Option Investor

Daily Newsletter, Saturday, 2/9/2013

Table of Contents

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

Market Wrap

Nemo Market

by Jim Brown

Click here to email Jim Brown

Sunday begins the year of the Snake in China but Friday was all about Nemo.

Market Statistics

Nemo was the major storm hitting the Northeast this weekend with 2-3 feet of snow in some areas. The markets did not close because of the storm but they should have. Volume after lunch was next to zero and only 5.5 billion shares were traded for the entire day. Most of that was on the opening spike. Once the volatility from the opening spike eased the S&P traded in a very narrow 3 point range the rest of the day.

The +8 point gain was enough to produce the sixth consecutive weekly gain and that is the first time the S&P has opened the year with six positive weeks since 1971.

S&P Chart - 3 Min

Thank goodness for Nemo because Friday was a very slow news day. The economic reports were low profile events but the trade numbers did surprise analysts. The international trade deficit improved nearly 20% in December. The headline number was -$38.5 billion compared to -$48.7 billion in November. This was the lowest number since 2010. Expectations were for a minor decline to $46.0 billion.

Exports rose +2.1% while imports fell -2.7%. Net petroleum imports declined from $23.4 billion to $18.7 billion thanks to the increased production in the USA. The U.S. increased its crude production in 2012 by 766,000 bpd. That was the biggest annual increase since 1859. Production hit 7.0 mbpd and the highest level in 15 years. The U.S. imported the least oil in nearly 16 years at 223 million barrels. Exports of refined petroleum products rose to $11.6 billion and helped reduce the deficit to the lowest level since August 2009.

Exports of refined products to Brazil rose by +59% to 255,000 bpd. Exports to Venezuela rose +56%.

The average gas mileage of cars sold in the USA in 2012 was 33.8 mpg. That is up from 29.0 in 2011 and 19.9 in 1978. This is reducing our overall demand for crude in spite of the 15.5 million vehicles sold. The average age of a vehicle in the U.S. is 11 years so there are still a lot of gas guzzlers on the road. Global production in 2013 is expected to be 83 million vehicles. This guarantees that oil consumption will continue to increase every year.

December exports were $186.4 billion, an increase of +2.1%. It was the second highest ever behind September's $187.1 billion. For all of 2012 we imported $2.74 trillion in products and commodities and exported $2.2 trillion.

You may have noticed gasoline prices rising lately. Goldman Sachs warned that global oil markets will remain "tight" this quarter because of "surprisingly robust fuel demand in emerging economies." Rising global demand, disruptions in Canadian supplies and a production cut by Saudi Arabia are accentuating the result of sanctions on Iran.

China reported on Friday that crude imports rose to the highest level in eight months in January because of their economic recovery. They imported 25.15 million tons of crude, a 7.4% increase. That is roughly 5.88 mbpd. Brent crude, the index price for water borne crude, closed at $118.90 and a new nine month high. WTI closed at $95.76. Goldman believes that $23 spread will narrow to $5 over the next six months. The bank expects WTI to rise to $102.50 in three months, $105 in six months and $97 in 12 months.

In the short term that means gasoline prices are going higher and we could see prices approach $4 in the spring. The average price for gasoline spiked +18 cents over the last week to $3.54 per gallon. That is six cents above year ago levels. This is the largest one week increase in gasoline since February 2011. All regions saw prices rise but the Midwest was the highest with a 22 cent gain.

Brent Crude Chart

WTI Crude Chart

The improvement in the international trade deficit probably lifted the Q4 GDP out of negative territory when it is revised next month. Unfortunately the December Wholesale Trade report released on Friday showed inventories declined -0.1% compared to a +0.6% gain in November and estimates for a +0.1% gain. This will offset the GDP gains from the trade report but at least the GDP will be "less negative."

The decline in inventories was due mostly to a -4.3% drop in drugs and a -6.0% drop in farm products. Automotive inventories fell -3.8% while furniture declined -2.5%.

Moody's called the drop in inventories a "wait and see posture" ahead of the fiscal cliff. Manufacturers did not want to have a lot of inventory on the shelves if the cliff debate ended badly. The inventory to sales ratio declined to 1.19 and the lowest level since May. That represents the number of months required to deplete inventories at the current rate of sales.

Helping the U.S. markets on Friday was news that Chinese imports surged +28.8% in January suggesting the recovery was accelerating. Exports rose by 25%.

German data showed the country had a trade surplus in 2012 of 188.1 billion euros that was the second highest in the last 60 years. Exports rose +3.4% to a record 1.1 trillion euros. This suggests the German economy, the biggest in the eurozone, is stronger than previously expected.

The economic calendar ahead is weak again with only three reports that will attract any attention. I highlighted Consumer Sentiment because of the recent sharp declines in sentiment and confidence. That has a direct bearing on retail sales and the stock market.

I highlighted the EU Finance Minister meeting on Monday but there is nothing pressing on their agenda so it will probably be ignored.

Also of note there is a flurry of Fed members giving speeches this week. Three of them will speak on Tuesday. When a Fed member is speaking the market is at risk.

Economic Calendar

Earnings remain higher than expected with the current forecast for the Q4 cycle to end with 5.4% to 6.8% growth. That compares to expectations of +1.4% just four weeks ago. More than 69% of companies have beaten on earnings but only about 50% have had positive guidance.

We are running out of big names on the earnings calendar. Cisco is going to be the most watched next week but GM and McGraw Hill (S&P) are also going to be important for the market. McGraw Hill will have to disclose more info on the $5 billion suit over subprime ratings. That should produce some headlines.

I am interested to see Cabelas earnings on Thursday to see how the feeding frenzy on guns and ammo impacted their earnings since they are one of the largest firearms retailers.

This is the last major week for earnings. After Dell and Hewlett Packard report the following week the cycle will be complete for 90% of the companies.

Earnings Calendar

The big earnings winner for Friday was LinkedIn (LNKD). Shares of LNKD soared +21% to $150 after posting earnings of 35 cents compared to estimates of 19 cents. Revenue rose +81% to $303.6 million. That was the seventh consecutive quarter LNKD beat analyst estimates. The company raised guidance for revenue to $305-$310 million compared to consensus estimates for $301 million. Gross margins are approaching 90%. The company recently added blogs from successful business people like Richard Branson, Jeffery Immelt, Mark Cuban and others to increase readership on the site. The CEO said the success of the blogs has far exceeded expectations. A dozen brokers were tripping all over themselves to raise the price target on LNKD.

LNKD Chart

In the "believe it or not" category AOL rallied +7% after posting its first quarter of revenue growth in eight years. The company posted earnings that rose +78% to 41 cents. Revenue rose +3.9% to $599 million and beating the consensus estimate of $576 million. The earnings were powered by a +17% spike in search ad revenue but display ad revenue was flat. Shares spiked +7% but remain well under the highs set in November when they beat estimates on the first rise in search revenue in three years.

AOL Chart

Coinstar (CSTR) fell -7% on worries the growth in its Redbox DVD service has reached a saturation point. Q4 revenue in the Redbox segment rose about +10%. That compared to +23% growth in the number of kiosks it had placed in supermarkets, drug stores and other retailers. The company ended 2012 with 43,800 kiosks, up from 35,500 in December 2011. Coinstar only expects to add another 500-1000 in 2013. The company guided below analyst estimates for Q1 partly because there are only 12 DVD titles coming available in Q1. There were 23 new titles last January.

The company is trying to compete with NetFlix by jointly developing a streaming video service with Verizon. The system is in test mode today and should be available to select areas by the end of March. That is going to be a tough fight.

Coinstar Chart

FleetCor (FLT) reported earnings of 82 cents that rose +56% compared to estimates of 75 cents. Revenue rose +45% to $202.6 million. That was well over estimates for $178 million. Gross margin was 75.4%. FleetCor provides specialized payment systems to fleet operators, oil companies and petroleum marketers. The company raised guidance to 82-86 cents compared to analyst estimates at 76 cents. The chart is a beauty but you have to wonder where you would have taken profits along the way.

FleetCor Chart

Caesars Entertainment (CZR) won the New Jersey lotto on Thursday when Governor Chris Christie vetoed a bill that would have allowed online gaming. While that sounds negative there was a catch. Christie listed three conditions that lawmakers could add to the bill and he would sign it. His conditions were an initial 10-year time limit, an increase of the tax on online bets and more money for compulsive gambling programs.

Caesars has four casinos in New Jersey and is the largest casino operator in the state. Caesars has the capability to implement online gaming almost immediately through its partners. An approval in New Jersey is thought to be the next step in getting online gaming nationwide. Three states already have it and seven more are in the process of approving it although every state will have slightly different rules. Caesars spiked earlier in the week when it said it may spinoff the Planet Hollywood casino in Vegas along with a $1.1 billion note and its interactive gaming unit. The new venture would be called Caesars Growth Venture Partners (CGVP). This is an effort to reduce its $20 billion debt that was incurred in a monster LBO in 2008 just before the financial crisis hit.

I think Caesars is going to be a huge short once the headlines fade. The company is way over valued and that $20 billion in debt is a stone around their neck. They would have to sell half of their properties at twice what they are worth to even come close to a reasonable valuation. I like Caesars casinos but after this short squeeze I am ready to hit the sell button for the ride back down.

Caesars Chart

You knew it was coming and now the battle has begun. Michael Dell is offering $13.65 ($24.4B) to take Dell private in a leveraged buyout. Good luck with that. Southeastern Asset Management started the ball rolling saying it was going to use all of its resources to prevent the acquisition because the price was grossly undervalued. Southeastern believes the valuation should be closer to $24. The company owns roughly 8.5% of Dell's stock. On Friday Harris Associates, Yacktman Asset Management and Pzena Investment Management, which together own 3.3% of Dell's stock also joined the protest party. That makes four of Dell's 20 largest shareholders are protesting the sale and odds are good quite a few more are going to join the revolt. Pzena believes the stock should be worth more than $20 if Dell would hold a Dutch auction. Michael Dell owns 16% of the company.

The terms of the buyout require a majority of shares NOT held by Michael Dell to be voted in favor of the deal. Southeastern believes a breakup of the company would provide more than $20 per share. Southeastern has a cost of more than $20 per share in their 8.5%. They would lose more than $825 million on the buyout. Two other firms, Alpine Capital Research and Schneider Capital have also voiced opposition to the deal.

Michael Dell replied to their complaints saying "The board concluded that the proposed all-cash transaction is in the best interest of stockholders." This battle is far from over.

Dell Chart

The fight for Apple's treasure is intensifying. Apple has about $137 billion in cash. David Einhorn wants some of it. Einhorn has sued Apple to try and prevent the company from removing preferred shares as an option in its charter. Einhorn wants Apple to issue perpetual preferred shares that pay a hefty dividend as a way to spin off some of their cash. Apple has "bundled" several unrelated matters into a shareholder vote and Einhorn claims the SEC has rules to prevent bundling. He is seeking an injunction to block a February 27th shareholder vote on the proposal.

The proposal seeks to amend Apples articles of incorporation and provide for majority voting for directors, establishing a par value for Apple shares and eliminate the ability to issue preferred shares. However, several major shareholders have recommended investors vote for the proposal. The California Public Employees Retirement System (CalPERS), the biggest U.S. public pension fund and owner of 2.7 million Apple shares wants shareholders to approve the proposal. The fund said "we don't want Apple cutting a deal on the side with a hedge fund out of fear that a lawsuit will cancel the annual meeting." CalPERS believes all shareholders should share in the $137 billion and not just preferred shareholders that get a sweeter deal.

Apple Chart

Moody's Corp (MCO) may be next in line for a suit on subprime ratings. The worry over a potential suit overshadowed a positive earnings report. Moody's earned 70 cents compared to 43 cents in the year ago quarter. Revenue rose +33% to $754 million and well over estimates for $687 million.

Comments from the Justice Dept were exceptionally vague. When asked if Moody's and Fitch were going to be sued as well as S&P the spokesman said "We are here to talk about S&P. We will not comment on whether we do or do not have an ongoing investigation or action against anyone else."

Typically the Justice Dept and other agencies will sue one participant in an area where there are multiple operators. Once they win the suit against the first party then they file on the remaining parties. At that point they have proved their arguments and have case law in their favor. They now have experience in prosecuting their case and the new defendants do not. The odds of a quick settlement in the follow on cases are very strong.

Will Moody's get hit with a suit? I think the odds are 100% but not until the S&P case is over.

Moody's Chart

Google's Executive Chairman, Eric Schmidt, made an SEC filing late Friday saying he plans to sell 3.2 million shares of Google. He currently owns 7.6 million worth $5.96 billion. He is going to sell those 3.2 million shares over the rest of the year as part of "his long term strategy for diversification and liquidity." Is he calling the top in Google by announcing his plans to sell nearly half his stake? Is he planning on leaving Google in the near future and is taking this opportunity to lighten up? Does he really need the $2.5 billion in liquidity he will get from selling the shares? Google shareholders may vote with their shares on Monday.

Google Chart

AT&T (T) announced an app for iPhone and Android that monitors your motion. If it detects motion in excess of 25 mph it assumes you are driving and will not notify you of calls and texts. If you receive a text it automatically replies back saying you are driving and will respond later. Your calls go directly to voicemail. The purpose of the app is to keep you off the phone while you are driving. I don't know how many people would voluntarily download this big brother app but AT&T claims it has spent millions developing it. Let's hope the government does not decide to make it mandatory. Some states already outlaw talking and texting while driving so this could give them a tool to enforce it.

Over 4700 flights were cancelled because of Nemo. Reports on Saturday claim most of New York was spared the big snows so there should not be any challenges with opening the market on Monday.

The Chinese New Year begins this Sunday and this is the year of the snake. Of the 12 years in the cycle the snake has the worst historical record for the markets. While I never recommending basing your trading plan on the zodiac or similar events the year of the snake has had a tough time. The last snake year was 2001 with a decline of -13.1% for the S&P and it traded as low as -28%. The prior snake year was 1989 and the S&P gained +9.7%. The year prior to that was 1977 and the S&P lost -17.5%. For those history buffs the 12 years in the order of their market returns are pig, sheep, rabbit, dragon, tiger, cow, chicken, monkey, dog, rat, horse and in last place the snake. The Chinese markets will be closed all week for the New Year celebrations.

Despite the low volume and traders leaving early because of the storm the S&P managed to close at a new five-year high at 1517. At the same time the AAII Investor Sentiment Survey for the week showed that bullish sentiment fell to 42.8%, down -5.3% from the prior week but more importantly it was down 10 points from the 52.3% reading two weeks ago. Bearish sentiment rose +5.5 points to 29.6%.

The Institutional Investor sentiment survey saw bulls rise to 54.7% while bears declined to 21.1%. The spread has not been this wide since June 2011 and just prior to the 18% market correction.

If you need more convincing a market top is near here is the Barron's cover. Proclaiming record highs, breakouts and bull markets on the cover of a major publication is typically seen as the signal to abandon ship because the bulls are "all in" at that point.

Barrons Cover

Another item contrary to the current bullish sentiment was the decline in the Gallup Job Creation Index. The index fell to 16 for January. That is an 11 month low. If it falls one more point it will be nearly a two year low. Gallup surveys workers asking them, "based on what you have seen, would you say that, in general, your company is 1) Hiring new people, 2) not changing the size of its workforce, or 3) letting people go and reducing the size of the workforce. Of those surveyed 32% said hiring, down from 36% in mid 2012, and 16% said firing. (32-16 = 16) The firing level has been relatively flat at 16-17 since early 2012.

This bodes ill for the pace of hiring in February and that is especially true since the sequestration debate is ramping up. If sequestration takes effect the CBO expects the country to lose 1.4 million jobs in 2012.

Gallup Job Creation Index

Despite the attempts of numerous analysts to call a market top the market continues to rebound from every single dip. Eventually that will end but until it does we need to follow the trend.

The very low volume on Friday did not keep the internals from being very positive. The advance/decline line on the S&P was almost 4:1 advancers to decliners.

The first chart below shows a broadening pattern at the top of a multi-month rally. Typically this type of a pattern suggests indecision and a pending retracement. The intraday swings become more pronounced with alternating gains and losses. Overall the trend is still up but the index is struggling to make higher highs. The S&P did make a higher high on Friday so the trend is still alive. A drop back below 1495 would be a lower low and a signal the trend has failed.

S&P Chart - Daily

The longer term chart has shown a pretty convincing pattern with each touch of the uptrend resistance since the 2011 lows. When the index nears resistance the index goes sideways for a couple weeks then fails. It is more pronounced this time because we are also at five year highs. The 1500 level is now key support and 1520-1525 is the next resistance target.

S&P Chart - Daily

The longer term uptrend resistance (prior) at 1495 is now support.

S&P Chart

The Dow chart easily illustrates the increase in volatility. Note the short candles in the two weeks prior to February. There were constant gains but they were steady not erratic. Once into February the trend changed. The uptrend stalled and the Dow has not made any upward progress since Feb 1st.

However, the Dow closed near its highs on Friday when there was ample opportunity for profit taking ahead of the weekend. I consider this bullish. We could view this weeklong pattern as consolidation before a higher move as opposed to stalling before a pending correction. Fortunately the pattern gives us a clear set of indicators for market direction. A breakout over 14,015 on decent volume is bullish while a decline below 13,850 suggests it is time to exit longs.

Dow Chart - 90 Min

Dow Chart - Weekly

Dow Chart - Daily

The Nasdaq is about to complete the "in spite of Apple" rally with a breakout over 3200. When you consider Apple has been down significantly more than up in recent weeks the Nasdaq has had to slowly creep higher while taking a daily beating by the Apple bears. With Apple, Google, Priceline and ISRG all up big on Friday the index was finally able to break out of the three weeks of congestion at 3150 and challenge final resistance at 3200. I say final resistance because that level is the 12 year high dating back to November 2000. Once through 3200 the minefield clears and the uphill battle should not be so intense. New highs tend to produce more new highs. Support is now well back at 3140.

Nasdaq Chart - Daily

The Russell 2000 finally broke out of two weeks of congestion at 905 to close at a new historic high at 913. JP Morgan raised their targets on the small caps saying the strength in the rally was better than expected. Now the 900-905 level should be strong support for any future correction.

Russell 2000 Chart - Daily

The Dow Transports finally broke out of their consolidation pattern just over 5800 and surged to a new high on Friday. They continue to defy gravity and higher fuel prices. Eventually this run is going to crash and burn but there are no signs of that today.

Dow Transports Chart - Daily

While we are worrying about new highs on the S&P or Apple moving back over $475 the stakes are a little higher in Asia. Japan and China are close to war over a chain of disputed islands. Twice in January Chinese naval vessels targeted Japanese navy vessels with their fire control radar. Turning on your fire control radar is a hostile act. The ship on the receiving end is suddenly thrown into a strong defensive posture with fear of an imminent attack. Sometimes the first response is to launch an attack of your own in order to beat the attacker to the punch. In today's navy battles it normally takes only one hit to knock a vessel out of combat. Nobody wants to wait until they are fired upon before formulating a response. It is a testament to the commanders on the Japanese side that they held their fire while expecting a missile to appear at any moment. The escalation of hostility between China and Japan is not getting much press now but you can bet the report of a shooting battle and loss of vessels would turn the market upside down very quickly.

Also, the tensions on the DMZ in Korea are increasing. In recent days the South Korean troops have received orders to return fire immediately against DPRK forces. The standing order today is to "respond immediately to any enemy provocation and punish automatically until the enemy surrenders." Since North Korea has never surrendered from Korean War in the 1950s they are not likely to surrender now. With North Korea testing nuclear weapons and long range missiles and the new premier toughening his stance against the South and the outside world this powder keg has a short fuse.

These events are a world away from us but should either one erupt it could cause an immediate market response.

Remember when 10-year Treasury yields were 7.28% in 1994? A one point increase in interest reduces the value of your bond by 7-11%. Money will eventually come out of bonds but not until the manufactured problems in Washington go away and the Fed starts talking about an end to monetary policy. That is at least May and the new debt ceiling date assuming they don't kick the can(s) farther down the road.

Meanwhile fund managers are stuck between a rock and a hard spot. Even if they wanted to take stock profits now ahead of a potential correction there is no other investment vehicle that offers any return. They don't want to switch to bonds with yields rising. They don't want to buy commodities with the currency wars making those markets more volatile. They can't just hold cash because if the market continued climbing they would be stuck buying back in at a higher level. That means fund managers are stuck holding their stock positions even though the market looks toppy. At least if stocks go down they go down for everybody and fund managers have the safety of the comparisons to other managers. If everybody goes down for the same reasons then there is no specific blame to be placed. It was not me, it was just the market.

The first day of the February expiration week has been down five of the last eight years. Expiration Friday has also been down more than it has been higher but only fractionally. In this expiration cycle the vast majority of option positions are calls and they are in the money. This could produce a negative bias as the cycle expires and positions are closed.

The S&P has gained for six consecutive weeks. That trend will eventually fail. Picture a roulette table where black has appeared for six consecutive spins. At that table the majority of money will now be bet on red in anticipation of a trend change. In 1998 I saw a table in Mesquite Nevada with a run of 21 consecutive black numbers. Small fortunes were lost betting on that trend change that never came. The market can remain irrational far longer than we can remain solvent.

Don't fight the Fed and the other global central banks.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"We can't tax our way out, cut our way out or grow our way out of our current debt problem."
Senator Alan Simpson

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Index Wrap

Bullish Breakout in the Nasdaq

by Leigh Stevens

Click here to email Leigh Stevens

The S&P is still working gradually higher but is no longer doing all the heavy lifting. The Nasdaq finally breaks out of a lengthily sideways move.

Someone not following the charts closely would probably assume that it was certain market related news that caused the big cap Nasdaq 100 (NDX) to finally lift. I would say yes to that but the 'timing' of such news often also relates to a technical pattern that would suggest it was 'time' for such news to come out so to speak. The NDX pattern is highlighted below in my hourly NDX chart.

There was a sideways or lateral consolidation after the NDX ran up from the low-2600 area to around 2750. This went on for some time. That is, until NDX finally reached chart support implied by the Index's hourly up trendline; also seen as the low end of NDX's uptrend channel. I can't predict if NDX is again headed for the UPPER end of its uptrend price channel but the length of the sideways move would 'support' a further advance, such as up toward the 2850-2900 area. If so, strength in Nasdaq would help keep the S&P and Dow rally going awhile longer.

Speaking of the Dow 30 (INDU), the Average is the one nearest to prior all-time highs. If INDU closed at or above where it went out on Friday, at 13992, it would finally achieve a new (all-time) monthly Closing high relative to the October 2007 close. Such a move, as I've been pointing out, could suggest the prospect of a substantial further up leg in coming months. In terms of Dow theory such a new monthly high gives a type of 'all-clear' confirmation of the primary, which is the very long-term investment-related trend that unfolds over many months and often, years.

I've been pointing out in this last advance that the S&P is vulnerable to a correction, mostly as suggested by overbought readings in the daily charts such as seen with the 13-day Relative Strength Index. However, periodic sideways moves also tend to 'throw-off' high RSI readings that run up into 'typical' overbought zones; readings that tend to precede pullbacks, often good-sized ones. The risk of a correction grows as the major stock indexes keep trending higher but it's also true that so-called overbought markets can continue for long periods.

What I tend to find the most telling then is whether bullish sentiment among options traders also gets to certain extremes; i.e., see my SPX and Nasdaq Composite charts for my CPRATIO indicator and the zone where I consider my sentiment indicator to show 'extreme' bullishness, especially on a 5-day moving average basis. This indicator is climbing but hasn't gotten to the extremes, often repeated 'extremes', that would suggest to me an even higher-risk situation for index calls and other bullish strategies.



The S&P chart continues to maintain its strong bullish climb along the top of its projected uptrend channel. Friday's upswing was a bullish breakout above the most recent trading range in SPX.

I'll just repeat from last week that somewhere in here there will be a scare and prices will fall off and trader profit taking sets in. Meanwhile 1500, prior resistance, appears to have 'become' a technical support. Trendline support is current seen in the 1470 area.

Near resistance is seen at 1525-1532. The 2007 weekly Closing high, which is the last major peak (after 2000), comes in at 1562 and it would seem that SPX 'wants to' retest that area. As if the Market had goals! But it seems that the trajectory of a trend is headed to prior key levels.

I noted in my initial 'bottom line' commentary that bullish sentiment is climbing certainly but isn't yet at the kind of 'extreme' readings that might keep me up at night if I had a lot riding on the continuation of a bull move.


The S&P 100 (OEX) chart continues on a bullish track and continued to trend higher climbing just under the upper end of the bullish uptrend channel line highlighted on the OEX daily chart. It would appear that the big cap S&P index can continue to work gradually higher, certainly in terms of the chart picture.

The 2007 highs range from 720 to 735. Regardless of how OEX gets there (e.g., whether after a substantial pullback or not) the Index appears headed to a test of those prior highs; i.e., highs made AFTER the 2000 peaks that were in the 830 area.

Technical/chart resistance is currently suggested in the 688-690 area, then at 700. Near-term support continues to be at 675, with more major support beginning in the 660 area.

As I wrote last week: "OEX's ability to hold above 680 keeps the index on a solidly bullish track chart wise ..." I also noted the high/'overbought' RSI reading but that has moderated some.


The Dow 30 (INDU) is trending sideways most recently as INDU has hit fairly tough resistance in the 14000 area. If Nasdaq continues higher and the S&P indexes continue to act bullishly (they are) the Dow should be able to churn through the 14000 barrier.

The key line of resistance is at 14000, the pivotal line of support is at 13860 currently. A breakout above 14000 or decisive downside penetration of the lower line of support would suggest potential for INDU to climb or decline a couple of hundred points.

Resistance is projected at 14090-14100, then in the 14150 area at the upper trend channel line, with resistance extending to just over 14200.

I'm repeating myself but per last week's comments, "I don't want to bet again the Dow continuing higher, 'overbought' or not, but at some point such extremes suggest correction sooner rather than later. Still, bull moves do get extended. Stay tuned." Yes.


The Nasdaq Composite has achieved a bullish upside penetration of its recent trading range, setting up a potential test of key near resistance in the 3200 area. If 3200 is pierced, especially for more than a day, COMP could climb next to the 3250-3260 area, or the upper end of the Index's broad uptrend channel.

Near support and a pivotal one is seen at 3130, extending to 3100.

The RSI is now longer at the 'overbought' extreme it was with COMP and bullish sentiment isn't at the high levels where I would say that a pullback was quite close at hand. If equities call daily call volume starts getting to double or more total daily put volume (for all equities on the CBOE), that's especially when I want to be out of any heavy market bets on the call side or in other equivalent strategies.


The Nasdaq 100 (NDX) has achieved a bullish upside penetration of a lengthily trading range where highs were seen repeatedly in the 2750 area and lows repeatedly in the low-2700 area.

The aforementioned pattern and 'breakout' move suggest NDX could be headed to the 2800 area or higher; I've pegged resistance above 2800 as around 2850 as the Index nears its prior highs from September.

Key support is at 2715-2700, extending to the 2665 and the low end of the big upside price gap that preceded a major spurt higher, followed by a several week sideways consolidation or sideways trend. Such a lateral narrow-range trend, especially one that doesn't retrace much of the prior upswing, is assumed to be a consolidation of the prior ADVANCE and the most likely eventual move will be in the direction of the prior trend; i.e., higher. NDX seems to be following this script.


The Nasdaq 100 tracking stock (QQQ) has the same bullish pattern (what else!) as the Nas 100/NDX and I've highlighted what is called in technical/chart pattern terms a 'bullish rectangle' or just a rectangle or 'line' formation according to Charles Dow who named this pattern. A line formation is seen as bullish after the upside breakout but the bias in directional expectation by technical traders is toward a further up leg occurring at some point that continues the prior trend.

Next resistance now looks like 68.3, with more key chart resistance in the 69.8-70 area, at the upper end of QQQ's projected uptrend channel.

Pivotal support is at 66.5, extending to 66 even.

Daily trading volume surged a bit over this past week which is mildly bullish given the sideways trend.


The Russell 2000 (RUT) Index continues bullish as the Russell moves higher within its long-standing uptrend channel.

Support implied by the low end of RUT's uptrend channel or at its up trendline, is at 900. Support below 900 is seen at 880-875.

Resistance is projected currently in the 923 area, extending to around 940.

The recent (more or less) sideways trend has 'thrown off' the overbought RSI extreme to a degree. This action is like letting off a little steam pressure in a boiler that could blow. RUT has a seasonal tendency to rally in the early part of the year and in fact seemed to lead the Market higher before strong up trends were apparent in the major indexes.


New Option Plays

Machinery, Volatility, & Energy

by James Brown

Click here to email James Brown


Dresser-Rand Group - DRC - close: 60.97 change: +0.51

Stop Loss: 59.75
Target(s): 64.90
Current Option Gain/Loss: Unopened
Time Frame: Exit prior to earnings on Feb. 28
New Positions: Yes, see below

Company Description

Why We Like It:
DRC manufactures custom-engineered rotating equipment for a number of different industries. Investors have been buying the dips in DRC's stock. The recent bounce from what should be round-number support at $60.00 looks like a new bullish entry point. I want to see a little more confirmation. Thus I am suggesting a trigger to buy calls at $61.25. If triggered we will aim for $64.90 but we'll plan on exiting prior to the late February (still unconfirmed) earnings report.

Trigger @ 61.25

- Suggested Positions -

buy the Mar $65 call (DRC1316c65) current ask $0.75

Annotated Chart:

Entry on February -- at $---.--
Average Daily Volume = 450 thousand
Listed on February 09, 2012

CBOE Volatility Index - VIX - close: 13.02 change: -0.48

Stop Loss: 11.45
Target(s): 22.00-25.00 range
Current Option Gain/Loss: + 0.0%
Time Frame: 8 to 9 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The CBOE volatility index has traditionally been viewed as an investor fear gauge. Low levels on the VIX indicate low levels of fear. High levels indicate elevated levels of fear. Naturally as stocks move lower the VIX moves higher. Right now the VIX is trading near multi-year lows thanks to multi-year highs in the major stock indices. We all know that stocks will see a correction lower eventually.

We are not calling a top in the market right now but we do expect a correction sooner rather than later. It may be late February or March but stocks will see a pullback. We are suggesting traders buy calls on the VIX to take advantage of what will likely be a sharp spike higher in volatility. I am setting a stop loss at $11.45. You might want to play this with no stop and just manage your risk based on the size of your option position.

- Suggested Positions -

buy the Apr $16 call (VIX1317D16) current ask $1.95

Annotated Chart:

Entry on February -- at $---.--
Average Daily Volume = n/a
Listed on February 09, 2012


EV Energy Partners - EVEP - close: 56.12 change: -0.26

Stop Loss: 57.25
Target(s): 50.50
Current Option Gain/Loss: Unopened
Time Frame: exit prior to earnings on Feb. 27
New Positions: Yes, see below

Company Description

Why We Like It:
EVEP is a master limited partnership in the energy sector. Currently shares offer a 5% dividend yield but that doesn't seem to be slowing the stock's decline. EVEP has been underperforming. Now the stock is nearing support at the $55.00 level.

I am suggesting a trigger to buy puts at $54.75. If triggered our target is $50.50.

Trigger @ 54.75

- Suggested Positions -

buy the Mar $55 put (EVEP1316o55) current ask $2.95

Annotated Chart:

Entry on February -- at $---.--
Average Daily Volume = 300 thousand
Listed on February 09, 2012

In Play Updates and Reviews

Market Melt Up Continues

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 has extended its rally to six weeks in a row. Most of our bullish candidates are following the indices higher.

Current Portfolio:

CALL Play Updates

BP Prudhoe Bay Royalty Trust - BPT - close: 79.28 change: -0.52

Stop Loss: 78.25
Target(s): 87.50
Current Option Gain/Loss: Unopened
Time Frame: Exit prior to earnings in early March
New Positions: Yes, see below

02/09/13: The price of oil ended lower on Friday and that could have slowed BPT's ascent. Shares of BPT flirted with a breakout past $80.00 but failed to hit our entry point.

I am suggesting a trigger to open small bullish positions at $80.25. If triggered our target is $87.50. FYI: The Point & Figure chart for BPT is bullish with a $110 target.

Trigger @ 80.25 *Small Positions*

- Suggested Positions -

buy the Mar $80 call (BPT1316c80) current ask $1.80


Entry on February -- at $---.--
Average Daily Volume = 131 thousand
Listed on February 07, 2012

Check Point Software Tech. - CHKP - close: 51.66 change: +0.87

Stop Loss: 49.40
Target(s): 54.50
Current Option Gain/Loss: +26.3%
Time Frame: 3 to 6 weeks
New Positions: see below

02/09/13: CHKP displayed some relative strength on Friday with a +1.7% gain. Yet the stock is still struggling with resistance at its simple 300-dma and the $52.00 level. I am not suggesting new positions at this time.

*Small Positions* - Suggested Positions -

Long Mar $50 call (CHKP1316c50) entry $1.90

02/06/13 new stop loss @ 49.40


Entry on February 01 at $50.25
Average Daily Volume = 2.7 million
Listed on January 31, 2012

The Cooper Companies - COO - close: 104.26 change: +1.39

Stop Loss: 99.90
Target(s): 107.50
Current Option Gain/Loss: + 9.2%
Time Frame: Exit prior to earnings on Mar. 7th
New Positions: see below

02/09/13: COO also displayed relative strength on Friday. The stock surged to $105.20 intraday but pared its gains by the closing bell. Honestly, I would not be surprised to see a pullback toward the $103 area again.

Earlier Comments:
Please note that we do want to keep our position size small because the option spreads are a little bit wide. COO is scheduled to report earnings on March 7th. We do not want to hold over the report. FYI: The Point & Figure chart for COO is bullish with a $125 target.

*Small Positions* - Suggested Positions -

Long Mar $105 call (COO1316c105) entry $2.70


Entry on February 06 at $102.60
Average Daily Volume = 303 thousand
Listed on February 02, 2012

3M Company - MMM - close: 102.66 change: +0.44

Stop Loss: 100.70
Target(s): 106.50
Current Option Gain/Loss: + 3.3%
Time Frame: 3 to 4 weeks
New Positions: see below

02/09/13: MMM saw a Friday morning spike to a new all-time high before paring its gains. The trend continues and more conservative traders might be able to get away with a stop loss closer to the simple 10-dma.

Earlier Comments:
I am suggesting we keep our position size small to limit our risk.

- Suggested Positions -

long Mar $100 call (MMM1316c100) entry $2.95


Entry on February 06 at $102.25
Average Daily Volume = 3.0 million
Listed on February 05, 2012

Rock-Tenn Company - RKT - close: 82.14 change: +0.97

Stop Loss: 79.45
Target(s): 84.85
Current Option Gain/Loss: + 8.1%
Time Frame: 3 to 4 weeks
New Positions: see below

02/09/13: RKT displayed some relative strength on Friday with a +1.1% gain and a new all-time high. If there is a pullback we can watch for support near $80.00 or the simple 10-dma.

FYI: The Point & Figure chart for RKT is bullish with a long-term $117 target.

- Suggested Positions -

Long Mar $80 call (RKT1316c80) entry $3.05


Entry on February 06 at $81.05
Average Daily Volume = 743 thousand
Listed on February 02, 2012

Starbucks Corp. - SBUX - close: 56.37 change: +0.51

Stop Loss: 54.75
Target(s): 59.85
Current Option Gain/Loss: - 11.9%
Time Frame: 3 to 6 weeks
New Positions: see below

02/09/13: SBUX saw a spike down midweek but has started to bounce again after filling the gap from mid January. Friday's high was $56.65. I would be tempted to buy calls on a new rise past this level (56.65).

Earlier Comments:
Our target is $59.85. More aggressive traders could aim for the all-time highs in the $62 area set last year. FYI: The Point & Figure chart for SBUX is bullish with a long-term $67 target.

- Suggested Positions -

Long Mar $55 call (SBUX1316c55) entry $2.51


Entry on February 01 at $56.57
Average Daily Volume = 6.8 million
Listed on January 30, 2012

SPX Corp. - SPW - close: 75.80 change: +0.72

Stop Loss: 73.95
Target(s): 78.00
Current Option Gain/Loss: +61.5%
Time Frame: Exit prior to earnings on Feb. 14th
New Positions: see below

02/09/13: After more than a week of consolidating sideways on either side of the $75.00 level shares of SPW finally appear to be breaking out to new highs. We only have a few days left on this trade. SPW is scheduled to report earnings on Feb. 14th. If shares do not hit our exit target at $78.00 then we will plan on closing positions on Feb. 13th at the closing bell.

- Suggested Positions -

Long Feb $75 call (SPW1316B75) entry $1.30

02/06/13 new stop loss @ 73.95
01/30/13 new stop loss @ 73.75
01/29/13 new stop loss @ 71.95, adjust exit to $78.00
readers may want to just take profits right now
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

Zimmer Holdings - ZMH - close: 75.85 change: +0.79

Stop Loss: 73.40
Target(s): 79.50
Current Option Gain/Loss: +21.8%
Time Frame: 3 to 6 weeks
New Positions: see below

02/09/13: The bounce continues in shares of ZMH. The stock is now at an important test of resistance at the $76.00 level near its January high. A reversal here and it will start to look like a bearish double top pattern. A breakout could fuel some short covering. I am not suggesting new positions at this moment. Please note our new stop loss at $73.40.

Earlier Comments:
I am suggesting we keep our position size small to limit our risk. FYI: The Point & Figure chart for ZMH is bullish with a long-term $89 target.

- Suggested Positions - *small positions*

Long Mar $75 call (ZMH1316c75) entry $1.60

02/09/13 new stop loss @ 73.40


Entry on February 07 at $75.24
Average Daily Volume = 1.2 million
Listed on February 06, 2012

PUT Play Updates

SourceFire, Inc. - FIRE - close: 40.47 change: +0.48

Stop Loss: 41.55
Target(s): 35.25
Current Option Gain/Loss: Unopened
Time Frame: exit prior to earnings on Feb. 21
New Positions: Yes, see below

02/09/13: Shares of FIRE managed an oversold bounce on Friday but the overall trend is still very bearish. We are waiting on a breakdown to new relative lows. The low today on Friday was $39.50. We have a trigger to buy puts at $39.40. We want to keep our position size small to limit our risk. We do not want to hold over the earnings report on Feb. 21st.

Trigger @ 39.40 *Small Positions*

- Suggested Positions -

buy the Mar $35 PUT (FIRE1316o35)


Entry on February -- at $---.--
Average Daily Volume = 890 thousand
Listed on February 05, 2012

Blue Nile Inc. - NILE - close: 31.57 change: +0.05

Stop Loss: 33.25
Target(s): 26.25
Current Option Gain/Loss: -10.8%
Time Frame: To be determined (see below)
New Positions: see below

02/09/13: Our aggressive play on NILE isn't moving very fast, at least not yet. The stock did breakdown to new multi-month lows this past week. Shares certainly look weak and poised to continue the move lower. Our challenge is earnings. Normally we do not hold over a company's earnings report because there are so many variables that could send the stock gapping the opposite direction. NILE is scheduled to report earnings on Feb. 12th, after the closing bell. At the moment I am tempted to hold over the report. We have two more trading days to make that decision.

Earlier Comments:
We want to keep our position size small to limit our risk. I am concerned that the $30.00 level might be potential round-number support.

*Small Positions* - Suggested Positions -

Long Mar $30 PUT (NILE1316o30) entry $1.85


Entry on February 07 at $31.45
Average Daily Volume = 319 thousand
Listed on February 06, 2012