Option Investor

Daily Newsletter, Saturday, 11/3/2012

Table of Contents

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

Market Wrap

Signs of Distribution

by Keene Little

Click here to email Keene Little
Friday's positive Payrolls report, and the gap up that followed, was again an opportunity for sellers to get better prices. This continues the distribution pattern we're seeing in the current market.

Market stats for Friday

Market stats for past four weeks and year-to-date

Following Sandy's devastation and the market's close on Monday and Tuesday, Wednesday ended up being a doji day, Thursday saw a good-sized rally and Friday gave most of it back. The net result for the week about even. The best performing sector on the above list were the homebuilders. With the enormous damage to homes that sector is going to see some business coming their way. On the bottom of the list, for Friday and the week, are the commodities.

On average last week's economic reports were neutral. Some were OK, some were a little disappointing, but in general there were no big surprises and no big market movers. Friday morning we got the hourly earnings, average workweek and factory orders. The hourly earnings came in at 0.0% vs. expectations of +0.2%, which is a drop from September's +0.3%. This is not a good sign since it shows a continuation of the trend toward lower earnings while prices for goods continue to rise. It's the squeeze on lower and middle income folks that's eventually going to cause more social unrest if it's not reversed soon.

The average workweek stayed the same (34.4) and the factory orders for September was +4.8%. Factory orders had dropped -5.2% in August so that was a big improvement.

The market was pleased with the ADP employment report on Thursday, which showed higher than expected hiring and helped fuel the rally that day in anticipation of a better than expected Nonfarm Payrolls (NFP) report. And Friday's pre-market release of the (NFP) gave equity futures a nice boost. Friday looked like it was going to continue Thursday's rally. It was either a buy-the-rumor, sell-the-news event or simply an opportunity to sell into a rally as it continued the pattern we've been seeing since September where rallies are being used to sell into rather add onto.

The NFP was good news because the number of new jobs created was an upside surprise at 171K vs. expectations for 125K. The whisper number was 150K after Thursday's ADP employment report so even that was beat. The number for September was also revised higher to 148K from the previously reported 114K (these adjustments are due to the Bureau of Labor Statistics (BLS) continually revising their seasonal adjustment factor, which is whole story by itself and the reason why it's so hard to trust the BLS monthly numbers). While the number is still low it's at least positive and a move in the right direction. So why did the market sell off so much after the initial excitement? It's called sentiment and it's a reason why you can't trade news.

As the chart below shows, the good news is the continuation of job growth since turning positive back in March 2010. The bad news is the severe decline in 2008-2009 has been followed by only tepid growth. It's a graphic depiction of why so many have been unemployed for far longer than past recessions, a chart of which I'll show later.

Monthly Change in Payroll Jobs, 2008-October 2012, chart courtesy calculatedriskblog.com

The unemployment rate came in as expected, at 7.9%, which ticked back up from September's 7.8%. These employment and unemployment-rate numbers will give both Obama and Romney some sound bites supporting why each should be our next president. I just want the elections over with so that we can get back to listening to drug commercials and all their associated risks, such as giant-eyeball syndrome, instead of listening to the giant-ego politicians.

As is true each time we get employment numbers from the BLS, there was an immediate cry of "foul!" when we got the NFP number because of the manipulation of the data that the BLS does when they come up with their estimate. We really don't have a clue what the employment picture really looks like. But we do know the employment growth that we've been getting for the past several years has only managed, at best, to keep up with population growth. The unemployment rate that we currently have (which most agree is grossly underreported) will likely be with us for many years to come. And if the economy sours on us in the coming year we will likely see the unemployment rate climb again.

We are in a period of structural change and many (most?) of the job losses over the past decade will likely not return. People are being forced to reeducate themselves to work in a different field. Many have been forced to take lower paying jobs in service industries after working in the higher-paying manufacturing/construction industries. The transition, like most transitions, can be full of new opportunities or it can be very painful. Which one it will be for many people will depend on individual initiative (rather than waiting for the government to fix it).

The chart below shows the job losses in each of the past employment recessions since 1948 and how long it took for those losses to return to 0% (to recover all the jobs that were lost during the recession). As can be seen on the chart below, the 2007-2009 recession caused the deepest job losses and is taking far longer than previous recessions to recover those losses (red line at the bottom).

Percent Job Losses from Recessions, chart courtesy calculatedriskblog.com

As Bill McBride at calculatedriskblog.com noted, even with the improvement in new jobs last month the economy has added only 1.55M private-sector jobs so far this year. Assuming the current pace is continued into the end of the year we will see 1.9M jobs added, which is less than the 2.1M jobs added in 2011. This is the reason Romney keeps beating up on Obama about job growth slowing rather than improving (not a political statement, just a fact). Each candidate of course spins the data to support their candidacy.

There's one other point I'd like to make about the above chart: note how the recoveries have been taking progressively longer since the 1981 recession. The last secular bull market started in 1982 and on a much longer timeframe that bull market was the completion of a big 5-wave move up in a century-long march higher for our economy and stock market. The 5th wave of a move is typically the weakest and while the stock market rallied, and even went parabolic, there were many fundamental measurements of the economy that showed the economy was much weaker than the previous secular bull market that ended in 1966 (the secular bear that followed ran from 1966 to 1982). The stock market's rally in the 1990s was getting completely out of whack with the underlying fundamentals when it hit its high in 2000. The correction since 2000 is therefore a much larger correction and the chart above reflects part of the correction process we're going through. This secular bear is much worse than the 1966-1982 bear and the stock market will reflect it with at least one more leg down.

At the current pace of job creation most analysts say it will take another 6+ years to recover the jobs that were lost during the 2007-2009 recession. Six years is 72 months, which would more than double the timeframe on the chart above. Instead of seeing jobs recover in 48 months, as it did following the 2001 recession, it could be 2 to 3 times that by the time the red line on the chart above gets back to zero. That's mind boggling and demonstrates just how much pain was caused by the housing and financial collapse.

Some say job creation will get a boost from Hurricane Sandy and while Sandy will help some industries, such as the home building sector and automobiles (maybe), the net result for the country is that it's going to be another blow to the economy. Many businesses have been hurt, at least temporarily if not permanently. Mayor Bloomberg was forced to cancel the NYC Marathon event that was to be held on Sunday. While there are plenty of arguments why it should or should not have been cancelled, how do you think the loss of $400M to NYC and its local businesses is going to affect their year?

The damages on the east coast are now estimated to be at least $50B and economists have been estimating there will be $20B-$30B of new business as a result (the shot in the arm that economists like to talk about as being the "benefit" of these kinds of storms). If my math is correct that leaves about $20B-$30B in damage that's not recovered. This goes into the net loss column that I discussed in Wednesday's wrap and why a storm like Sandy is NEVER good for the economy.

Most Keynesian economists just don't seem to grasp this concept. They talk about the positive multiplier effect of spending money on new home construction without talking about the negative multiplier effect from the losses. They believe the government should simply spend more money that they don't have and thereby pump more money into the economy. That unfortunately just creates more debt and an even larger burden on future generations, which slows down economic growth even further into the future.

The chart above, showing the slower and slower job loss recoveries is a net result of too much debt and slowing income growth. It all catches up with us at the end. What the politicians and central bank leaders are attempting to do is push the end out to a time when it won't affect their jobs.

OK, that's all long-term stuff, which I consider fundamental reasons for why the stock market has suffered a lost decade and will likely suffer two lost decades before the correction finishes. The only question is what shape the lost decades will take. The first one (2000 to the end of 2009) saw the S&P 500 give up half its gains from 1974-2000 and then recover half that loss before the decade finished at 1115. SPX is currently 300 points higher at 1415 and I wouldn't be at all surprised to see it 300 points lower at 815 within the next 1-1/2 years. Where it will be at the end of 2019 is anyone's guess but based on the underlying fundamental weakness in our economy, as discussed above, I think it will be extremely difficult for the stock market to hold off from another selloff.

What path the market takes over the next few years is anyone's guess. I of course have mine, which are based primarily on the longer-term wave structure of the market but obviously no one knows (unless you're a time traveler and have seen our future). Who knows, after 12/21/2012, the end of the Mayan calendar, maybe we'll all be time travelers (wink).

For all of us non-time travelers we'll need to stick with the charts and make our best guess from them. Starting the weekend chart review with the SPX weekly chart, we can see the bulls still holding the advantage here since the uptrend line from October 2011 is still holding. By definition the uptrend is still intact. That uptrend line is currently near 1409 (log price scale whereas it's lower near 1391 when using the arithmetic scale) so a break below that and the October 26th low near 1403 would be bearish. I'm leaning short here, based on the shorter-term pattern but I certainly can't argue against the reason why a trader should be looking to buy support at the uptrend line. As long as your stop is just below 1400 that could prove to be a very good trade for a run up to the 1500 area into the end of the year.

S&P 500, SPX, Weekly chart

The daily chart below shows SPX bounced off the uptrend line from October on Wednesday and then at Friday's high it back tested its crossing 20- and 50-dmas at 1434.74 and 1434.48, resp., with a high at 1434.27. The other resistance level is support-turned-resistance near 1429 (horizontal red line). The sharp drop back down on Friday leaves a bearish kiss goodbye after these back tests, which is another reason why a break of its uptrend line from October 2011 would be bearish. The bulls must rally the market from here.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1464
- bearish below 1400

On Thursday I had posted that I was looking for SPX to reach a target/resistance zone by Friday morning at 1431-1435 and to look at it as a shorting opportunity if resistance held. On Friday morning I had suggested shorting the gap up and rally to 1434 once it appeared it was ready to roll over (it was a nice little 5-wave move up from Wednesday to complete the a-b-c bounce off the October 26th low). I didn't know yet if we'd get just a small choppy pullback before heading higher again or start the next leg down in the decline from the October highs. It was a very good setup for a larger decline and once it dropped below the bounce high on Wednesday, at 1418.76 (labeled wave-a below), the overlap confirmed the bounce off the October 26th low as just a correction and not something more bullish. The bounce could get bigger with another rally leg on Monday but that would be just a guess from here. The more likely scenario, depicted in bold red on the chart below, is for the market to drop a little lower (perhaps following a sideways consolidation Monday morning) and then a bounce back up to the 1418-1420 area for one more back test before plunging lower.

S&P 500, SPX, 60-min chart

The interesting thing about the EW scenario outlined on the chart above is that it ties in with what Archie Crawford sees for next week (I discussed his outlook in Wednesday's wrap). With his prediction for a severe market decline in November, possibly starting November 6th, it will be interesting to see how the price pattern sets up as the election results come in. To review, Crawford's interpretation of the astrological setup is that it's not good for the stock market since severe market declines have been associated with the setup. He says the setup is also predicting we could have trouble not knowing who is to be our next president, similar to what happened in 2000 between Bush and Gore that was a result of Florida not being able to determine who was going to get their electoral votes.

Then on Thursday I read an article about how Ohio has changed their absentee-ballot process which could lead to a couple hundred thousand provisional ballots that can't be opened until 10 days after the election. Considering how the election could come down to Ohio's electoral votes, Ohio could be this year's Florida (I'm sure Florida would love to hand off the distinction). Normally I probably wouldn't have even noticed this kind of article but now it has potential meaning.

This year Ohio sent absentee-ballot applications to about 95% of its citizens rather than require people to request one. Anyone who returned the application was then sent an absentee ballot, which then requires them to vote by the absentee ballot and not at a polling station. If they do try to vote at a polling station they'll cast a provisional ballot which must then be held under lock and key for 10 days while the state waits to see if an absentee ballot had been received. At the moment some are guessing that there could be 250K or more provisional ballots as a result of this. That large of a number could easily cause Ohio to not be able to project a winner if the voting is too close to call.

So let's do a little speculation here -- the national election comes down to Ohio being the deciding state. Ohio finishes with a too-close-to-call election and must wait for the provisional ballots to be counted (in the meantime multiple states will be contested and recounting their votes). Ten days later after figuring out which provisional ballots are to be counted in Ohio the race finishes in a virtual tie that requires a recount, so more delay. Are we going to then get into some version of the hanging chad issue? Is the Supreme Court going to get involved again? In the meantime the country doesn't know who the next president will be or whether the election will go to the House to decide (in which case Romney would be chosen as president by Congress and Joe Biden would be the VP choice of the Senate). One can only imagine the potential turmoil if this election is very close and Ohio's problems cause a delay that stretches out for weeks. Think the market would be happy with all that?

It all makes for interesting speculation but of course that's all it is. One side could run away with it on Tuesday and we'll have a clear winner by Wednesday morning. All we can do is work with what we've got and use our charts to help make trading decisions. The only caution is that it's possible the market is going to wake up Wednesday morning very unhappy. I see the election as a neutral to negative event, with very little upside potential, so perhaps consider at least some downside protection that you can remove on Wednesday if everything works out fine.

Now we move to the DOW's chart and a bearish wave count setup that is staring into the abyss. The DOW's Friday morning high at 13289 came very close to its October 12th low at 13296 and since there's no overlap I can still consider the bounce off the October 25th low to be a 4th wave correction in the move down from October 5th. That says we're due one more new low (5th wave) and then a big bounce into at least the end of the week. But the other indexes have overlapped their October 12th lows and that negates the 4th wave idea. The bounce is either more bullish, following the 3-wave pullback from October 5th, or it's very bearish.

As shown on the chart below, the 3-wave pullback from October 5th is either a correction to the longer-term rally (labeled in green), to be followed by another rally leg to a new high into the end of the year, or it's a 1-2, 1-2 wave count to the downside and Friday morning's high completed the second 2nd wave correction. The drop from the morning high has already overlapped Wednesday's high at 13189 (confirming a 3-wave bounce off the October 26th low), which is another reason I'm leaning toward the bearish interpretation here. If we get a drop and a small bounce on Tuesday to a lower high, especially if it remains inside the down-channel from October, I would short it and see what happens Wednesday. It could result in a wicked ride on a high-speed southbound train.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 13,600
- bearish below 12,970

To reiterate, the bearish wave count for the DOW calls for a very strong decline next week, one that could drop the DOW down to the 12500 area (about 800 points below Friday's high), or worse, in a matter of a couple of days before it consolidates and then stair-steps lower. The fact that it lines up with Archie Crawford's forecast for a strong decline following the November 6th elections makes it interesting even if I wouldn't trade Crawford's signal (because I do not understand it and don't trade blindly like that). The thought I have is that we could see a decline on Monday back to the October 26th low, just above, bounce into Tuesday and then open the trap door to much lower lows after Wednesday. It's an idea I'll be monitoring closely and will update daily.

One other point about where the market currently stands -- an argument could be made that we have a very similar setup (fractal) to where the DOW was just before the October 1987 crash. The price action between August and October 1987 is similar to what we have been September and November. This setup calls for a market crash in the next couple of days. So if everything is still fine after Wednesday's trading this fractal pattern will be negated. In the meantime it's one more piece of the puzzle that says the market could be in significant trouble next week but the danger will pass if we make it through the coming week without any major selling. In the meantime be careful; for example, you couldn't pay me enough right now to be in bull put spreads (and forget about naked puts). I know several iron condor traders who are only selling call spreads at the moment and/or call butterflies. Buy some longer-term put protection for your portfolio and then if nothing bad happens this week you can sell the puts and consider the cost as insurance that you didn't need to collect on.

The NDX chart is bearish but not as bearish as what I've outlined on the DOW's chart. It calls for a minor new low, perhaps down to 2600, before consolidating and then pressing lower again into the end of November. So the pattern is bearish but in more of an orderly pattern to the downside. There is of course still the potential for another bounce up -- back up to its broken uptrend line from March 2009, near its 20-dma at 2719 (note that the Nasdaq Comp has not yet broken its uptrend line from 2009, near 2960), and then its 50-dma near 2770. But Friday's strong reversal and AAPL's refusal to participate in rallies should be worrisome to bulls.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2775
- bearish below 2660

The RUT is bouncing between support and resistance, testing both sides on Friday. The top of its down-channel from September and its 20- and 50-dmas were tested Friday morning and it dropped back down to its uptrend line from October 2011 by Friday's close, near 812-813 on Monday. A little lower, near 807 on Monday, is its 200-dma so a break below 806 would be more bearish. But with the bottom of its down-channel near 795 and price-level support near 790, those are the levels the bears will need to break through before they can declare they're fully in charge.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 843
- bearish below 806

Bond yields continue to coil ever tighter since their September 14th highs. Bond yields are getting ready for a big move and I think a break above the October 18th highs or October 12th lows will confirm the direction of the break. Bond prices are of course opposite and TLT or TBT are two ETFs that could be used to play the direction of the break (as well as the emini futures ZN, 10-year, and ZB, 30-year) since it will likely be a very good trade. I like to do my analysis on the yields because it seems to provide a more accurate picture, especially for longer-term views.

The 30-year yield (TYX) weekly chart is shown below and what I believe is the next move -- down. The bounce off the July low looks corrective and therefore suggests another leg down. The large descending wedge pattern for the decline from 2010 and the bottom of the longer-term term down-channel from 1994 intersect near 1.65% next April and that makes for a good downside price/time target for now. The early sign of a break in progress would be a rally above the October 18th high at 3.007% or a breakdown through the October 12th low at 2.80%. If the weekly descending wedge is the correct interpretation the low in April 2013 should be met with additional bullish divergence, as indicated on RSI, which would be a good reversal setup. As mentioned in previous wraps, that reversal should be the start of a 30-year climb in yields and a reason not to own any intermediate to longer-term bonds from then on (higher yields will drop bond prices).

30-year Yield, TYX, Weekly chart

The banks held up better than the broader market on Friday and BIX was able to close above the top of its 157-159 support band and finished with a doji. But so far it looks like a back test of its broken uptrend line from October 2011 followed by a small pullback. I'm not impressed yet with its bounce attempt and I continue to look at its sideways consolidation as a bearish continuation pattern until proven otherwise (starting with a rally back above its broken uptrend line, near 160.70 on Monday).

S&P Banks index, BIX, Daily chart

The transports continue to get whacked around in a choppy sideways pattern. When the chart starts to make sense (breaks out or down) I'll update it but right now it's offering no clues.

The commodities got hit hard on Friday and while the dollar's rally was likely part of the reason it seemed to be a bigger move than just dollar related. I'm not sure why commodities got hit hard but as the commodity index (DJUBS) chart below shows, Friday's break was below important support. I scrunched the daily chart as much as possible to be able to see price action since the 2011 high and still show how the 200-dma was broken on Friday.

The DJUBS index had broken its downtrend line from 2008 in September and hit a high on September 14th. I had shown this index shortly after that to show it left an island top reversal on that day. When you look at this chart with the log price scale, the downtrend line is higher and the September 14th high was a gap above the trend line and then the next trading day it gapped back down below the line. It was a key reversal. Using the arithmetic price scale for the chart below shows price dropped down to the line this week and tried to bounce, gapping up on Wednesday and Thursday. But Friday it gapped down and sold off sharply, breaking back below its downtrend line from 2008 and its 200-dma in the process. It could recover next week and leave a head-fake break to the downside, just as it did to the upside on September 14th, so this coming week will be important to see how the commodities do. They often trade in synch with the stock market.

Commodity index, DJUBS, Daily chart

After back testing its 20-dma on Wednesday the dollar rallied above the top of its up-channel from September and ran into its 200-dma. It's possible we'll see it get knocked back down and head lower from here but I continue to like the odds for an upside breakout.

U.S. Dollar contract, DX, Daily chart

In Wednesday's update I had shown an expectation for gold to make it a little higher on Thursday and then continue lower. It didn't make it quite as high as I thought it would go and then sold off hard on Friday and broke support in the 1690-1700 area. The next support level will be in the 1640-1650 area. If it bounces back up to 1700 and finds it to be resistance it would be a good shorting opportunity. Back above Thursday's high at 1727.50 would be bullish, at least for a higher bounce.

Gold continuous contract, GC, Daily chart

From a sentiment perspective gold is ready for a much bigger decline. At its recent high in October trader sentiment, as measured by small traders' net long position in futures and options, was at an extreme high, higher than any time since gold's 2008 high. At the same time the commercials held their largest net-short position. You always want to be on the side of the commercials -- they tend to be early as they build a position but when small traders hit an extreme position it's best to bet against them.

Oil is still holding above its October 29th low at 84.66 but only barely (it tested it to the penny on Friday). Assuming it breaks lower we could see it drop to the bottom of its parallel down-channel, currently near 82. Back above Thursday's high at 87.42 would be at least short-term bullish.

Oil continuous contract, CL, Daily chart

It's going to be a quiet week ahead as far as economic reports. We'll get the ISM Services for September on Monday, which is expected to be flat to maybe slightly lower than August. There will be no reports on Tuesday and then Wednesday we'll get Consumer Credit, which is expected to show a decline of $10B. The last report of +$18B had analysts excited to see consumers were out spending and racking up more debt, a sure sign of economic health (cough). I guess that means the -$10B is a sign of economic contraction. If there are any troubles with the election results none of this will matter anyway.

Economic reports and Summary

The storm-shortened week was essentially a consolidation period, which is no surprise. Many are still digging out of the storm and just praying they get some power back before the cold temperatures start snapping water pipes. The coming week will be focused on what happens around the elections and if everything goes well we can move on with our lives on Wednesday. Considering the setup on the charts and the planets and stars, we could be in for a rough ride in the markets if everything doesn't go well with the elections. The dissatisfaction with our government representatives could be a mirror into the dissatisfaction with the stock market as well, which is one of the best barometers of sentiment that we have.

With the bearish setups on the charts the way to negate them is for the bulls to come in on Monday and Tuesday and rally this market hard. Anything less than that (they need to get back above Friday morning's high for a start) could embolden the bears and scare those who are long but not liking it at the moment. Fear of loss is a powerful motivator (it works both ways since a fear of loss of a money-making opportunity can drive the market higher in a parabolic climb) and right now the market remains perched on the edge of the cliff. We should know by Wednesday if someone will pull the market back or kick it off.

Good luck in the coming week and I'll be back with you on Wednesday. Get out and vote even if you don't like either candidate -- pick your poison otherwise you'll have no right to complain later (wink). Also, don't forget to set your clock back one hour on Sunday (spring ahead, fall behind).

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying

Index Wrap

Correction Mode continues: Bounce (to Resistance) over fast

by Leigh Stevens

Click here to email Leigh Stevens

There's a chart question that I considered this week. Normally, I keep daily charts 'set' to reflect an open space for the occasional holiday. This past week, we had two days without trading, putting a bigger than usual 'hole' in the charts at the beginning of the week. I've elected to keep my daily charts reflecting the two lost days from hurricane Sandy.

The rebound in the S&P 500 was only to the 50-day Moving Average until renewed selling drove prices lower again. The correction continues; just don't figure it's a bear market. On the S&P side of things, only the narrow (30 stock) Dow Average, has retraced even as much as a (fibonacci) 38% retracement of the strong June to September advance. The Dow is lagging as a number of Dow stocks continue corrections. A number of the former laggards are looking like they've completed basing patterns and could take over some of the leadership when the next rally phase kicks in. It's my assumption that Dow 14000 will be challenged again; INDU has come all the way from the 6500 area in early-2009 to recent highs around 13600. It would be unusual that there won't be a full retest of such a major all-time peak. Doesn't have to happen of course. The Market is habitual in certain patterns but there's enough of an element of uncertainty and wild card outcomes to keep traders on their toes.

The Nasdaq Composite (COMP) hasn't to date retraced more than 50% of its June-Sept advance, so there's no change on that front. Tech stocks had run up the most of course and are overshooting on the downside. Nasdaq bellwether Apple Computer (AAPL) has hit an interesting technical milestone as its now retraced 38% of its major rally from late-2008/early-2009 lows in the $363 area. From 363 to nearly $700 in 9-10 months. Not bad! Of course, we have to go back further to see how MONSTER the AAPL rally really has been since AAPL traded as low as 78.2 in January 2009.

It looks like the correction continues and I'm still looking for that dip in SPX to at or under 1395-1400. The Nasdaq 100 (NDX) could 'easily' fall next to the 2600-2595 area and where NDX would look like a buy in terms of a risk to reward calculation. The outside chance of seeing 2550 in NDX is relative to upside rebound potential to 2750.



The rebound in the S&P 500 (SPX) was only to near resistance implied by SPX's 50-day moving average, which had previously been an area of support. Once this key trading average was pierced, it then 'became' subsequent resistance. Appears so; SPX turned on a dime after hitting the 50-day average as it became a trigger point for concerted selling.

I still think that the 1400 area will be tested as it is key expected chart support. I've pegged support based on the chart and on 1395 representing a Fibonacci 38% retracement of the last big Market up leg. 1370, representing a 50% retracement, is another area of anticipated support.

Near resistance should come in around 1435, with next resistance in the 1453 area, as suggested by the current intersection of the previously broken up trendline. 1453-1460 looks like fairly major resistance at this point.

SPX hit a fully oversold extreme prior to this past week in terms of the 13-day Relative Strength Index (RSI); my Trader Sentiment model also showed 'extreme' bearishness. These levels may be seen again before this correction runs its course.


The S&P 100 (OEX) chart remains bearish in its short to intermediate-term pattern and this statement continues to look true for another week. There was a rebound but the rally stopped short at prior support. As I've said, probably ad nauseam, support once penetrated often 'becomes' subsequent resistance. Near resistance is seen in the 656 area because of this factor. Next resistance is seen at 664-665, extending to 670.

Look for technical support in the 642-640 area again this week. If a 'measured move' occurred, the downside potential could extend to 630-628. 628 represents potential support suggested by a 50% retracement of the last big up leg (June-September).


The Dow 30 (INDU) is maintaining a bearish technical chart in that INDU highs didn't come up to more than the prior floor of technical support. Traders who previously might have bought the Dow in the 13300-13250 area remember full well that rallies to this same area puts them close to break even. This previously bullish group offered some concentrated selling at recent highs.

12850 continues to be an area to pay attention to simply because this level represents a full half/50% retracement of the June to September advance. It's very common for stocks to retrace around half of prior gains and still remain within a longer-term uptrend. The Dow is only an average of just 30 blue chip stocks. Well, actually not 'just' any group of 30 big cap stocks but the biggest names in a few areas from finance to tech.

Currently I rate 10 Dow stocks as having bullish technical patterns, whereas 15 that look bullish (or half of the Dow 30 universe) is a more comfortable situation to bet on a sustained run up. This is the time of year when its common to see many cross currents due to the seasonality of earnings in some sectors and portfolio adjustments with large funds as they rotate out of stocks that have bountiful gains to ones that are emerging.

I suggested last week that the Dow would be unlikely to crack the 13250-13300 zone. I'm still noting resistance for this area. Next big technical resistance then is back at the (previously) 'broken' up trendline, currently intersecting in the 13485 area. Call it resistance at 13485-13500. My work suggests a dip to the 12850 area over a move back above 13300 near-term.


The Nasdaq Composite (COMP) chart remains bearish as the recent rally failed handily. It remains to be seen if support in the 2962-2965 area continues to materialize. COMP looks like it may be headed lower than its recent lows.

I don't want to under report that the Composite has given back fully HALF of its gains from its last big up leg. In terms of just the chart pattern, it looks like one tracing out a downtrend price channel, with another potential dip to the low end of this channel. This kind of unfolding could take COMP to the 2905-2900 area.

Resistance is apparent at the line of prior lows around 3036. Next resistance then looks like 3085, extending to 3100.


The Nasdaq 100 (NDX) Index looks to be in a still-bearish pattern as NDX's most recent rally didn't get beyond nearest resistance at 2700. The 2700 area remains pivotal near resistance and longer range resistance looks to come in back up at the prior up trendline currently intersecting in the 2767 area.

Recent support came in around 2645-2650; I've noted next lower support at the 62-66% retracement levels at 2610 to 2592.

What I wrote last week of "looking for a leveling out, with a possible further dip to test the low-2600 area" and also that I'd be bullish in this area is mostly my unchanged view. I can't say that 2650 wasn't an area to exit short positions, especially taken with NDX in the 2850 area and topping action. It's tricky with downtrends to look for that last little bit lower and to expect a 'fully' oversold RSI extreme.


The Nasdaq 100 tracking stock's (QQQ) chart remains bearish and the pattern suggests a downtrend channel is being traced out. There was a rally to the upper end of the downtrend channel and now the next price swing looks to be down toward the 64 area. Stay tuned on that!

I've pegged near technical resistance at the 21-day moving average at 66.5, with next resistance at 67.7 at the prior up trendline.

I'd like to see if a next downswing brings in daily volume spikes again. A fall to the 64 area on above average daily trading volume might be a final volume 'climax' low and offer a favorable risk to reward in buying the stock; or, purchases of at the money or slightly in the money calls. I especially like counter-trend trades after completion of retracements in the 62-66 per cent area and especially when accompanied by an oversold RSI extreme (such as would be seen above on the NDX chart).


The Russell 2000 (RUT) chart remains bearish given the recent rally failure in the area of the former up trendline. I've highlighted resistance at 827, extending to the 835 area. It would take a sustained move above 835 to suggest that RUT was back on bullish track.

Near support is in the area of recent lows in the 811 to 808 area with next support highlighted at 798, representing a 50% Fibonacci retracement of the June to September run up. I've also noted potential support for the 785 area.


New Option Plays

Defense & Oil Services

by James Brown

Click here to email James Brown

Editor's Note:

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

(bullish ideas) TWC, ECL, AMP, HAE, WLK, ATW, HD, ITW

(bearish ideas) JEC, SHPG, MPC, THS


L-3 Communications - LLL - close: 75.85 change: +1.00

Stop Loss: 73.75
Target(s): 79.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of LLL have been consolidating under resistance at the $75.00 level for months. The stock has been building on a bullish trend of higher lows and higher highs the last few weeks. Finally the better than expected earnings report this week helped push LLL past resistance. LLL closed Friday at a new 2012 high.

I am suggesting we buy calls on a dip at $75.25. The risk of using this entry trigger is that LLL might continue to rally without an immediate pullback. Our target is $79.75.

Trigger @ 75.25

- Suggested Positions -

buy the Dec $75 call (LLL1222L75) current ask $2.25

Annotated Chart:

Entry on November xx at $ xx.xx
Average Daily Volume = 423 thousand
Listed on November 3, 2012


Oil States Intl. - OIS - close: 69.74 change: -2.00

Stop Loss: 72.25
Target(s): 65.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Oil and oil service stocks have been underperforming recently. OIS was definitely showing weakness on Friday with a -2.7% decline. The bounce attempt on Friday morning reversed and shares broke support at the $70.00 level. The next levels of likely support are $65.00 and $60.00.

I am suggesting small bearish positions on Monday morning with a stop loss at $72.25. Our short-term target is $65.25. More aggressive traders could aim lower.

- Suggested *Small* Positions -

buy the DEC $65 PUT (OIS1222x65) current ask $1.45

Annotated Chart:

Entry on November xx at $ xx.xx
Average Daily Volume = 589 thousand
Listed on November 3, 2012

In Play Updates and Reviews

Jobs Report Rally Reverses

by James Brown

Click here to email James Brown

Editor's Note:

The Friday morning rally on the better than expected jobs report didn't last very long and stocks ended the day in negative territory.

EVEP and WYNN were triggered.

IWM was stopped out. MDVN was closed as planned.

Current Portfolio:

CALL Play Updates

Deere & Co - DE - close: 85.60 change: -1.27

Stop Loss: 84.75
Target(s): 89.90
Current Option Gain/Loss: -29.5%
Time Frame: 3 to 4 weeks
New Positions: see below

11/03/12: The Friday morning rally in DE didn't last very long. Traders immediately sold into strength and DE gave back most of Thursday's gains. Odds look pretty good we'll see DE retest support near the $85.00-84.85 zone. If there is any further weakness then DE will hit our new stop loss at $84.75.

I am not suggesting new positions at this time.

- Suggested Positions -

Long NOV $87.50 call (DE1217k87.5) entry $0.88

11/01/12 new stop loss @ 84.75
10/26/12 triggered @ 85.55
10/25/12 adjust the entry trigger to $85.55, stop to $84.25


Entry on October 26 at $85.55
Average Daily Volume = 3.3 million
Listed on October 22, 2012

EV Energy Partners - EVEP - close: 65.38 change: -0.51

Stop Loss: 63.95
Target(s): 69.85
Current Option Gain/Loss: - 33.3%
Time Frame: exit prior to the Nov. 8th earnings report
New Positions: see below

11/03/12: Warning! I am urging caution here. The stock market's widespread rally on Friday morning was enough to push EVEP to a new relative high and above resistance near $65.00. Yet the stock reversed lower as the market gave back its gains. Unfortunately, our bullish trigger to buy calls had already been hit at $66.25. I am not suggesting new positions at this time.

We want to exit prior to the Nov. 8th earnings report.

- Suggested Positions -

Long NOV $65 call (EVEP1217k65) entry $2.85


Entry on November 02 at $66.25
Average Daily Volume = 111 thousand
Listed on October 27, 2012

Green Mountain Coffee Roasters - GMCR - close: 25.67 change: -0.67

Stop Loss: 23.90
Target(s): 29.50
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: see below

11/03/12: After big gains on Thursday it was not surprising to see some profit taking on Friday. It looks like the simple 150-dma remains technical resistance. I would look for a dip back into the $25.50-25.50 zone and wait for a bounce there before considering new bullish positions. More conservative traders might want to consider raising their stops closer to $25.00.

Earlier Comments:
GMCR could see a short squeeze. The most recent data listed short interest at 37% of the 127 million-share float. There is short-term technical resistance at the 50-dma.

*Small Positions* - Suggested Positions -

Long NOV $27 call (GMCR1217k27) entry $0.85

11/01/12 triggered @ 25.50


Entry on October xx at $ xx.xx
Average Daily Volume = 6.0 million
Listed on October 24, 2012

Harley-Davidson - HOG - close: 47.29 change: -0.32

Stop Loss: 45.40
Target(s): 52.25
Current Option Gain/Loss: -13.4%
Time Frame: 3 to 6 weeks
New Positions: see below

11/03/12: HOG tagged a new four-month high on Friday morning before reversing back into negative territory. I would not be surprised to see shares dip back into the $47.00-46.00 zone. Wait for a bounce there before considering new bullish positions.

Earlier Comments:
The $50.00 level could be round-number resistance and conservative traders may want to exit near $50.00. I am setting our exit target at $52.25 instead.

- Suggested Positions -

Long DEC $50 call (HOG1222L50) entry $0.82

11/01/12 triggered at $47.50


Entry on November 01 at $47.50
Average Daily Volume = 2.5 million
Listed on October 31, 2012

Stericycle, Inc. - SRCL - close: 94.77 change: -0.99

Stop Loss: 93.60
Target(s): 99.75 or $104.00
Current Option Gain/Loss: - 26.6%
Time Frame: 3 to 6 weeks
New Positions: see below

11/03/12: There was no follow through for SRCL on Thursday's bullish breakout. Shares failed at the $96.00 level and gave back nearly all of Thursday's gains. Furthermore Friday's session has produced a bearish engulfing candlestick reversal pattern.

More conservative traders may want to raise their stop loss. I am not suggesting new positions at this time. We'll reconsider if SRCL can bounce near the $94.00 area.

Earlier Comments:
Please note that I am setting two exit targets. Our conservative exit target is $99.85 since the $100.00 level could be round-number, psychological resistance. Our more aggressive, longer-term target is $104.00.

- Suggested Positions -

Long DEC $100 call (SRCL1222L100) Entry $0.75


Entry on November 2 at $95.98
Average Daily Volume = 509 thousand
Listed on November 1, 2012

Sempra Energy - SRE - close: 69.13 change: +0.14

Stop Loss: 68.40
Target(s): 72.00
Current Option Gain/Loss: +14.2%
Time Frame: Exit prior to the Nov. 6th earnings report
New Positions: see below

11/03/12: SRE displayed some relative strength by posting a small gain on Friday. Shares remain under round-number resistance at $70.00. The stock's trend is up but we're out of time. SRE is scheduled to report earnings on Tuesday. We will plan to exit positions on Monday at the closing bell. I am raising our stop loss to $68.40, which is just under the simple 10-dma.

- Suggested Positions -

Long DEC $70 call (SRE1222L70) Entry $0.70

11/03/12 new stop loss @ 68.40, prepare to exit on Monday at the closing bell


Entry on October 26 at $68.65
Average Daily Volume = 939 thousand
Listed on October 25, 2012

Wynn Resorts - WYNN - close: 120.80 change: -2.10

Stop Loss: 117.75
Target(s): 129.75
Current Option Gain/Loss: -11.3%
Time Frame: 3 to 6 weeks
New Positions: see below

11/03/12: We were expecting WYNN to see a little pullback after its Wednesday-Thursday rally. Sure enough WYNN did retrace its steps on Friday with a -1.7% decline. Unfortunately Friday's performance has also created a new bearish engulfing candlestick (one-day) reversal pattern. Now typically these patterns need to see confirmation but it's still a warning signal.

Our buy-the-dip trigger was hit at $121.25. At this point I would wait for a new bounce, possibly near $120 or more likely the rising 10-dma near $118 before considering new positions.

Earlier Comments:
WYNN can be a volatile stock so I am suggesting we keep our position size small to limit our risk.

- Suggested *Small* Positions -

Long DEC $125 call (WYNN1222L125) entry $3.00


Entry on November 02 at $121.25
Average Daily Volume = 1.8 million
Listed on November 1, 2012

PUT Play Updates

The Mosaic Co. - MOS - close: 52.19 change: -0.94

Stop Loss: 54.25
Target(s): 48.00
Current Option Gain/Loss: +13.8%
Time Frame: 3 to 6 weeks
New Positions: see below

11/03/12: The Friday morning rally attempt in MOS didn't last very long. Shares failed under the $54.00 level. The stock reversed into a -1.7% decline and set a new multi-month closing low. MOS looks poised to breakdown further but I am not suggesting new positions at this time.

- Suggested Positions -

Long NOV $55 PUT (MOS1217w55) entry $2.60

10/27/12 new stop loss @ 54.25
10/23/12 triggered @ 53.45


Entry on October 23 at $53.45
Average Daily Volume = 3.9 million
Listed on October 20, 2012

Schlumberger Ltd. - SLB - close: 68.77 change: -1.38

Stop Loss: 71.05
Target(s): 65.25
Current Option Gain/Loss: +21.7%
Time Frame: 3 to 4 weeks
New Positions: see below

11/03/12: So far so good with SLB. The bounce attempt failed at resistance on Friday morning and shares fell to a -1.9% decline. This is a new three-month closing low. Friday's drop looks like a new bearish entry point.

Earlier Comments:
SLB appears to have formed a bearish head-and-shoulders pattern, which would forecast a drop toward the $62 area. FYI: The Point & Figure chart for SLB is bearish with a $64 target.

- Suggested Positions -

Long NOV $70 PUT (SLB1217w70) entry $1.70

11/01/12 warning, today could be a bullish reversal
10/31/12 triggered @ 69.65


Entry on October 31 at $69.65
Average Daily Volume = 5.3 million
Listed on October 25, 2012


iShares Russell 2000 - IWM - close: 81.19 change: -1.30

Stop Loss: 81.45
Target(s): 86.00
Current Option Gain/Loss: -25.9%
Time Frame: several weeks
New Positions: see below

11/03/12: We had a relatively tight stop loss on our IWM trade. Friday's bearish reversal lower was too much and shares hit our stop loss at $81.45. Technically Friday's move looks like a bearish engulfing candlestick reversal pattern and a failed rally under the 50-dma and its six-week trend of lower highs. A close under what should be support at $80.00 would be a very bearish signal for the markets.

- Suggested Positions -

2013 Jan $85 call (IWM1319a85) entry $1.35 exit $1.00 (-25.9%)

11/02/12 stopped out at $81.45
11/01/12 triggered @ 82.25


Entry on November 01 at $82.25
Average Daily Volume = 35 million
Listed on October 27, 2012

Medivation, Inc. - MDVN - close: 47.50 change: -3.65

Stop Loss: 49.95
Target(s): 57.00
Current Option Gain/Loss: -72.5%
Time Frame: exit prior to the Nov. 8th earnings report (unconfirmed date)
New Positions: see below

11/03/12: It looks like we were correct to worry about MDVN. Shares had been acting weak the last couple of days. The failed rally on Thursday was a signal to exit. Our plan was to abandon ship immediately on Friday morning. The market's rally on Friday morning helped MDVN gap open higher at $51.84 but shares quickly reversed lower and plunged to a -7.1% drop. The long-term up trend has been broken.

- Suggested Positions -

Nov $55 CALL (MDVN1217K55) Entry $2.00 exit $0.55 (-72.5%)

11/02/12 planned exit at the open on Friday morning
11/01/12 prepare to exit immediately tomorrow morning
10/20/12 Friday's bounce looks like a new entry point.
10/17/12 MDVN is not cooperating and closed under the 50-dma, readers may want to exit immediately.
10/15/12 triggered @ 52.50


Entry on October 15 at $52.50
Average Daily Volume = 780 thousand
Listed on October 12, 2012