Option Investor

Daily Newsletter, Monday, 1/14/2013

Table of Contents

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

Market Wrap

Defining "Substantive"

by Linda Piazza

Click here to email Linda Piazza
Market Internals


Speaking last night in Hong Kong, Chicago Federal Reserve President Charlie Evans attempted to define a word that has puzzled market watchers since the statement accompanying the last FOMC decision. That word is substantive.

What constitutes substantive improvement in labor markets, the type of improvement needed before the Fed would stop asset purchases? According to President Evans, examples include payroll employment increases of 200,000 a month for several months in a row or 1 million new jobs over a six-month period. He believes that bringing the unemployment down to 6.5 percent would require much longer than meeting those less stringent requirements and would likely not occur until the middle of 2015. However, did you catch that the requirements for stopping asset purchases could stop sooner? That was a point that another Fed speaker was to make absolutely clear later in the day.

President Evans' statements are only the latest among those of Federal Reserve presidents attempting to clarify what wasn't clear. St. Louis Federal President James Bullard said recently that if the U.S. could attain 7 percent unemployment rates by the end of the year, it was possible the Fed would stop asset purchases. Evans didn't think the U.S. would see 7 percent by the end of this year, however. We'll see later in the article what others thought.

Did that clarify the Fed's likely actions for you? Not so much for me. Perhaps other market participants were also sitting at their desks with tilted heads and squinted eyes as they thought about those clarifications. Market participants didn't seem to know where to send prices as we heard other Fed speakers and President Obama today and waited for Federal Reserve Chairman Ben Bernanke's speech after the close this afternoon. Those other Fed speakers seemed to be shortening the time frame for asset purchases, and if our equity markets didn't quite know where to go, they knew it wasn't up just yet.

Our indices turned in mixed performances on low volume today. The SPX dropped 0.09 percent, but the Dow rose 0.14 percent. The NDX dropped 0.46 percent. The RUT dropped 0.23 percent, and the SOX, 0.24 percent. Financials as represented by the BIX and BKX dropped 0.63 and 0.43 percent, respectively, after WFC's report and ahead of others from financials later in the week. WFC dropped 0.94 percent after last week's report.

In commodities, the CL slid up and down, but all within a slightly rising channel that has contained it since the beginning of the year. It's at 94.22 as this report is prepared, producing another of those small-bodied candles on the daily chart. The /ng natural gas moved up, at 3.381 as this report is prepared, with the CMEGroup saying that a changing weather reported prompted the climb. In metals, the /GC contract stayed within the tightening triangle formation that has been setting up on the daily chart since the middle of December, with experts still talking about it trading now like a commodity and not like a hedge. That contract was at 1667.1 as I type. The /SI silver contract continued the late-afternoon bounce off Friday's lows and is at 31.03 as this report is prepared.

Monday's Developments

Asian bourses turned in mixed performances last night although more climbed than dropped. The Nikkei 225 jumped up 1.40 percent as the yen dropped against other currencies. The Hang Seng rose 0.64 percent, but the Straits Times dropped 0.31 percent. China's Shanghai Composite soared 3.1 percent higher after regulators raised foreign-investment quotas.

European bourses had their own reasons for celebrating, too, at least early in the session. Their celebrations fizzled out before the close. Germany's Finance Minister Wolfgang Schaeuble announced that the euro zone had put the worst of the cataclysm behind them. He, however, acknowledges the hurdle of upcoming elections in Italy and also wants more time to put together a bailout package for Cyprus. Today, the FTSE 100 lost 0.22 percent; the DAX gained 0.18 percent; and the CAC 40 inched up 0.06 percent. Spain's IBEX 35 lost 0.38 percent.

The FOMC site featured a heavy speaking schedule for FOMC members during the day today, ahead of Chairman Bernanke's conversation after the close. Federal Reserve Bank of San Francisco President John Williams addressed the SEMI 2013 Industry Strategy Symposium. He did not limit his talk to the SEMI industry, but instead said that he wanted to address the "uneven progress of the U.S." economy, his outlook and the Federal Reserve's plans to help the economy.

Williams addressed the change in the way the FOMC talked about policy and the tying of policy to thresholds for unemployment and inflation. He labeled uncertainty "a significant factor" that was holding back economic recovery. His personal belief is that final GDP will register about 1.75 percent in 2012 and that it will expand to about 2.5 percent this year. He believes that unemployment will come down, but gradually, staying at or above 7 percent "at least through the end of 2014." He anticipates that the Fed's purchases of longer-term Treasury securities and mortgage-backed securities will continue until the middle half of this year. That might have been startling news to some market participants who had assumed they would last longer, but this was a view that was to be repeated later.

Williams also discussed the inflation component of the Fed's statement. Some market commentators have found it easier to understand the cause/effect relationship of Fed actions and inflation than it is to understand why Fed actions have been tied to employment rates.

A little later, Federal Reserve Bank of Atlanta's President Dennis Lockhart spoke before the Rotary Club of Atlanta, and he also discussed uncertainty's effect on the U.S. economy in what was beginning to feel like a theme for the day. He, as did President Williams, blamed Congress and the administration for some of that uncertainty, due to fiscal-cliff deliberations and the way they were handled. He called 2013 a pivotal year, one in which some of the uncertainties hindering businesses and consumers could be resolved, with an unvoiced appended "if politicians would just get their act together" sentiment. He wanted us to know that "expansionary monetary policy based on bond purchases does not increase the fiscal deficit or the federal debt." He also wanted listeners to know that the FOMC's intention was not to enable "Congress to kick the can down the road." He asserted that the intention of the FOMC is not to influence such deliberations.

He clarified that the 6-1/2 percent unemployment threshold so debated "does not apply to the FOMC's asset purchase programs." He believes that it will take almost three years to reach that threshold. He cautions that there is another either/or condition to accommodative policies: inflation that rises too high or threatens to do so.

He warned that "open ended" purchases of longer-term Treasuries does not equate "without bound." He summed up the situation by noting that "we begin the year in a mode of slow overall growth, tolerable inflation, and gradual progress on unemployment." He mentioned the perception in the Southeast of "pent-up demand."

Does that sound as if market participants are being prepared for a withdrawal of the Fed's purchasing of mortgage-backed securities and longer-term Treasury securities sooner, rather than later? That's the way it sounded to me, and equity markets appeared to soften a bit.

If FOMC speakers addressed uncertainty, President Obama spoke about certainties. In a news conference this afternoon, he warned that a refusal to lift the debt ceiling would trigger a debt default, calling that "a self-inflicted wound." He warned that some seniors might not receive Social Security benefits. He stated that he would be willing to assume authority for raising the limit if Congress doesn't act. He said we must "stop lurching from crisis to crisis to crisis." Certainly, the Republican side will have something to say, too, as deadlines approach, as they're unlikely to agree to President Obama's assessment or solutions.

Story stocks today started out with United Parcel Service Inc. UPS (79.24, up 1.32 or 1.69 percent) announced that European regulators would likely block its takeover of parcel-delivery firm TNT Express NV. UPS withdrew its bid for the company. Articles noted that bankers missed out on $55 million in fees, with Goldman Sachs, Bank of America and UBS among those companies missing out on those fees. A Reuters article by Sophie Sassard and Anjuli Davies notes that although the value of global M&A deals has inched up this year, the number of large deals has gone down, and that means lower fees for these institutions.

Goldman Sachs (GS, 136.13, down 1.00 or 0.73 percent) also made news overseas ahead of its earnings report later this week. In London, news reports wondered if the company would postpone some bonuses until April, when the new tax year with its lower top tax rates would go into effect in the U.K. The speculators do not believe the company would defer 2012 bonuses this way. Instead, they conjecture that the company might treat bonuses deferred from 2009-2011 in this manner. In the U.K., regulators have insisted on deferred bonuses, seen as one way of curtailing huge risk-taking, and now there are all those deferred bonuses waiting to be paid in stock. When bonuses are held up in this manner, the theory is that employees know their bonuses can be clawed back if excessive risks are discovered.

This possible further deferment of 2009-2011 bonuses for more favorable tax treatment is merely speculation right now, until Goldman Sachs announces its intentions one way or the other. This speculation arose in part because the company paid out some deferred bonuses early in the U.S. so that they would be subject to lower taxes. One article in the U.K.'s Guardian pointedly contrasts this action to the statements of GS's chief executive Lloyd Blankfein about the appropriateness of tax rises for the wealthiest.

The Nikkei newswire told a story on Apple (AAPL, 501.75, down 18.55 or 3.57 percent), too, sending that stock lower in Asian trading. The newswire reported, in a story also picked up here in the U.S., that slipping sales of the iPhone have resulted in scaled-back production plans. The WSJ, for example, reported that orders for iPhone 5 screens for the current quarter are about half the previously planned size. Competition from Samsung's Android-based models and cheap smartphones from Chinese manufacturers may have dented demand for AAPL's products. AAPL bounced 0.85 off that closing level in afterhours trading.

Facebook (FB, 30.95, down 0.77 or 2.44 percent) didn't like AAPL getting so much attention. The company has invited media representatives to its Menlo Park campus tomorrow at 1:00 EST for an announcement. No details have been revealed, rendering this announcement akin to AAPL's mysterious announcements of the past. Shareholders hope that they live up to the hype that's being created. Speculation abounds that they could be announcing a new product launch since the invitation was one to "come see what we're building." One caution: the consensus is that FB's press conferences aren't greeted with the same uniform approval that AAPL's once were, and investors didn't appear too dazzled by the announcement today. FB dropped in the last hour of trading.

Transocean (RIG, 53.93, down 0.16 or 0.30 percent) joined the list of story stocks today. The company reported that Carl Icahn had notified the company that he was seeking approval to potentially acquire voting securities that would be more than a $682.1 million threshold established by the Hart-Scott-Rodino Act but less than what would amount to 25 percent of the outstanding voting securities, another threshold established by the Act. The Hart-Scott-Rodino Antitrust Improvements Act of 1976 amounts to an amendment of a previous antitrust act. This Hart-Scott-Rodino act requires that certain types of acquisitions, transfers of securities or assets, or mergers can not be completed until a detailed filing has been made with the Department of Justice and U.S. Federal Trade Commissions. Those entities then have to give their blessing before the actions can be completed. In the notice, Icahn revealed that he and his affiliates hold shares that total 1.56 percent of the issued shares and that he also has set up a synthetic long position representing 1.70 percent of the shares.

Dell (DELL, 12.29, up 1.41 or 12.96 percent) made the list of story stocks, jumping higher in mid-afternoon after Bloomberg speculated that the company was in talks to go private. The company reportedly is in talks with two private equity firms. Dell would not comment on the report, at least not intially.

Other story stocks included reporting company PPG Industries Inc. (PPG, 141.03, down 1.07 or 0.75 percent). PPG, the globe's second-largest paint manufacturer, reported before the open. PPG might prefer the title "specialty products and coatings company." The company reported net income of $227 million or $1.46 a share. The Q4 results constituted a record, according to the company's press release, with sales up four percent. The year-ago levels had been $126 million or $1.39 a share.

If nonrecurring costs related to acquisitions and the divestitures are excluded, the company reported $238 million or $1.53 per share. The company is separating its commodity chemicals business and plans to merge part of its business with a subsidiary of Georgia Gulf Corp. (GGC, 50.39, up 0.41 or 0.82 percent). Analysts had anticipated the $1.53 a share, so the EPS number was in line. Revenue was higher than anticipated.

The full-year results indicated higher sales but lower profit, with that unfavorable comparison one that the company blamed on favorable tax rate adjustments in the comparable quarter in 2011. The forward guidance mentioned a pickup in growth prospects in Asia while activity levels in Europe remained restrained.

A number of related releases today concerned planned mergers or acquisitions for PPG. GGC announced a new company name for its subsidiary's merger with PPG, with the new company to be named Axiall Corporation and trade on the NYSE with the ticker symbol AXLL. PPG also announced that it was in discussions with Essilor about the future of their joint venture, Transitions Optical. PPG warned that the company did not know the outcome of those discussions, and provided three possible outcomes that basically covered all the bases ranging from a new JV structure, PPG buying all or part of Essilor's stake or Essilor buying PPG's.

Fifth and Pacific Companies, Inc. (FNP, 14.31, up 1.47 or 11.45 percent), which almost sounds more like a stately bank than the designer and manufacturer of apparel and accessories for women and girls, reported earnings that disappointed. In particular, Juicy Couture sales disappointed, but the CEO says he believes that the problems at Juicy Couture are being corrected. Same-store sales at kate spade were strong, and those at Lucky grew 3 percent. The CEO delivered full-year guidance at the lower end of the prior guidance, with Sandy receiving some of the blame along with Juicy Couture.

Francesca (FRAN, 27.22, down 1.01 or 3.58 percent) provided another outlook on the retail sector, a different one. The company raised its guidance for the fourth quarter. The company cited the performance during the holiday as well as response to the merchandizing strategy at the company's boutiques when it raised guidance. The stock dropped another 0.47 in afterhours trading.

After the close, Lululemon (LULU, 72.30, up 1.46 or 2.06 percent) raised Q4 expectations for revenue to the high end of its former range, and said earnings would be $0.74/share, higher than the previous range of $0.73. However, that wasn't enough to impress investors. The stock dropped sharply in afterhours trading, at $67.65 as this report was prepared.

Other companies reported today, of course, but the number of Fed speakers and the importance of their messages squeezed out room for all but the most important of those announcements.

Also after the close, perhaps while FOMC Chairman Ben Bernanke was speaking, Treasury Secretary Timothy Geithner said the U.S. could reach the debt limit by the middle of February or early March. This news was delivered in a letter to House Speaker John Boehner.

FOMC Chairman Ben Bernanke spoke at the University of Michigan in Ann Arbor in what was billed as a conversation with the Ford School Dean Susan M. Collins. The topic was monetary policy and the U.S. economy, with audience questions allowed.

The chairman did address the Fed's change from offering a specific date when policy might change to instead giving the conditions under which it might change. When asked by a student if that change had helped make the statements more effective or complicated the message, he said it was up to the rest of us to determine that. However, if a date were provided and conditions changed, market participants would not know how to recalibrate the date by which the Fed might change policy. "If using these guideposts" such as inflation and unemployment thresholds, and conditions improve, he said, "investors in the market would say, the date we reach this seems to be a little closer." However, during this discussion, he did not speculate on any specific date by which asset purchases might be stopped, as some of the other FOMC members had done today, but it's possible that such statements might have occurred before I was able to tune into the broadcast from the university.

The chairman did note that the Fed's policies have been non-standard and aggressive. He acknowledged that some of those policies were going to work and some weren't, but that the Federal Reserve in the 1930's may have erred by sticking only to standard policies. When questioned about the constitutionality of the central bank, he noted that the law establishing the central bank had been in place since 1913.

Other moments of interest included the moment when a student questioned the Fed Chairman about whether the Treasury would have accepted the "trillion dollar platinum coin." The chairman's answer? "I'm not going to give that any oxygen." He noted that the Treasury had this past weekend issued a statement, approved by the Federal Reserve, that this issuance wouldn't have been the right tactic to take, presenting all sorts of legal and other issues. This was a good lead-in to question about the debt ceiling.

On prompting by a student who asked if the debt ceiling had a practical purpose, he answered no, that it had only symbolic value and that we were among the very few countries with such a ceiling. He continued by saying that if you borrowed $100, told someone to spend it, but collected only $80 to make up for it, logic told you that you were going to have to borrow money to make up the amount you were short. He said allowing the country to hit the debt ceiling without raising it would be akin to saying, "We're spending too much. Let's stop paying the credit card bill." He emphasized several times the cost of default to our economy.

Someone questioned him about the idea of raising interest rates to force Congress to take action in fiscal policy, but he didn't agree that would be a viable solution. He said, "It's not up to the Fed to address what the administration and Congress are doing," other than warning of the costs of a failure to resolve the issue. Just as he wants to allow the administration and Congress independence, he believes that much depends on having a strong and independent central bank. He was questioned about a bill calling for an audit of the Federal Reserve. He said that was a misnomer, that most people assumed it was an audit of their books, which are already thoroughly audited. This bill would allow someone in Congress who didn't like a monetary decision to send GAO auditors to the Federal Reserve and audit the process that went into making that decision and perhaps rescind or revise it. "This bill would strike at the very heart" of the independence the Federal Reserve needs to keep disgruntled politicians from undoing Federal Reserve independence.

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 SPX has reinstituted a pattern of strong climbs followed by sideways move and a quick dip back to test a rising red 9-ema. That's the index's pattern when it's climbing strongly. In the context of that pattern, the SPX looks as if it's begun the process of the sideways move that is followed by a dip to the red 9-ema. We would normally expect that to happen in the next 2-4 days and would normally not expect the SPX to close too much above last Thursday's closing high until it dips to the 9-ema. In other words, while SPX might produce an intraday high at the next target near 1475-1479, we probably wouldn't expect it to close above that before its next dip to test the red 9-ema. If this pattern is to continue, when the SPX did dip to the 9-ema, we would expect it to bounce back from that test.

In this case, the SPX has managed several days of closes above its September closing high of 1465.77 but below September's intraday high of 1474.51. Normal patterns will likely not be the governing driver here with the SPX maintaining closes above that September closing high. Bulls and bears are balancing not just recent gains but perhaps also their portfolios, anticipating what they might see as earnings season progresses, the resolution--or not--of the debt crisis, and whatever might happen next in Europe.

For now, this chart shows us that the SPX has resumed its rally mode but that it may be readying for a pullback to the 9-ema or even the bottom of its smallest grey channel, with both those levels marked on the chart. The setup suggests that a quick pop up toward 1475-1476 could be part of the sideways movement prior to a 9-ema retest. The setup suggests not to believe too strongly in a new upside breakout until and unless the breakout is confirmed by sustained daily closes above about 1478. Furthermore, the setup suggests that sustained daily closes above 1478 set a new potential upside target, also marked on the chart.

If the SPX should retest the red 9-ema and that support should fail, the next downside target would likely be in the 1444-1450 zone.

Annotated Daily Chart of the Dow:

We see the same dynamic with the Dow, except that the SPX's sideways movement has been transformed to a sideways-up kind of pattern sketched by small-bodied candles. We can also note, however, something not quite as happy a comparison. The Dow has not yet topped September's closing or intraday highs.

Like the SPX, the Dow looks due for a pullback to its red 9-ema sometime this week. In the normal course of trading, that would probably happen before the Dow reached up to the 13540-13600 next target zone. However, the Dow's sister index, the Dow Jones Transports, powers ever higher. I wouldn't bet too strongly against a further Dow climb as long as the transports are still powering higher, but do be careful with bullish Dow-related bets if the transports roll down again. The transports can move fast, the Dow doesn't tend to move too far in any direction if the transports are headed a different direction, and the Dow is already underperforming her sister index. We will also see later that the transports are reaching a key potential resistance level.

If the Dow follows her sister index higher, watch for potential resistance on daily closes to kick in at the 13540 level and to extend up toward the October high of 13661.87. The chart suggests that traders need to see sustained daily closes above 13590-13600 before they believe too strongly in a breakout. The next potential upside target is marked on the chart in the case of such a breakout.

If the Dow instead tests the 9-ema, bull want to see daily closes at or above that average and then a bounce from that average. If the Dow fails a 9-ema retest, it could drop to test the lower boundary of its smallest channel. That's near 13250 now, but it will move in the direction of price movement. It could be higher or lower before it's retested.

Annotated Daily Chart of the NDX:

AAPL pressured the NDX, of course, but the NDX did bounce off the low of the day. This index's prices have remained within an unstable broadening formation. At least the NDX has stabilized enough to form consistent daily closes above a rising 9-ema, with several tests of this moving average over the last two weeks. Bulls want or need to see that pattern continue.

This chart gives a slight preference to the possibility of the NDX rising up to test what appears to be strengthening resistance in the 2760-2790 resistance band rather than dropping to test potential support in the 2680-2700 zone. However, the differences in outlook can be quickly changed. With the broadening band's known instability, it's hazardous to guess which move will happen next, but the bulls will be cheered if prices stay above 2680-2700 and resist falling into the bottom half of that broadening formation. Other potential targets are marked if the NDX should sustain daily closes that show either an upside breakout or a downside breakdown.

Annotated Daily Chart of the RUT:

The RUT has been the strongest of these indices. It broke out on 1/2, setting a new potential upside target and then confirming the breakout by consistent daily closes above a rising 9-ema. Since the last strong breakout on 1/2, it has been consolidating in a sideways-up pattern with mostly small-bodied candles. This action has not been strong enough to meet the next potential upside target, a target that should have been approachable with the siren call of 900 beckoning. The RUT may require another trip down to retest the red 9-ema's support before it can climb any further, although that's just speculation at this point.

This chart suggests that a test of the red 9-ema and a test of the 893-895 zone are equally attainable. The chart slightly favors a retest of the 9-ema, but we know better than to trust these sorts of setups with the RUT. Traders need to know that their RUT- or IWM-related trades can withstand either test without sustaining unmanageable losses in the process. Either move could occur quickly.

If the RUT drops to retest the 9-ema, traders should also be aware that it's been a long time, even for the RUT, since it has last tested the lower boundary of its smallest Keltner channel, now near 862. As the chart is set up, it looks as if a strong thrust down would be required to break through what looks like substantial potential support building from 869-874. However, if that break should occur, 860-862 could be tested.

Annotated Daily Chart of the Dow Jones Transports:

Traders should continue to keep the transports ($DJT on many charting systems, not to be confused with the Nasdaq's TRAN) on their radar screens. The next potential Keltner target, also the site of potentially strong resistance on daily closes, has risen to nearly coincide with the prior swing high of 5627.85. The transports have been on a momentum run higher, so it would be silly to suggest that it can't reach that next target. It would also be silly to ignore the long length of time since the transports have dropped back to retest the red 9-ema's support, much less the bottom of its smallest Keltner channel. I don't know whether market participants will grow warier or giddier if the transports more closely approach that next barrier and new breakout level, but market participants should watch for either a test of that 5627-5650 zone or a drop into a retest of the 5477-5513 zone. Either could occur at any time.

Tomorrow's Economic and Earnings Releases

President Eric Rosengren of the Federal Reserve Bank of Boston, a voting member for 2013, will address the economic outlook, speaking before the Greater Providence Chamber in Rhode Island. President Narayana Kocherlakota of the Minneapolis Federal Reserve Bank will talk about Fed actions and the macroeconomy. President Kocherlakota will be addressing the Financial Planners Association of Minnesota in Golden Valley, Minnesota. It was not clear whether there would be a question-and-answer session after either address.

What about Tomorrow?

I've dialed down from last week's two-hour charts to one-hour charts for this week. The action was tame enough last week to bring most indices back within those channeling systems on this time frame although they had all broken out the previous week. Only the RUT remained outside the normal outer boundaries of this charting system on this time frame, but today, even the RUT sank back inside the channel system's outer boundaries.

Annotated 60-Minute Chart of the SPX:

The SPX had been finding support on 60-minute closes along the top of its (purple) 45-ema-based Keltner channel. Now it's finding resistance on 60-minute closes there. A gap higher tomorrow could take care of that little matter as long as such a gap is maintained through the first couple of hours. If so, this chart suggests a next potential target at 1481-1485, given that the Keltner channel line will be pushed up by a sustained or strong climb.

Barring a gap or just a strong thrust up through that resistance early tomorrow, the setup suggests that it's more likely for the SPX to drop toward 1462-1465. Bulls hope that such a drop would be a simple recharge before another push higher. A failure to hold that support on sustained 60-minute closes sets the next downside target.

Annotated 60-Minute Chart of the Dow:

The Dow has been finding support on 60-minute closes along its rising 9-ema, now closely converging with the outer channel line (purple) based on the 45-ema. As long as these closes are maintained above the red 9-ema, the Dow has set a potential upside target near 13600. However, those increasingly small candles cling to that support and are not launching themselves upward, so this is hardly a totally convincing picture.

If the Dow should instead tumble through the 9-ema's support and not soon reverse, it sets a next potential downside target at 13450-13460, where the grey channel line is likely to drop on a downdraft. If that support fails on sustained 60-minute closes, a test of the 13400-13415 level could be next.

Annotated 60-Minute Chart of the NDX:

The NDX's 60-minute chart paints the picture of what can happen to other indices. After beginning to find resistance at the upper boundary of the (purple) Keltner channel based on the 45-ema, the NDX dropped through to test potential support levels I've marked on other charts. The NDX's failure to find consistent support or resistance on the 9-ema as the day closed makes its equally likely that the NDX could drop next to 2720-2727 or climb to 2746-2753. Next potential targets are marked in case those support or resistance levels do not hold when tested.

Annotated 60-Minute Chart of the Russell 2000:

The widest Keltner channel on this charting system is the pink channel, but the RUT broke out of that channel and dragged the smaller channels with it. On retests, the RUT had found support on 60-minute closes on that channel's top boundary until this afternoon, when it began slipping back beneath that channel again on 60-minute closes. The RUT has been corralled, contained, channeled again. At least, it has temporarily been corralled.

The setup suggests a pullback to 875-877, to retest the potential support there. If that should fail on sustained 60-minute closes, the next potential downside target is marked.

However, we can't assume that the RUT will drop just because the setup suggests that it will. A small gap of a few points will bring the RUT back above potential resistance from 880-882 and erase that other possible scenario. If such a gap or early runup holds on sustained 60-minute closes or maybe just beyond the first couple of hours of trading, the RUT is in breakout mode again, and anything goes.

I didn't read too much chatter on blogs or other such sites about those 2013 comments from Fed speakers today. However, I wonder if they won't begin to weigh on traders, together with the heightened debt-ceiling rhetoric seen today. It's just anecdotal so far, but doesn't it also seem that companies are being punished when they report in-line or even raise expectations? We know how these indices are supposed to behave when they're in strongest rally mode, so now we watch for any changes.

New Option Plays


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) VMW, KEX, ANF, RHT, WTW, VNO, FRT


CH Robinson Worldwide - CHRW - close: 64.80 change: +0.26

Stop Loss: 63.75
Target(s): 69.25
Current Option Gain/Loss: Unopened
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The transportation sector continues to show relative strength. CHRW was showing some strength of its own on Monday. Shares look poised to breakout past round-number resistance at $65.00 soon.

I am suggesting a trigger to launch bullish positions at $65.20. If triggered we'll use a stop loss at $63.75. Our target is $69.25.

We do not want to hold over CHRW's earnings report, which is expected in very late January or early February so this is a short-term two or three week trade.

Trigger @ 65.20

- Suggested Positions -

buy the Feb $65 call (CHRW1316B65) current ask $1.85

Annotated Chart:

Entry on January xx at $ xx.xx
Average Daily Volume = 1.3 million
Listed on January 14, 2012

In Play Updates and Reviews

A Quiet Monday on Wall Street

by James Brown

Click here to email James Brown

Editor's Note:

It was a relatively quiet day for the stock market. Weakness in Apple (AAPL) weighed on the market this morning but the major indices recovered from their morning lows.

Current Portfolio:

CALL Play Updates

Concur Technologies - CNQR - close: 72.08 change: +0.11

Stop Loss: 69.40
Target(s): 74.85
Current Option Gain/Loss: +18.1%
Time Frame: exit prior to the late January earnings report
New Positions: see below

01/14/13: CNQR spent Monday churning sideways in a narrow range just above the $72 level. I am not suggesting new positions at current levels but nimble traders could buy calls on a bounce off the $70 area.

Earlier Comments:
More aggressive traders could aim for the 2012 highs near $76.00. 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

01/11/13 new stop loss @ 69.40, adjust exit target to $74.85

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

Deere & Co - DE - close: 89.86 change: +0.24

Stop Loss: 88.25
Target(s): 99.00
Current Option Gain/Loss: -12.7%
Time Frame: 3 to 4 weeks
New Positions: see below

01/14/13: DE spiked higher this morning and hit the $91.00 level before trimming mot of its gains. Once again the stock was unable to close above resistance at the $90.00 level. Readers may want to wait for a close above $90 before considering new bullish positions.

We do not want to hold over its mid February earnings report (still unconfirmed). FYI: The Point & Figure chart for DE is bullish with a $104 target.

- Suggested Positions -

Long Feb $90 call (DE1316B90) entry $2.35

Entry on January 11 at $90.25
Average Daily Volume = 2.3 million
Listed on January 09, 2012

EOG Resources - EOG - close: 124.66 change: -0.97

Stop Loss: 123.40
Target(s): 134.00
Current Option Gain/Loss: - 29.7%
Time Frame: 3 to 4 weeks
New Positions: see below

01/14/13: EOG faded lower most of the session. The stock is testing short-term technical support at its simple 10-dma. Nimble traders could buy a dip or a bounce off the simple 10-dma near $124.00 but I would prefer to wait for a new high above Friday's intraday high at $126.45 as our next entry point.

FYI: EOG is due to begin trading ex-dividend on January 15th. The quarterly cash dividend is 17 cents.

Earlier Comments:
We do not want to hold positions over the earnings report in February.

- Suggested Positions -

Long Feb $130 call (EOG1316B130) entry $2.45

Entry on January 11 at $126.30
Average Daily Volume = 1.4 million
Listed on January 10, 2012

Fiserv, Inc. - FISV - close: 82.90 change: -0.08

Stop Loss: 79.75
Target(s): 88.00
Current Option Gain/Loss: + 13.3%
Time Frame: exit prior to earnings on Feb. 5th
New Positions: see below

01/14/13: Attention! Tomorrow morning could be a volatile one for shares of FISV. Right at the closing bell tonight they announced they were buying Open Solutions, Inc. for $55 million in addition to assuming $960 million in Open Solution's debt. The stock is trading lower after hours near the $81.00 level. I am worried we could see FISV gap open lower and spike below support at $80.00, hit our stop loss, and then rebound.

I am not suggesting new positions at current levels.

Our target is $88.00 but we will plan on exiting positions prior to FISV's next earnings report on February 5th. FYI: The Point & Figure chart for FISV is bullish with a $93 target.

- Suggested Positions -

Long Feb $80 call (FISV1316B80) entry $3.00

01/10/13 do not hold over the earnings report on Feb. 5th

Entry on January 08 at $81.60
Average Daily Volume = 864 thousand
Listed on January 07, 2012

Ingersoll-Rand - IR - close: 49.75 change: +0.15

Stop Loss: 48.25
Target(s): 54.00
Current Option Gain/Loss: Unopened
Time Frame: Exit prior to earnings on Feb. 1st!
New Positions: Yes, see below

01/14/13: IR was showing some relative strength today. The stock recovered from its morning lows to close up +0.3%. Yet IR remains under resistance at the $50.00 level for now.

We are suggesting a trigger to buy calls at $50.25 with a stop loss at $48.25. Our target is $54.00 but we will plan on exiting prior to the earnings in early February.

Trigger @ 50.25

- Suggested Positions -

buy the Feb $50 call (IR1316B50) current ask $1.30

Entry on January xx at $ xx.xx
Average Daily Volume = 1.8 million
Listed on January 12, 2012

iShares Russell 2000 (ETF) - IWM - close: 87.39 change: +0.05

Stop Loss: 85.90
Target(s): 94.50
Current Option Gain/Loss: Unopened
Time Frame: 6 to 9 weeks
New Positions: Yes, see below

01/14/13: The IWM spent Monday's session churning sideways in a very narrow range above the $87.00 level. There is no change from my earlier comments.

Earlier Comments:
Thursday's high was $87.69. I am suggesting a trigger to buy calls at $87.85. If triggered our multi-week target is $94.50.

Trigger @ 87.85

- Suggested Positions -

buy the Mar $90 call (IWM1316c90)

Entry on January xx at $ xx.xx
Average Daily Volume = 41.2 million
Listed on January 10, 2012

Mohawk Industries - MHK - close: 94.08 change: -0.15

Stop Loss: 91.25
Target(s): 99.00
Current Option Gain/Loss: - 28.7%
Time Frame: 3 to 4 weeks
New Positions: see below

01/14/13: Monday proved to be a pretty boring day for MHK. The stock spent most of the session in a very narrow range hugging the $94.00 level.

Nimble traders could buy a bounce off the rising 10-dma. Otherwise I would probably wait for a rally past $95.00 before considering new positions.

- Suggested Positions - *Small Positions*

buy the Feb $95 call (MHK1316B95) entry $3.30

Entry on January 10 at $95.00
Average Daily Volume = 787 thousand
Listed on January 09, 2012

Noble Energy - NBL - close: 105.43 change: -0.14

Stop Loss: 101.75
Target(s): 114.00
Current Option Gain/Loss: -13.0%
Time Frame: Exit prior to earnings on Feb. 7th!
New Positions: see below

01/14/13: NBL is little changed on the session. The stock opened at $105.31 and closed almost unchanged. I would still consider new bullish positions now. However, readers might want to wait and only launch positions if both NBL and the S&P 500 index open positive tomorrow. FYI: The Point & Figure chart for NBL is bullish with a $112 target.

- Suggested Positions -

Long Feb $110 call (NBL1316B110) entry $1.15

Entry on January 14 at $105.31
Average Daily Volume = 820 thousand
Listed on January 12, 2012

OpenTable, Inc. - OPEN - close: 53.53 change: +1.17

Stop Loss: 49.90
Target(s): 58.00
Current Option Gain/Loss: - 9.4%
Time Frame: 4 to 6 weeks
New Positions: see below

01/14/13: OPEN rallied to $54.00 this morning and spent the rest of the session fading lower. Overall it was a forgettable session.

More conservative traders may want to raise their stop loss closer to the $51.50 level instead (near last week's low).

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

01/12/13 new stop loss @ 49.90

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

Sherwin-Williams Company - SHW - close: 161.18 change: -0.10

Stop Loss: 154.65
Target(s): 169.00
Current Option Gain/Loss: -14.5%
Time Frame: Exit prior to earnings on Jan. 31st!
New Positions: see below

01/14/13: It's the same story here. SHW spent Monday drifting sideways in a narrow range. I would still consider new positions now or you could wait for a new rise above $162.00 as an entry point.

Earlier Comments:
We keep our position size small to limit our risk. Plus, this is a shorter-term trade. We do not want to hold over the January 31st earnings report. FYI: The Point & Figure chart for SHW is bullish with a $196 target.

- Suggested Positions - *Small Positions*

Long Feb $165 call (SHW1316B165) entry $3.10

Entry on January 09 at $161.28
Average Daily Volume = 928 thousand
Listed on January 08, 2012

iShares Silver ETF - SLV - close: 30.04 change: +0.56

Stop Loss: 27.45
Target(s): 33.50
Current Option Gain/Loss: +27.3%
Time Frame: 6 to 8 weeks
New Positions: see below

01/14/13: A drop in the U.S. dollar helped fuel gains in the precious metals today. The SLV rallied +1.8%. More importantly the SLV has finally closed above resistance at its 200-dma and the $30.00 level. Readers could use today's move as a new bullish entry point.

Earlier Comments:
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

Sohu.com - SOHU - close: 48.85 change: +0.64

Stop Loss: 45.75
Target(s): 49.25
Current Option Gain/Loss: +56.0%
Time Frame: 3 to 6 weeks
New Positions: see below

01/14/13: SOHU almost hit our bullish target today. Our exit target is $49.25 and SOHU hit $49.20. Readers may want to go ahead and take profits now although odds are good we could see SOHU hit our target tomorrow. I am not suggesting new positions.

Earlier Comments:
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: 62.51 change: +0.43

Stop Loss: 60.90
Target(s): 64.75
Current Option Gain/Loss: + 2.2%
Time Frame: 2 to 3 weeks
New Positions: see below

01/14/13: TRMB displayed relative strength today with a +0.6% gain. Traders are buying the dip at its 10-dma. The trend is up and TRMB looks good. However, we are almost out of time on our January calls. We only have four days left. I am raising our stop loss to $60.90. More conservative traders may want to abandon ship now.

Earlier Comments:
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

01/14/13 new stop loss @ 60.90
01/10/13 we only have six trading days left for our January options. More conservative traders may want to exit early now

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

PUT Play Updates

Green Mtn Coffee Roasters - GMCR - close: 39.34 change: -1.89

Stop Loss: 41.20
Target(s): 35.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

01/14/13: There was no follow through on Friday's bullish move higher. Quite the opposite occurred. GMCR reversed with a -4.5% plunge. I don't see any changes from my prior comments. We are waiting for a breakdown under support.

Earlier Comments:
Last Thursday's low was $38.83. I am suggesting a trigger to buy puts at $38.45. If triggered our target is $35.25. More aggressive traders might want to aim for a drop near $31.00 instead.

NOTE: GMCR can be a volatile stock. We want to keep our position size small.

Trigger @ 38.45 *Small Positions*

- Suggested Positions -

buy the Feb $35 PUT (GMCR1316n35)

Entry on January xx at $ xx.xx
Average Daily Volume = 4.2 million
Listed on January 10, 2012