Option Investor

Daily Newsletter, Saturday, 3/2/2013

Table of Contents

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

Market Wrap

Volatility Increasing

by Jim Brown

Click here to email Jim Brown

The Dow closed positive for the 9th consecutive Friday after a week of major volatility.

Market Statistics

The president's sequester program is now reality and the stock market did not implode. Despite all the warnings about the impact to the economy and the end of life as we know it the equity market ignored the event. That is not to say it won't react in the near future but so far it was just another brick in the wall of worry.

The much touted $85 billion in spending cuts are actually only about $44 billion in the current fiscal year. In reality there is no cut in total spending because the government will spend more in 2013 they it did in 2012. This is a cut in "spending growth." Some departments may see their budgets cut so the money can be used somewhere else where it is deemed more important.

With the sequester discussion now behind us the next challenge is the expiring budget resolution on March 27th. Congress will have to authorize a new "continuing resolution" to fund the government by April 15th or there will be shutdowns of nonessential services while the two parties duke it out again. Since the president has never passed a budget since he has been in office the House has been forced to pass a continuing resolution to fund the government on a temporary basis for the last three years. The Senate voted 98-0 against the president's last budget and he has yet to even present one this year. It was due by law the first week of February. Now that the election is over and the two sides are more opposed than ever the budget battle could be ugly. After the budget battle is over the debt ceiling debate comes back to haunt us in May.

What this all means is we could get a grand bargain in late March that revises the president's sequester, includes a new continuing resolution and addresses the debt ceiling all at one time. I am not hopeful it is possible. The more likely scenario is a continuing monthly crisis where each month the parties square off over the budget and spending.

The difference this time is that there will be no backroom deals. The House republicans want everything to go through the "regular order" of business. That means the administration through the Senate will have to present a budget bill that will have to be voted out of the Senate and then move to the House. That way there is full debate of the merits in both the Senate and the House. Lawmakers can amend it and vote on it in full view of the press and the public. In the prior debates over the debt ceiling and fiscal cliff there were last minute deals cut by party leaders and the rank and file had to vote on the bills as agreed rather than bills debated and formed in the normal course of Congress and the Senate.

In the normal course of business the lawmakers providing input to the bills are identified and they have to lobby for their amendments. That means the voters at home know how they voted and where they stand. If the republicans are successful in forcing the normal course of business the light of day will eliminate some of the shenanigans pulled in the last several crisis events. I believe lawmakers on both sides should act responsibly and in the public forum. Unfortunately the process can be ugly and it is rarely smooth. That suggests the coming budget battle could be a whopper. It will only be worse because they will be trying to fix the sequester as part of the new budget resolution and that is going to gum up the works.

For the time being the sequester should fade from the headlines and that should be positive for the equity markets.

The markets needed some help on Friday morning when the Dow opened -116 points lower. Dragging the markets lower was a flurry of bad data from overseas. The official Purchasing Managers Index (PMI) for China came in at 50.1 for February. That was down from 50.4 in January. It was the weakest reading in five-months. The HSBC-Markit Economics PMI fell from 52.3 to 50.4 and a four-month low. Readings above 50 represent expansion and below 50 represent economic contraction.

The rebound in the Chinese economy appears to be failing. New orders, an indication of expected conditions in the months ahead, fell to 50.1 and a five-month low while export orders contracted for the second month. China lives on exports and two months of contraction is a bad sign.

However, analysts point to the weeklong Chinese New Year celebration that fell in February this year as the reason for the weakness. Businesses and markets are closed for the celebration. The State Council Development Research Center said declines mean "economic growth will move from rebounding to stabilizing." The GDP for China rose +7.9% in Q4 and is expected to rise +8.2% in Q1.

In the U.K. the PMI declined dramatically from 50.5 to 47.9. This put the index well into contraction territory and sent the pound to a 2.5 year low and the dollar to a new six-month high. The S&P GSCI commodity index fell to the lowest level of the year and its fourth weekly decline. That is the longest losing streak since June. Copper fell -1.4% to the lowest level since November as a result of the Chinese PMI. Crude prices also declined with WTI trading as low as $90.04 intraday. That is a three month low. Aluminum prices dropped for the 10th consecutive day and the longest streak of declines since June.

British Pound Chart

Dollar Index Chart

Unemployment in the 17-nation euro area rose to 11.9% in January. That is the highest level since the data stream began in 1995. The table below shows the unemployment in the various countries in the eurozone.

EU Unemployment Rates

While you are pondering the high numbers in the EU let me give you one more statistic. In Egypt half the population of 82 million are age 30 or younger. (41 million) Unemployment for those 30 or younger is 75% or roughly 20.75 million. Civil unrest is normally caused by unemployed youth. Is it any wonder that Egypt is struggling with political unrest? This unemployment problem is growing all across the Middle East and that suggests growing civil unrest. I included the Egypt numbers because they relate to our global economic health.

Italy's PMI fell to 45.8 and far worse than the estimates of 47.6. Italy's deficit to GDP was above 3.0% and pushed the debt to GDP to the highest level in more than 20 years. Spain's manufacturing PMI rose slightly from estimates of 46.5 to 46.8. Both of those countries are in contraction.

The market opened lower because of overseas economics but once the U.S. numbers were released the rebound began. The ISM Manufacturing Index surprised to the upside with a 54.2 reading compared to 53.1 in January and estimates for a decline to 52.5.

The internal components were positive and suggest the economy was stronger than expected. The new orders component rose from 53.3 to 57.8 and that was the largest gain since 2010. Backorders rebounded back into expansion territory at 55.0 from 47.5. The only real negative was a decline in employment from 54.0 to 52.6.

This was the third consecutive monthly gain in the headline number from the 49.9 reading in November.

ISM Chart

The final reading on the February Consumer Confidence rose to 77.6 from 76.3. The present conditions component rose from 85.0 to 89.0. The expectations component rose from 66.6 to 70.2. This was the second consecutive monthly gain since the huge -10 point drop in December on worries over the fiscal cliff. Strangely the sequester failed to impact sentiment in the same way. Apparently a 2% spending cut is not as important to consumers as the potential shutdown of the government.

Consumer Sentiment Chart

Sentiment may not be as rosy next month after the impact of high gasoline prices and rising taxes finally hits home. Personal Income for January fell -3.6% after rising +2.6% in December and +4.2% in November. The big year end gains were due to the accelerated dividends and bonuses being moved into 2012 to avoid the rising taxes. The decline in January came from the restart of the FICA taxes and the lack of many normal dividends in January. Many of the regular quarterly dividends were pulled forward into December. This should equalize once we get into March.

Moody's Personal Income Chart

Construction spending for January fell off a cliff with a drop of -2.1% compared to an average gain of +1.5% for the prior three months. Residential construction was flat at zero but non-residential construction declined -5.1%. The decline was blamed on the uncertainty around the fiscal cliff and future tax rates. However, the non-residential decline was caused by a sharp decline in power and utility structures. I would not apply too much importance to this report unless the weakness continues.

Moody's Construction Spending Chart

Vehicle sales for February rose to an annualized rate of 15.4 million units compared to 15.3 million in January. The slight gain was due to a small increase in light truck sales. Given the sharp rise in gasoline prices I am not surprised those truck sales were lethargic. They rose from 48.6% to 49.3% of total sales. Sales of imported vehicles rose to 23.8% of all sales. The average age of existing vehicles in the U.S. is more than 10 years old and the increase in fuel mileage and ready availability of auto credit should continue to push sales higher.

The economic calendar for next week is headlined by the payroll reports and the Fed Beige Book. The employment reports will be the key. The ADP report on Wednesday is expected to show a decline in jobs to +175,000 from +192,000. The Nonfarm Payrolls on Friday is expected to be flat at +160,000 jobs. The future payroll reports are expected to show even fewer job gains as the sequester impact is felt.

The last Fed Beige Book covered the period from mid November to mid January and showed that all 12 districts either had modest or moderate growth. This report may show more of the impact from the fiscal cliff decisions on January 2nd and could be bullish for sentiment. However, if the Beige Book shows any improvement in the economy we will see an immediate return to worrying about a halt to QE. Conversely if the economy remained flat or weakened it would guarantee QE for the rest of the year.

Economic Calendar

There was a major blow to investor sentiment this week. The AAII Investor Sentiment Survey saw the bullish contingent decline a whopping -13.4% from the prior week to 28.4% and the lowest level since July. This compares to 41.79% last week and 52.34% of respondents just four weeks ago. Those leaving the bullish camp did not migrate to the bearish side with an increase of only +4.1% to 36.6%. They went to a neutral corner with a +9.3% increase to 35.0%. This put the bullish contingent at 28.4% below both the neutral and bearish numbers.

In theory this would be a contrarian signal to buy because the sentiment has changed so dramatically. The long term average is 39.0% bullish and 30.5% bearish.

TrimTabs.com reported on Friday that February insider buying of company shares fell to the lowest monthly amount since records were started in 2004. At the same time the ratio of insider sales to insider buying exceeded 50:1 and that is also the highest ratio since records were started in 2004. Charles Biderman tracks payroll taxes on a real time basis and he claims the government tax receipts rose more than 8% in February and that has pushed the real income of consumers to a multiyear low. He said the country entered a recession in late February as a result of higher taxes and lower consumer spending.

Berkshire Hathaway reported earnings after the bell on Friday. They earned $1,704 per share compared to estimates of $1,755 per share. For only the ninth time since the company started in 1965 the value of the shares rose less than the S&P-500. Buffett called the year "subpar" for that reason. The share price rose +14.4% and the S&P rose +16%. Since 1965 Berkshire shares have had a 19.7% compound annual growth rate or roughly 568,817%. Over the same period the S&P growth rate was 9.4% for a total of 7,433%. Berkshire is a big, actively managed mutual fund with zero turnover.

Berkshire's insurance businesses have generated $73 billion in free cash. That cash can be invested in acquisitions until it is needed to pay claims. As policies expire the reserve claim on the cash disappears but the investment continues. The insurance business alone is worth the investment in Berkshire. Any business that generates billions in investable cash every year is a gold mine.

Berkshire apologized for not finding any "elephants" to purchase in 2012. He said they worked hard on several but were not able to do a deal. The Heinz acquisition at year end cost them $12 billion for 50% ownership. Berkshire said their elephant guns are still loaded with cash and they are still on safari in search for a major elephant to acquire.

Buffett said he planned to buy more shares of Coco-Cola, American Express, Wells Fargo and IBM. Berkshire has no intentions of paying a dividend. Buffett said their size requires larger and larger acquisitions to move the needle and they need to save cash for the next big acquisition.

Berkshire Chart

Herbalife (HLF) said it was adding two board members chosen by Carl Icahn after the investor acquired a 13.6% ownership position in the company. The board will expand from 9 to 11 directors. The company also agreed to let Icahn boost his stake to 25%. This will seriously aggravate Bill Ackman with his 20 million share short position. Icahn said Ackman's high profile short position has allowed investors to buy a good company at a cheaply discounted price. "They are in 87 countries. I think it is a really good product." While I seriously doubt Icahn has begun sucking down Herbalife vitamins and protein shakes the positive comments definitely helped the stock price when the news hit on Thursday afternoon.

This is probably one of the few companies that really welcomed Icahn with open arms. Most are terrified when the activist shareholder expresses interest in their company. Icahn has said the company should be private. The Herbalife president said on Feb 27th the company would "certainly" consider going private in a buyout "in the right circumstances." If Icahn does continue adding to his stake the noose around Ackman's short position is going to get tighter. With every point gained the investing public is going to increase their bets for the "mother of all short squeezes" as Icahn has prophesied. Icahn hates Ackman and he has the money to force that short squeeze.

Herbalife Chart

Best Buy (BBY) reported earnings that were better than expected although still a loss on a GAAP basis. The company posted an adjusted profit of $1.56 per share but that was a -24.8% decline over the year ago quarter. Revenue rose slightly to $16.71 billion. Same store sales rose +0.9% and that was the best performance in 11 quarters. The company also said it did not receive a buyout bid from co-founder Richard Schulze by the Thursday deadline. Three private equity firms working with Schulze offered to purchase a minority stake for $1 billion but the company turned them down saying it was not in the best interest of the company. Schulze still has the option to appoint two nominees to the board so the saga may have a few chapters left.

Best Buy Chart

Apple (AAPL) collapsed -$11 to a new 52-week low at $430 after a $1.05 billion award in a prior patent-infringement case against Samsung was cut to $598.9 million. The judge said the jury based its award on an incorrect legal theory. The new award covers 12 Samsung phones and the judge called for a retrial on 14 other phones included in the initial award. Meanwhile Samsung has more than a dozen new phones in the pipeline that are sure to take additional market share away from Apple. CEO Tim Cook has not been successful in filling the product pipeline with new products and the revised iPhones have not been that different from the older ones except for the 4G capability. Investors are frustrated with the broken stock and the new low on Friday could trigger an entirely new round of selling. There was no stock split announced at the shareholders meeting and the excitement over Apple shares is fading fast.

Apple Chart

Groupon (GRPN) shed its CEO on Friday after posting another disappointing quarter of earnings. CEO Andrew Mason sent a farewell letter saying "I am leaving to spend more time with my family. Actually I am just kidding. They fired me today. If you have to ask why, you were not paying attention." He said the company was struggling and as CEO he was responsible. As a co-founder of Groupon he said "For those concerned about me, please don't be - I love Groupon, and I am terribly proud of what we have created. I am OK with having failed at this part of the journey." He joked he needed to go find a "fat camp" to lose the 40 pounds he had gained in the CEO role. The board will now be faced with finding a new CEO that is willing to take on a challenge with the current chairman of the board also the largest shareholder at 17.5%. Groupon is suffering from deal fatigue. There are too many clones including offerings from Google and Amazon. Consumers have turned off their email subscriptions and the daily deal fad is officially over.

Groupon Chart

Intuitive Surgical (ISRG) may have won the title of volatility king. The stock is all over the charts even in normal markets. On Thursday the stock lost -$64 after the FDA said it was launching an inquiry into the robot surgery giant. It quickly rose to the forth most heavily shorted stock on the Nasdaq with more than nine days of normal volume short. Immediately several analysts came out to defend the stock saying the selloff was overdone. ISRG rebounded +$43 on Friday.

ISRG Chart

Gasoline futures prices rallied +0.6% on Friday to $3.13 and retail prices rose to $3.77 nationwide. Coastal prices are well over $4 with $4.36 the average in California. We have reached the point where prices will begin to impact consumer spending. The $4 level nationwide is the breaking point where significant changes occur. This is going to provide additional braking power for the economy in addition to the higher tax rates and the sequester spending cuts. Eventually all of these factors are going to matter and the market is going to pay attention.

Gasoline Futures Chart

The testimony by Bernanke last week robustly affirmed his plans to continue QE well into 2014 or beyond. In a speech late Friday he restated his goal to keep QE in place until the economy was self sustaining and unemployment at 6.5% and said it could be a long time given the potential impact of the sequester. The arrival of the sequester cemented the QE into place for the rest of the year.

Currently the Fed is buying $4 billion a day in treasuries and mortgage backed securities. If the QE program remains in place the Fed will buy 86% of all U.S. Treasury debt issued in 2013 and that could rise to 95% in 2014. I remain dumbfounded the rest of the world is not up in arms at this blatant monetization of the US debt. Eventually the outrage will occur.

David Rosenberg at Gluskin Sheff believes it is a reasonable scenario the Fed could continue its zero interest rate policy (ZIRP) through 2018 instead of mid-2015. That is how long it will take to reduce unemployment to 6.5% assuming the labor force participation rate remains at the current 30 year low. The economy has to add 200,000 jobs per month to account for new workers and immigrants entering the job market. You would need to add an additional 150,000 jobs per month to reduce unemployment to 6.5% by mid 2018. We have not seen 350,000 a month in job gains in a very long time.

On January 1st 2009 there were 31,983,719 individuals receiving food stamps. (Supplemental Nutrition Assistance Program or SNAP) On February 1st 2013 there were 47,622,363 individuals receiving SNAP coupons. That is a gain of 15,638,647 people. Over the same period there have been a net of 231,000 jobs created. If you eliminate all of 2009 when there were huge job losses from the recession and only count the job gains since January 2010 there were 4,971,000 net jobs created. That means there were three people added to the food stamp program for every person hired. The food stamp program provided an average benefit of $278 per month per household and cost $75 billion in 2012.

Food Stamps vs Jobs

Jonathan Krinsky at Miller Tabak warned last week the divergence between the S&P-500 and copper prices was a warning to the market. Typically "Doctor Copper" is a leading indicator for global economic activity and the S&P and copper move in tandem. Since early 2012 the price of copper has been falling while the S&P was rising.

We saw last week the decline in manufacturing activity in multiple countries and that is a scenario we have been seeing for some time now. This copper divergence suggests the equity markets are likely to face problems ahead.

S&P-500 & Copper Chart

The Baltic Dry Shipping Index is also telling us that economic activity is very low. This is the index rate to ship freight along various ocean routes. The rate was up in the $10,000 a day range in 2008 and has fallen to $776 per day in 2013. Global import and export traffic has slowed to a crawl.

Baltic Dry Index Chart

Despite the declining economic fundamentals the market will remain supported because of QE. So far in 2013 the S&P is up +7.5%. Historically that would be a good year but we have 10 months to go. Sam Stovall at S&P said the index has risen in both January and February 26 times since 1945. In those years the S&P had an average gain of +24% and all 26 years ended with positive gains. In theory that is a good sign for 2013 but Stovall did not have a statistic for how many of those years the global economy was weakening. We all know past performance is no guarantee of future success but it is interesting to know the historical facts.

The dip last week was short, sharp and scary as are most bull market corrections. However, it was not a correction. The -2.9% dip in the S&P was just a speed bump. There are quite a few analysts that wished it was the start of a decent dip but they were disappointed. Every tremor is not followed by an earthquake. You never know which one is the real deal.

The end of the month and first day of a new month are typically powered by retirement fund contributions. Friday's opening decline and rebound to positive territory came on the lowest volume of the week at 6.7 billion shares. When fund flows decline late in the week so will volume.

The decline in the AAII Investor Sentiment survey to 28.39% bullish and the lowest level since July 19th has not yet impacted the equity markets. The percentage of stocks in the S&P-500 that are over their 200-day average is currently 86.6%. That is a minor decline from mid February but still bullish. However, the percentage over their 50-day average has fallen to 74.2% and the momentum indicators on the 50-day chart have gone negative. In English, the market momentum is slowing.

S&P-500 Over 200-Day Average Chart

S&P-500 Over 50-Day Average Chart

The Nasdaq 100 big cap tech index is showing the strain more than the other indexes. The NDX is looking suspiciously like a head and shoulders in progress. The relative strength (RSI) is declining. The MACD is declining. There is a clear series of lower highs. I would not buy a stock with this chart.

Nasdaq 100 Chart - Weekly

The S&P chart I showed last week has not changed. The volatility increased with a penetration down to 1485 but overhead resistance remains. The rebound on Thursday came to a dead stop at 1525 the same level as the short squeeze rebound on Monday. That 1525 level has returned as strong resistance.

There is nothing that prevents us from moving higher in response to the QE support but the internals and market sentiment are weakening. If we get another dip to the 1485 level and support holds then we could see a stronger rebound. However, should that 1485 level break on the next test the result could be a significant decline.

S&P-500 Chart - Daily

The Dow chart is different from the S&P. The Dow made a higher high on Thursday at 14,149, only 15 points below its historic high close at 14,164. Friday's close at 14,089 was a new five year high close. The positive close was solely on the back of IBM with a gain of $2.08. The next highest gainer was WMT at 96 cents and then Disney at 74 cents. Only 18 of the 30 stocks finished positive. It was FAR from a bullish day but it was a higher high close.

We can't argue with results. Despite the negativity in some other indexes the Dow was the leader. The Dow opened the day with a -116 point loss so rebounding in the face of the sequester to close with a +35 point gain was impressive.

The megaphone pattern on the Dow is in danger of breaking out to the upside. That would negate the topping pattern and turn it into a consolidation-continuation pattern.

The Dow is targeting that 14,164 historic high level. There are numerous precedents suggesting a climax spike to close over that level could result in the long awaited bout of profit taking. However, indexes making new highs by more than a handful of points tend to keep making new highs.

Dow Chart - Daily

The Nasdaq is consolidating around the 3150 level with a pattern of lower highs and higher lows suggesting a breakout is near. The only question is direction. The Dow should determine that direction. If the Dow does break to the upside the Nasdaq will likely follow. Key support is now 3100 and critical support 3085.

Nasdaq Composite Chart - Daily

The Russell 2000 chart is a clone of the Nasdaq with a consolidation pattern after the new highs in mid February. Support at 895 remains a critical level and traders will load up on shorts if that level breaks. The high close was 932.00 so that remains the ultimate target with resistance at 920. Watch the Russell as a fund manager sentiment indicator.

Russell 2000 Chart - Daily

The market surprised everyone with the swift rebound on the Dow. Unfortunately the other indexes did not follow through with the same excitement. The Fed is still driving the train and QE may overcome the declining global economics. However, global economics is a longer time horizon. The market can remain unconcerned in the context of a change in the global economic picture until suddenly panic appears. This is not something we can juggle day to day.

The payroll numbers will be the headlines to fear this week. Analysts don't expect any sudden change in the numbers but they never do until the headlines surprise them.

The Fed is in control. Don't fight the Fed. Resistance is futile.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them."
Thomas Jefferson

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Index Wrap

Dow Average Flashes 'All-Clear' on Primary Bull Market trend

by Leigh Stevens

Click here to email Leigh Stevens

The Dow 30 (INDU) went to a new monthly closing all-time high which is an important milestone. The Dow Transports were already at new monthly highs and the interaction of INDU and TRAN says 'all-clear' as to a Primary Bull Market.

I wondered WHAT would push stocks higher in a sizable new up leg. Bullish news for stocks on a 2013 horizon was the political truce on further self-destruct impasses on raising the debt ceiling or on things that might shut down the government. When the leadership of the two parties said ok to such a truce, there's an 'all-clear' on the political war for enough time for businesses and individuals to spend based on fiscal stability.

I look for a continued uptrend in the S&P and the Dow, with lagging pickups in tech stocks and the Nasdaq. Money is flowing into stock mutual funds again, nervous trader types are not all that bullish and amid these low expectations I anticipate some further upside into spring and a strong seasonal time.



The S&P 500 (SPX) has seen strong buying interest as SPX fell toward the low end of its broad uptrend channel. 1500 looks like an area to have bought or buy again, with expectations of a move back to near resistance in the 1530 area with some promise of a break out to the top end of SPX's uptrend channel; suggesting potential to 1560 and higher over time. Absent a decisive downside penetration of support at 1490-1480, I'm bullish on the S&P. If there was such a dip I've noted next support at 1460.

The RSI is back to neutral and I don't expect a move to an 'oversold', which isn't that common with bullish price trends such as we're in currently. Bullish sentiment is low relative to the chart pattern. Go with the bullish chart.

Bullish sentiment figures are on a downward trend as is apparent with the blue 5-day moving average of the CPRATIO line above. With the S&P acting very buoyant at the lower end of its uptrend channel, the downward trend in bullish expectations or 'sentiment' is unwarranted in my view. Many rallies begin on low expectations for the upside.


The bullish pattern seen with the S&P 100 (OEX) chart is compared on a close-only line chart basis, topmost below, with a the standard 'bar' chart below that. It's helpful at times to sometimes compare how prices ended the day (a close-only line chart) to the intraday price range shown by candle charts and what's called an Open, High, Low, Close (OHLC) or standard bar chart. Charles Dow in his time was only concerned with the closing price as value is based on the end-day price.

Both chart types, slightly different ways of depicting the current price trend, are bullish. The line chart looking the most bullish to me. RSI is in a mid-range neutral which is about as far as a strong bull trend gets to oversold.

670-675 is key support (next support: 640) and 690 key resistance, extending to 697-700. A move to new highs such as to the 700 area looks more likely than another downswing.


The Dow 30 (INDU) is leading the way in this bull market of late as it broke out above 14000 after a brief dip to 13800; strong buying was seen on the panic driven dip to 13800; prices not seen for long as buyers were back in strongly below 13900.

INDU's chart is bullish. I noted last week of a third of the 30 Dow stocks being in powerful uptrends. Immediate overhead resistance is at 14100, but INDU looks like it can blow through that on the way to the 14200 area, and probably then still higher such as again to the upper end of the bull channel; see chart.

Pivotal technical support is at 13800, with long-term support coming in around 13600.

An important aspect of Charles Dow's ideas was that new monthly highs made in either his Transportation Average (TRAN) or the Dow Industrials (INDU) should be later 'confirmed' by the other Average also going to new monthly highs and providing evidence a bull market was continuing. INDU just went to a new all-time monthly high, finally following TRAN in that feat. A nice bullish 'all clear' signal to investors and you have likely noticed that stock mutual funds are getting more and more money coming back into them.


The Nasdaq Composite (COMP) is bullish as long as COMP continues to hold the low end of its uptrend channel. This means key must-hold support relative to a bullish chart is at 3240 on a closing basis. I look for a move above to and above 3200 with a possible test of 3250 on the way to 3300.

Proving my bullish case wrong is a couple of back to back closes below 3100; in which case 3020-3000 might be seen by COMP.

I've gotten interested again in Apple (AAPL) as its weekly chart has traced out a bullish downward sloping wedge pattern. A strong rebound in AAPL would fuel a strong rise in COMP. Stay tuned.


The Nasdaq 100 (NDX) chart has held key technical support in the 2700 area, at the low end of NDX's bullish uptrend channel. The Index is still in a relatively narrow 2700-2780 trading range which makes the near-term picture 'mixed'.

From current levels I'm anticipating a move higher. It appears that the lower end of the uptrend channel has been tested sufficiently as support. As long as 2700 continues to hold up as a lower support floor, I'm looking for another move up toward at least the middle of the channel if not toward the upper end.

Another element that makes for a bullish technical picture: while NDX has held the low end of its bullish channel, a bullish plus, traders are only mildly bullish. On a contrary option basis, low optimism on the bullish side when there's a positive chart (positive upward slope) is in itself bullish.

Initial support is seen at 2715 extending to 2690, with next lower support in the 2660 area. Resistance is at 2780, extending to 2815, then 2850 and the top end of NDX's highlighted uptrend channel. We're at a key juncture technically as the index needs to work higher to keep its bullish pattern. I go with the bullish Dow and S&P and figure tech will move higher too.


The Nasdaq 100 tracking stock (QQQ) is bullish so long as the low end of the Q's uptrend channel continues to show up as support, meaning buying came in on each dip to this area. Funny about that but the chart looks bullish so far but next up has to be a move above 68.2 to prove a bullish case.

I lean to a bullish outcome of what I'm seeing here as prices bounce from trendline support and that's the lowest risk area in terms of a trade exit point. In other words buy the dip to the trendline, risk to just under it and if the bull trend is true, there's a possible trampoline effect to 69-70. Strong up trendlines are like springboards to a next up leg.


The Russell 2000 (RUT) Index looks to be a buy in the 900 area, risking to a close below 880 and with a projected upside potential to 932 and higher, such as back to the top end of RUT's bullish uptrend price channel currently intersecting in the 953-960 area at least in the coming week.


New Option Plays

Healthcare, Oil, & Cars

by James Brown

Click here to email James Brown


Cerner Corp. - CERN - close: 89.23 change: +1.77

Stop Loss: 87.25
Target(s): 87.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
CERN is in the healthcare information technology industry. The stock has spent most of February consolidating sideways below its all-time highs in the $89 area. Friday's session saw CERN display relative strength (+2.0%) and a new all-time high. More aggressive traders may want to buy calls now. I see potential resistance at the $90.00 mark. Thus I am suggesting a trigger to buy calls at $90.25. If triggered our multi-week target is $97.50. FYI: The Point & Figure chart for CERN is bullish with a long-term $141 target.

Trigger @ 90.25

- Suggested Positions -

buy the Apr $90 call (CERN1320d90) current ask $2.60

Annotated Chart:

Entry on March -- at $---.--
Average Daily Volume = 916 thousand
Listed on March 02, 2012

Marathon Petroleum - MPC - close: 85.01 change: +2.13

Stop Loss: 82.25
Target(s): 89.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Many of the oil-refining stocks are showing relative strength. MPC is helping lead the bunch higher with a show of relative strength on Friday (+2.5%). Shares are also trading near all-time highs. MPC is currently trading near round-number resistance at $85.00. I'd like to see a little bit more confirmation. Therefore, I am suggesting a trigger to buy calls at $85.25. Our short-term target is $89.75. More aggressive traders could definitely aim higher. FYI: The Point & Figure chart for MPC is bullish with a $98 target.

Trigger @ 85.25

- Suggested Positions -

buy the Apr $87.50 call (MPC1320d87.5) current ask $2.65

Annotated Chart:

Entry on March -- at $---.--
Average Daily Volume = 3.5 million
Listed on March 02, 2012

Toyota Motors - TM - close: 102.69 change: +0.09

Stop Loss: 99.95
Target(s): 108.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
There is a recent article published last week that said a new study shows the average U.S. family cannot afford a new car. The recent payroll tax increase and a steady rise in gasoline prices might also influence a family's decision to buy a new car. Yet vehicles sales are on the rise. The American consumer is ignoring most of the noise out of Washington and the rising cost of fuel. One reason could be their current car is just too old. Currently the average car in the U.S. is more than 11 years old.

Analysts are estimating that February's vehicle sales will hit an annual pace of 15.2 million units. That would be a +7% increase from February a year ago. Toyota just said their U.S. sales rose +8.7% in February. February is normally a slow month for car dealers.

Shares of TM are also on a roll. The stock is in a bullish channel and just bounced off the bottom of the channel a few days ago. We want to jump on board. I am suggesting a trigger to buy calls at $103.25. If triggered our target is $108.00. More aggressive traders could aim higher.

I do want to warn you that shares of TM tend to gap open (up or down) each day as the U.S. shares adjust for trading that occurs back home in Japan.

Trigger @ 103.25

- Suggested Positions -

buy the Apr $105 call (TM1320d105) current ask $2.18

Annotated Chart:

Entry on March -- at $---.--
Average Daily Volume = 686 thousand
Listed on March 02, 2012

In Play Updates and Reviews

Stocks Churn on Sequestration

by James Brown

Click here to email James Brown

Editor's Note:

After all the hype about the March 1st sequestration date the market didn't seem to care. Traders bought the dip on Friday morning.

We want to exit our COF trade on Monday morning.

Current Portfolio:

CALL Play Updates

Check Point Software Tech. - CHKP - close: 51.84 change: -0.68

Stop Loss: 50.75
Target(s): 54.50
Current Option Gain/Loss: +10.5%
Time Frame: 3 to 6 weeks
New Positions: see below

03/02/13: On Thursday I cautioned readers that CHKP looked headed for the $51.75 area. Shares dipped to $51.65 on Friday afternoon. The relative weakness on Friday (-1.2%) is a bit disappointing but the overall trend is still up. More conservative traders might want to adjust their stop loss into the $51.25-51.50 zone. I am not suggesting new positions at this time.

*Small Positions* - Suggested Positions -

Long Mar $50 call (CHKP1316c50) entry $1.90

02/25/13 market looks weak, readers may want to exit now
02/20/13 new stop loss @ 50.75
02/16/13 CHKP looks poised to dip back toward support at $50.00
02/13/13 new stop loss @ 49.90
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

Canadian Pacific Railway - CP - close: 123.52 change: +2.00

Stop Loss: 119.65
Target(s): 124.75
Current Option Gain/Loss: +52.7%
Time Frame: 3 to 4 weeks
New Positions: see below

03/02/13: CP displayed relative strength on Friday with a +1.6% gain and a new all-time high. If this strength continues we could easily see CP hit our exit target at $124.75. More aggressive traders may want to aim higher. I am raising our stop loss to $119.65.

- Suggested Positions -

Long Mar $120 call (MAR1316c120) entry $2.75

03/02/13 new stop loss @ 119.65


Entry on February 27 at $120.25
Average Daily Volume = 795 thousand
Listed on February 23, 2012

Home Depot - HD - close: 69.03 change: +0.53

Stop Loss: 66.40
Target(s): 74.00
Current Option Gain/Loss: +21.0%
Time Frame: 3 to 6 weeks
New Positions: see below

03/02/13: The rally in HD continues. The stock is up four days in a row and closing at new 12-year highs. The next hurdle is the $70.00 level. I am not suggesting new positions at this time.

Earlier Comments:
It is possible that the $70.00 level could act as round-number, psychological resistance especially since the stock failed their multiple times in the 1999-2000 time frame. However, we are going to set our sights on a run to $74.00. FYI: The Point & Figure chart for HD is bullish with a long-term $95 target.

- Suggested Positions -

Long Apr $70 call (HD1320d70) entry $1.00


Entry on February 28 at $ 68.50
Average Daily Volume = 6.9 million
Listed on February 27, 2012

McDonald's - MCD - close: 95.68 change: -0.22

Stop Loss: 94.25
Target(s): 99.75
Current Option Gain/Loss: +34.3%
Time Frame: 3 to 6 weeks
New Positions: see below

03/02/13: The news on Friday brought headlines that MCD was tweaking its menu. The company is dropping the fruit & walnut salad and the chicken selects items from its U.S. menus. The company is also considering whether or not to eliminate its Angus burgers.

Technically the stock dipped to short-term support near $95.00 on Friday morning and bounced. I would still consider buying calls at current levels but we will raise our stop loss to $94.25.

FYI: The Point & Figure chart for MCD is bullish with a $115 target.

- Suggested *Small* Positions -

Long Apr $95 call (MCD1320d95) entry $1.66

03/02/13 new stop loss @ 94.25


Entry on February 25 at $95.38
Average Daily Volume = 4.9 million
Listed on February 23, 2012

CBOE Volatility Index - VIX - close: 15.36 change: -0.15

Stop Loss: 11.45
Target(s): 19.90
Current Option Gain/Loss: +15.7%
Time Frame: 8 to 9 weeks
New Positions: see below

03/02/13: The VIX initially spiked higher on the stock market's Friday morning weakness. Yet as stocks recovered off their lows the VIX retreated. Our April options still managed to see improvement on Friday.

- Suggested Positions -

Long Apr $16 call (VIX1317D16) entry $1.90

02/25/13 adjust exit target to 19.90


Entry on February 10 at $13.37
Average Daily Volume = n/a
Listed on February 09, 2012

PUT Play Updates

Capital One Financial - COF - close: 51.87 change: +0.84

Stop Loss: 54.55
Target(s): 48.50
Current Option Gain/Loss: + 8.9%
Time Frame: 3 to 4 weeks
New Positions: see below

03/02/13: Shares of COF are not cooperating. I cautioned readers that the $50.00 level might be support and that conservative traders may want to exit near $50. The stock gapped open lower on Friday at $50.21 and then rebounded sharply. By Friday's closing bell COF outperformed the market with a +1.6% gain. The financial sector has been moving sideways the last several days. Even though the financials are arguably still overbought they could breakout higher again. If that happens COF might follow the sector higher. Given Friday's big bounce from support we don't want to hold on.

I am suggesting an early exit on Monday morning at the open.

- Suggested Positions - *Small Positions*

Long Mar $52.50 PUT (COF1316o52.5) entry $1.23

03/02/13 prepare to exit on Monday morning
02/23/13 be careful here. COF is holding support at the $52 level. Shares could be poised to bounce.


Entry on February 20 at $52.25
Average Daily Volume = 5.9 million
Listed on February 19, 2012

Eastman Chemical - EMN - close: 69.71 change: -0.02

Stop Loss: 72.05
Target(s): 65.25
Current Option Gain/Loss: -23.9%
Time Frame: 3 to 4 weeks
New Positions: see below

03/02/13: The gap down in EMN shares on Friday morning really didn't help our entry point. The stock opened at $69.09 and slowly recovered toward the $70.00 level by the closing bell. EMN closed almost unchanged on the session and I don't see any changes from my Thursday night comments.

*Small Positions* - Suggested Positions -

Long Apr $67.50 PUT (EMN1320p67.5) entry $2.30

03/01/13 trade opened on EMN's gap down


Entry on March 01 at $69.09
Average Daily Volume = 1.8 million
Listed on February 28, 2012

F5 Networks - FFIV - close: 93.58 change: -0.85

Stop Loss: 96.75
Target(s): 86.50
Current Option Gain/Loss: -11.2%
Time Frame: 3 to 4 weeks
New Positions: see below

03/02/13: There was no follow through on FFIV's bounce from Thursday. Shares underperformed the market on Friday with a -0.9% decline. I would still consider new bearish positions at current levels. However, readers may want to try and reduce their risk by lowering the stop loss.

Earlier Comments:
It's possible the $90.00 level could act as round-number, psychological support but we are going to aim for the $86.50 level.

- Suggested Positions -

Long Mar $95 PUT (FFIV1316o95) entry $3.55

02/28/13 corrected the option entry price toe $3.55


Entry on February 27 at $93.50
Average Daily Volume = 1.4 million
Listed on February 26, 2012

iShares Dow Jones Transports - IYT - close: 106.51 change: -0.16

Stop Loss: 108.25
Target(s): 100.25
Current Option Gain/Loss: - 4.5%
Time Frame: 3 to 4 weeks
New Positions: see below

03/02/13: Please note I have corrected the closing price for the IYT tonight. Previously it was listed too low.

The transportation ETF spiked lower at the open on Friday like most of the market but only managed a minor bounce. We are still expecting a correction from what are new all-time highs in the $107.00 area. This remains a higher-risk, more aggressive trade.

Our stop loss is at $108.25 but more conservative traders may want to adjust their stop closer to Thursday's high of $107.46. I would still consider new positions at current levels.

Small Positions - Suggested Positions -

Long Apr $105 PUT (IYT1320p105) entry $2.20


Entry on February 28 at $106.61
Average Daily Volume = 610 thousand
Listed on February 26, 2012