.55. We'll use a stop loss at $55.70. Our target is $64.00. FYI: The Point & Figure chart for UA is bullish with a long-term $85 target.

Trigger @ 58.55

- Suggested Positions -

Buy the Oct $60 call (UA1220J60) current ask $2.15

Annotated Chart:

Entry on August xx at $ xx.xx
Average Daily Volume = 2.1 million
Listed on August 18, 2012

In Play Updates and Reviews

Facebook Closes at -50% from its IPO Price

by James Brown

Click here to email James Brown

Editor's Note:

The IPO disaster of the year is FB's plunge from $38 to $19 in just three months. Of course that's good news for our recent FB put trade.

Our EW trade was stopped out.

Current Portfolio:

CALL Play Updates

Amgen Inc. - AMGN - close: 83.38 change: +0.28

Stop Loss: 81.45
Target(s): 88.50
Current Option Gain/Loss: Sep85c: -19.2% & Oct85c: - 9.7%
Time Frame: 3 to 6 weeks
New Positions: see below

08/18/12 update: Traders bought the dip in AMGN again on Friday. Shares slipped under their 10-dma briefly before rebounding. More conservative traders may want to wait for a close over $84.00 before initiating positions.

- Suggested Positions -

Long Sep $85 call (AMGN1222i85) Entry $1.35

- or -

Long Oct $85 call (AMGN1220j85) Entry $2.15

08/15/12 triggered at $83.75


Entry on August 15 at $83.75
Average Daily Volume = 4.8 million
Listed on August 14, 2012

BRCM - Broadcom - close: 35.83 change: -0.19

Stop Loss: 33.25
Target(s): 38.50
Current Option Gain/Loss: +22.2%
Time Frame: 4-6 weeks
New Positions: see below

08/18/12 update: After big gains on Thursday BRCM consolidate a little bit on Friday. Shares lost -0.5%. The $36.00 level does look like potential short-term resistance.

Readers may want to cinch up their stop loss closer to the $34 level. I am not suggesting new positions at this time.

- Suggested Positions -

Position: Nov $36.00 Call (BRCM1217K36) entry $1.80

08/08/12 new stop loss @ 33.25
no follow through, turning cautious
08/07/12 triggered @ $34.75
08/06/12 adjust stop loss to $32.45


Entry on August 07 at $34.75
Average Daily Volume = 10 million
Earnings Oct-23rd
Listed on Aug 4, 2012

Caterpillar - CAT - close: 90.01 change: +1.42

Stop Loss: 85.90
Target(s): 91.50
Current Option Gain/Loss: +24.7%
Time Frame: 3 to 4 weeks
New Positions: see below

08/18/12 update: Shares of CAT displayed relative strength with a pop higher and a close right at round-number resistance at the $90.00 mark. Shares got a boost from news that 800 workers at one of its Illinois plants had ratified a six-year labor deal and ended a four-month strike.

CAT has yet to break this resistance level at $90.00. I am not suggesting new positions at current levels.

Earlier Comments:
I do consider this somewhat aggressive. CAT's recent earnings were strong and the company raised guidance but its stock price is probably still vulnerable to negative economic headlines. Furthermore the $90.00 level might be round-number resistance.

- Suggested (SMALL) Positions -

Long Sep $90 call (CAT1222I90) Entry $1.90

08/13/12 new stop loss @ 85.90
08/07/12 triggered @ $87.25


Entry on August 07 at $87.25
Average Daily Volume = 8.6 million
Listed on August 6, 2012

Concur Technologies - CNQR - close: 72.04 change: +0.66

Stop Loss: 68.75
Target(s): 74.75
Current Option Gain/Loss: Sep75c: +24.0% & Nov75c: +8.3%
Time Frame: 3 to 4 weeks
New Positions: see below

08/18/12 update: CNQR continues to rally and hit new all-time highs. The stock is up three days in a row and up significantly from its early August lows near $62. That's a $10 move (+16%) in just over two weeks. Odds are growing that CNQR will see a pullback. We can look for broken resistance at $70.00 to offer some new support.

I am not suggesting new positions at this time.

- Suggested Positions -

Long Sep $75 call (CNQR1222i75) Entry $1.25

- or -

Long Nov $75 call (CNQR1217j75) Entry $3.60

08/16/12 new stop loss @ 68.75
08/15/12 triggered at $70.25


Entry on August 15 at $70.25
Average Daily Volume = 577 thousand
Listed on August 13, 2012

Intl. Business Machines - IBM - close: 201.22 change: +0.38

Stop Loss: 197.40
Target(s): 209.00
Current Option Gain/Loss: - 7.6%
Time Frame: 3 to 4 weeks
New Positions: see below

08/18/12 update: Friday was a relatively quiet day for IBM. Shares did hit new three-month highs before paring their gains. Now that shares are above resistance at $200 there is a good chance the stock will rally to catch up with some of its peers in the technology space.

I would still consider new positions now or you can wait for a dip near the $200 level, which should offer some short-term support. FYI: The Point & Figure chart for IBM is bullish with a $226 target.

- Suggested Positions -

Long Sep $205 call (IBM1222i205) Entry $1.71


Entry on August 17 at $201.08
Average Daily Volume = 3.4 million
Listed on August 16, 2012

Joy Global, Inc. - JOY - close: 55.90 change: -0.08

Stop Loss: 52.75
Target(s): 59.75 & 62.40
Current Option Gain/Loss: Unopened
Time Frame: exit prior to the Aug. 29th earnings report
New Positions: Yes, see below

08/18/12 update: Shares of JOY failed to see much follow through on Friday but then Friday was a pretty lazy day for the stock market. I would still consider new bullish positions now or nimble traders could try and buy calls on a dip near $55.00 instead.

Our first target is $59.75. I am setting a secondary, more aggressive target at $62.40 but JOY will have to get past potential resistance at $60.00. FYI: The Point & Figure chart for JOY is bullish with a longer-term $74 target.

- Suggested Positions -

Long Sep $57.50 call (JOY1222i57.5) Entry $2.70

- or -

Long Oct $60.00 call (JOY1220j60) Entry $2.50


Entry on August 17 at $59.27
Average Daily Volume = 2.1 million
Listed on August 16, 2012

Netflix, Inc. - NFLX - close: 63.69 change: -0.62

Stop Loss: 59.45
Target(s): 69.50
Current Option Gain/Loss: - 9.4%
Time Frame: 3 to 4 weeks
New Positions: see below

08/18/12 update: Hmm... I would be a little careful here. The two-week trend in NFLX is up but Friday's performance actually looks like a short-term top. I would expect a dip back into the $62.50 region. We can look for a pullback or wait to buy the bounce before initiating new positions.

Earlier Comments:
I do consider this an aggressive trade. NFLX can be volatile. Nimble traders may want to wait and buy calls on a dip.

- Suggested (SMALL) Positions -

Long Sep $67.50 call (NFLX1222i67.5) Entry $2.23


Entry on August 16 at $63.46
Average Daily Volume = 5.8 million
Listed on August 15, 2012

Pharmacyclics - PCYC - close: 61.61 change: +0.95

Stop Loss: 59.45
Target(s): 67.00
Current Option Gain/Loss: +14.8%
Time Frame: 3 to 6 weeks
New Positions: see below

08/18/12 update: PCYC continues to show strength and rallied to another multi-year high on Friday. Broken resistance near $60.00 should offer some support so we are raising our stop loss up to $59.45.

The next level of overhead resistance looks like $70 (from years ago). We will aim for $67.00 but more aggressive traders could aim higher.

- Suggested Positions -

Long Sep $65 call (PCYC1222i65) Entry $2.70

08/18/12 new stop loss @ 59.45
08/16/12 triggered on gap open higher @ 60.94


Entry on August 16 at $60.94
Average Daily Volume = 879 thousand
Listed on August 15, 2012

PVH Corp. - PVH - close: 89.01 change: +1.45

Stop Loss: 84.75
Target(s): 91.50
Current Option Gain/Loss: +34.5%
Time Frame: exit prior to the Aug 27th earnings report
New Positions: see below

08/18/12 update: PVH continues to outperform the major indices. The stock added another +1.6% on Friday. More conservative traders may want to consider taking profits now or before PVH reaches what might be resistance at $90.00. I see resistance in the $92.50-93.00 area as the level to watch so we're aiming for $91.50 as our exit target. I am not suggesting new positions at this time.

Earlier Comments:
The $90.00 level could be resistance but we will aim for the 2012 highs near $93.00. FYI: The Point & Figure chart for PVH is bullish with a $97 target.

- Suggested Positions -

Long Sep $87.50 call (PVH1222i87.5) Entry $3.27

08/18/12 more conservative traders may want to take profits early
08/16/12 new stop loss @ 84.75
08/14/12 triggered on gap open at $85.62 (trigger was 85.25)


Entry on August 14 at $85.62
Average Daily Volume = 845 thousand
Listed on August 13, 2012

Qualcomm - QCOM - close: 63.29 change: +0.72

Stop Loss: 60.95
Target(s): 64.25
Current Option Gain/Loss: +50.0%
Time Frame: 4-6 weeks
New Positions: see below

08/18/12 update: The QCOM rally continues with the stock up five weeks in a row. The widely expected yet unannounced launch of Apple's iPhone 5 is driving component makers like QCOM higher. Please note that I am adjusting our exit target down to $64.25. More conservative traders may want to exit now to lock in gains since QCOM is technically overbought and due for some profit taking.

I am not suggesting new positions at this time.

- Suggested Positions -

Position: Oct $62.50 Call (QCOM1222J62.5) entry $1.70

08/18/12 adjust exit target to $64.25
08/16/12 new stop loss @ 60.95
08/07/12 triggered @ 60.51


Entry on August 07 at $60.51
Average Daily Volume = 1.5 million
Listed on Aug 4, 2012

SBA Communications - SBAC - close: 60.51 change: -0.02

Stop Loss: 58.95
Target(s): 64.90
Current Option Gain/Loss: Sep60c: -18.4% & Dec65c: -19.2%
Time Frame: 4 to 8 weeks
New Positions: see below

08/18/12 update: It was a very quiet Friday for the stock market and SBAC churned sideways to close virtually unchanged on the session. While the larger trend is up I am not suggesting new positions at this time.

Our multi-week target is $64.90. We might need some patience on this one. SBAC doesn't move super fast. FYI: The Point & Figure chart for SBAC is bullish with a long-term $100 target.

- Suggested Positions -

Long Sep $60 call (SBAC1222i60) Entry $1.90

- or -

Long Dec $65 call (SBAC1222L65) Entry $1.30

08/16/12 new stop loss @ 58.95
08/14/12 triggered @ 60.75


Entry on August 14 at $60.75
Average Daily Volume = 1.5 million
Listed on August 11, 2012

WellPoint Inc. - WLP - close: 57.26 change: -0.58

Stop Loss: 55.85
Target(s): 59.75
Current Option Gain/Loss: - 3.1%
Time Frame: 3 to 4 weeks
New Positions: see below

08/18/12 update: It was a disappointing Friday for WLP. The stock retreated from new short-term resistance near $58.00 thanks to an analyst downgrade on Friday morning. Fortunately, traders bought the dip at the rising 10-dma.

I am not suggesting new positions at this time.

- Suggested Positions -

Long Sep $57.50 call (WLP1222I57.5) Entry $1.60

08/16/12 new stop loss @ 55.85
08/08/12 triggered @ 56.50


Entry on August 08 at $56.50
Average Daily Volume = 4.4 million
Listed on August 7, 2012

PUT Play Updates

FB - Facebook - close: 19.05 change: -0.82

Stop Loss: 20.35
Target(s): 17.00
Time Frame: 2-4 weeks
Current Option Gain/Loss: +31.0%
New Positions: see below

08/18/12 update: To quote Hannibal from the A-Team, "I love it when a plan comes together."

As expected shares of FB have continued to sink under a new wave of selling pressure thanks to the lock up expiration of 270 million new shares available for sale. The breakdown under round-number support at $20.00 is bearish. The stock is now down -50% from its IPO price of $38.00 a share.

Readers may want to go ahead and lock in profits now but we are aiming for the $17.00 level. We will try and reduce our risk by lowering the stop loss down to $20.35.

I am not suggesting new positions at this time.

Earlier Comments:
Facebook has turned into the stock everyone loves to hate. Facebook has 674 million shares outstanding as of Friday. On August 15th another 268 million shares will see their lockup expire and become available for trading. That is 40% additional shares. If you were an investor or employee and you watched your shares decline from $35 to $20 ahead of your lockup expiration you are probably just waiting for an opportunity to sell. Another factor is that taxes are due on the awarded shares regardless of whether they are sold. That means employees have a big tax bill and they have not been able to sell those shares to pay the taxes. That is an additional incentive to pull the trigger on at least part of their position on August 15th.

Facebook has hundreds of detractors and they seem to be racing each other trying to put a lower price target on the stock. Mark Hulbert was on CNBC on Friday with a $13.80 price target based on a bunch of different metrics.

Facebook also has the various lawsuits over the IPO including the valuation and the various claims made about users and revenue in the days leading up to the IPO. There are plenty of clouds and no real catalysts to pump up the stock.

Facebook said expenses grew by 60% in Q2 and they would grow faster in Q3/Q4. That means earnings will decline.

I am recommending a September option with plans to exit (some time) after the August 15th share lock up expiration.

Suggested Positions

current position: Sept $20 PUT (FB1220U20) entry $1.45

08/18/12 new stop loss @ 20.35, readers may want to take profits now
08/07/12 triggered @ 20.95
08/06/12 adjust entry trigger to $20.95


Entry on August 07 at $20.95
Average Daily Volume = 80.0 million
Listed on August 5, 2012


Edwards Lifesciences - EW - close: 97.80 change: -0.38

Stop Loss: 100.25
Target(s): 91.50
Current Option Gain/Loss: -53.7%
Time Frame: 3 to 4 weeks
New Positions: see below

08/18/12 update: After underperforming the market all week long EW suddenly erupted higher on Friday. I couldn't find any specific news to account for the relative strength (+2.6% on Friday). Shares broke through potential resistance at $100 and its 50-dma and hit our stop loss at $100.25.

- Suggested Positions -

Sep $95 PUT (EW1222u95) Entry $2.70 exit $1.25 (-53.7%)

08/17/12 stopped out at $100.25.
08/13/12 trade opened on gap down at $97.66 (trigger was 97.75)


Entry on August 13 at $97.66
Average Daily Volume = 950 thousand
Listed on August 9, 2012