Option Investor

Daily Newsletter, Saturday, 1/19/2013

Table of Contents

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

Market Wrap

Dow Five-Year High

by Jim Brown

Click here to email Jim Brown

The Dow finally joined the new high list that includes the S&P-500, Russell 2000 and Dow Transports. The Nasdaq is still lagging.

Market Statistics

The Nasdaq has not joined the current new high list because of a weak performance by AAPL, GOOG, MNST and AMGN. Apple declined to close exactly at $500. Google was down -$35 for the week and Amgen -$5. Intel was also a major drag on Friday with a -6.3% decline plus its impact to the rest of the chip sector. It was not a good week for the Nasdaq with a gain of only +9 points.

The Dow closed at a new five-year high at 13,649 but that is still slightly below the intraday highs from September. It was a good move and nobody is complaining but traders will feel a lot better with another 50 points on the board.

Dow Chart - Daily

It was another session of dip buying after Dow component Intel tanked at the open and the Consumer Sentiment for January suffered its own decline.

Consumer sentiment declined from 72.9 to 71.3 and that is the lowest level since December 2011. The decline was nowhere near the -9.8 point decline in December but analysts were expecting a rebound from what was thought to be an abnormal number in December.

The declines were blamed on the fiscal cliff in December and on the return of the payroll tax in January. The current conditions component fell -2.2 points to 84.8 and the lowest level since July. The expectations component declined -1.1 to 62.7 and the lowest level since November 2011. The headline number should decline again with the second reading for January once the rest of the country gets their paychecks with the smaller net amount.

Consumer Sentiment Chart

Sentiment was the only U.S. economic report of note on Friday. However, China's National Bureau of Statistics said GDP for Q4 rose +7.9% compared to estimates for +7.8% growth and a 7.4% reading for Q3. This powered the overseas indexes and was underlying support for our markets during the day.

Next week the calendar is highlighted by three more regional manufacturing reports and followed by New Home Sales on Friday. The real news for next week will be earnings not economics.

Economic Calendar

Tuesday's earnings will be led by IBM and Google. IBM has been languishing just over $190 for the last two months and can't seem to find a direction. Earnings are expected to be $5.25 per share and they have been very quiet. I would love to see a strong beat here to push the Dow higher.

Google is floundering. After hitting $745 seven days ago they have been in a steady decline after they blamed partner LG for manufacturing problems that have held the Nexus 4 phone to about 370,000 units internationally. LG blamed Google saying the company underestimated the demand by a factor of 10. LG said there was a serious backlog that would not be corrected soon. The lack of these phones will not hurt Google's profits but they are killing the share price.

On Wednesday Apple is expected to report earnings of $13.44 per share. If they report as expected it will be the first time in nine quarters that they reported lower earnings than the comparison quarter. In this case the year ago quarter was $13.87 per share. Apple is expected to guide lower for Q1 because of the slowing sales of the iProducts. Sharp reported on Friday they had almost completely halted production of screens for the large iPad do to an order cancellation by Apple. About the only thing you can be sure of for Apple's earnings is that they will produce a monster move in the stock. Historically Apple has averaged a 3.9% move on the day after the earnings report. That is calculated over the last eight quarters. The options are predicting a 7% move for next week. If you only knew which direction you could make a lot of money. Options are so expensive you can't play a straddle/strangle with any reasonable hope of making a profit.

While on the topic of Apple I saw where Al "Jazeera" Gore exercised some options to buy Apple shares. Using his options he paid $7.47 for 59,000 shares of Apple. The cost was $441,000 to get $29.5 million shares of Apple. Gore joined the board of Apple in 2003 at the request of Steve Jobs after his gig as VP ended in 2001. Apple shares were trading for $7.47 at the time of the option grant. I guess Jobs was hoping Gore would use his experience in "creating the internet" to help them refine new ground breaking products for Apple. Gore told Wolf Blitzer in a CNN interview in March 1999 when asked about his accomplishments, "I took the initiative in creating the Internet." His words were taken out of context but that claim has followed him for more than a decade now.

Dow components MCD and UTX report on Wednesday. UTX is expected to report a drop in earnings from $1.42 to $1.03. McDonalds is expected to report $1.33 per share and the same as Q4-2011. Both companies will be scrutinized for their outlook for Asia.

Thursday has earnings from MMM, MSFT, SBUX and JNPR. 3M is expected to report $1.41 compared to $1.35. Starbucks is expected to report 57 cents compared to 50 cents. Starbucks will be quizzed on same store sales in Europe. That is where it lost ground last quarter. Juniper is a preview of Cisco and they are also expected to report an earnings decline from 28 cents to 22 cents.

Microsoft is expected to report an earnings decline from 78 cents to 75 cents. The adoption of Windows 8 has not been strong and sales of the Surface tablet have been lackluster. MSFT shares have been dead money for years and they will have to release a breakout product to change the trend. Windows has become a commodity and there is no urgent desire by users to upgrade to the current version.

Friday has earnings from Halliburton, Honeywell, Kimberly Clark and Proctor & Gamble. Halliburton should duplicate Schlumberger's guidance but because HAL is more land based they could be a disappointment. Honeywell will be late to the earnings party and their earnings mostly ignored even though they are expecting to post $1.09 and a nickel better than the comparison quarter. KMB and PG are just filler for Friday. Nobody really cares what they earn. They only want to know if sales are rising or falling as a view into current consumer sentiment. As always guidance will be the key.

Earnings Calendar

Next week is considered tech earnings week because of Apple, IBM, Google, Microsoft, etc. However, Intel reported on Thursday and it was not pretty. That could have colored expectations for techs for next week and set the bar even lower.

Intel said sales declined -3% in the last quarter and that came after a -5% decline in the prior quarter. With PC sales dying and individuals moving to tablets by the millions it is costing Intel a lot of money. Researchers believe PC sales declined -4.9% in Q4 and that is normally a strong quarter. Tablet sales rose +72% in the same period.

Intel reported earnings of 48 cents that beat the street by 3 cents but the guidance was the key. They are planning on spending $13 billion on new plants and equipment in 2013 in an effort to compensate for the lower demand by upgrading their product line and reducing future costs. Intel has 80% of the PC processor market. Server sales rose +4% to $2.8 billion. Q1 sales are expected to decline to $12.7 billion, compared to $12.9 billion in the year ago quarter. With full year revenue expected to be just over $50 billion that $13 billion capex investment is steep. Analysts were expecting something in the high $9 billion range and the announcement of rising capex and falling sales had analysts wondering how Intel was going to pay for it. $2 billion is earmarked for a research facility to engineer a process for creating 450-millimeter (18 inch) silicon wafers. That will increase the number of chips they can make during each production run.

Wafers - The largest here is 12 inch.

Intel declined -6.3% to close at $21.25. That is the biggest decline since January 2009 and it came after a -15% decline in 2012. AMD declined -10.2% because any problem impacting Intel is magnified on AMD. The number two chipmaker reports earnings on Tuesday.

Intel Chart

GE reported earnings on Friday that seemed to please investors. The company reported earnings of 44 cents that beat the street by a penny. Revenue rose +4% to an eye popping $39.3 billion. Profits were $4.0 billion. Profits for the full year were $13.6 billion or $1.39 per share. CEO Jeff Immelt said the outlook for developed markets remained uncertain. However, China and other emerging markets, along with those regions exploiting natural resources, were expanding.

GE reported increased profits in all seven of its industrial divisions. Energy management, oil and gas, aviation and transportation all grew more than 10%. GE bought back $2.1 billion in stock for the quarter raising the total to $5.2 billion for the year. This is how GE beat the street by buying back a significant number of shares. That raises the earnings per share because of the fewer outstanding shares.

GE Chart

Morgan Stanley (MS) was the hero for the day. Morgan reported earnings of 45 cents compared to a loss of -20 cents in the year ago quarter. Revenue jumped +37% to $7.5 billion. Morgan is moving more into the individual investor area and scaling back part of its investment banking efforts. The bank is scaling back on expansions in Russia and the Middle East and cutting 1,700 positions in that effort. Overall they cut 4,500 people in 2012.

The bank made news last week by announcing a deferred bonus program. Roughly the top 20% or the highest paid workers will have their bonuses deferred rather than paid in a lump sum. They will be paid in installments over three years. That breeds a longer term commitment to the company and encourages workers not to take chances that would endanger their future bonus payments. In theory it takes some risk out of the business model plus it averages out the payments Morgan has to make. A good year can be offset by a bad year.

Morgan Stanley Chart

Oilfield service provider Schlumberger (SLB) reported earnings of $1.08 that beat estimates by a penny. Revenue rose +8.5% to $11.2 billion. That was well over analyst estimates for revenue growth. A slowdown in land drilling was expected to weigh on SLB but the company made up for it because of the boom in offshore drilling. The company expects customers to boost spending on exploration and production by +10% in 2013. SLB said earnings per share could increase by double digits in 2013 as global oil demand continues to increase.

SLB gets two-thirds of its revenue from outside the USA. The company said the number of active rigs around the world declined to 3,426 in Q4. That is a decline of -6.5% from Q4-2011 thanks to a drop in shale gas drilling.

Halliburton may not have such a rosy report next week because they are predominantly land based.

SLB Chart

Another big loser on Friday was Capital One (COF). The bank reported earnings of $1.42 per share compared to estimates for $1.58. This was a huge miss but it got worse. COF told analysts revenue would be "about the same" as Q4 at $5.62 billion compared to the prior forecast of $5.76 billion. Net interest margin (NIM), the gap between the interest it pays depositors and the interest it charges borrowers fell to 6.52%. That is -0.45% less than Q3. It does not sound like much but they have $212.5 billion in deposits. Half a percent on $212 billion is a lot of money. On the positive side the $1.42 in earnings compares to only 88 cents in the year ago quarter.

They also raised loan loss reserves to $1.15 billion, an increase of $290 million. Loans over 30 days past due rose to 3.66% and the highest of the top six credit card issuers. COF has made more than $28 billion in acquisitions since 2005 and that boosted deposits by more than $100 billion.

I looked a little deeper at COF to see if it was worth recommending a buy at this level and decided it was not worth the risk. I would rather buy AXP than COF. The metrics are much better. COF is definitely improving but there may be more tough times ahead. Raising the loan loss reserve is the key signal. COF deals with subprime borrowers and the increase in the payroll tax could push a few more people into the delinquent column.

COF Chart

OSI Systems (OSIS) was crushed back in November after the government said tests on new software "may have been falsified" to produce acceptable images. Rapiscan, a subsidiary of OSI, produced the x-ray backscatter scanners the TSA was using to scan airline passengers. The scan produces a nude image of the person being scanned and the TSA has taken a lot of heat in the issue. OSI strongly objected to the claims of software rigging saying, "This was a government controlled test at all times and the company could not have manipulated any data." The company was told it had to come up with a less intrusive image by June or the scanners would be replaced.

Fast forward to Friday and Rapiscan told TSA it would not be able to meet the deadline and TSA cancelled its contract with Rapiscan. The TSA will remove all 174 scanners at 30 airports. There are also 76 in storage. The TSA has been quietly replacing them in high profile airports and shifted them to very small airports. OSI shares rebounded on Friday after the company said the 250 scanners would be moved to other government agencies like prisons and military bases where privacy is not a problem. Shares jumped because that meant OSI would not have to take them back and incur millions in losses. OSI will take a one-time $2.7 million charge to cover efforts to create the software to blur the image.

Sample Rapiscan Image

The replacement scanners are made by L-3 Communications (LLL) and use a millimeter wave to produce an image and the software does not show the naked form. TSA has 669 of these scanners already and options for 60 more.

OSIS Chart

Level-3 Chart

The push to new market highs last week was amazing for multiple reasons. First, the S&P pushed to new five-year highs without any help from Google and Apple. Those companies were actually a significant drag on the S&P.

Secondly, the huge fund flows from the prior week were reversed. In the prior week there was $18.32 billion in total fund flows with $8 billion into the U.S. equity markets. That was the most since 2008. Six billion of that $18.32B went into non-U.S. equities. Last week there was -$4.181 billion in outflows from domestic equity funds.

I think everyone realizes the fund inflows for the first full week of January was from a NORMAL surge in end of year retirement funds. It was supplemented by inflows from money market funds after the fiscal cliff deal was completed on Jan 3rd and investors realized capital gains taxes were not going to the 43% as some had predicted.

Regardless of the reason for the prior week's inflows the market still rose last week despite the outflows. That has got to be bullish. Maybe too bullish. The AAII Investor Sentiment Survey showed individual investor bullish sentiment declined -2.5 points to 43.9% bullish. However, the bullish sentiment for institutional managers rose to 55%. That means the Rodney Dangerfield rally is getting more respect from the major money managers.

The USA Today said this weekend that the S&P has now gained more than 119% since the March 2009 lows. That puts it in the top nine bull markets of all time that gained more than 100%. Since the 2009 bear market was the worst since the Great Depression it makes sense that it should be followed by a big gain. The current bull has taken 1,407 days and that ranks it eighth in the 1,000 day club. Wilshire Associates claims the market has generated $10.5 trillion in paper wealth since that March 2009 low.

Ironically the current bull market has been almost completely ignored by individual investors. In 2012 they pulled $557 billion out of stock mutual funds and put more than $1 trillion into bond funds according to the Investment Company Institute. Investors don't trust the market after the parade of dips including things like the Flash Crash and Euro Debt Crisis. The 44 million baby boomers are too close to retirement to risk another 50% decline in their 401K and IRAs. There have been two 50% declines since 2000.

That reluctance to put money back into equities could just be the driver of the next leg higher. When markets breakout to new highs they become a price magnet. Everyone is afraid they will miss the next bull market and they suddenly want to throw money at it. Making less than 2% in the bond market is also a driver. You can't live on 2%. If bonds continue to decline we are going to see more investors cutting their losses in the bond market and moving back to equities.

Others are waiting for that next big drop to put their money to work. The higher the market rambles the more incentive to give up on waiting for the drop and put some money back to work.

The Rodney Dangerfield market may be getting more respect as the indexes breakout to new highs but the volume is still very low. The irrational exuberance of past bull markets has not yet appeared in the current bull. When (if) it does the stampede away from bonds will begin.

The S&P is currently trading at a PE of 13. That is well below the historical average of 15 and bull market levels of 17. Earnings for Q4 have averaged about 2.5% but only about 10% of companies have reported. Next week will begin the flood of reports and we could see that number increase slightly. Most analysts believe Q3 was the low point for earnings and they will rise from here and grow roughly 10.6% for the full year according to Thomson Reuters or 13% according to Abby Joseph Cohen. That will mean the market will be even further undervalued if it does not keep pace.

The political cloud is still the biggest worry for investors. The Feb-15th debt ceiling, March 1st sequester and March 27th continuing resolution makeup the wall of worry the bulls must scale.

We may have seen some breakthrough this weekend when news broke that the Republicans are going to offer a bill next week to raise the debt ceiling for another 90 days to push that fight until after the other two battles. The only requirement will be a demand for the senate to pass a budget by April 15th. The sequester and the continuing resolution are fights over spending and spending cuts while the debt ceiling is more of a political football. I think this is wise to put the focus back on the budget rather than a lose-lose proposition on the debt ceiling.

Of course the democrats claim they will not vote on any debt ceiling that has any conditions attached so this is not going to be a rubber stamp deal. The current political environment in Washington is negative for the markets with the biweekly manufactured crisis confrontations. Until this calendar clears we are only a sound bite away from a sell off.

The market seems to be discounting the debt ceiling risk and assuming it will be resolved just like the fiscal cliff issue did, with another can kicking session. President Obama is proving why he is the orator in chief. He is excellent at making speeches and casting blame on the republicans for everything even though the democrats have not passed a budget in four years.

He claims he wants an unlimited ceiling without having to come to congress for approval. Apparently he forgot that as a senator he voted against a debt ceiling increase when the deficit was only $248 billion. He condemned Bush for adding to the national debt and called it "irresponsible" and "unpatriotic." Fast forward to today he said not approving a $5 trillion increase in the debt ceiling is "irresponsible" and "unconscionable" a "catastrophe" and a "self inflicted wound."

Whatever the politicians want to call it the debt battle is likely to be pushed off until April 15th. That will remove one more obstacle to investor sentiment in the short term. All three political problems still remain but another crisis will have been averted by kicking the can farther down the road.

The market should breathe a sigh of collective relief as the cloud over the current earnings cycle will be pushed back until April. Short term the market can continue to move higher but ultimately we are going to have some challenges in March and April. That would correspond nicely with the normal weakness we see in those months and setup a bigger risk of decline than normal. Don't worry, be happy! That is three months away. Traders have plenty of time to profit from the new highs and then hunker down for the political battles.

The S&P finally broke out to a new five-year high with a close at 1,486 and above the December 27th, 2007 close of 1,476. The next hurdle is the 1,497 close that came from the prior week. That is also round number resistance at 1,500 so it may take some really good news to push us over that level. Future resistance highs are 1,515, 1,549 and the big daddy of them all the all time closing high of 1,565 from Oct-2007. Current support is 1,465 so dip buyers have a clear entry point. Markets making new highs tend to continue making new highs so the outlook remains bullish.

S&P Chart - Daily

The Dow managed to squeeze by the closing highs from September but remains slightly under the intraday highs of 13,661. Barring any significantly negative headlines next week this should be accomplished and put the Dow on course for the 13,727 closing high from December 2007. Lastly the all time high close of 14,164 from Oct-2007 will be the eventual target. Moving from Friday's close at 13,649 to 14,164 is only 515 points and a successful can kick on the debt ceiling could open the door for that gain. Support is 13,500.

Boeing is the biggest drag on the Dow with the 787 fleet not likely to return to service in the near future. Within a few days the knee jerk damage to Boeing shares should be complete and it will cease being an anchor for the Dow.

Dow Chart

The Nasdaq remains hostage to Apple and Google and their earnings next week are not likely to be market positive unless the declines from last week were traders pricing in a disappointment. We just need to get past these events and suffer the post earnings dip so new investors will feel comfortable about taking positions in those two stocks.

The Nasdaq will be influenced by a lot of tech earnings other than the two giants so next week will be a critical wall of worry for tech investors. Support remains 3100 and resistance well above at 3185.

Nasdaq Chart

The most bullish signals for the market are the new high breakouts on the Russell 2000, S&P Midcap 400 and the Dow Transports. These market segments suggest fund manager sentiment is very bullish and worries over a future political dip are unfounded. These breakouts show belief in a global economic rebound and better U.S. economics later in 2013. Let's hope these hopes are not unfounded.

Russell 2000 Chart

Dow Transports Chart

S&P Midcap 400 Chart

I believe we remain in a buy the dip market. The headlines next week will be over the proposed debt ceiling extension and of course Q4 earnings. More than 80 S&P companies report and by the end of the week we should know how the earnings cycle is going to end. Without the debt ceiling cloud we could see the markets continue to creep higher for the rest of January.

Monday is a market holiday making next week a short week. This should intensify the volume and make any breakout more relative or breakdown more troubling.

I remain in buy the dip mode until proven wrong.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"When one door closes, another opens; but we often look so long and so regretfully upon the closed door that we do not see the one which has opened for us."
Alexander Graham Bell

Index Wrap

A Two-tiered Market; S&P Charging Ahead, Nasdaq Not so Much

by Leigh Stevens

Click here to email Leigh Stevens

Sometimes the S&P and Nasdaq go separate ways for a time. Past cycles suggest that the lagging market more often holds the other one back rather than the strong segment necessarily pulling the other up.

That said, the S&P and Dow look like they could go a bit higher but are nearing an overbought condition and are due for a correction. This is borne out by the approach of the S&P 500 (SPX) to potential resistance at the high end of its uptrend channel which also would hit an important psychological milestone at 1500. A pause if not a pullback is a risk ahead, even with the reprieve of a debt ceiling impasse inducing market chaos at least for the next 3 months apparently.

As to the Nasdaq, I don't see the Many holding up the Few here, meaning the multitude of smaller Nasdaq companies, reflected in COMP, offsetting the lag in some key big cap tech stocks such as Intel (INTC) and especially Nas 100 (NDX) bellwether Apple Computer (AAPL). In taking another close look at AAPL's weekly chart and looking again at the optimal placement of its long-term uptrend line, AAPL's major trend only starts to look in trouble on a weekly close below 488; the stock is hanging in so to speak at $500 so far.

The Dow Industrials (INDU) and Dow Transports (TRAN) are looking good on a major trend basis and both Averages have gone to new weekly Closing highs and thereby given 'confirmation' of a primary up trend in the Market. TRAN hasn't gone to a new weekly closing high since early-July of 2011.

Rating the technical outlook: near-term risk of a sideways to lower dip that would 'throw-off' the overbought condition, which includes increasing bullish market sentiment. Longer-term, the market looks headed higher and the bull market is intact. Prior SPX highs in the 1550-1576 area dating from the massive 2000-2007 double top could be exceeded as part of the current move; one dating from the March 2009 low.



The S&P chart continues in a bullish pattern. The bull flag that formed in early-January (1/2-1/8) had the 'predictable' outcome once the top of the 'flag' was penetrated; namely another strong spurt higher. This important pattern, which includes bullish AND bearish flag formations warrants a description with examples in my next Trader's Corner columns which I've slotted for Sunday and Monday (a market holiday of course for MLK day).

There are 2-3 technical aspects to point out increasing risk for the bulls near-term:

1.) SPX is approaching potential resistance at the top end of its uptrend channel, especially at the psychologically and numerically important 1500 level.

2.) The approaching overbought condition suggested by the 13-day Relative Strength Index or RSI indicator.

3.) The spikes showing up in my measure of bullish/bearish trader sentiment which suggest another 'type' of overbought condition suggested when daily equities' options call volume starts nearing twice that of the daily put volume. Such readings can go on for a while but usually they indicate that stock prices are getting overheated and vulnerable to a correction, even if mostly sideways for a time.

Near support is suggested at 1460-1450, with next support around 1430, at the low end of the highlighted uptrend channel.

I've highlighted resistance at the upper channel line, in the 1495-1500 area. I don't have higher targets on a near-term basis; on a longer-term basis, 1550-1575 looks like it could be tested. We don't see big TRIPLE tops all that much in the major indexes and a rally failure in the 1550-1575 area would set that up. This could happen of course, but it would be somewhat surprising to me if this year saw another major top in this area.


The S&P 100 (OEX) chart is bullish in the same way that the larger SPX pattern is. There is also the same approach to potential resistance at OEX's upper channel line, per my notations of possible resistance in the 674-677 area in the coming week; a shorter 4-day trading week.

I suggested last week that the best part of the current move is probably behind us, at least before a correction sets in even if that's just a sideways move. Volatility has fallen sharply since late-December and we're no longer seeing call premiums expand.

OEX has also reached a 'fully' overbought condition in terms of the RSI model, which can go still-higher of course, but warns of a correction risk. We can't rule out either the possibility that OEX forms a double top, at least for a time as some of the January new-year buying slows down.

Resistance is suggested at 674-677, then probably on an approach to 690-700. Support is in the 660 area, than comes in around 650-647.


Last week I was seeing the Dow 30 (INDU) as heading toward a test of a 'next' technical resistance at the "upper end of the price channel that the Average has traced out in recent weeks suggesting key near resistance at 13600-13650"; Exactamundo! Sometimes the chart patterns are quite prescient.

I pointed out last week also that there were a good number of Dow 'laggards' that were having minor oversold bounces (even HPQ!) and others that continued in very strong uptrends; e.g., CSCO, CVX, DIS, HD, JNJ, KFT, MMM, PFE, TRV and XOM.

While INDU has gone to a new Closing weekly high for this move and relative to the September-October highs, there is some technical resistance suggested by INDU's upper channel line and the basis on which I note pivotal resistance at 13685-13720.

INDU looks 'due' for a correction and I rate the likelihood of a further strong and sustained thrust above 13700 as somewhat lower than a pullback to support at 13500; or, a fall back toward the 21-day average, currently intersecting at 13345. Beyond the near-term INDU looks capable of again testing major resistance in the 14000-15000 price zone.


The Nasdaq Composite continues to have bullish price action at it climbed further above 3100 as it could be headed toward resistance around 3150-3170. 'Ultimate' near technical resistance comes in at 3185-3200, as I've highlighted at the top end of COMP's bullish uptrend channel.

Near support is seen around 3085, extending to the 3050 area. Major support is expected at 3000 but COMP maintains a bullish chart as long as the Index doesn't start closing below 2950.

The odds of a correction, even if that's a sideways 'time' correction, grows as the Index gets nearer to the prior fall highs in the 3177-3195 area. These highs correspond to potential resistance that also is implied by the top end of the uptrend channel. Most key is the fact of prior highs. Failure to move through this prior top sets up the possibility of a double top, at least for a time. Longer-term, COMP could advance to the 3500 area sometime this year.


The Nasdaq 100 (NDX) index remains in a bullish pattern but looks to be stalled for now, witness the line of resistance that's developed around 2750. Assuming a break out above this near resistance, key resistances then come in at the top end of NDX's uptrend channel which, in the coming week, intersects at 2803-2815.

The other obvious resistance is implied by the prior (fall, 2012) cluster of highs in the 2860-2880 area. It seems unlikely that NDX is going to work much higher than the 2800 area, if that, at least near-term. Over the coming weeks/months, the trajectory seen with NDX's long-term weekly chart (not shown) suggests potential up to the 3000 area.

Near support comes in around 2700, extending to 2670. Major support begins at 2600 and the prior (down) swing low.

I mentioned in my initial 'bottom line' comments that Apple Computer (AAPL) bears watching as a key NDX bellwether and that it is holding weekly chart support to date in the $500 on a closing basis. A weekly close below 488 breaks below AAPL's long-term up trendline and would very likely be part and parcel of weakness in NDX.


The Nasdaq 100 tracking stock (QQQ) has the same bullish pattern as the underlying NDX with the same pattern of a near-term 'line' of resistance that's developed in the 67.3 area; the only recent exception was a brief recent advance to near 67.5.

If QQQ can achieve a decisive upside penetration of 67.3, next key technical resistance is suggested at the top end of the Q's broad uptrend channel where I've highlighted potential resistance at 68.6-68.9. Ultimately, the most pivotal chart resistance is implied by QQQ's September top in the 70.4-70.6 area.

Near support comes in around 66.2 in my estimation, with support extending down to around 65.3, the end of the (coming) week's intersection of QQQ's up trendline. Major support begins in the 64 area.

Volume has been relatively low as the stock has been churning around and going sideways. I don't expect a sizable jump in daily trading volume unless there's a move below 66.2-66. If we saw such a drop, the prior upside gap might get 'filled in' by a decline to as low as 65.3, which is also support implied by the intersecting trendline as noted already.


The Russell 2000 (RUT) Index continues in a strong bullish pattern, as highlighted by RUT's fairly steep uptrend channel. RUT has continued to climb within this steep channel. Meanwhile the Index has climbed to a higher overbought extreme in terms of its 13-day RSI.

The best further upside potential I see anytime soon for the Russell 2000 is to 900 or a bit higher and I've specifically noted resistance at the upper channel line in the 908-915 area.

Key support as implied by the current low end of RUT's uptrend channel is highlighted at 866-873.

RUT is out far ahead of the rest of the market and this isn't likely to go on and on. It's a matter of time rather than if RUT experiences a correction of even a fibonacci 38% of the Index's advance from its mid-November low; a 38% retracement which would be back to 843 currently is an example of what would be a fairly 'minimal' correction as an example.


New Option Plays

Beverages & Biotech

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:



Anheuser-Busch InBev - BUD - close: 89.72 change: +0.81

Stop Loss: 87.45
Target(s): 99.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of this beverage giant have been consolidating sideways under resistance near $90.00 for the last few months. At the same time BUD has maintained its long-term up trend. I am suggesting a trigger to buy calls when BUD hits $90.25. If triggered our target is $99.00.

Trigger @ 90.25

- Suggested Positions -

buy the MAR $90 call (BUD1316c90) current ask $2.75

Annotated Chart:

Entry on January -- at $---.--
Average Daily Volume = 894 thousand
Listed on January 19, 2012

Gilead Sciences - GILD - close: 78.28 change: +0.75

Stop Loss: 76.45
Target(s): 84.50
Current Option Gain/Loss: Unopened
Time Frame: Exit prior to earnings on Feb. 4th
New Positions: Yes, see below

Company Description

Why We Like It:
Both the BTK biotech index and shares of GILD are trading near all-time highs set this month. Now after churning sideways the last few days both look poised to breakout again. GILD's recent high was $78.59. I am suggesting a trigger to buy calls at $78.65. If triggered our target is $84.50. However, this is a short-term trade. We do not want to hold over the February 4th earnings report.

Trigger @ 78.65

- Suggested Positions -

buy the Feb $80 call (GILD1316b80) current ask $1.46

Annotated Chart:

Entry on January -- at $---.--
Average Daily Volume = 4.0 million
Listed on January 19, 2012

In Play Updates and Reviews

A Market Melt Up

by James Brown

Click here to email James Brown

Editor's Note:

Investors have decided to pour more money into stock funds this year and the U.S. market is melting higher.

Our WYNN trade is triggered. RHT has been stopped out.

Current Portfolio:

CALL Play Updates

CH Robinson Worldwide - CHRW - close: 65.51 change: +0.63

Stop Loss: 63.75
Target(s): 69.25
Current Option Gain/Loss: - 2.3%
Time Frame: 2 to 3 weeks
New Positions: see below

01/19/13: The rally in the transports continues. CHRW added +0.9% on Friday after traders bought the dip at its 10-dma on Thursday. This is a new multi-month closing high for the stock. I do want to urge a little caution. The Dow Jones Transportation average looks overbought here. That doesn't mean it can't grow more overbought but eventually the sector will see some profit taking. Readers may want to limit their position size in CHRW.

CHRW did provide a rally above $65 so readers can use Friday's move as a new entry point.

Earlier Comments:
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.

- Suggested Positions -

Long Feb $65 call (CHRW1316B65) entry $2.10


Entry on January 15 at $65.20
Average Daily Volume = 1.3 million
Listed on January 14, 2012

Concur Technologies - CNQR - close: 71.91 change: +0.40

Stop Loss: 69.40
Target(s): 74.85
Current Option Gain/Loss: - 9.0%
Time Frame: exit prior to the Jan. 30th earnings report
New Positions: see below

01/19/13: Hmm... CNQR underperformed the S&P 500 on Friday. Shares actually closed below what should have been short-term technical support at the 10-dma. We only have until the end of the month. I am not suggesting new positions at this time.

Plan to exit prior to the January 30th earnings report.

Earlier Comments:
More aggressive traders could aim for the 2012 highs near $76.00. 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: 90.96 change: +0.86

Stop Loss: 88.25
Target(s): 99.00
Current Option Gain/Loss: - 1.7%
Time Frame: Exit prior to the Feb. 13th earnings report
New Positions: see below

01/19/13: DE displayed some relative strength on Friday with a +0.9% gain. This is a new 18-month closing high for the stock. The stock looks poised to run into the $95-100 range.

We do not want to hold over DE's February 13th earnings report. 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: 126.79 change: +0.76

Stop Loss: 123.40
Target(s): 134.00
Current Option Gain/Loss: - 10.6%
Time Frame: Exit prior to the Feb. 13th earnings report
New Positions: see below

01/19/13: Traders bought the intraday dip on Friday and EOG rallied to a new multi-year high. Please note that we want to exit prior to the earnings report on February 13th.

This breakout to a new relative high can be used as a new bullish entry point.

- 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

Starwood Hotels - HOT - close: 60.02 change: -0.14

Stop Loss: 58.85
Target(s): 64.50
Current Option Gain/Loss: Unopened
Time Frame: exit prior to earnings on Feb. 7th
New Positions: Yes, see below

01/19/13: It looks like the gap open and spike higher was a bad tick. According to my quote feed the intraday high was only $60.49. That means our HOT trade is still not open yet. HOT does look poised to breakout from its three-week consolidation.

We are suggesting a trigger to buy calls at $60.60. If triggered our stop loss is $58.85. Our target is $64.50. However, we will plan to exit prior to the earnings report on Feb. 7th.

Trigger @ 60.60

- Suggested Positions -

buy the Feb $60 call (HOT1316B60)


Entry on January xx at $ xx.xx
Average Daily Volume = 1.9 million
Listed on January 15, 2012

Ingersoll-Rand - IR - close: 50.95 change: +1.48

Stop Loss: 48.25
Target(s): 54.00
Current Option Gain/Loss: -11.4%
Time Frame: Exit prior to earnings on Feb. 1st!
New Positions: Yes, see below

01/19/13: IR tagged a new 52-week high on Friday morning. Unfortunately the rally ran out of steam and shares faded to a -0.6% decline. The breakout above $50.00 this past week is bullish. I would still consider positions at current levels.

Our target is $54.00 but we will plan on exiting prior to the earnings in early February.

- Suggested Positions -

Long Feb $50 call (IR1316B50) entry $1.75


Entry on January 17 at $50.25
Average Daily Volume = 1.8 million
Listed on January 12, 2012

iShares Russell 2000 (ETF) - IWM - close: 88.57 change: +0.25

Stop Loss: 85.90
Target(s): 94.50
Current Option Gain/Loss: + 1.4%
Time Frame: 6 to 9 weeks
New Positions: see below

01/19/13: The IWM has extended its gains to three weeks in a row. This is a new all-time high. You could certainly argue that the small cap index and ETF look overbought but it can always grow more overbought! I am not suggesting new positions at current levels.

Our multi-week target is $94.50.

- Suggested Positions -

Long Mar $90 call (IWM1316c90) entry $1.36


Entry on January 15 at $87.85
Average Daily Volume = 41.2 million
Listed on January 10, 2012

Mohawk Industries - MHK - close: 96.30 change: -0.58

Stop Loss: 92.45
Target(s): 99.00
Current Option Gain/Loss: - 9.0%
Time Frame: Exit prior to earnings on Feb. 21st
New Positions: see below

01/19/13: MHK didn't see much follow through on Thursday's bullish breakout past $95.00. Shares briefly tagged a new high on Friday morning and then hit some profit taking. Nimble traders could buy a dip near $95.00 or the 10-dma. More conservative traders may want to raise their stop loss.

- Suggested Positions - *Small Positions*

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

01/17/13 new stop loss @ 92.45


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

Noble Energy - NBL - close: 106.62 change: -0.35

Stop Loss: 102.75
Target(s): 114.00
Current Option Gain/Loss: -13.0%
Time Frame: Exit prior to earnings on Feb. 7th!
New Positions: see below

01/19/13: NBL rallied to new all-time, record highs this past week. Yet shares hit some profit taking on Friday. Fortunately traders bought the dip at its rising 10-dma. On Thursday we raised our stop loss to $102.75. More conservative traders may want to inch their stops higher.

- Suggested Positions -

Long Feb $110 call (NBL1316B110) entry $1.15

01/17/13 new stop loss @ 102.75


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

OpenTable, Inc. - OPEN - close: 54.15 change: +1.92

Stop Loss: 51.40
Target(s): 58.00
Current Option Gain/Loss: - 7.4%
Time Frame: Exit prior to earnings on Feb. 7th!
New Positions: see below

01/19/13: OPEN spent the last couple of weeks churning sideways in the $51.50-54.00 zone. Friday's big +3.6% rally looks like a bullish breakout from this sideways consolidation. We are raising our stop loss to $51.40.

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

01/19/13 new stop loss @ 51.40
01/16/13 new stop loss @ 50.90
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: 164.02 change: +1.18

Stop Loss: 159.65
Target(s): 169.00
Current Option Gain/Loss: + 9.6%
Time Frame: Exit prior to earnings on Jan. 31st!
New Positions: see below

01/19/13: SHW continues to show strength and hit new record highs with Friday's +0.7% gain. We have less than two weeks to go. I am raising our stop loss to $159.65.

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

01/19/13 new stop loss @ 159.65


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

iShares Silver ETF - SLV - close: 30.81 change: +0.14

Stop Loss: 27.45
Target(s): 33.50
Current Option Gain/Loss: +67.3%
Time Frame: 6 to 8 weeks
New Positions: see below

01/19/13: The U.S. dollar managed a bounce on Friday but that didn't stop the SLV from posting another gain. You may have heard the talking heads on TV mention the growing threat of a "currency war". Japan just announced plans to devalue (weaken) their currency to make their exports more affordable. The U.S. and EU's QE programs have a similar effect. Russia just warned on Friday that the world is on the brink of a currency war as other countries might follow suit to weaken their currencies to stay competitive.

The good news is that weak currencies usually mean strong precious metals. Sadly that probably won't offset the impact of a weak currency in the rest of our daily lives.

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

Weight Watchers Intl. - WTW - close: 59.92 change: +0.14

Stop Loss: 58.75
Target(s): 64.50
Current Option Gain/Loss: Unopened
Time Frame: exit prior to earnings in mid February
New Positions: Yes, see below

01/19/13: The S&P 500 and the Dow Industrials and the Russell 2000 index are all breaking out to new highs. What are investors waiting for in WTW? Shares of WTW have been hovering below resistance near $60.00 and its 300-dma for days now. I would expect WTW to join the market's advance soon.

Earlier Comments:
The January 16th high was $60.30. I am suggesting a trigger to buy calls at $60.50. If triggered our target is $64.50. However, we will plan to exit prior to the mid February earnings report. FYI: The Point & Figure chart for WTW is bullish with a $78 target.

Trigger @ 60.40

- Suggested Positions -

buy the Feb $62.50 call (WTW1316B62.5) current ask $2.25


Entry on January -- at $---.--
Average Daily Volume = 732 thousand
Listed on January 17, 2012

Wynn Resorts Ltd. - WYNN - close: 124.06 change: +0.60

Stop Loss: 121.90
Target(s): 129.75
Current Option Gain/Loss: -17.6%
Time Frame: Exit prior to earnings (likely late Jan or early Feb)
New Positions: see below

01/19/13: Our brand new play on WYNN has been opened. Unfortunately, shares did not hit our trigger point to buy calls at $124.25 as expected. The stock gapped open higher at $125.15, which immediately opened our trade. WYNN's pop higher on Friday morning was a reaction to an analyst upgrade. WYNN hit $126.11 and then pared its gains. At this point, I would wait for a new rally past $124.50 before initiating new positions.

We do not want to hold over the very late January earnings (an unconfirmed date).

- Suggested Positions -

Long Feb $125 call (WYNN1316B125) entry $3.45

01/18/13 trade opened on gap higher at $125.15, trigger was 124.25


Entry on January 18 at $125.15
Average Daily Volume = 1.24 million
Listed on January 17, 2012

PUT Play Updates

Cliffs Natural Res. - CLF - close: 37.25 change: +0.56

Stop Loss: 36.55
Target(s): 30.50
Current Option Gain/Loss: Unopened
Time Frame: exit prior to earnings on Feb. 13th
New Positions: Yes, see below

01/19/13: Hmm... CLF is up two days in a row and has closed back above its 10-dma and its 100-dma. These moving averages should have been short-term technical resistance. Yet with the market moving higher it might be tough to find bearish candidates. Overall CLF still looks bearish. Nimble traders could use another failed rally near $40.00 as a bearish entry point. Currently I am suggesting a trigger to buy puts if CLF hits $34.90. If triggered our target is $30.50 since the $30.00 level could be support. We do not want to hold over the mid February earnings report.

Trigger @ 34.90

- Suggested Positions -

buy the Feb $35 PUT (CLF1316n35)


Entry on January -- at $---.--
Average Daily Volume = 7.7 million
Listed on January 15, 2012

Green Mtn Coffee Roasters - GMCR - close: 40.60 change: -0.28

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

01/19/13: GMCR did not participate with the market's generally widespread rally on Friday. That's a good sign for the bears but we don't want to buy puts yet. If GMCR doesn't roll over soon we'll probably drop it.

Earlier Comments:
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


Red Hat, Inc. - RHT - close: 54.15 change: -0.71

Stop Loss: 53.90
Target(s): 59.25
Current Option Gain/Loss: - 48.6%
Time Frame: 3 to 6 weeks
New Positions: see below

01/19/13: RHT did not want to cooperate with us. Our trade was triggered with Thursday's intraday spike that turned into a failed rally pattern. Friday saw some follow through lower and RHT hit our stop loss at $53.90.

- Suggested Positions -

Feb $55 call (RHT1316B55) entry $1.85 exit $0.95 (-48.6%)

01/18/13 stopped out at $53.90


Entry on January 17 at $55.40
Average Daily Volume = 1.7 million
Listed on January 15, 2012