Option Investor

Daily Newsletter, Monday, 1/28/2013

Table of Contents

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

Market Wrap

Seeing Dragonflies

by Linda Piazza

Click here to email Linda Piazza
Market Internals


Today, the mighty Dow Jones Transports hit a new record high for the ninth straight session in a row. However, its sister index, the Dow, posted a small loss and missed the opportunity post a gain its 12th day out of the last 13. Similarly, the SPX's small loss prevented it from producing its ninth day in a row of gain. It did manage a second day in a row with a close above 1500, if only barely. The RUT produced its close in a row above 900.

Index gains were small and losses tended to be, too. Many U.S. indices produced dragonfly doji candlesticks at the top of their rally patterns. These candlesticks have small bodies that form at the top of their day's range, with a lower shadow or wick that is at least twice as long as the candlestick's body. They're produced when the index sells off sharply from the open but then reverses to close near the high of the day.

Dragonfly doji are a potential reversal signal, but there's a catch. Technically, they indicate indecision about the next direction at the top of a rally, and their reliability as a reversal signal is low to moderate. Did we need all those dragonflies to know that market participants might be undecided about next direction ahead of this week's earnings reports, FOMC meeting and Non-Farm Payrolls? The catch to that potential reversal signal idea is that when potentially bearish signals don't see follow through, rabid gains can result.

Markets dealt with a number of reports today, a bit unusual for a Monday morning. Reaction to those various reports contributed to the construction of the dragonflies. Before the open this morning, Fitch Ratings reassured the U.S. The suspension of the debt limit, temporary though it might be, has been sufficient to remove the near-term risk to the U.S.'s triple-A rating, Fitch said.

That news might have contributed to the early morning gains. However, ratings firms delivered unhappy news today as well as happy news. Moody's downgraded the long-term ratings of six Canadian banks. The ratings on all six were knocked back one notch. Expressing concern about the banks' exposure to elevated housing levels and the more debt-incurring Canadian consumer, Moody's also "removed systemic support from the ratings of all rated Canadian banks' subordinated debt instruments." That included those issued by the Royal Bank of Canada. Moody's affirmed the short-term Prime 1 ratings of the banks, however. A Moody's VP said that even with today's actions, Canadian banks remain among the most highly rated banks among those Moody's ranks across the globe.

How are our banks doing? We'll find out on March 7, the Federal Reserve said today. That's when the results of stress tests on the 19 largest financial institutions will be released.

These influences as well as others that will be discussed resulted in those dragonfly candlesticks on many daily charts. In the U.S., the SPX dropped 0.18 percent, and the Dow, 0.10 percent. However, the NDX rose 0.21 percent. The NDX was helped by gains in AAPL. The RUT rose 0.16 percent, and the SOX, 0.17 percent. The index everyone is watching, the Dow Jones Transports, rose 0.09 percent.

Monday's Developments

Last night, Asian markets closed with mixed performances. Traders in Nikkei 225 stocks were in a mood to lock in profits after the index hit a new recent high in early trading. By the close, the index had lost 0.94 percent. The Hang Seng rose 0.39 percent, and the Straits Times, 0.14 percent. In Singapore, that small gain propelled the Straits Times to its highest close in more than two years. This weekend, the island's ruling party lost a by-election, blamed for high costs of living and other strains. China's Shanghai Composite gained 2.41 percent, reacting to projections of at least 8.0 percent growth for 2013 and news that profits of its largest industrial businesses rose 5.3 percent year over year.

European bourses spent their morning sessions zigzagging back and forth across the flat-line level. In the afternoon, they zigzagged, too, but in different directions. The FTSE 100 gained 0.16 percent; the DAX lost 0.32 percent; and the CAC 40 ended near the flat-line level, up 0.07 percent. Spain's IBEX 35 dropped 0.60 percent.

You may have noticed less coverage of European and other global developments on our and other news-related pages. The European crisis appears to have temporarily settled down. That refocusing or looking-beyond has permeated the investing world.

Global markets show the strongest correlations during downturns--one reason that diversification into emerging markets sometimes doesn't protect a portfolio as much anticipated during downturns. However, in better times, the focus returns to earnings reports, prospects for growth, and other such measures. Correlations do not prove as strong. Great stock pickers or just lucky stock pickers are rewarded.

Bloomberg's Alexis Xydias and Whitney Kisling reported today on a drop in a correlation measure applied to the more than two thousand stocks comprising the FTSE All-World Index. A joint announcement by Societe Generale and Bloomberg noted that the correlation has dropped from December's high of 49.6 (with 100 meaning all stocks moving in lockstep) to the last-reported 32.4. Since this kind of stock-pickers market has generally been associated with rallies, this severe drop could be viewed as a good thing. However, the comparison drawn was that the indicator was at the lowest level since 2007. That's not a particularly confidence-inspiring comparison because we know that in 2007, equities were due for a rollover. For now, it's a confirmation of what we've seen already happening, but it serves as a warning to remember that correlation will increase during downturns.

Today's first economic reports appeared at 8:30 am EST. The Commerce Department reported Durable Orders and Core Durable Orders for December. Pundits predicted gains of 1.8 and 0.8 percent, respectively, for these numbers after November's gains of 0.8 and 1.6 percent.

Gains were much bigger than anticipated, at 4.6 and 1.3 percent, respectively. We should note, however, that the headline number jumped due to big orders for Boeing's aircraft. With all that's going on with Boeing, this number is likely to be even more volatile for the next few months than it typically is.

That volatility in the headline number due to large transportation orders is one of the reasons that so many people focus on the core durable orders. Those orders were higher than expected, too, but core durable orders for November were revised lower, to 1.2 percent. When the focus is narrowed further, to core capital goods, December's gains were barely gains at all, at 0.2 percent. Year-over-year, core capital goods have gained only 0.3 percent. That small gain troubled some experts who look to this number as a key guidepost.

If the Durable Orders surprised to the upside, Pending Home Sales produced the opposite effect. At 10:00 am EST, the National Association of Realtors reported its Pending Home Sales (PHS) Index for December. Experts had predicted that sales would rise 0.5 percent after November's 1.7-percent rise. Instead, November's rise was revised slightly lower to a 1.6-percent gain and December's number dropped 4.3 percent. Pending home sales fell in the Northeast, South, and West, but climbed in the Midwest. In all regions but the West, pending sales were higher than the year-ago level, however.

The National Association of Realtors' chief economist, Lawrence Yun, was quick to point out the positives. Buyer interest remains strong, and buyer foot traffic has increased. Shortages of homes is limiting sales, not lack of interest. Lawrence Yun thought existing-home sales would rise 9 percent again in 2013 after a similar rise in 2012. The DJUSHB, the Dow Jones U.S. Home Construction Index, did not show that investor felt the same confidence. That index dropped 10.35 points or 2.02 percent, to 500.77.

Story stocks today included Transocean (RIG, 58.17, up 1.41 or 2.48 percent). The company's shares jumped this morning and maintained levels near the high after a brief mid-morning dip. Stock prices were reacting to the news that Carl Icahn had increased his position in RIG to a 5.6-percent stake. He also wants the company to declare a dividend of $4.00 a share.

Herbalife (HLF, 40.02, down 3.57 or 8.19 percent) isn't in such good shape after today's trading. The FTC said that it would shut down Fortune Hi-Tech Marketing, accusing it of being a pyramid scheme. When the FTC said it would make an announcement, a spokesperson confirmed that the announced would not concern Herbalife. However, the fact that HLF is not associated with Fortune Hi-Tech Marketing did not stop some investors from selling in the wake of recent accusations leveled against the company by Bill Ackman that it, too, was engaging in a pyramid scheme. The stock traded as low as $38.71 in intraday trading, moving up from that low by the close.

A number of companies received upgrades or downgrades today. Have your grain of salt ready when you read analyst upgrades or downgrades. They sometimes occur a bit too late in a cycle to do retail traders much good. As evidence was today's downgrade of AAPL stock and upgrade of Facebook (FB, 32.47, up 0.93 or 2.95 percent) ahead of its Wednesday earnings report. An upgrade of FB when it was trading at $17.55 would have been more helpful, perhaps. AAPL (449.95, up 9.95 or 2.26 percent) has been the topic of much speculation about the cheaper phone it plans to introduce.

Twitter announced that it had received a major investment from BlackRock (BLK, 234.86, down 1.56 or 0.66 percent). That $80 million investment values Twitter at $9 billion. The investment was made via a tender offer that bought stock from early employees, buying the stock at about $17 per share.

Lockheed Martin (LMT, 89.32, down 3.07 or 3.32 percent) dropped after reports that a failure in a F-35B fighter jet was due to a manufacturing error. The failure occurred shortly before takeoff, and the fleet has been grounded while the Pentagon investigation takes place. Reuters broke the news today.

As has been true last week, too, the focus today mostly remained on earnings. Companies reporting included Yahoo(YHOO, 20.31, down 0.06 or 0.29 percent), with CEO Marissa Mayer at the helm for about six months now. The company was expected to report earnings of $0.27/share with sales of $1.21 billion. Perhaps more importantly, investors will be parsing CEO Mayer's ideas about future growth. Investors have had confidence in Mayer's turn-around capabilities, but now they want to know specifically about growth potential, particularly in areas such as mobile technology and search. In a recent interview, Mayer talked about developing technology that will individualize Web content to be fed to mobile devices, also showing connections among people with similar interests.

After the close, YHOO reported earnings, excluding items, of $0.32 on sales of $1.22. However, analysts pouring over the results noted a 3.5-percent decrease in display advertisements when compared to the year-ago level. Those appearing on business TV programs and in print expressed concern, as they had been most interested in how Mayer might produce organic growth. Search revenue was more than anticipated, so that YHOO escaped too much damage from the decline in display ads. Perhaps since Mayer had said that search would be an area of growth, this earnings report will confirm her foresight, but several analysts used words such as "troubling" to describe the results in the display ads. With the conference call not yet completed as this article was edited, YHOO had been volatile in after-hours trading. It had jumped up as high as $21.38, but was last at $20.25 as this report was edited.

Analysts expected Caterpillar (CAT, 97.45, up $1.87 or 1.96 percent) to report earnings of $1.70/share on revenue of almost $16 billion. However, due to recently reported accounting missteps in a newly acquired unit, the company took a hit of $0.87/share.

The earnings report came through early this morning with earnings of $1.04 a share on profit of $16.08 billion. Some article writers termed these results a "miss," but if I subtract $0.87 from $1.70, the $1.04 does not appear to be a miss of the new expectations, but rather a beat. The comparisons with the year-ago numbers causes one to wince anyway, as CAT reported $2.32 a share or $1.55 billion in that year-ago period. The company pointed to declines in dealer inventories, lower sales and revenues, and sharply lower production as the forces leading to the falling profit.

CAT also lowered guidance for the upcoming Q1, without giving specifics for sales, revenues, or profit outlook. The company said they will all likely be "significantly lower than the first quarter of 2012." This quarter, the company anticipates sales and revenues about $2 billion less than for the same time period in 2012. The company believes that dealers will continue to reduce inventories. For the full year 2013, the company anticipates earnings/share of $7.00-9.00 rather than the prior $8.61 set point. The company expressed optimism about 2013 economic growth but also expressed caution about how long it would take for that growth to be converted into increased sales and revenues.

Analysts predicted that Seagate Technology (STX, 37.41, up 0.16 or 43 percent) would report earnings of $1.27-1.28/share. The company beat on both EPS and revenue, reporting $1.38 per share. Revenue had been expected at $3.58 billion, but rose to $3.7 billion instead. The stock was last at 36.97, down 0.44 from the day's close.

Other reporting companies today included Biogen Idec Inc. (BIIB), BMC Software (BMC) VMware (VMW), and Zions Bancorporation (ZION). Analysts anticipated earnings of $1.01/share for BMC.

BIIB (149.99, up 3.79 or 2.59 percent) missed on earnings of $1.40/share, but revenues of $1.42 billion beat expectations. Analysts had anticipated $1.46/share and $1.39 billion. The guidance for fiscal 2013 of $7.15-7.25/share was below the prior $7.27 consensus. Revenue was projected at about $6.07 billion, up from the prior $5.98 billion estimate. The stock had added an additional $0.65 in after-hours trading.

BMC Software (BMC, 44.48, down 0.02 or 0.04 percent) dropped in after-hours trading after its report. It was last at 41.50, down 2.98 or 6.70 percent from the day's close. The problem appeared to be a miss in this report as well as lowered guidance for 2013. Analysts forecast earnings of $1.01/share (non-GAAP), but those earnings were instead $0.99/share. Analysts had expected $587.4 million in revenue, but the company reported $580 million. Analysts had anticipated 2013 earnings to be $3.56, but the company instead set expectations at $3.35-3.45.

Expectations for VMW (98.32, down 0.68 or 0.69 percent) had been pegged at $0.78/share. That stock was diving in after-hours trading, down 12.82 or 13.04 percent from the day's close, at $85.50. The company reported $0.81/share on revenue of $1.29, both beating expectations. The problem appeared to be its outlook for the Q1, with revenue projected to be $1.17-1.19 rather than the prior expected $1.25.

Analysts forecast earnings for ZION (22.89, down 0.09 or 0.39 percent) at $0.35/share. The stock was last at 22.85, down $0.04 more in after-hours trading. In addition to reporting earnings of $0.19 per diluted common share, the company said it will auction $200 million of non-cumulative perpetual preferred stock

Let's look at daily charts and see what we can see.


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:

We don't have to make this too difficult. We know what we're seeing if we've watched the SPX for any length of time. The SPX has reinstituted its pattern of testing its (red) 9-ema (or 10-sma or -ema, if you prefer), bouncing strongly up from that support test, and then trending sideways to sideways up with small-bodied candles for a few days.

In this case, the momentum has been so strong that the sideways- to sideways-up movement to consolidate gains has been a straight-up move with no "sideways" about it. That's a sign of a momentum run.

Until the SPX breaks this rally pattern, nothing has changed its rally tenor. Breaking the pattern means failing to find support on consistent daily closes at or above its 9-ema. The next confirmation of a change in tenor would be a flattening of that moving average or turning it lower and closing beneath it on consistent daily closes. Until that tenor does change, that next upside potential target near 1517-1521 must be considered a possible and viable next target.

Look at the number of days of SPX gains with no appreciable pullback, however. It is time for a retest of the 9-ema. The SPX is actually overdue for a test of the bottom of its smallest (grey) channel, too. I said the same thing the last time I wrote the Monday Wrap two weeks ago. That retest didn't happen then and it may not this week. There are no guarantees, but that doesn't mean that probabilities aren't going to catch up at some time or another. Even when the SPX is in rally mode, it tends to retest this moving average at more regular intervals than it has done lately.

Traders also need to prepare for the possibility of a dip to the bottom of that smallest (grey) Keltner channel, also something that the SPX needs to do from time to time. If that dip happens, bulls want to see the SPX bounce right back up above the 9-ema and continue doing what it has been doing. Bears will hope to see the SPX fall back from the retest of the 9-ema from the underside.

Other potential downside targets are marked in case the SPX loses traction. Closes below about 1472-1474 could lead to a quick tumble to the next downside target.

For now, nothing has changed the tenor. Out-of-the-money puts are cheap, though. If the size of your long trades are frightening you, a cheap put--not meant to make money but rather just to insure against a catastrophic loss--may help you sleep better.

Annotated Daily Chart of the Dow:

Ditto the Dow, but here the chart looks scary bullish. Scan the chart and you can see that the Dow does not typically go this long between retests of the (red) 9-ema's support. It's pulled way above that support in its quest to reach its next potential upside target. The Dow has had a boost from its sister index, the out-of-control Dow Jones Transports. I continue to suggest that you keep the transports ($DJT in some charting services) on your radar screen, too, if you're trading the Dow or even the SPX and OEX.

For now, the Dow has a potential upside target near 14,050. Traders need to be prepared for that target to be approached unless something changes about the Dow's pattern.

For now, the Dow's pattern has been to scramble up on top of its smallest (grey) Keltner channel. It's going to be time sooner or later for it to come back and retest the 9-ema or perhaps even the bottom of its smallest grey channel, currently way down near 13,600 but still rising.

The strongest behavior would be found if the Dow trends sideways while the red 9-ema climbs up closer underneath it and then dips down quickly to retest and bounces. However, bulls should be prepared for a 9-ema retest at any time and possibly a 13,600 test. That's all within the context of normal behavior, even in a bullish market.

If the Dow should plunge through the 9-ema to the bottom of its smallest (grey) Keltner channel, bulls want to see it scramble back above the 9-ema within a day or two. Bears should anticipate that possible bounce, but then they would want to see the Dow's prices turn lower again at the retest of the 9-ema from the underside.

Annotated Daily Chart of the NDX:

Previous Monday Wraps mentioned the broadening formation seen on the NDX's daily chart. The difficulty with a broadening formation is that it is, by definition, a sign of instability. Moreover, it's difficult to ascertain when the breakout has occurred. Clearly, the NDX produced some breakouts above the original outline of that broadening formation, but was this really a breakout, a sign of strength to come, or just more of the same, a broadening of the broadening formation? For now, all we can say is that it's more of the same.

Moreover, the NDX is not displaying the same pattern with respect to a rising (red) 9-ema as were the SPX and Dow. The NDX churns back and forth across that moving average, and it's flattened it. About all that can be determined from this chart is that the NDX may be about equally likely to reach up toward 2795-2805 or dip to 2680-2700.

Annotated Daily Chart of the RUT:

The RUT's pattern with respect to its (red) 9-ema is as clear as that seen on the SPX and Dow. What's amazing here is the nearly straight-up angle of the 9-ema. Moreover, the RUT has broken through the widest Keltner channel's top boundary. All signs show this is a strong momentum run.

I have no further potential upside targets to offer based on this chart. The RUT has overrun them all. Moreover, when I roll up to a weekly chart (not shown), the RUT is jammed against potentially strong resistance on weekly closes. We discover a number of signs, then, that this latest rally may be overextended.

We cannot assume that overextended translates into a reversal, however, particularly when talking about the RUT. In the first half of 2003, such strong behavior preceded a breakout above the weekly Keltner channel the RUT tests now (not shown). Another breakout sent the RUT climbing all the way through the end of that year and the beginning of 2004, with market participants fearing a turnaround the entire time.

However, while not sacrificing ourselves by standing in front of those freight trains, we need to think about probabilities and normal behaviors, too. Even the strongest bull markets require occasional dips to shake out weak hands and retest support, so bulls should anticipate a retest of the 9-ema at some point.

What does it take to maintain the current tenor of the RUT's trading? It requires pullbacks that find support at a rising 9-ema or even at the bottom of the (grey) smallest Keltner channel and then bounce from there. If the RUT should drop to the bottom of the smallest (grey) channel and fail to zip back above the 9-ema within a day or so, however, the tenor may have changed. If the RUT produces enough daily closes beneath the 9-ema to flatten it or turn it lower, the tenor is likely changing. Other potential downside targets are marked in case the nearby ones fail to provide support on consistent daily closes.

Annotated Daily Chart of the Dow Jones Transports:

If there was ever an overextended index chart, the $DJT's is it. This rally has been a strong momentum run. The chart demonstrates the way one can use retests of the (red) 9-ema to gauge whether the tenor remains as strong even when it seems that the run has been overextended.

It certainly appears to be time for the $DJT to drop back and retest that 9-ema or perhaps even the bottom of its smallest (grey) Keltner channel. Just because it's time doesn't mean that such a pullback will be the next action. However, Dow, SPX and OEX bulls might keep a watch on the $DJT. Those three indices don't tend to move too far in any direction unless the $DJT is moving the same direction. The $DJT's actions are not great market-timing tools, but this index's behavior sometimes provides a heads-up on a reversal in the making.

Tomorrow's Economic and Earnings Releases

Tomorrow's big news is the beginning of the two-day FOMC meeting. Also, it should be noted that today Goldman Sachs downgraded the U.S. steel sector from a "Neutral" rating to a "Cautious" one. X was down ahead of tomorrow's earnings report.

What about Tomorrow?

Because we have again had such strong moves, I rolled up to the two-hour charts before I found a marker that shows us when the tenor will change on these intraday charts.

Annotated 120-Minute Chart of the SPX:

The SPX has been charging higher on the back of a rising red 9-ema on this two-hour chart. The SPX's behavior with respect to retests of that 9-ema will tell us what we want to know about its tenor, a little sooner perhaps than we might see on the daily chart. I prefer a 30-minute chart to give a faster signal, but the indices' behavior with respect to such benchmarks isn't as strong on the shorter-interval charts.

Nothing has changed on the tenor of this chart as of yet. However, as this chart is set up, it looks if it's time for the SPX to fall through the support of the rising 9-ema and drop down to 1493-1497, with bounce potential in that zone. If this scenario should unfold, bulls should be particularly wary if the SPX does not then bounce hard enough to again produce sustained 120-minute closes above the 9-ema.

Bears should be wary if the SPX does follow that scenario or if the SPX just keeps going without even falling back to test that 9-ema on 120-minute closes. Rejected potentially bearish formations can be followed by rabid rallies. Surprised shorts help fuel the beginning of the rally after big money gaps or drives prices above resistance. Real buyers take over from there. That pattern after the rejection of a bearish formation has been especially true in this climate.

Potential upside and downside targets are marked on this chart, but the only indicated next upside target is near 1506-1510. That doesn't mean that the SPX can't climb higher than that. It means that it will be in a momentum run all the way up through this 120-minute chart if it does, however, and that's a dangerous time for bulls and bears alike.

Our task may be doubly complicated this week because our equity markets tend to behave one of two ways as FOMC meetings begin and the decision is awaited. They might park themselves and zigzag back and forth, chopping apart all the nice little resistance and support zones previously mapped out and rendering them useless as benchmarks. The other version we sometimes encounter is when indices zoom to either strongest resistance or strongest support and park there, without the trader having much clarity about the next move. Remember that even if indices park themselves somewhere and trade is quiet, the volatility indices may rise ahead of important economic events, complicating trade decisions.

With the SPX's prior behavior with respect to the 9-ema seen clearly on this chart, traders at least have some decision points to map out and can set out planned profit-protecting or loss-managing steps. A number of 120-minute candles closing below the 120-minute 9-ema means that something has changed, if only temporarily.

Annotated 120-Minute Chart of the Dow:

The Dow's behavior with respect to the 120-minute red 9-ema is the same as the SPX's. However, in the Dow's case, that moving average has clearly broken out into momentum territory, breaking above the widest channel's (pink) upper boundary. This is dangerous excess, but it's dangerous to bulls and bears alike.

No matter how overextended this chart shows the move to be, the chart will let us know when the bullish tenor has begun to change. The first changes will be consistent 120-minute closes beneath the red 9-ema. The next will be prices sinking back inside the channel lines now coming together near 13,780-13,820. Confirmation will come if the Dow tries to rise and butts up against the 9-ema or this other level and falls back to break through the prior low.

Annotated 120-Minute Chart of the NDX:

It's tempting to write that traders can't tell much from comparing the NDX's behavior to its tests of its 120-minute 9-ema. That's not true, however, because the way the NDX chops back and forth across that average proves that it's not in a clear trend. That behavior tells us something quite specific. We can't count on the NDX to behave like a normally trending index.

Moreover, we can see that all closes on 120-minute periods have been between the upper and lower channel lines of the (purple) channel now at about 2,700 and 2,770. The NDX needs to produce sustained 120-minute closes outside those channel lines before we know whether it's breaking out in either direction. That's of course a wide range, but the NDX has unfortunately been chopping out that wide know-nothing-for-certain range. We've seen it on the daily chart, and we see it here, too.

On the shorter-term, the chart setup assigns about equal probability to the NDX rising to about 2,759-2,765 or dropping to 2,711-2,726.

Annotated 120-Minute Chart of the Russell 2000:

The RUT has clearly been finding support on most 120-minute closes at or above its rising 9-ema. This moving average and the RUT candles have also clearly zoomed up above the upper boundary of the widest (pink) channel, engaging in a wild momentum run. In fact, the momentum has proven so strong that the RUT has dragged several other upper channel boundaries and the entire small (grey) channel into that momentum run with it.

As with other momentum runs we've discussed, this momentum run outbreak proves dangerous for bulls and bears alike. Bulls should be aware that someday the RUT's behavior is going to revert to the norm with respect to its Keltner channels. At some point, the RUT is either going to move sideways for a prolonged time to allow the channels to catch up or else it's going to drop back inside those channels.

The danger to the bears lies in the fact that there's no guarantee that such action will happen any time soon. Clearly, nothing has changed yet in the tenor of the movement seen on this chart. That rising 9-ema looks like an escalator carrying candles ever higher without a misstep.

By mid-morning, this chart suggested that a quick move up to about 908-910 or a quick drop to 898-899 could happen at any time. The mid-afternoon rally attempt very nearly reached 908. Was that close enough? Are prices going to keep reaching for that next level, nudging it ever higher?

Normally, because the RUT is above the 9-ema, we could consider further up move the most likely to occur next. However, the RUT has been charging higher for so long that I lean toward giving about equal weighting to either possibility or at least to a retest of the 9-ema.

What do we know after examining these charts? We don't know what's going to happen next. We do know what the pattern has been and how to identify changes in those patterns. If anyone out in algorithm-writing land were to listen to me, I think it's time for a pullback to retest support. I think the SPX needs to pull back to about 1476; the Dow, 13,650; and the RUT, 882-884 at the very least. However, I thought so two weeks ago, too, and you can see that no one was listening to me. Watch the patterns.

New Option Plays

Nutritional Supplements

by James Brown

Click here to email James Brown


Herbalife Ltd. - HLF - close: 40.02 change: -3.57

Stop Loss: 40.55
Target(s): 31.00
Current Option Gain/Loss: Unopened
Time Frame: Exit prior to earnings on Feb. 19th
New Positions: Yes, see below

Company Description

Why We Like It:
Late this morning word was announced that the Federal Trade Commission (FTC) would hold a press conference later in the day as they bust a pyramid scheme. They didn't say who the company was and all the publically traded multi-level marketing names, like HLF, traded lower on worries they might be the target company.

The company the FTC targeted was called Fortune Hi-Tech Marketing (FHTM). Yet the news that HLF was not the target failed to produce a bounce in the stock price. Normal volume on HLF is about 13.6 million. Today's volume was 28.2 million. The stock is flirting with a breakdown under support near $40.00. Before I continue I want to warn you that HLF can be a volatile stock. December saw a plunge from $48 to $24. By mid January it had bounced back to $45. Now shares appear to be rolling over again.

There have been high-profile allegations that HLF is a pyramid scheme, which is why shares reacted they way the did today. Technically the stock looks weak. It is heavily shorted, which can produce short squeezes. I suspect the stock is about to move lower again. We consider this an aggressive, higher-risk trade. Today's low was $38.71. I am suggesting we buy puts when HLF hits $38.50. If triggered our target is $31.00.

Trigger @ 38.50 *Small Positions*

- Suggested Positions -

buy the Feb $37.50 PUT (HLF1316n37.5) current ask $2.10

Annotated Chart:

Entry on January -- at $---.--
Average Daily Volume = 13.6 million
Listed on January 28, 2012

In Play Updates and Reviews

The Rally Stalls on Monday

by James Brown

Click here to email James Brown

Editor's Note:

The bull market in stocks rested on Monday. Many stocks and indices are looking short-term overbought. Some are starting to lose momentum.

Our SLV trade was stopped out.

Current Portfolio:

CALL Play Updates

Anheuser-Busch InBev - BUD - close: 91.81 change: +0.10

Stop Loss: 88.45
Target(s): 99.00
Current Option Gain/Loss: +21.3%
Time Frame: 3 to 6 weeks
New Positions: see below

01/28/13: BUD popped higher this morning but gains faded throughout the day. If the market does see a pullback look for BUD to find support near $90.00.

- Suggested Positions -

Long MAR $90 call (BUD1316c90) entry $3.05

01/25/13 new stop loss @ 88.45

Entry on January 22 at $90.25
Average Daily Volume = 894 thousand
Listed on January 19, 2012

Catamaran Corp. - CTRX - close: 52.13 change: -1.10

Stop Loss: 50.90
Target(s): 58.50
Current Option Gain/Loss: -58.3%
Time Frame: exit PRIOR to earnings in late February
New Positions: see below

01/28/13: CTRX underperformed on Monday with a -2.0% decline. I didn't see any company-specific news to account for the relative weakness. More conservative traders might want to inch up their stop loss. I am not suggesting new positions at this time.

- Suggested Positions -

Long Feb $55 call (CTRX1316B55) entry $0.60

Entry on January 25 at $53.25
Average Daily Volume = 1.3 million
Listed on January 24, 2012

Deere & Co - DE - close: 93.99 change: +0.52

Stop Loss: 89.25
Target(s): 99.00
Current Option Gain/Loss: +89.3%
Time Frame: Exit prior to the Feb. 13th earnings report
New Positions: see below

01/28/13: DE continues to march higher and added +0.5% on Monday. Readers might want to go ahead and take profits now. I am concerned that the market's major indices are slowing down and DE is looking short-term overbought and due for a dip.

Please note that I am adjusting our exit target down to $94.75. More aggressive traders can aim higher.

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

01/28/13 adjust exit target down to $94.75
01/22/13 new stop loss @ 89.25

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

Starwood Hotels - HOT - close: 62.02 change: +1.13

Stop Loss: 59.75
Target(s): 64.50
Current Option Gain/Loss: +51.9%
Time Frame: exit prior to earnings on Feb. 7th
New Positions: see below

01/28/13: HOT finally broke out past resistance near the $61.00 level. Shares were upgraded this morning and that produced the pop higher at the open. HOT closed with a +1.8% gain and a new 52-week high. I am raising our stop loss to $59.75. Keep in mind our plan to exit prior to earnings on Feb. 7th.

- Suggested Positions -

Long Feb $60 call (HOT1316B60) entry $1.81

01/28/13 new stop loss @ 59.75

Entry on January 22 at $60.60
Average Daily Volume = 1.9 million
Listed on January 15, 2012

Ingersoll-Rand - IR - close: 51.15 change: -0.32

Stop Loss: 49.75
Target(s): 54.00
Current Option Gain/Loss: + 2.8%
Time Frame: Exit prior to earnings on Feb. 1st!
New Positions: see below

01/28/13: The early morning pop in IR failed and shares closed with a -0.6% decline. If the market sees a pullback we can look for IR to retest the $50.00 level as potential support.

I'm not suggesting new positions. We only have a few days left. The plan is to exit prior to earnings on Feb. 1st.

- Suggested Positions -

Long Feb $50 call (IR1316B50) entry $1.75

01/26/13 new stop loss @ 49.75
01/24/13 new stop loss @ 49.25

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

Noble Energy - NBL - close: 107.56 change: -0.74

Stop Loss: 104.65
Target(s): 114.00
Current Option Gain/Loss: -21.7%
Time Frame: Exit prior to earnings on Feb. 7th!
New Positions: see below

01/28/13: NBL is still churning sideways in the $107-109 range. Traders did buy the dip near its simple 10-dma again this morning. I am not suggesting new positions at this time.

- Suggested Positions -

Long Feb $110 call (NBL1316B110) entry $1.15

01/26/13 new stop loss @ 104.65
01/22/13 new stop loss @ 103.75
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: 53.75 change: -0.25

Stop Loss: 51.85
Target(s): 58.00
Current Option Gain/Loss: - 3.5%
Time Frame: Exit prior to earnings on Feb. 7th!
New Positions: see below

01/28/13: If we're lucky the little pullback in shares of OPEN is over. Traders bought the dip twice near $53.25 midday and the stock rebounded to a +1.1% gain. I am raising our stop loss to $51.85.

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

01/28/13 new stop loss @ 51.85
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: 164.09 change: -1.42

Stop Loss: 161.75
Target(s): 169.00
Current Option Gain/Loss: + 0.0%
Time Frame: Exit prior to earnings on Jan. 31st!
New Positions: see below

01/28/13: SHW dipped toward short-term support near its 10-dma on some profit taking. We only have a couple of days left. Readers may just want to go ahead and exit early now to avoid or minimize any loss.

SHW is scheduled to report earnings on January 31st. If SHW does not hit our exit target at $169.00 then we will plan on closing positions on January 30th at the closing bell. Please note our new stop loss at $161.75.

Earlier Comments:
We keep our position size small to limit our risk.

- Suggested Positions - *Small Positions*

Long Feb $165 call (SHW1316B165) entry $3.10

01/26/13 new stop loss @ 161.75
Prepare to exit on Jan. 30th at the closing bell if SHW does not hit our target by then.
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

SodaStream Intl. Ltd. - SODA - close: 50.96 change: -2.27

Stop Loss: 49.45
Target(s): 58.50
Current Option Gain/Loss: -24.3%
Time Frame: 3 to 4 weeks
New Positions: see below

01/28/13: Uh-oh! I couldn't find any news to explain the relative weakness in SODA today. The stock gave back -4.2%. Furthermore today's pullback has created a bearish engulfing candlestick reversal pattern. There is still a chance that SODA will find support at the $50.00 mark, which is now bolstered by its rising 10-dma. More conservative traders may want to adjust their stop loss so it's a little bit closer to the $50 level. We are leaving our stop at $49.45 tonight.

- Suggested Positions -

Long Feb $52.50 call (SODA1316b52.5) entry $1.85

01/28/13 caution: SODA produced a bearish reversal candlestick pattern
01/26/13 new stop loss @ 49.45

Entry on January 25 at $52.15
Average Daily Volume = 1.2 million
Listed on January 24, 2012

SPX Corp. - SPW - close: 74.50 change: +0.71

Stop Loss: 71.40
Target(s): 79.00
Current Option Gain/Loss: +34.6%
Time Frame: Exit prior to earnings on Feb. 14th
New Positions: see below

01/28/13: SPW continues to march higher, extending its gains to six out of the last seven trading days. Traders should be aware that the $75.00 level might be round-number resistance. Do not be surprised to see a pullback on the initial test of this level. I am raising our stop loss to $71.40. I am not suggesting new positions at this time.

- Suggested Positions -

Long Feb $75 call (SPW1316B75) entry $1.30

01/28/13 new stop loss @ 71.40

Entry on January 23 at $72.42
Average Daily Volume = 832 thousand
Listed on January 22, 2012

Whole Foods Market - WFM - close: 96.33 change: +0.68

Stop Loss: 91.40
Target(s): 99.50
Current Option Gain/Loss: +68.4%
Time Frame: Exit PRIOR to earnings on Feb. 13th
New Positions: see below

01/28/13: WFM displayed some relative strength today with a +0.7% gain. The stock is now up several days in a row and arguably short-term overbought and due for a pullback.

We do not want to hold over the Feb. 13th earnings report.
NOTE: because of a previous dividend the option strike for February is an odd one (95.50)

- Suggested Positions -

Long Feb $95.50 call (WFM1316B95.5) entry $1.90

Entry on January 24 at $94.25
Average Daily Volume = 1.5 million
Listed on January 23, 2012

Cimarex Energy Co. - XEC - close: 64.01 change: +0.01

Stop Loss: 61.90
Target(s): 69.50
Current Option Gain/Loss: Unopened
Time Frame: Exit PRIOR to earnings on Feb. 19th
New Positions: Yes, see below

01/28/13: XEC closed virtually unchanged on the session. We are waiting on a bullish breakout higher. There is no change from my prior comments.

Earlier Comments:
I am suggesting a trigger to buy March calls at $64.55. More conservative traders may want to wait for a rally past $65.00 instead. If triggered our target is $69.50. However, we will plan to exit prior to the Feb. 19th earnings report.

Trigger @ 64.55

- Suggested Positions -

buy the Mar $65 call (XEC1316c65)

Entry on January -- at $---.--
Average Daily Volume = 708 thousand
Listed on January 26, 2012

PUT Play Updates

Monster Beverage Corp. - MNST - close: 47.45 change: +0.74

Stop Loss: 50.15
Target(s): 41.00
Current Option Gain/Loss: -12.0%
Time Frame: Exit PRIOR to the late February earnings report
New Positions: see below

01/28/13: MNST managed a bounce on Monday with a +1.5% gain. I would still consider new positions now. Nimble traders could look for a failed rally near the descending 10-dma as an alternative entry point.

Earlier Comments:
Please note that MNST has been a very volatile stock in the past. This should be considered an aggressive, higher-risk trade.

- Suggested Positions - *Small Positions*

Long Mar $45 PUT (MNST1316o45) entry $2.90

Entry on January 28 at $46.91
Average Daily Volume = 2.0 million
Listed on January 26, 2012


iShares Silver ETF - SLV - close: 29.85 change: -0.36

Stop Loss: 29.85
Target(s): 33.50
Current Option Gain/Loss: - 6.3%
Time Frame: 6 to 8 weeks
New Positions: see below

01/28/13: The profit taking in the SLV continued on Monday. Shares of this ETF hit our new stop loss at $29.85.

- Suggested Positions -

March $30 call (SLV1316c30) entry $0.95 exit $0.89 (-6.3%)

01/28/13 stopped out
01/26/13 new stop loss @ 29.85
01/22/13 new stop loss @ 28.49


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