Option Investor

Daily Newsletter, Monday, 1/7/2013

Table of Contents

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

Market Wrap

Settlement Monday Replaces M&A Monday

by Linda Piazza

Click here to email Linda Piazza
Market Internals


The globe's bourses were in a profit-taking mode as U.S. traders woke this morning. However, the globe's banks had tended to outperform. Sunday, the Basel Committee of banking supervisors allowed banks four more years and more flexibility to increase their cash cushions.

That sector outperformance wasn't going to extend to the U.S. financials, however. Before the open, news hit first that Bank of America was settling with Fannie Mae. Soon, the focus on financials extended to include JPMorgan Chase and Wells Fargo who, together with Bank of America and other institutions, would pay $8.5 billion in a settlement over foreclosure abuse. The settlement would also include Citigroup, MetLife Bank, PNC Financial Services, Sovereign, SunTrust, U.S. Bank and Aurora.

By the U.S. close, the BKX, the KBW Banking Index, had dropped 0.34 percent. The S&P Banks Index had dropped 0.50 percent. The SPX fell 0.31 percent; the Dow, 0.38 percent; and the NDX, only 0.01 percent. The RUT dropped 0.38 percent; the Dow Jones Transports, 0.37 percent; and the SOX, 0.48 percent. You had to wonder if there wasn't some across-the-board lightening of the load with so many indices dropping in the 0.37-0.38-percent range. The Dow Jones Home Construction Index, the DJUSHB, was having none of that dropping business, however. Perhaps influenced by developments relating to the mortgage business, this index jumped 1.53 percent. Retailers also climbed although by a more modest 0.27 percent.

In the metals, silver futures outperformed gold futures. Gold futures were last at 1647.30 as this was typed and silver futures at 30.170. Neither was helped by weakness in dollar futures, at 80.34 as this was typed. Inter-market relationships have shifted a bit this last couple of weeks. The CME's report noted that crude prices probably received some support from the building belief that the Seaway pipeline "would go into effect" later this week. The /CL contract was at 93.27 as this report was typed.

Monday's Developments

Last night, many Asian bourses trended down off their morning highs to close in negative territory. Those included the Nikkei, closing down 0.83 percent; the Hang Seng, inching down 0.01 percent; and the Straits Times, dropping 0.22 percent. China's Shanghai Composite appeared to buck that trend, gaining 0.37 percent. However, my charting source inexplicably dropped the Shanghai Composite, and I could not verify the accuracy of the new quote.

Ahead of Thursday's ECB decision, European investors were in a take-profit mode. At the end-of-the-day, the FTSE 100 had lost 0.41 percent; the DAX, 0.56 percent; and the CAC 40, 0.68 percent. Spain's IBEX 35 dropped 0.20 percent. Many EU banks outperformed in the early part of the session, at least, due to the change Basel III requirements.

This week's new position by the Basel Committee, a softening of liquidity rules, was prompted by the fear that the earlier iteration of those Basel III rules would have stymied economic recovery. Now some of those freed-up funds can be used to help struggling economies and also increase profits at the affected financial institutions. The new standards will be phased in from 2015-2019. The change is considered significant, but of course it also significantly reduces the building up of cash reserves. A Reuters article, "EU banks race to 17-month high as liquidity rules softened," used Barclays as an example. As of September, the bank allegedly held a liquidity pool of 160 billion pounds. With the change in rules, 30 billion pounds of that would be surplus now. That surplus could be shifted from cash or low-paying government bonds into assets with higher interest payments. And higher risk, of course.

Story stocks started out this morning with Bank of America (BAC, 12.09, down 0.02 or 0.17 percent). The bank drew headlines by announcing that it will pay Fannie Mae (FNMA, 0.30, up 0.032 or 12.17 percent) $3.6 billion. This payment is meant to settle claims covering a period of nine years, to the end of 2008, relating to residential mortgage loans. The bank will buy back $6.75 billion in residential loans that it sold to Fannie Mae as part of the settlement, thereby reducing pretax income for Q4 by about $2.7 billion. In a move that Reuters predicted last Friday, the bank also agreed to sell about $306 billion in residential mortgage servicing rights to Walter Investment Management Corp. (WAC, 47.68, up 3.63 or 8.24 percent) and Nationstar Mortgage Holdings LLC (NSM, 38.83, up 5.60 or 16.85 percent). Chief Executive Brian Moynihan said these steps would help resolve the company's legacy mortgage issues. Many of those issues resulted from the bank's acquisition of Countrywide Financial Corporation.

Another financial, JPMorgan (JPM, 45.41, up 0.05 or 0.11 percent), has reportedly asked the court to dismiss a mortgage securities lawsuit in New York, but both BAC and JPM were soon to be involved in another big headline, together with Wells Fargo (WFC, 34.77, down 0.17 or 0.49 percent). They and seven other banks were agreeing to pay $8.5 billion for alleged foreclosure abuse.

A 2011 enforcement action had required a review process of foreclosure files. This settlement will end that process for the listed financial institutions, with homeowners wrongfully foreclosed on receiving $1,000 to $125,000, depending on the seriousness of the abuse. Up to 400,000 of the 3.8 million people in foreclosure in 2009-2010 might be due payments, the regulators estimated. The settlement provides for $3.3 billion in direct payments to borrowers and $5.2 billion for assistance such as loan modifications. Other financial institutions such as GMAC Mortgage, HSBC Finance Corp. and EMC Mortgage Corp. are included in the 2011 action but were not listed among those settling today.

Today could have been named Settlement Monday. Friday, ITT Education (ESI) announced a $13.2 million after-tax charge that would be taken against its Q4 net income, but today was the first day that investors had a chance to react. This charge results from a settlement with Sallie Mae regarding a loan agreement, the company said. Sallie Mae provides private education loans to ITT Educational Services' students. The charge will likely reduce ESI's earnings by about $0.56/share. Analysts had previously predicted earnings of $1.88 per share.

Apple (AAPL, 523.90, down 3.10 or 0.59 percent) must also be included among the story stocks, as it frequently is. This weekend, Jim detailed a DB warning that AAPL might disappoint on guidance for future quarters. Today Barclays cut its price target for AAPL from $800 to $740. AAPL countered with news that December App Store downloads numbered over 2 billion, and those for the full-year numbered almost 20 billion, with almost 500 million active accounts. Several news sources reported that AAPL's share of the smart phone marketplace in the U.S. rose to 53.3 percent for the 12 weeks leading up to November 25th. That represents a significant gain over the 35.8 percent share a year ago. AAPL was dropping in after-hours trading, down another $0.55 from the close.

Amazon (AMZN, 268.48, up 9.31 or 3.59 percent) may soon take over from AAPL as the stock-that-must-be-mentioned among the story stocks. Today price hit an all-time high. Morgan Stanley raised the status to an overweight rating. The intraday high was 269.73.

The first trial for Johnson & Johnson (JNJ, 71.40, down 0.15 or 0.21 percent) relating to artificial hip claims began today in Maryland. The company has more than 10,000 such claims against it.

As we head into the earnings season's big kickoff tomorrow, expectations remain low. Today Emergent BioSolutions (EBS, 16.71, down 0.13 or 0.77 percent) issued downside guidance for the full year this year and next. Is this a harbinger of what's to come? This announcement is probably not a harbinger unless it's followed up by similar notices from other companies. Biopharmaceutical companies are notoriously volatile, and this biopharm has an average daily volume of about 210,000 shares. This announcement was accompanied by one from another biopharm company with average daily volume of under 1 million shares, ViroPharma (YPHM, up 1.06 or 4.46 percent). This company said that 2013 revenues are now expected to be $450-475 million, with a midpoint of $462.5 million, rather than the prior estimated $466.33 million.

Onyx Pharmaceuticals, Inc. (ONXX, 82.13, up 0.75 or 0.92 percent) rose after reporting its fourth-quarter sales of Kyprolis, its myeloma drug, and other drugs for hard-to-treat cancers. The company was presenting before the J.P. Morgan Healthcare Conference.

Illumina (ILMN, 50.90, down 3.86 or 7.06 percent) was hit today. Swiss company Roche had announced this weekend that it did not intend to acquire the company. Analysts and investors had speculated for months that Roche might want the company. ILMN also announced a planned acquisition of Verinata Health.

Because trading can be treacherous in stocks with low average daily volume, I don't tend to cover events on companies with stocks trading an average under 1.0 million shares a day. However, as we try to gain some perspective on what this earning season might bring, it might be interesting to note the report of Commercial Metals (CMC, 16.02, up 0.48 or 3.09 percent). CMC beat on Q1 earnings but missed on revenues. The guidance, however, draws attention. The company reported that "there is growing evidence of an emerging recovery in domestic construction end markets." The company, however, noted caution among its customers and "deteriorating conditions in the Euro zone."

Dendreon (DNDN, 5.74, down 0.27 or 4.49 percent) said today that its preliminary revenue for Q4 would beat the expected $80.71 million. Their guided-higher estimate measures $85.5 million or $81.6 million on a pro-forma basis. DNDN also announced its appearance today at the J.P. Morgan Healthcare Conference in San Francisco. Someone liked what was said, apparently, as the stock was up in after-hours trading, $0.28 above its close, to 6.0199. Be careful of those after-hours trades, though.

Netflix (99.20, up 3.22 or 3.36 percent) joined the story stocks today. I first began reading rumors that Carl Icahn was out of the stock, rumors that I wasn't able to substantiate. While researching those rumors, I found information that Warner Brothers has licensed NFLX to show subscribers previous seasons of its serial dramas.

Another "Warner" rated inclusion here, Time Warner Cable (TWC, 97.26, down 0.49 or 0.50 percent). The company inked a deal with Roku Inc., allowing Time Warner subscribers to access Internet video and live TV from sites such as Google Inc. and Netflix (NFLX) via the Roku setup. Roku said this adds 300 live television channels to those it streams.

INTC (21.25, up 0.09 or 0.43 percent) announced a new smart phone chip. It's a new version of the Atom chip unveiled at a Consumer Electronics Show in Las Vegas. This new version is designed for low-cost tablets and smart phones and uses less power.

Of course, a big story here in the U.S. features the heightened rhetoric over the debt debate. At this point, little can be gained in spending paragraphs rehashing those statements. These are akin to the statements to the press ahead of a prize fight, having little to do as yet with the eventual outcome. Just know that at some point, volatilities will increase in our financial markets and we'll be again held captive to the effects of each such statement on the markets we trade. Plan accordingly.

Let's look at daily charts.


Those new to my Monday Wraps might find the following two paragraphs useful when interpreting my charts. Those who have read the Wraps can skip straight to the charts. I set up nested Keltner channels on my charts. It's a run-of-the-mill channeling system like the more familiar Bollinger Bands. As with those more familiar BB's, channel boundaries are often targets for upside or downside moves. They also mark levels where prices might find support or resistance on closes. When several channel lines converge, that potential resistance or support might appear stronger, just as it would if 20-, 50- and 100-sma's all converge in one spot.

For the benefit of subscribers, I mark potential upside and downside target/support/resistance levels with ovals, usually green for upside and red for downside. Orange ovals are sometimes used when the darker-colored ones would not allow for a clear examination of the next target. From now on, I will mention the nearest potential support or resistance level in the discussion on the chart, but not the further-out ones. They can be located on the charts if price breaks through the nearest levels on consistent daily closes. If an interpretation such as "support levels appear stronger than resistance, so up looks more likely than down" is possible, I'll tell you. Often we traders must be able to defend our trade against a move in either direction.

As with any type of potential support or resistance, those with profits should be protective of those profits as support or resistance is tested. If prices find support and climb, look to the next higher oval, even one just broken through, as potential resistance. Do the reverse when resistance is breached. Hopefully, this format provides you with the information you need without requiring all night to read as happens when I list each potential support or resistance level individually.

Annotated Daily Chart of the SPX:

The rectangles on the SPX chart are placed just as they were last Monday, although the color of some has been changed for legibility. The SPX ran up to the potential upside target where potential Keltner resistance met that at the top of a former price channel. That potential resistance converted into actual resistance as the SPX stalled there. So far, the stall is nothing more than a sideways move.

In many cases, pullbacks like today's can be discounted when they occur in the context of a sideways stall. However, even when the SPX is in is strongest rally mode, a candle like this one often predicts a fall back to retest the potential support of the red 9-ema. Bulls should be aware that this could happen and often does happen with this setup. Of course, bulls want to see that 9-ema support hold on daily closes if it is tested. If that support doesn't hold, the next potential downside targets are marked, too.

What if the SPX breaks to the upside rather than falls back to test the 9-ema? Don't believe too strongly in the breakout unless the SPX either slices cleanly through the 1471-1475 range and soars above it or is producing consistent daily closes it. This is the range where potential Keltner and historical resistance exist. The next potential Keltner target is marked, too, in case the 1471-1475 range is cleared.

Later, we'll look at the Dow Jones Transports' chart, a chart that sometimes has relevance for the SPX and OEX as well as the Dow. While the DJT's movements do not constitute a perfect market-timing tool, don't count on the Dow, SPX or OEX continuing too long in any direction if the DJT isn't leading the way or at least going along.

Annotated Daily Chart of the Dow:
[Insert Chart 010713dow03]

The Dow underperformed the SPX by Keltner measures and also by its failure to quite reach the top of its former price channel. The Dow might have underperformed by these measures, but its current consolidation pattern looks much like the SPX's. The Dow can sometimes trend sideways when the SPX is beginning to trend sideways-down. However, traders should be aware that a trip down to the red 9-ema's potential support looks at least as likely as a rise up to the 13570-13662 potential target, where various forms of potential resistance exist. If the Dow breaks out to the upside, don't believe too strongly in a breakout unless the Dow either forms consistent daily closes above 13570-13662 or else zooms right through that zone.

If the Dow dips to test support and that next marked support does not hold on daily closes, next potential downside targets are also marked.

Annotated Daily Chart of the NDX:

For more than a month, the NDX's pattern has diverged from the patterns seen on the previous two charts. The NDX has chopped back and forth at will across the flattening central Keltner channel averages. Such action rendered a prediction of next direction impossible, or, rather, possible with a 50 percent success rate.

Then the NDX broke down and then up. In doing so, the NDX created a broadening pattern. Such patterns are indicate of indecision--No kidding, right?--and emotion-based trading. What does this tell us about next direction? Not a thing. However, it tells us a lot about not risking too much in NDX- or MNX-related trades and the need to be protective of any profits in those trades. Something isn't right, both due to the this index's divergence from the others and the broadening pattern seen here. This is still at trendless market.

One problem with a broadening formation is that market participants find it difficult to determine when resistance and support levels have been breached. What level clearly constitutes a breakout? A second problem is that trading can become increasingly unpredictable within the formation, and that's where we've been for some time with the NDX.

The NDX has already begun slipping toward its red 9-ema. If that average is tested, bulls want to see support hold there on daily closes. Other potential support levels are marked, but we know that the NDX has tended to trade across those levels at will. The normal conclusion would be that if the NDX produces consistent daily closes beneath about 2670, it has the potential to fall all the way through that broadening formation again. However, the probability of such a drop after daily closes beneath about 2670 is difficult to assess now since all that action is contained within a broadening formation.

If the NDX should break higher, don't believe too strongly in an upside breakout until and unless it forms consistent daily closes above 2760-2785. Beyond that, there's not much that can be predicted by this chart.

Annotated Daily Chart of the RUT:

The RUT has a chart like none of the others. For example, the candle today shows an inside-day formation, with today's trading range encapsulated within Friday's opening and closing levels. Some traders use formation as a trading guideline for the next day, selling on breakdowns below today's low and buying on breakouts above it.

I don't tend to find trades based on inside-day patterns reliable in my own trading and I can point to some previous RUT candles that fit the parameters of inside-day trades but didn't see follow-through in the expected direction. We at least know this pattern is indicative of indecision.

Last Monday, the RUT was clearly outperforming by Keltner standards, not dropping anywhere near support that the other indices had already tested. Wednesday, the RUT broke to the upside. This chart does not have the same placement on the rectangles as were there last week. The RUT blew through everything, dragging those potential support levels higher and pushing the potential next target zone higher.

This index still outperforms the SPX, perhaps due to a combination of funds buying (January effect), piggy-backing retail and momentum traders buying, and panicked shorts covering less liquid small caps. We can count on some excesses built into RUT moves both to the upside and the downside.

What happens next? As this chart is set up now, the RUT is as likely to reach up toward 890, with 900 possibly an irresistible siren call at that point, as it is to drop to 861-868, and vice versa. Bulls should have profit plans in place for a test of 890-900, if that should occur.

If the RUT pulls back, bears need a profit-protecting plan in place, too. Unless the RUT slices quickly and cleanly through the 861-868 zone on a pullback, some would-be small-cap buyers who thought they missed last week's opportunity are likely waiting to jump on board and ride the gains to 890-900. However, if the RUT does slice through those support levels, every bounce back toward that 861-868 zone might be met by last week's buyers jumping ship. Subsequent potential downside targets are marked, if needed.

Annotated Daily Chart of the ^DJT:

I often advise keeping the Dow Jones Transports on the radar screen. Several times in years past, during periods of doom-and-gloom, the DJT broke to the upside and zoomed higher, presaging economic reports that showed at least a temporary improvement in economic conditions. That's been happening lately, too.

Back in the middle of December, the DJT broke above long-term resistance. The index zoomed higher then dropped back to retest the former resistance. That former resistance then held as support, and, in the classic manner for such a retest, the DJT zoomed even higher. Now the DJT has a potential upside Keltner target of 5628-5630. That level would also constitute a challenge of the 7/6/2011 high of 5627.85. If the RUT has the 890-900 zone singing a siren song to it, the DJT has that 2011 high doing the same thing.

However, if we eliminate the Keltner channels and just look at chart action, the DJT often follows candles such as today's with pullbacks to the 9-ema, at least. Therefore, a pullback to about 5400 looks about as likely as a rise to 5628-5630 and vice versa. Keep this index on your radar screen if you're trading Dow, SPX or OEX options. Be wary of making big directional bets on those indices if the DJT isn't corroborating their actions. This index can't be used as a market-timing tool, but it can and should be used to determine whether the underpinnings of the market are supporting your trades. Apply appropriate caution if that corroboration isn't in place.

Tomorrow's Economic and Earnings Releases

Richmond Federal Reserve Bank President Jeffrey Lacker will address the South Carolina Business and Industry Political Education Committee. He is scheduled to speak about the economic outlook. With last week's FOMC Minutes providing a somewhat different outlook on the time period for accommodative actions than the FOMC statement at the last meeting, his statements could prove important if they're markedly different than the current expectation. However, the primary focus now remains on the debt threat and earnings, with earnings perhaps trumping them all.

The important developments for tomorrow include the kickoff to the earnings season. The releases from China might also prove market moving, but we just don't know when those numbers will be released.

What about Tomorrow?

The wild movements of the last week exploded index prices out of the Keltner channels all the way up through the tops of the 60-minute setups. They were in momentum runs, a time of great danger--and great opportunity--to bulls and bears alike. This break all the way through the tops of the 60-minute charts was indicative of how outsized and unusual the movements were, with that impression echoed by a look at percentage gains and standard-deviation moves. The RUT moved 2.5 standard deviations last Wednesday, for example. Because of the outsized moves, I needed to roll to the two-hour charts for this Wrap. Otherwise, no nearby upside targets or resistance areas were visible.

Annotated Two-Hour Chart of the SPX:

The SPX approached but did not hit its highest potential upside target on this two-hour chart. Its strong surge higher pushed the potential target higher, too. The surge pushed that target from about 1466 when the SPX first broke out of the (purple) channel based on the 45-ema up to its current 1472-1475 level. Today, consistent two-hour closes at or beneath the channel line that had been providing support on closes late last week provides a quick visual of relative weakness when compared to the action last week. Bulls want to see today's pattern undone and last week's pattern of support on that line reinstituted. However, a drop toward 1448-1454 looks about as likely and perhaps slightly more likely than a push up toward 1465-1468, where next resistance might be found on two-hour closes.

The chart suggests that a drop into the 1448-1454 range, unless a strong momentum drop, could be accompanied by a bounce. It also suggests that if the bounce is tepid or stalls or beneath today's lows, bulls should be alert to the possibility of a rollover and quick drop to the next Keltner level marked. Watch out for a strong momentum push down through that support without realistic attempts to bounce.

Annotated Two-Hour Chart of the Dow:

Last week, the Dow also broke through the upper boundary of the (purple) Keltner channel based on the 45-ema. Prices soon dropped back to that channel line, however, never closely approaching the next potential upside target. The gravity of that channel proved too strong for the Dow to pull free.

Dow prices did manage to form most two-hour closes at or above that channel's support. This behavior wasn't the strongest showing after that first surge higher last Wednesday, but the price action did keep alive the possibility of moving up toward the next price target. Until today.

Today, the Dow fell through that support and did so more strongly than the SPX had done. The Dow dropped all the way into a test of the highs from the middle of December, a level akin to the SPX's as-yet-not-retested 1448 level.

The Dow bounced from today's low, just as the SPX's chart suggests the SPX might do if it tests the 1448 level. However, late in the day, the Dow's bounce from that potential support zone did appear to stall. That's not a pattern bulls want to see continued.

Bulls want to see a climb back above Friday's high followed by a reinstitution of the pattern of support at or above the 45-ema Keltner channel. This action would suggest that the Dow had enough strength to reach for that next upside target marked on the chart. However, as the chart is set up now, it appears that the 13435-13448 zone could provide resistance on two-hour closes if it is tested. Bulls need to be alert to that possibility. It would be better for bulls if the Dow just pushed hard through that level or gapped above it tomorrow morning. Prices lingering too long at or below the 13400 level or at or below Friday's highs may convince skittish longs to sell and lock in profits.

If the Dow drops tomorrow instead of climbs, potential support exists at the nearest red rectangle. If that support fails, further potential support levels are marked.

Annotated Two-Hour Chart of the NDX:

Like the Dow, the NDX today dropped to test a level akin to the SPX's as-yet-not-retested 1448 level. Like the Dow, the NDX then bounced. Like the Dow's, the NDX's bounce stalled although the NDX did at least find better support on the red 9-ema.

With the NDX's last two-hour candle sitting on a flattening 9-ema, it's difficult to predict next direction. A drop to 2700-2704 or perhaps even to the next potential support level look about as likely as a climb to 2737-2752. The pattern by late this morning had predicted a quick drop toward 2700 but the NDX steadied instead. The pattern predicting drop to 2700 has been negated and the picture clouded.

Annotated Two-Hour Chart of the Russell 2000:

Not even the two-hour chart was able to contain and explain the RUT's 2.5-standard deviation move last Wednesday. The RUT exploded up out of all those Keltner channels on this chart, too, warning us of the strong momentum move. We certainly did not need the confirmation from Keltner channel setups, did we? Anyone in RUT trades was either celebrating or ruing that move.

This chart doesn't reveal any further potential upside targets, but that doesn't mean that the RUT doesn't have any and can't climb. It does mean that the RUT was in such a high momentum move that it ran ahead of itself a bit, as the RUT often does.

We have seen the potential 890-ish upside target on the RUT's daily chart, and I think we have to extend that to 900.

We're left with the rising 9-ema on this two-hour chart as a benchmark. The RUT has so far maintained 2-hour closes at or above that flattening 9-ema. Bulls want to see the RUT rise high enough and consistently enough to turn that (red) 9-ema higher again. They want to see the RUT push right through Friday's high and keep going.

Bears want to see the RUT fall fast enough or consistently enough that the red 9-ema is turned lower. They should perhaps prepare for a potential bounce attempt from the 866-871 level if that is tested, but if such a bounce should occur, they want it to fail, preferably beneath a turning-lower 9-ema. Then they want the RUT to plunge through the support near 866-871.

When thinking about potential support for the RUT, we must always now think about that prior September intraday high of 868.50 and closing high of 864.70. As it turns out, these coincide with the current levels of the tops of the Keltner channels that the RUT broke through last week, with those channels now risen to the 866-871 level. Would-be bears who have been fading a pullback need to be aware that many would-be bulls may be waiting to buy there. Those bears should know ahead of time how they'll treat a test of that zone, if it's tested. They would prefer to see prices just barrel through the potential support as easily as they moved up through it.

Other potential support levels are marked on the chart. Although I have not included a Fibonacci chart to avoid any more clutter than is already there, it should be noted that all the potential support levels I've marked (and some I haven't) coincide with important Fib levels.

The reaction to earnings tomorrow could set the direction of the next move, to either retest broken-through support or reach for further highs.

I can tell you what looks most likely from these chart setups, but those chart setups have not been particularly predictive this last week. The SPX and DJT look ready to pull back, at least in a normal retest of support, while the Dow looks ready to go along for the ride, whatever direction those decide to go. The RUT? That inside day tells us that all the rest of traders are just as uncertain as we might be. It could go either way. It looks ready to pull back to its 9-ema. However, I keep anthropomorphizing the RUT, and it reminds me of my youngest golden retriever when I attempt to call him back to me when he's just spotted deer leaping through the fields behind our house. He looks back at me all right. He knows he's supposed to come back, but his body never turns back toward me. In an instant, he's whirled and taken off. Is the RUT going to obey or take off again? We'll find out, won't we?

As always, watch prices in relationship to those 9-ema's on the daily charts. If you're bullish, you want those 9-ema's climbing, and you want support on daily closes at or above those averages. You realize that after a strong climb that pulls too far away, it's just natural that prices either have to stall while the 9-ema's rise up beneath them or prices have to drop down to meet them, and then take off again. Every once in a while, prices have to drop to the bottoms of their smallest Keltner channels, but then they need to spring up again and reinstitute that pattern. Otherwise, something is wrong with the bullish pattern.

Something is wrong in the NDX, but we don't know how it will be resolved.


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New Option Plays

Financial Services

by James Brown

Click here to email James Brown


Fiserv, Inc. - FISV - close: 81.21 change: +0.51

Stop Loss: 79.75
Target(s): 88.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
FISV is in the financial services technology business dealing with electronic bill payment and other similar services. The stock is trading near all-time highs. Currently shares are hovering just beneath resistance near $81.50. A breakout could spark the next run higher.

I am suggesting a trigger to buy calls at $81.60. If triggered our target is $88.00 but we will plan on exiting positions prior to FISV's next earnings report (due in late January or early February). FYI: The Point & Figure chart for FISV is bullish with a $93 target.

Trigger @ 81.60

- Suggested Positions -

buy the Feb $80 call (FISV1316B80) current ask $2.75

Annotated Chart:

Entry on January xx at $ xx.xx
Average Daily Volume = 864 thousand
Listed on January 07, 2012

In Play Updates and Reviews

A Quiet Monday Session

by James Brown

Click here to email James Brown

Editor's Note:

Lack of news and economic data led to a quiet session on Monday. Most of the market drifted sideways with a little bit of profit taking following last week's big gains.

CNQR was triggered. We have closed our MON trade.

Current Portfolio:

CALL Play Updates

Concur Technologies - CNQR - close: 70.22 change: +0.44

Stop Loss: 68.40
Target(s): 74.50
Current Option Gain/Loss: - 9.0%
Time Frame: exit prior to the late January earnings report
New Positions: see below

01/07/13: CNQR kept the rally alive and broke through resistance near $70.00. Our trigger to buy calls was hit at $70.25. I would still consider new positions now. Our short-term target is $74.50. We do not want to hold over the late January earnings report. FYI: The Point & Figure chart for CNQR is bullish with an $81 target.

- Suggested Positions -

Long Feb $70 call (CNQR1316B70) entry $3.30

Entry on January 07 at $70.25
Average Daily Volume = 462 thousand
Listed on January 05, 2012

Canadian Pacific Railway - CP - close: 107.28 change: -0.04

Stop Loss: 103.75
Target(s): 109.00
Current Option Gain/Loss: +128.0%
Time Frame: 3 to 6 weeks
New Positions: see below

01/07/13: Monday proved to be a forgettable session for CP. The stock churned sideways in a narrow range. There is no change from my prior comments. Readers may want to start taking profits now.

Our plan was to use small positions to limit our risk.

- Suggested *SMALL* Positions -

Long Jan $105 call (CP1319a105) entry $1.25

01/05/13 new stop loss @ 103.75
01/02/13 new stop loss @ 101.75
12/21/12 trade opened on gap down at $101.46

Entry on December 21 at $101.46
Average Daily Volume = 961 thousand
Listed on December 20, 2012

OpenTable, Inc. - OPEN - close: 52.91 change: -0.19

Stop Loss: 49.40
Target(s): 58.00
Current Option Gain/Loss: + 0.3%
Time Frame: 4 to 6 weeks
New Positions: see below

01/07/13: I didn't see any news to explain the spike higher in OPEN this morning. Shares hit $66.30 before paring its gains and eventually closing in negative territory. If you were waiting for a dip near $52.00 you got it this afternoon.

Earlier Comments:
OPEN could see a short squeeze. The most recent data listed short interest at 42% of the very small 19.4 million share float. FYI: The Point & Figure chart for OPEN is bullish with a $73 target.

- Suggested Positions -

Long Feb $55 call (OPEN1316B55) entry $2.54

Entry on January 04 at $52.23
Average Daily Volume = 361 thousand
Listed on January 03, 2012

iShares Silver ETF - SLV - close: 29.18 change: -0.06

Stop Loss: 27.45
Target(s): 33.50
Current Option Gain/Loss: - 8.4%
Time Frame: 6 to 8 weeks
New Positions: see below

01/07/13: The U.S. dollar turned lower today but gold and silver prices failed to rally on its weakness. The SLV essentially drifted sideways today. Readers might want to wait for a new close above $29.50 or even $30.00 before considering new bullish positions. More cautious traders might want to raise their stop loss.

- Suggested Positions -

Long March $30 call (SLV1316c30) entry $0.95

Entry on December 31 at $29.07
Average Daily Volume = 11.6 million
Listed on December 29, 2012

Snap-on Inc - SNA - close: 79.65 change: -0.32

Stop Loss: 78.90
Target(s): 84.50
Current Option Gain/Loss: - 56.2%
Time Frame: 2 to 3 weeks
New Positions: see below

01/07/13: SNA spent Monday churning sideways underneath the $80.00 level. Odds seem to be growing that SNA is going to fill the gap and dip toward $79.00. On a short-term basis I would want to see a close above $80.50 before considering new bullish positions.

Earlier Comments:
I consider this a short-term trade. It will probably only last a few days. Our target is $84.50. I would use small positions!

- Suggested Positions - (Keep positions small)

Long Feb $85 call (SNA1316B85) entry $0.80

Entry on January 03 at $80.90
Average Daily Volume = 239 thousand
Listed on January 02, 2012

Sohu.com - SOHU - close: 47.82 change: -0.08

Stop Loss: 45.75
Target(s): 49.25
Current Option Gain/Loss: +31.7%
Time Frame: 3 to 6 weeks
New Positions: see below

01/07/13: SOHU didn't move much. The stock hovered just under the $48.00 level most of the session. I am not suggesting new positions.

Earlier Comments:
SOHU can be a volatile stock so we want to limit our position size to reduce our risk. If triggered our target is $49.75. More aggressive traders may want to aim higher since SOHU seems to have built a decent bottom over the last several months. With enough time you could aim for the $55-60 zone. FYI: The Point & Figure chart for SOHU is bullish with a $66 target.

- Suggested Positions -

Long Feb $47.50 call (SOHU1316b47.5) entry $2.05

01/05/13 new stop loss @ 45.75
01/02/13 adjust exit down to $49.25
SOHU almost hit our target at $49.75 but the high today was only $49.70. We don't want that to happen again.
12/29/12 new stop loss @ 43.45

Entry on December 27 at $45.20
Average Daily Volume = 606 thousand
Listed on December 26, 2012

Trimble Navigation - TRMB - close: 61.73 change: -0.21

Stop Loss: 59.75
Target(s): 64.75
Current Option Gain/Loss: - 8.8%
Time Frame: 2 to 3 weeks
New Positions: see below

01/07/13: TRMB spent most of the day chopping sideways between $61.50 and $62.50. I suspect we could see shares dip back toward the $60.00 level. Readers could wait for a dip or a bounce near $60 as our next entry point.

We are aiming for $64.75 but more aggressive traders could aim higher. We do want to keep our position size small to limit our risk.

- Suggested Positions - (Keep positions small)

Long Jan $60 call (TRMB1319a60) entry $2.25

Entry on January 03 at $61.32
Average Daily Volume = 750 thousand
Listed on January 02, 2012

The Travelers Companies - TRV - close: 73.06 change: -1.00

Stop Loss: 72.85
Target(s): 79.00
Current Option Gain/Loss: Unopened
Time Frame: exit prior to earnings on Jan. 22nd
New Positions: Yes, see below

01/07/13: TRV displayed relative weakness today with a -1.35% decline. Shares saw consistent selling for the 30 minutes of trading. Big picture nothing has changed for us. We are waiting for a bullish breakout.

Earlier Comments:
The stock's long-term trend is up and now TRV is poised to breakout to new highs. I am suggesting a trigger to buy calls at $74.60. More conservative traders may want to wait for a breakout past the $75.00 level instead. If triggered our target is $79.00 but we may have to abandon this play early to exit prior to earnings.

FYI: The Point & Figure chart for TRV is bullish with an $82 target. It's also poised to produce a brand new triple-top breakout buy signal soon.

Trigger @ 74.60

- Suggested Positions -

buy the Feb $75 call (TRV1316B75)

Entry on January xx at $ xx.xx
Average Daily Volume = 2.3 million
Listed on January 05, 2012

PUT Play Updates

Currently we do not have any active put trades.


Monsanto Co. - MON - close: 95.94 change: -0.17

Stop Loss: 94.40
Target(s): 99.50
Current Option Gain/Loss: + 72.8%
Time Frame: exit prior to Jan 8th.
New Positions: see below

01/07/13: MON saw a little volatility this morning but bounced back to spend the rest of the day hovering just under the $96.00 level. Our plan was to exit today at the closing bell to avoid holding over the earnings report.

Earlier Comments:
Our plan was to keep our position size small.

*Small Positions*

- Suggested Positions -

2013 Jan $95 call (MON1319a95) entry $1.25 exit $2.16 (+72.8%)

01/07/13 planned exit at the closing bell
01/05/13 prepare to exit on Monday at the close, new stop loss @ 94.40
01/02/13 new stop loss @ 92.45
12/24/12 triggered @ 93.05


Entry on December 24 at $93.05
Average Daily Volume = 2.2 million
Listed on December 19, 2012