Option Investor

Daily Newsletter, Wednesday, 3/20/2013

Table of Contents

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

Market Wrap

Fed Assures US There's More to Come

by Keene Little

Click here to email Keene Little
The market is jumping higher on expectations for more money from overseas and from the Fed. Life is good (cue the music for "Jaws").

Market Stats

The market started out with a bang to the upside today after the futures rallied during the overnight session. If there were any bears (all one of them at this point) hoping for some downside follow through today they were disappointed. But not surprisingly, following the gap up the market then just stopped moving and went on hold into the FOMC announcement. The market got a little pop up to new daily highs (and for the DOW new all-time highs) but it then again went into a holding pattern while Bernanke held his press conference.

It was a quiet morning with no major economic reports, which was another reason the market was quiet right from the open. The rally was courtesy of the overnight rally in the futures but there was nothing else to drive it higher and it went into a holding pattern until the FOMC announcement and Bernanke's press conference. There was nothing new out of the FOMC and Bernanke continued to assure the market that the Fed will continue its accommodative policies until at least 2015. Bernanke did mention that if the labor market were to show sustained growth for a number of months that the Fed might back off on the amount it's purchasing every month.

Basically the market got what it wanted and rallied a little more following the announcement and press conference. But it was only a little so the Fed appears to be having less of a positive impact as each meeting passes.

With the potential banking problems in Europe, starting with Cyprus, analysts have been tripping over themselves this week in raising their price targets for the year. Long-term bears have been throwing in the towel and it seems everyone is looking for at least a repeat of 2012 (rally into April/May before worrying about a sizeable correction but then higher into the end of the year again).

And the reason for so much bullishness this week? Because of the bad news in Europe of course. As many are now saying, those who are looking to get their money out of European financial institutions have their eyes on the U.S. market. The money flooding into the U.S. from Europe will be good for both our stock and bond markets.

Last week I showed the bullish sentiment as measured by DSI and Market Vane. Bulls have turned very bullish and bears have turned either neutral or bullish. This week has apparently increased the number of bulls and the bears (all one of them) are feeling very lonely at the top. The worrisome thing here is that from a contrarian perspective it's getting way too crowded on one side of the boat.

What's universally believed is often universally wrong. The market rarely accommodates the majority and the fallacy of believing the U.S. will continue to rally in spite of a decline in the rest of the world's economies and stock markets is that we're all too interconnected to think we will be able to avoid being dragged down by Europe. Sentiment is what drives the stock market and when sentiment sours in Europe, because of banking fears, that sentiment will be mirrored elsewhere.

To say that Cyprus does not matter is the same as saying Greece did not matter when the world's stock markets declined together. To say it's different this time is simply ignoring reality. The 1998 "Asian Contagion" started with a tiny country called Thailand and their "insignificant" currency, the Baht. The failure of their currency quickly morphed into a huge problem for the world's currency and stock markets.

Whether it was the .com bomb or the housing bubble there were little signs that quickly morphed into big problems that were ignored until they couldn't be ignored any longer. Even the failure of Lehman Brothers was discounted by none other than Bernanke himself, noting that the banking system was structurally sound and strong. In hindsight we see the foolishness of such thinking. Cyprus could be the little crack that leads to a much bigger problem.

The Fed has made it abundantly clear on many occasions that they want to entice people out of savings accounts and into riskier assets. They reason that a higher stock market has a "wealth effect" and causes people to feel wealthier and therefore spend more money. Consumer spending drives the economy and voila, the economy gets fixed. This plan hasn't been working too well although now we're seeing the retail crowd believing in the rally and rushing in to join the party. Too bad they're buying the top (again).

Since zero interest rates haven't been enough to entice people out of savings and into more spending, now some bright-eyed nitwits, I mean EU financial leaders, have figured out an better way. If the people don't want to spend their own money then the state will spend it for them. Tax it in the name of austerity, promise them bank stock in return and entice more people to spend it before the state takes it. Brilliant! We've heard far-fetched stories about the U.S. government eyeing the trillions in 401(k) and other retirement funds with the idea that they'll take the money and "manage" it for us. Suddenly it doesn't sound so far-fetched.

Comedians are often the best observers of what's happening around us and Jay Leno's joke the other night was telling: "The island nation of Cyprus is now considering a 10 percent tax on every individual savings account in that country. They'll take 10 percent of your money right out of the bank. To which President Obama said: 'You can do that?'" Funny ha ha, until it happens to you.

These hair-brained ideas of financial leaders tend to spread and what's happening in Cyprus could easily spread to Europe and the U.S. Don't write off what they're trying to do in Cyprus as a one-off event. Just like bans on short-selling, these ideas have a way of spreading and when the banks reopen in Cyprus on Friday we'll see just how trusting the people are. If there's a run on the banks it could quickly spread and that's why little Cyprus is important.

As of last Friday it was looking good for an important high for the stock market but the decline into Tuesday's low looked too choppy to be the start of a more serious decline. The rally from Tuesday now looks better as the 5th and final wave of the move up from February and it's even possible the top is already in place. That's not a prediction but it is a warning. It's very common for the 5th wave to complete on what is perceived to be good news (the FOMC announcement). While the 5th wave is currently shorter than what would typically be expected, it remains possible.

Keeping in mind the bigger picture, the SPX weekly chart below shows upside potential to the trend line along the highs form 2000 and 2007, near 1600. The same number of points added to 1576, the 2007 high, as that high was above the 2000 high at 1553 (23 points) gives us 1599. From an EW (Elliott Wave) perspective, I've been waiting since the November low for the completion of the 5th wave of the rally, which is the leg that started from February 26th. Once complete we'll see the market start to head back down.

S&P 500, SPX, Weekly chart

The rally from November is a clean 5-wave move and it makes it easier to identify when the rally has finished. The uptrend is obviously intact and the pullback from last Friday is obviously small so there doesn't appear to be any threat to the bull run yet. The projection to 1589.66 is where the 5th wave of the rally would equal the 1st wave. It has already met the minimum projection near 1550-1551 so I remain alert to the possibility that the rally could complete at any time. Just when the majority have turned bullish is when the wave pattern is calling for a completion, even if it means we first see SPX 1590. Tuesday's low near 1539 is now the key level to the downside -- a break below that level would indicate the rally is very likely finished.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1558
- bearish below 1539

The 5th wave of the move up from November is shown in detail on the 60-min chart below. The high on Friday fit as the completion of the rally but not well. The slow choppy climb from March 5th left too many possibilities but once we got the choppy pullback into Tuesday's low, followed by this morning's gap up, it became abundantly clear that the pullback is the 4th wave of the move up from February. That puts us now into the 5th wave. As shown on the chart, I've got upside projections at 1563.49 (5th equals 62% of the 1st wave) and 1578.90 (5th equals 1st). The upper projection crosses the trend line along the highs from March 5th on Friday morning. That's a setup, if it happens, that says you will not want to be long over the coming weekend. As labeled in light red, it's important to note that the final little 5th wave from Tuesday could finish at any time, including at today's high. The final 5th often occurs on perceived good news and the FOMC announcement fits. That's why a reversal from here that drops below 1539 would be confirmation that a final high was put in.

S&P 500, SPX, 60-min chart

The DOW made a minor new high today, almost 14547 vs. Friday's 14539, which once again went unconfirmed by the other indexes. Even the TRAN didn't confirm it and in fact was in the red today. But until we see a drop below Tuesday's low at 14382 the bulls get the nod here. As I've been showing on the daily chart, the upside projection at 14678 is where the 5th wave of the move up from November would equal the 1st wave. I have some other projections at 14608 and 14747 and nothing is lining up yet so I'll be watching the form of the rally into the end of the week, if it continues rallying, to see how it sets up before the weekend. Again, keep in mind that today's minor new high might have been its last. I wouldn't want to bet on that but keep it in mind.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 14,550
- bearish below 14,382

Both the NDX and COMPQ have been in a very choppy pattern but the move up from February 26th appears to be in synch with the other indexes. A final high looks to be very close and for the COMPQ we could be looking at just a retest of last week's high near 3260, which would be another test of its trend line along the highs from March-September 2012. There's higher potential to the trend line along the highs from January 3rd, currently near 3290 but be ready for a failure at any time.

Nasdaq Composite, COMPQ, Daily chart

Key Levels for COMPQ:
- bullish above 3265
- bearish below 3205

At least the various indexes are in synch and the RUT is no different. A final 5th wave for the move up from February 26th will complete the 5-wave move up from November and set up at least a larger retracement. Between the daily chart and the shorter-term price projections I have a fairly wide target zone of 950-983. Keep an eye on 958-960 if it's achieved and price rolls over from there. Back below Tuesday's low near 936 would tell us the high is in place.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 952
- bearish below 936

The NYSE weekly chart shows a very interesting setup that I thought completed last week but now looks like it too could give us one more minor new high to complete. The move up from October 2011 is a picture-perfect double zigzag wave count -- an a-b-c up to the March 2012 high, with two equal legs up near 8348, an x-wave down to the June 2012 low and then another a-b-c up to the current high. Two equal legs up for the 2nd a-b-c is at 9134.48. The two a-b-c's (labeled wave-w and wave-y) are equal at 9135.66. Last week's high was just shy of 9129 and a minor new high this week could achieve those projections. The fact that the projections are right on top of each other makes this a high-odds setup for a major reversal. As with the other indexes, a break below Tuesday's low at 8968 would indicate the final high is in place.

NYSE Composite Index, NYA, Weekly chart

The chart of the 10-year Treasury Note supports the idea that money is going to come into Treasuries and push prices higher. The weekly chart of ZN, the 10-year emini futures contract, looks like a completed a-b-c pullback from July 2012 and ready for the next, and final, leg of its multi-decade run higher. The high later this year, assuming we'll get it, should be its final one, at which time the Fed will lose control of the bond market. But there's still time to enjoy a bond rally this year. A break below 130 would have me backing away from the bullish side of Treasuries.

10-year Treasury Note emini futures, ZN, Weekly chart

The weekly chart of BKX, shown below, is also looking for the completion of a corrective wave count off its 2009 low. Wave projections for the final high are tightly correlated at 57.68-58.99, which includes the April 2010 high at 58.83. Last week's high was 57.60 so just shy of the lower end of the target zone. One more minor new high from here should do it. But a drop below Tuesday's low at 56.53 would be the first warning sign that the top is in place for the banking index.

KBW Bank index, BKX, Weekly chart

FedEx (FDX) warned after yesterday's close and dropped sharply today (down -7.33 to 99.13, -6.9%) and that dragged the TRAN down with it. They warned that Asian shipments are down and the concern of course is that shipments will slow further if Europe continues to also slow down (the U.S. as well but at the moment most are ignoring that fact). Last week I had pointed out on the TRAN's chart an upside projection at 6271.59, which is where it would achieve two equal legs up from October 2011. That was achieved last week and yesterday morning's minor new high at 6291 was for good measure before dropping back down and losing a little more today. It's a good setup for a reversal and the start of a decline following the completion of a 5-wave move up from November, which completes the a-b-c up from October 2011 at the top of its parallel up-channel from that low.

Transportation Index, TRAN, Weekly chart

A slowdown in transportation stocks is a sign of a slowing economy. The big question is whether FDX is an outlier or just the beginning. The TRAN chart says it's just the beginning. We have other signs that the economy is slowing. I've recently shown charts of copper and how disconnected the stock market is from copper (it only cares about more money from the Fed). Copper gave us another sell signal by confirming the breakdown from its sideways triangle pattern from October 2011. The break below its November low at 3.40 on Tuesday confirms the breakdown from the triangle. Now the question is how long it will take the stock market to also break its November low.

Copper futures contract, HG, Weekly chart

Another sign of an economic slowdown, which is also related to shipping, is the Baltic Dry Index (BDI). This is a measure of the cost to ship goods on ships and obviously the lower the price, the lower the demand. It too has been consolidating in a sideways triangle since January 2012 and it's currently in its final bounce inside the triangle before it too should break lower. It takes a rally above its May 2012 high at 1165 to turn this into a bottoming pattern instead of the bearish continuation pattern. A drop below its December low at 699 is needed to confirm a breakdown.

Baltic Dry Index, BDI, Weekly chart

One more sign of the economy slowing came from Caterpillar (CAT), with their less-than-desirable earnings report after yesterday's close. They said sales are slowing, particularly in Asia (which FDX also noted as slowing) and North America. But the stock market is in the "don't confuse me with facts" mode as it whistles past the graveyard, hoping the zombies stay underground. I think I'll start investing in a company that makes zombie killers since we're likely to see them rising from their graves very soon.

The U.S. dollar has continued to show strength beyond where I thought we'd see a pullback. But it's only been able to chop its way higher since the beginning of March and is leaving a bearish divergence at each new high. It's ready for at least a deeper pullback but I see the potential for a rally up to the 83.43-83.63 area before finishing the leg up from February 1st. The longer-term pattern remains unclear at this time and there is the potential for the dollar to sell off to below 79 once it starts back down. The more bullish longer-term pattern calls for just a pullback into April before rallying much stronger into the summer.

U.S. Dollar contract, DX, Daily chart

Silver remains much weaker than gold in its bounce off the March 1st lows, which has me still leaning toward seeing lower lows for both. The current bounce in gold has relieved its oversold MACD, which has now risen to the zero line. A curl back over from here would produce a sell signal. But if gold can get above its January 4th low at 1626 it would open the door to at least its downtrend line from October 2012, currently near 1650, if not its 200-dma at 1664.

Gold continuous contract, GC, Daily chart

As can be seen on oil's weekly chart below, it's been coiling since the June 2012 low, which is inside a larger coiling pattern since May 2011. Flip a coin from here but I think the higher-odds scenario calls for a decline at least to the bottom of its larger sideways triangle pattern, currently near 80.

Oil continuous contract, CL, Weekly chart

Tomorrow will finish off this week's economic reports since there are no major reports on Friday. Thursday morning we'll get the unemployment numbers and more importantly at 10:00 AM we'll get existing home sales, the Philly Fed index and the leading indicators. This should help provide some additional insight into how the economy is doing, not that it matters I suppose; only how much money the Fed is printing seems to matter. The Philly Fed index is expected to make a big improvement from February's -12.5. It might be a little "less bad" or it could pop back up into positive territory. That would likely give the market a nice little jump. But with price patterns potentially set up for a reversal following the FOMC bounce, beware of the possibility for a disappointing report that sends the bulls running for cover.

Economic reports and Summary

It's been challenging reading the price pattern this month but the choppy pullback from last week followed by the rally off Tuesday's low has cleared it up. It's now looking very likely that we're into the final wave of the rally from February, which in turn will complete the final wave of the rally from November. Oftentimes the final wave finishes on what is perceived to be good news. Was it the FOMC announcement?

Today's volume for an up day was again weak. The heavier volume is coming in selling, not the buying. It's possible the final high is going to be a truncated one (lower high) and leave the DOW as the only index to make a marginal new high. But that's speculation at this time. I mention it because of the risk in looking for more rally; it could fail at any time now. I provided some upside targets to watch so that if they're reached and the market rolls over from them we'll have a good setup to play the short side. But keep in mind that upside potential at this point is dwarfed by downside risk. Trade accordingly.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying

New Option Plays

Technology & Mining

by James Brown

Click here to email James Brown


CommVault Sys. - CVLT - close: 82.74 change: +1.41

Stop Loss: 79.45
Target(s): 89.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
CVLT has been trending higher for months. Yet last week saw CVLT surged higher and broke through resistance near $80.00 on takeover speculation. Since then the stock has corrected a bit and retested broken resistance near $80.00 as new support. The stock looks poised to rally again. I am suggesting a trigger to buy calls at $83.25. If triggered our target is $89.00.

Trigger @ 83.25

- Suggested Positions -

buy the Apr $85 call (CVLT1320D85) current ask $2.70

Annotated Chart:

Entry on March -- at $---.--
Average Daily Volume = 627 thousand
Listed on March 20, 2012


Joy Global, Inc. - JOY - close: 58.72 change: -0.31

Stop Loss: 60.25
Target(s): 52.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Many of the metal and mining stocks continue to underperform. Shares of JOY have broken down below a significant trend line of support. Now they are flirting with a bearish breakdown under technical support at the simple 200-dma. Today's low was $57.71. I am suggesting a trigger to buy puts at $57.50. Our target is $52.50 but you could aim for the $50 level.

Trigger @ 57.50

- Suggested Positions -

buy the Apr 60 PUT (JOY1320P60) current ask $1.35

Annotated Chart:

Entry on March -- at $---.--
Average Daily Volume = 2.7 million
Listed on March 20, 2012

In Play Updates and Reviews

Stocks End 3-Day Slide

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market's major indices ended a three-day slide on Wednesday. Once again the S&P 500 index looks poised to hit new all-time historic highs.

AXLL and MKC were both triggered today.

Current Portfolio:

CALL Play Updates

Axiall Corp. - AXLL - close: 62.09 change: -0.04

Stop Loss: 59.90
Target(s): 69.00
Current Option Gain/Loss: Apr62.5c: +12.5% & May65c: +16.3%
Time Frame: 3 to 6 weeks
New Positions: see below

03/20/13: Our new trade on AXLL is off to a strong start. Shares opened at $62.36 and rallied to a +4.1% gain and another new high. Our trigger to buy calls was hit at $63.15.

> FYI: The Point & Figure chart for AXLL is bullish with an $83 target.

- Suggested Positions -

Long Apr $62.50 call (AXLL1320D62.5) entry $3.20

- or -

Long May $65 call (AXLL1318E65) entry $2.75*

03/20/13 trade opened at trigger $63.15.
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on March 20 at $63.15
Average Daily Volume = 1.3 million
Listed on March 19, 2012

Crane Co. - CR - close: 56.77 change: +0.19

Stop Loss: 53.90
Target(s): 58.50
Current Option Gain/Loss: +24.0%
Time Frame: 6 to 9 weeks
New Positions: see below

03/20/13: CR is still marching higher with small steady gains every day. I am adjusting our stop loss to $53.90.

Earlier Comments:
We do want to keep our position size small to limit our risk. If triggered our multi-week target is $58.50. More aggressive traders could certainly aim higher but CR doesn't move super fast.

- Suggested Positions - *Small Positions*

Long JUN $55 call (CR1322F55) entry $2.50

03/20/13 new stop loss @ 53.90
03/11/13 triggered at $55.25, plus we corrected the typo regarding the April versus June option. We are suggesting the June $55 call.

Entry on March 11 at $55.25
Average Daily Volume = 314 thousand
Listed on March 09, 2012

Green Mtn Coffee Roasters - GMCR - close: 56.19 change: +1.13

Stop Loss: 52.95
Target(s): 59.75
Current Option Gain/Loss: +10.3%
Time Frame: 3 to 4 weeks
New Positions: see below

03/20/13: After yesterday's show of relative strength the rally in GMCR stalled today. Shares gave back -0.6%. Nimble traders could use a dip near the $55.00 mark or the 10-dma as a new bullish entry point.

Earlier Comments:
If this rally continues GMCR could see a short squeeze. The most recent data listed short interest at 37% of the 129 million-share float.

- Suggested Positions -

Long Apr 57.50 call (GMCR1320D57.5) entry $1.64

Entry on March 19 at $55.55
Average Daily Volume = 3.4 million
Listed on March 18, 2012

Genesee & Wyoming - GWR - close: 92.18 change: -1.66

Stop Loss: 89.90
Target(s): 98.50
Current Option Gain/Loss: -14.2%
Time Frame: 3 to 6 weeks
New Positions: see below

03/20/13: GWR gapped open higher but then spent the rest of the day inside the $92.50-93.50 zone. I am not suggesting new positions at current levels.

More conservative traders may want to raise theirs closer to yesterday's low (91.10).

Earlier Comments:
I would keep your position size small to limit our risk.

*Small Positions* - Suggested Positions -

Long Apr $95 call (GWR1320D95) Entry $1.40

03/19/13 new stop loss @ 89.90

Entry on March 11 at $92.35
Average Daily Volume = 407 thousand
Listed on March 09, 2012

Kansas City Southern - KSU - close: 108.98 change: +1.07

Stop Loss: 104.75
Target(s): 114.00
Current Option Gain/Loss: +10.0%
Time Frame: 3 to 5 weeks
New Positions: see below

03/20/13: KSU is back to showing relative strength. The stock added +0.99% and looks poised to breakout past resistance near $110 soon.

Earlier Comments:
We want to keep our position size small to limit our risk since the transportation sector and KSU are arguably overbought at current levels.

- Suggested Positions -

Long Apr $110 call (KSU1320D110) entry $2.50

Entry on March 14 at $107.50
Average Daily Volume = 984 thousand
Listed on March 13, 2012

McCormick & Co. - MKC - close: 71.71 change: +0.70

Stop Loss: 69.90
Target(s): 74.85
Current Option Gain/Loss: -5.5%
Time Frame: Prepare to exit PRIOR to earnings on April 2nd
New Positions: see below

03/20/13: Our new play on MKC has been opened. We wanted to launch bullish positions at $71.20 but shares gapped open higher at $71.40 this morning. The rally continued and MKC outperformed the broader market with a +0.98% gain. I would keep our position size small to limit our risk. Don't forget that we plan to exit prior to the earnings report on April 2nd.

*Small Positions* - Suggested Positions -

Long Jun $70 call (MKC1322F70) current ask $2.70

03/20/13 triggered on gap open higher at $71.40

Entry on March 20 at $71.40
Average Daily Volume = 750 thousand
Listed on March 19, 2012

Toyota Motors - TM - close: 104.28 change: +1.13

Stop Loss: 102.35
Target(s): 108.00
Current Option Gain/Loss: -26.6%
Time Frame: 3 to 6 weeks
New Positions: see below

03/20/13: TM displayed some relative strength today with a +1.0% gain. The stock looks poised to breakout from its recent sideways consolidation. Readers may want to wait for a close above $105.00 before considering new positions.

Earlier Comments:
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.

- Suggested Positions -

Long Apr $105 call (TM1320d105) entry $2.25

03/18/13 new stop loss @ 102.35, more conservative traders may want to exit early now
03/16/13 new stop loss @ 101.75

Entry on March 05 at $103.25
Average Daily Volume = 686 thousand
Listed on March 02, 2012

PUT Play Updates

SINA Corp. - SINA - close: 49.60 change: +2.09

Stop Loss: 50.25
Target(s): 42.50
Current Option Gain/Loss: -48.3%
Time Frame: 3 to 4 weeks
New Positions: see below

03/20/13: The Chinese Shanghai index was up strongly today with a +2.6% gain. This strength back home may have sparked some short covering in shares of SINA. The stock opened higher and surged to a +4.3% gain. The rally did stall at round-number resistance at the $50.00 mark. Unfortunately today's rally does break the multi-week bearish trend of lower highs. If there is any follow through higher we could see SINA hit our stop loss at $50.25. I am not suggesting new positions.

- Suggested Positions -

Long APR $47.50 PUT (SINA1320P47.5) entry $2.11

Entry on March 13 at $47.75
Average Daily Volume = 2.7 million
Listed on March 12, 2012

Vitamin Shoppe, Inc. - VSI - close: 50.90 change: +0.32

Stop Loss: 51.55
Target(s): 45.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

03/20/13: The rebound in VSI (+0.6%) kept pace with the bounce in the S&P 500 index (+0.6%). Overall VSI continues to look vulnerable. We are still sitting on the sidelines waiting for a breakdown.

I am suggesting a trigger to buy puts at $49.75. If triggered our target is $45.50.

Trigger @ 49.75

- Suggested Positions -

buy the Apr $50 PUT (VSI1320P50)

Entry on March -- at $---.--
Average Daily Volume = 736 thousand
Listed on March 11, 2012