Option Investor

Daily Newsletter, Saturday, 5/18/2013

Table of Contents

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

Market Wrap

Keeps Going and Going and Going

by Jim Brown

Click here to email Jim Brown

This market rally has more staying power than the Energizer Bunny.

Market Statistics

The Teflon Market continues to power higher thanks to the Rodney Dangerfield rally. The rally that has had so much trouble getting any respect has turned into the schoolyard bully. Shorts are getting beaten to a pulp on a daily basis and bystanders on the sidelines are being pulled into the fray.

It would appear we have definitely reached the "Oh heck I missed it, throw money at the market" stage. Fund managers have to remain fully invested with every new dollar they get because they can't let any other fund outperform them. Investor money follows gains and it is a cutthroat and highly competitive fund market.

Treasuries are selling off with the yield up +19.7% since May 1st. That is the difference between a yield of 1.61% on May 1st and Friday's close at 1.95%. We are closing in on that 2.0% level again and that is considered the turning point to shift money from treasuries to equities.

Ten Year Yield Chart

However, despite the monster +9% gain in the Russell over the last four weeks there are a lot of investors still unconvinced. Credit Suisse reported that 30% of investor accounts were all cash. That is a huge amount of money showing investors are still skeptical of the rally. Morgan Stanley said only 34% of client funds were invested in equities. Only 34% !! That means 66% is either in cash, bonds or treasuries.

Some of that money will never be put into equities. The holders may be retirement age and scared of another 50% correction, flash crash or some other unknown. Cash is their form of security. Another large chunk of that cash is probably waiting for a correction as an entry point.

The bottom line is still a lot of cash on the sidelines and we are already reaching the euphoria stage in the rally where that cash is sucked into the market because Ma and Pa investor suddenly succumb to the constant new highs and chase stocks.

Normally this would end badly and it still may. However, there is a new sentiment appearing in the market. Apparently as a result of the Fed, BOJ, BOE, ECB, etc and the rampant stimulus programs there is a shortage of stock. Trillions of dollars are flowing into the U.S. markets from institutions and from overseas investors fleeing their local banking systems. Investors who are already long equities are celebrating and they don't want to sell. That leaves a huge influx of cash bidding for a shrinking number of shares.

This is like the current Tesla (TSLA) situation. More than 75% of TSLA shares are owned by ten entities and the shares are not traded. Of the 25% of the shares that do trade 41% are sold short. Every piece of good news creates a new short squeeze because new investors are trying to buy a piece of Tesla. There are too many people trying to buy too few available shares.

Tesla Chart

The current market rally is too much cash chasing too few shares. The internals tell the tale. Volume all week has averaged 6.2 billion shares per day. We are setting new record highs and the volume is on the low side of mediocre. There is no rush to buy stock at least in terms of volume. The available shares are simply being bid higher by the surge in cash. On Wednesday there were 1,250 new 52-week highs and that is a 25 year high but volume was still mediocre.

I feel like we entered the Twilight Zone the last couple weeks. The major economic numbers have accelerated to the downside while the market races higher. The U.S. economy is plunging but the dollar is soaring. The dollar hit nearly a three year high on Friday despite the terrible economics. The justification was "expectations the Fed would taper the QE before year end." What economic planet are these market reporters on? If the economy continues on the current path they will be raising their purchases in the coming months.

The critical Philly Fed Manufacturing Survey on Thursday fell 6.5 points to -5.2 and back into contraction territory. New orders and backorders plunged well into contraction. The Empire Manufacturing Survey on Wednesday crashed back into negative territory from +3.1 to -1.4 compared to estimates for +4.0 gain. New home construction starts fell -16.5% from 1.036 million to 853,000 in April. What happened to the housing boom? Lumber prices are imploding and last time I checked houses were built mostly with lumber. Lumber prices have fallen -23% since March. Wal-Mart missed on earnings, sales declined and they guided lower. That does not suggest the economy is getting better.

The U.S. is supposedly the prettiest girl at the dance with GDP expectations for the full year at +1.8%. Japan is forecast at +1.1%, the Eurozone -0.5%, Russia +1.6% and all OECD (developed countries) average +1.2%. That is another reason given for the stronger dollar because we are growing faster that everyone besides China (+7.6%) and India (+6.0%). Personally I believe the difference between the U.S. GDP expectations at +1.8% and the other developed countries at +1.2% is nothing to brag about. With our current economic history that 1.8% is definitely at risk.

Dollar Index Chart

Lumber Futures Chart

To further convince us we have entered the Twilight Zone the Consumer Sentiment for May surged from 76.4 to 83.7 in Friday's release. That is the highest level since July 2007. Yes, I am not kidding. We suddenly rebounded from worrying over the Fiscal Cliff, the Sequestration, Debt Ceiling and a dozen other things to the highest sentiment in six years? I am not making this stuff up.

The present conditions component soared from 89.9 to 97.5 and the highest level since October 2007. The expectations component rose from 67.8 to 74.8 and the highest level since November. Apparently consumers are super excited about the arrival of spring but they are less enthused about the outlook for the holiday season six months from now. It is amazing what record highs in the stock market can do for consumer sentiment. There was also a week of headlines about the Nonfarm Payrolls and uninformed consumers thought the addition of 278,000 part time jobs with no health care benefits was good news. The rise in home prices was also a factor. If that drop in lumber prices translates into a stalling housing market the sentiment numbers can decline just as fast as they went up.

It is too soon for the IRS scandal, the seizing of two months of AP phone records and the new revelations on Benghazi to have impacted sentiment but you can bet it will. The IRS is the most hated government organization and this will trickle down to the consumer level. The tin foil hat community now has justification for their conspiracy theories. With the IRS the controlling body for implementation of Obamacare what else could go wrong?

The actual sequestration pain is expected to intensify over the next 90 days so I would expect a decline in sentiment over the summer months. As you can tell from the chart below the sentiment numbers are very volatile as we move from headline to headline throughout the year.

Consumer Sentiment Chart

The economic calendar for next week has two Fed activity reports and two housing reports. All will be of interest to the market but it is unlikely they will cause a market disruption.

The release of the FOMC minutes on Wednesday is the biggest event of the week. After several Fed heads gave conflicting outlooks last week for ending QE in 2013 the minutes will be scoured for signs of Fed direction. Given the rapidly declining U.S. economics I can't imagine they will have spent much time pondering their eventual exit. Over the last month several Fed heads have emphasized the potential for increasing QE purchases if the economy continued to slide. I believe those comments found more traction in the equity market than comments on tapering QE.

On Thursday the president of the San Francisco Fed, John Williams, caused a drop in the market after saying the Fed should begin cutting back on QE purchases this summer. However, on Friday Minneapolis Fed president, Narayana Kocherlakota, warned the Fed has not done enough to boost economic growth. He cited the declining inflation and outlook for overly high unemployment for the next 2-3 years. He said, "The Fed has still not lowered the real interest rate sufficiently in light of the changes in asset demand and asset supply." He wants the Fed to keep rates low until unemployment is 5.5%. That would be in 2016 or so at the present rate.

The market does not know who to believe with a Fed speaker or two almost every day. This is why they will pay so much attention to the minutes this week. That is the official log of what they really discussed at the meeting.

Economic Calendar

It was a bad week for gold. The yellow metal declined -6.14% or -$89 to close at $1358 on Friday. The soaring dollar and the end of the Armageddon trade are weighing on gold prices. Europe appears to be recovering and the weekly crisis has disappeared. Greek 10-year bonds are now yielding 8% compared to the 30% just a year ago. Spain posted its first trade surplus on record for March at 634.9 million euros compared to a deficit of 3.2 billion in March 2012. Turkey's two-year bond yields fell to a record 4.61% after Moody's raised the country to investment grade for the first time in more than two decades. China remains the fly in our soup with expectations for the lowest growth since 2009 but at least they are not in crisis mode.

Paper gold declined for seven consecutive days and the worst streak since March 2009. When it hits the April low of $1321 I would expect a flurry of dip buying. Whether it will be just a trade or a longer term move is unclear. Physical gold demand is surging but with the equity market in euphoria mode stocks have more appeal than gold. The difference between paper gold (ETFs, futures) and real gold (coins, bars, jewelry) will eventually shrink. When thousands of hedge funds and speculators in general can create a futures contract by simply selling (shorting) it into existence the volume of paper gold is many times higher than the real gold it could eventually represent. Unlike equities there are no shares to borrow you only need to "sell to open" to create a new futures contract. These paper, actually electronic, contracts are simply trading mechanisms and are not really gold. They are the illusion of gold and those contracts are being cancelled by investors who want to use that margin to buy equities.

A shortage of the physical metal has caused premiums for delivery of actual gold products to soar and waiting periods for delivery can be up to 90 days. The U.S. Mint sold 210,000 ounces of gold coins in April thanks to the price drop. This compares to only 62,000 ounces in March. They had to halt sales more than once because they could not keep up with the demand. The Perth Mint in Australia is working around the clock to keep up with orders at a level not seen since the 2008 financial crisis.

Speculators have sent the level of short positions at the Comex to the highest level since late 2008 according to SocGen. Shorts have risen from 4.3 million ounces in late September to 13.9 million ounces today. This could be the mother of all short squeezes when it reverses.

Gold Chart

Gold Miners ETF Chart

Comex Gold Shorts Chart - Bloomberg

In stock news Dell reported earnings of 21 cents, down from 43 cents a year earlier. It was also well below estimates of 35 cents. Revenue declined -2.4% to $14.1 billion. The earnings miss should help Michael Dell fight off the attack by Carl Icahn in the battle over who gets Dell's bones. For shareholders trying to decide between the $13.65 offer from Michael Dell or the $12 plus stock offer by Icahn the earnings miss makes the outlook for profitability of a post Icahn acquisition look weaker. If Dell's profits are seen to be plunging then investors are less likely to want to accept stock in the new company if Icahn was successful.

Dell is suffering from the decline in the PC business and rise of the tablet model. Windows 8 has been a disaster for the PC companies. The software release has a new user interface and customers don't like it. Humans, especially older ones, don't like change. For the 50+ age group that matured over the last 30 years with a Windows environment that did not change much from release to release the new interface is a change they don't like. For the younger generation that lives on Facebook and social media it has advantages. Unfortunately they don't buy that many PCs and Windows 8 was a negative for PC buyers.

Dell shares failed to move much on the earnings news since the $13.65 offer is outstanding and more likely after the report.

Dell Chart

Facebook shares closed at $26.25 on the anniversary of their IPO in 2012. The stock was priced at $38 and traded between $38 and $45 on the first day on record volume of 458 million shares. It would have been more but the colossal mistakes at the Nasdaq kept share from trading for half of the day. Facebook has never returned to that $38 IPO price with the high in 2013 of $32.51. Mark Zuckerberg still has about 28% of the company worth about $13 billion. There are roughly 1.75 billion shares outstanding and the company has 1.1 billion users.

Facebook Chart

Transocean Offshore (RIG) won a battle against Carl Icahn last week but they did not escape without any scars. Shareholders voted against the $4 dividend plan proposed by Icahn and in favor of a $2.24 per share plan that left some cash in the company. The plan received 75% of the vote. They also voted out the Chairman, Michael Talbert. The company had already said Talbert would step down later this year so the vote was anticlimactic. Talbert had been a director for 19 years. Icahn candidate, Samuel Merksamer, won a seat on the board but his two other candidates lost. Icahn owned 5.6% when he last reported. Shares of RIG declined 70 cents on the news.

Transocean Chart

Aruba Networks (ARUN) declined the most in five years after it guided for earnings below analyst expectations. Increased competition from Cisco was also a factor. Aruba called it a "heightened level of competition." Cisco is its biggest rival. Aruba guided for profits in the range of 10-12 cents for Q2 and analysts were expecting 16 cents. May has not been kind to Aruba with two major declines in the stock price.

Aruba Networks Chart

JP Morgan (JPM) raised its year end estimate for the S&P from 1,580 to 1,715. They cited the rise in the Transports and Semiconductors as evidence the rally has legs. They also said the widening bond spread suggested money was rotating into equities. Jeffery Saut from Raymond James reiterated his 1,700 or higher target for the S&P.

The brokers raising estimates almost have to do it out of self defense. Having a 1,500 S&P target when the index closed at 1,667 on Friday makes you look stupid to the average investor. I personally understand that these are YEAR END targets and the odds are very good we will trade down to 1,500 or below before the summer is over. If the economy does not stop its slide it could be a lot lower.

The S&P has gained +1,000 points in 1057 days. It was March 6th, 2009 the S&P hit what everybody called a "generational low" at 666. Do you think the Friday close at 1,667 could be an ominous sign? That would be a perfect spot for a retracement to begin but I am not expecting it.

The S&P has broken above uptrend resistance and is in blue sky territory. That prior resistance should now be initial support at 1,650. The 1,700 level should now be the round number target and we could hit it next week if the rally continues at the present rate. We are over extended by any rational metric with the +17% gain for the year. Overextended bull markets can remain illogical for a long time so don't bet against it. Just plan for a dip at some point in our future.

S&P Chart - Daily

The Dow has lagged the S&P in terms of relative performance despite being up the same +17%. The Dow is just now reaching the upper channel resistance at 15,350. Should the market decide to take a rest I would expect the 15,000 level to be strong support. Only twenty-three of Dow stocks were positive with the +121 point gain.

Dow Stocks

Dow Chart - Daily

The Nasdaq is up +16% for the year and the month of May has been amazing. The majority of the gains have come in the last four weeks. The Nasdaq has gained +11.4% since April 18th. Many years the tech index does not gain that in the entire year.

Looking at the chart shows the euphoria rocket taking off and it met round number resistance of 3,500 at the close on Friday. The RSI is grossly overextended and suggests the index needs a rest. Initial support is well back at 3,400.

Winners and Sinners

Nasdaq Chart

The Russell 2000 moved a little bit closer to what could be strong round number resistance at 1,000. If I had to pick a point for the market to react negatively this would be it. If we couple this with the strong round number resistance on the Nasdaq at 3,500, the high was 3,499 on Friday, I would expect this combination to be deadly. However, nothing seems to phase the market. Bad economics, earnings misses and political scandals just bounce off.

I would be conscious and cautious of these levels next week.

Russell 2000 Chart - Daily

The S&P bullish percent rose to 89.2% from 86.2% the prior week. That means 89.2% of the S&P is showing a bullish signal. Historically anything over 70% is considered overbought and anything under 30% is considered oversold. Clearly the S&P is overbought and at a level that has produced sell offs in the past.

S&P Bullish Percent Chart

We know there is a headline in our future that will cause havoc in the markets. The more overextended we become the more likely that headline will appear.

However, as long as there is a surplus of cash and shortage of stock the dips will be bought and the market will continue moving higher. If we were to get a 3% decline I would consider us lucky.

I know most U.S. citizens don't really pay attention to what is going on in the rest of the world. This next topic is important. Last week the U.S. deployed the USS Kearsarge amphibious assault ship along with the 26th Marine Expeditionary unit to Eilat Israel for a "visit." According to the Navy, "While in port, the officers, sailors and marines will meet with local officials, participate in community engagement projects and experience the rich history and culture of the region." What the U.S. did not say is that the Kearsarge and the 26th MEU is now positioned conveniently close to Syria just in case they need to "visit" Syria.

The Russians got the hint and immediately provided one of their own. For the first time in decades the Russian Pacific Fleet transited the Suez Canal and entered the Mediterranean headed for the Cypriot port of Limasol, which is also conveniently close to Syria. The implications are clear that Russia will not stand idly by if Israel or others decide to mount new attacks on Syria. Israel has already launched two bombing raids in recent weeks to prevent missiles from being delivered to Hezbollah. Russia is Syria's ally and they are supplying Syria with higher technology antiaircraft batteries, missiles and long range anti-ship missiles.

Neither of these ship movements made the headlines in the U.S. but it is obvious the stakes are rising in the Syrian conflict with the major players repositioning their chess pieces on the global board.

Not to be left out of the global headlines North Korea launched three missiles into the sea off the eastern coast just to prove it still could.

Iran pulled off another delay last week when it met with the IAEA and the P5+1 UN nations in different meetings and both failed to reach any agreement. It was the 11th meeting for the IAEA and the last five have just had a goal of coming up with a structure for a real meeting. For a year Iran has successfully avoided any real conversation by disagreeing on what would be discussed IF a real meeting was held. There is no way Iran is going to be brought to the negotiating table without the real and credible threat of military action. I don't see that happening in the near future. The U.S. drew a red line in Syria and they stepped over it multiple times with no repercussions. North Korea has been doing it for a decade and finally produced nuclear weapons. Why would Iran not believe they could get away with it as well? Today the U.S. is projecting an image of all bark and no bite.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"Things may come to those who wait, but only the things left by those who hustle"
Abraham Lincoln

Index Wrap

Trend Accelerates to the Upside; Bulls Rampage On!

by Leigh Stevens

Click here to email Leigh Stevens

The market is getting quite overbought in conventional terms and bullish sentiment has finally caught up to that fact that we're in a major bull move. A correction can come any time but I don't anticipate a steep reversal.

I noted that the market is overbought and I should clarify that bull markets almost ALWAYS get overbought in technical terms but this situation tends to continue in this pattern for prolonged periods. Moreover, it depends on what time frame is being examined. On a daily chart basis, the 13-day Relative Strength Indicator (RSI) is about as high as it ever gets without at least a pause or minor correction.

A pause or even a minor correction will moderate or 'throw off' an overbought condition. Another rally ensues and then the indicator rises to an overbought 'extreme' again. It's common in a major bull move for a number of overbought extremes to be reached before the market comes down in a significant way. On a weekly chart basis, again using 13 as the 'length' input (1/4 of a year), the S&P and Dow are also seeing the high readings of overbought extremes; not quite so much yet with the Nasdaq, but they're getting there also.

Now the next question is can you 'time' a top based on the major indexes being at overbought extremes. Not really. It is more of a danger of a bearish shakeout when bullish 'sentiment' also gets very high. And we're getting there according to my 'CPRATIO' sentiment indicator displayed with the S&P 500 (SPX) chart and the Nasdaq Composite (COMP) daily charts.

There is the factor of chart resistance as even more telling on a chart/technical basis, assuming you can FIND either a prior high that might mean at least an interim top OR, in this market, resistance implied by the top end of broad WEEKLY uptrend price channels that I highlighted last week (5/11/13), as seen on this LINK. This week, I will show these broader price channels on my daily charts. The upper channel lines suggest the major market indexes might hit significant technical resistances or objectives around:

1750 in SPX; in the 775 area in the S&P 100 (OEX)

At 16100-16200 in the Dow

3800 in the Nasdaq Composite (COMP) and 3300 in the Nas 100.

With the NDX tracking stock QQQ, 80 could be a major objective

1100 is a possible longer range target in the Russell 2000 (RUT}.

I have no advice to exit bullish strategies taken on from significantly lower levels. I have no advice to step IN and would resist taking on bullish positions after such lofty gains.

Conversely, I don't want to take on bearish positions unless there is a clear cut price reversal, NOT just based on the fact that this market is quite overbought on both a price and 'sentiment' basis.

It is interesting and oh-so common from past market cycles that traders finally got super-bullish after the S&P rallied 250 points or 18% since the beginning of the year. It never fails. Try as hard as we can to teach getting in on trends EARLY and when the market is 'oversold' for example, human nature is always to get drawn into the market after prolonged gains. It's a well-known psychological phenomena that I suggest you NOT be part of!

The strongest SPX sector gains were seen in the 7 (of 9) S&P 500 sectors represented by the Exchange Traded Fund (ETF) stocks of XLV, 'consumer services'; XLF, 'financials'; XLK, select 'technology' stocks; XLB, 'basic industries'; XLI, select 'industrials'; XLP, 'consumer staples'; XLE or the SPDR for the S&P 'energy' sector did finally achieve a new closing weekly high relative to its 2011 peak.



The S&P 500 (SPX) continues in an accelerating bullish trend and SPX achieved a bullish upside penetration above the top end of the daily chart uptrend channel the Index had been for many months.

Evaluating the broadest uptrend channel for SPX as calculated based on the weekly chart (not shown), the upper resistance end of SPX uptrend channel intersects up in the 1750 area currently, which becomes both a potential upside objective AND a potential resistance. 1700 could offer some near resistance.

Near support is at the prior resistance trendline (resistance, once penetrated, 'becoming' support) at 1650. Technical support then extends to the 1600 area.

As noted in my initial 'bottom line' comments, all the indices are at overbought extremes on a daily chart basis as seen with the RSI indicator above; a bit less so on a longer term chart basis. Such readings suggest potential for volatility once some bearish news comes in and traders start taking profits in mass.

A more defining kind of 'overbought' extreme is suggested by the high level of bullish sentiment in my CPRATIO indicator seen just under the SPX Relative Strength Index above. Such bullish 'sentiment' extremes are typically a more worrisome thing for the bulls, as most tops of any significance occur after traders push the call to put ratios to high extremes. Stay tuned!


The S&P 100 (OEX) is in the same very strong bullish pattern as the broader 500 Index. OEX also broke out above minor resistance implied by the top end of the daily chart uptrend price channel; I've now pegged immediate support at the 740 'breakout' point.

The broader uptrend channel, as suggested by long-term charts (weekly chart not shown) intersects currently up in the 773 area. This is now the only potential 'resistance' I can point to on a chart/technical basis.

Support below 740, is highlighted at 720, then around 710 at the current intersection of the uptrend channel.

As with SPX, the S&P 100, OEX, is at an overbought extreme according to the RSI indicator and suggests higher risk of a pullback and volatility upon bearish news.


The Dow 30 (INDU) continues in a strong bullish trend. INDU is approaching potential resistance in the 15500 area. I currently estimate major resistance above 16000.

16050 is the current intersection and potential resistance, implied by the upper end of INDU broadest projected uptrend channel, as calculated from longer-term charts; not shown here, although the relevant upper channel line IS.

Near support is highlighted at 15050, with support then extending to 14870.

I suggest being alert to a downside correction if the Dow reaches the 15500 area. If INDU sails through this area, on a chart basis, I couldn't on a technical basis forecast potential 'resistance' coming in before the Dow went up another 500/500+ points.

Of course a correction can come now, in the 15500 area or at any point ahead implied by overbought extremes seen in the RSI momentum indicator and based on climbing bullish sentiment. This, as traders have finally become 'believers' in the bull market it seems just 2,300 points higher from the lows of late-December!


The Nasdaq Composite (COMP) is in a strong bullish uptrend that has accelerated since COMP broke out above 3400 resistance implied by the high end of its uptrend channel marking the back and forth price swings of the more gradual uptrend dating from late last year into early-May.

I've projected next resistance as possible in the 3600 area, then more major resistance up at 3750, which is the broadest projected uptrend price channel as derived from longer-term weekly charts (not shown).

A downside correction can come at any time based on the overbought extreme suggested by the Relative Strength Index AND by the overbought extreme in bullish sentiment as reflected in my CPRATIO (CBOE equities daily call to put volume ratio) indicator.

Near support, 3400, extending to 3350; major support suggested by COMP up trendline is at 3230 currently.


The Nasdaq 100 (NDX) chart shows the same accelerating uptrend as the broader Composite. NDX also saw a bullish penetration of what had looked like what might be strong resistance around 3000. So far so good for the bulls! Next resistance is projected for the 3085-3100 area. Major resistance, at the upper end of NDX's broadest uptrend price channel, comes in around 3300.

Near support is likely on a pullback to what was resistance at 3000, but key support so to speak is in the low-2900 area, extending to NDX's up trendline intersecting around 2825 currently.

The tech-heavy Nasdaq is not leading this Market of course. I tend to follow Apple Computer (AAPL) as a possible Nasdaq bellwether and it had a big of a set back after hitting technical resistance in the $450 area; AAPL closed the week at $433.

NDX is at the same overbought RSI extreme as the other major indices and which suggests caution in taking on more risk in bullish strategies a this juncture. Eventually, if this bull market rolls on into the summer, we could see 3300 eventually but a big further up leg would be surprising without a correction, even if more a sideways type move, coming first.


The Nasdaq 100 (QQQ) tracking stock is moving higher with NDX opf course and broke out above 73 resistance this past week and got to 74.3 at the Close. Possible next resistance in QQQ comes in around 76. Major resistance is seen in the 80 area.

A move to as high at 80 would be some move, if seen from a low Close of 62 in mid-November to 80; even to 74.3 on Friday is one heck of a move of nearly 20% in around 6 months.

Near support, 73 even but more pivotal chart support is 71.5, extending to lower trendline support seen in my close-only (line) daily chart.

Daily trading volume hasn't been stellar, which is often the case as more volume tends to come out on the stock retreating. The more key volume ancillary indicator with this ETF stock is the On Balance Indicator (OBV) which is trending strongly higher.


The Russell 2000 (RUT) Index is rapidly approaching key resistance at the 1000 mark. I've pegged potential near resistance at 1011, at the upper end of the bullish uptrend channel that RUT has been in for a few months; and, which RUT might break out above as has occurred with Nasdaq and the S&P. On the other hand, 1000-1015 could see selling coming in and an interim top. Just saying!

Major resistance implied by the upper 'resistance' end of RUT's broadest uptrend channel, transposed or calculated based on its weekly chart (not shown), extends much higher, to the 1100 area currently.

Near support is seen back at prior resistance in the 950-953 area, with trendline support at 923 currently.

Because of the way that RUT zigged and zagged higher from it last low, the Russell 2000 is not showing the same overbought extreme as Nasdaq. Still if the Market corrects, RUT will fall back with it.


New Option Plays

Restaurants & Data Storage

by James Brown

Click here to email James Brown


Panera Bread Co. - PNRA - close: 186.60 change: +1.82

Stop Loss: 199.00
Target(s): 183.95
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
PNRA is a specialty restaurant and honestly one of my favorite places to eat. The stock broke out higher back in April after a five-month consolidation in the $155-170 zone. Traders bought the post-earnings dip at support and now the stock is breaking out to new all-time highs.

Given the market's momentum we could see PNRA testing the $200 area soon. Friday's breakout from its short-term sideways consolidation the last few days is another bullish signal. I'd like to see a little more follow through. Tonight I am suggesting small bullish positions if PNRA can trade at $187.00. If triggered at $187.00 our target is $199.00. FYI: The Point & Figure chart for PNRA is bullish with a $234 target.

Trigger @187.00 *Small Positions*

- Suggested Positions -

buy the Jun $190 call (PNRA1322F190) current ask $3.30

Annotated Chart:

Entry on May -- at $---.--
Average Daily Volume = 558 thousand
Listed on May 18 2013

Western Digital - WDC - close: 60.46 change: +1.41

Stop Loss: 58.95
Target(s): 64.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
In prior years many investors would equate WDC with desktop PCs and hard drives. It's widely known that the desktop PC industry is in decline as consumers move to tablets and smartphones. Fortunately, WDC has positioned itself in preparation of the desktop decline. According to the company's management, non-PC related business should account for more than 50% of revenues in 2013. This may be why shares of WDC are hitting new all-time highs, above their 1997 peak.

Friday's high was $60.48. I am suggesting a trigger to open small bullish positions at $60.65. If triggered our target is $64.75.

Trigger @ 60.65 *small positions*

- Suggested Positions -

buy the Jun $60 call (WDC1322F60) current ask $2.50

Annotated Chart:

Entry on May -- at $---.--
Average Daily Volume = 3.3 million
Listed on May 18 2013

In Play Updates and Reviews

BA & CBI Hit Our Targets

by James Brown

Click here to email James Brown

Editor's Note:

Shares of Boeing Co. (BA) and Chicago Bridge & Iron (CBI) hit our bullish exit targets on Friday.

We have removed ORLY. Both XLE and COV hit our entry triggers.

Several stop losses have been updated.

Current Portfolio:

CALL Play Updates

HanesBrands Inc. - HBI - close: 51.54 change: +0.56

Stop Loss: 50.40
Target(s): 54.75
Current Option Gain/Loss: +15.0%
Time Frame: 3 to 6 weeks
New Positions: see below

05/18/13: HBI kept pace with the broader market and added another +1.0% on Friday. This is a new closing high for the stock.

We are turning a bit more defensive here and raising the stop loss to $50.40. More aggressive traders will want to consider keeping their stop loss below $50.00, which should be round-number support.

- Suggested Positions -

Long Jun $50 call (HBI1322F50) entry $2.00

05/18/13 new stop loss @ 50.40
05/14/13 new stop loss @ 49.40


Entry on May 08 at $50.72
Average Daily Volume = 1.4 million
Listed on May 07 2013

Michael Kors - KORS - close: 60.61 change: +1.34

Stop Loss: 57.65
Target(s): 64.75
Current Option Gain/Loss: -19.1%
Time Frame: exit PRIOR to earnings on May 29th
New Positions: see below

05/18/13: Traders did indeed buy the dip in KORS on Friday. The stock bounced off its 10-dma and managed to erase Thursday's decline. We have less than two weeks left on this trade. KORS is scheduled to report earnings on May 29th and we do not want to hold over the announcement.

- Suggested Positions -

Long Jun $62.50 call (KORS1322F62.5) entry $3.40

05/13/13 trade triggered on gap open higher at $61.55
trigger was $60.65


Entry on May 13 at $61.55
Average Daily Volume = 3.5 million
Listed on May 11 2013

Lockheed Martin - LMT - close: 106.41 change: +2.41

Stop Loss: 103.45
Target(s): 109.00
Current Option Gain/Loss: +147.0%
Time Frame: 3 to 6 weeks
New Positions: see below

05/18/13: Wow! LMT was a strong outperformer on Friday with a +2.3% surge to new four and a half year highs. More conservative traders may want to take profits right now since our call option is up more than +140%.

We are raising the stop loss to $103.45. I am not suggesting new positions.

- Suggested Positions -

Long Jun $105 call (LMT1322F105) Entry $0.85

05/18/13 new stop loss @ 103.45. More conservative traders may want to take profits now with the bid on our call at more than $2.00


Entry on May 15 at $103.05
Average Daily Volume = 1.7 million
Listed on May 14 2013

MEDNAX, Inc. - MD - close: 92.99 change: +0.29

Stop Loss: 88.90
Target(s): 98.50
Current Option Gain/Loss: +33.3%
Time Frame: 4 to 8 weeks
New Positions: see below

05/18/13: MD extended its gains to four days in a row and shares are up 8 out of the last 9 sessions. Thus MD is growing short-term overbought here and probably due for a dip. Look for short-term support in the $91-90 zone.

Earlier Comments:
If triggered our target is $98.50. However, I am suggesting we keep our position size small. MD doesn't trade a lot of volume and the options do not see a lot of volume either.

*Small Positions* - Suggested Positions -

Long Jun $95 call (MD1322F95) entry $0.90


Entry on May 14 at $91.15
Average Daily Volume = 242 thousand
Listed on May 11 2013

Martin Marietta Materials - MLM - close: 110.91 change: +0.99

Stop Loss: 107.45
Target(s): 118.50
Current Option Gain/Loss: + 3.2%
Time Frame: 4 to 6 weeks
New Positions: see below

05/18/13: On Thursday MLM teased us with a breakout past $110. On Friday the stock jumped past resistance at $110 and closed at new multi-year highs. The simple 10-dma has risen to $108.45. More conservative traders may want to adjust their stops closer to this level.

Earlier Comments:
MLM is currently hovering below short-term resistance at $110. A breakout here could spark more short covering. The most recent data listed short interest at 11% of the rather small 45.9 million share float.

- Suggested Positions -

Long Jun $110 call (MLM1322F110) entry $3.10


Entry on May 16 at $110.25
Average Daily Volume = 378 thousand
Listed on May 15 2013

Occidental Petroleum - OXY - close: 92.84 change: +1.81

Stop Loss: 89.75
Target(s): 98.50
Current Option Gain/Loss: +19.4%
Time Frame: 4 to 8 weeks
New Positions: see below

05/18/13: Friday's market rally helped boost OXY. The stock managed to outperform the major indices and many of its peers with a +1.98% gain. Furthermore OXY has broken out past short-term resistance at the $92.00 level.

I am raising the stop loss to $89.75.

Earlier Comments:
On the weekly chart (see below) OXY has created a huge, inverse head-and-shoulders pattern, which is bullish. FYI: The Point & Figure chart for OXY is bullish with a $114 target.

- Suggested Positions -

Long Jun $92.50 call (OXY1322F92.5) entry $1.95

05/18/13 new stop loss @ 89.75


Entry on May 14 at $90.75
Average Daily Volume = 6.3 million
Listed on May 13 2013

WellPoint Inc. - WLP - close: 77.81 change: +0.97

Stop Loss: 75.95
Target(s): 79.50
Current Option Gain/Loss: +80.6%
Time Frame: 3 to 6 weeks
New Positions: see below

05/18/13: WLP managed to outperform its peers in the healthcare sector with a +1.26% gain on Friday. The stock remains below short-term resistance at $78.00.

The simple 10-dma has risen just past $76.00. Plus the $76.00 level is the bottom of the recent gap higher so it should be short-term support. We are raising the stop loss on WLP to $75.95. More conservative traders might want to raise their stop higher or just take profits right now. I am adjusting our exit target down to $79.50.

- Suggested Positions -

Long Jun $75 call (WLP1322F75) entry $1.91

05/18/13 new stop loss @ 75.95, adjust exit target to $79.50
05/14/13 new stop loss @ 74.65


Entry on May 08 at $75.25
Average Daily Volume = 2.0 million
Listed on May 07 2013

Energy ETF - XLE - close: 82.12 change: +1.35

Stop Loss: 79.45
Target(s): 89.00
Current Option Gain/Loss: Jun85c: + 4.7% & Sep85c: + 2.2%
Time Frame: 4 to 8 weeks
New Positions: see below

05/18/13: The energy sector surged higher on Friday and the XLE managed to breakout past resistance at its 2011 highs. Our trigger to buy calls was hit at $81.55.

If triggered our multi-week target is $89.00. The $90.00 level was major resistance back in 2008 and will probably be a hurdle for the ETF to cross.

- Suggested Positions -

Long Jun $85 call (XLE1322F85) entry $0.42

- or -

Long Sep $85 call (XLE1321i85) entry $1.80


Entry on May 17 at $81.55
Average Daily Volume = 13.0 million
Listed on May 14 2013

PUT Play Updates

Allergan Inc. - AGN - close: 101.41 change: +0.99

Stop Loss: 104.25
Target(s): 97.00
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: see below

05/18/13: With the market in rally mode AGN managed a rebound off its midday lows. Shares added almost +1% by the closing bell. Look for overhead resistance near $103.00.

- Suggested Positions -

Long Jun $100 PUT (AGN1322R100) entry $1.85

05/16/13 new stop loss @ 104.25, adjust exit target to $97.00


Entry on May 09 at $103.46
Average Daily Volume = 2.4 million
Listed on May 08 2013

Covidien - COV - close: 65.77 change: +0.10

Stop Loss: 67.05
Target(s): 62.00
Current Option Gain/Loss: - 8.3%
Time Frame: 3 to 4 weeks
New Positions: see below

05/18/13: Friday's session was relatively quiet for shares of COV. The stock's failure to really participate in the market's widespread rally is a good sign for the bears. Shares did hit our trigger to buy puts at $65.55. I would consider new positions at current levels or you could wait for a new relative low under $65.49.

- Suggested Positions -

Long Jun $65 PUT (COV1322R65) entry $1.20


Entry on May 17 at $65.55
Average Daily Volume = 3.5 million
Listed on May 16 2013

iShares Russell 2000 - IWM - close: 99.05 change: +1.10

Stop Loss: 102.25
Target(s): 95.25
Current Option Gain/Loss: Unopened
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

05/18/13: It was another impressive week for the small cap Russell 2000 index with a +2.1% gain. The index is up four weeks in a row and now up +17.3% for the year. We suspect that the 1,000 level will be round-number, psychological resistance for the Russell 2000. That equals the 100.00 mark for the IWM ETF.

Tonight we are adjusting our strategy to take a more aggressive entry point. We will use a trigger to buy puts at $99.75 and adjust our stop loss to $102.25. Readers may want to keep their position size small since this is a riskier entry point. Most traders avoid trying to catch a falling knife and pick a bottom in a rapidly falling stock. At the same time, trying to pick a top can be just as dangerous.

I am adjusting our exit target to $95.25.

Trigger @ 99.75

- Suggested Positions -

buy the Jun $95 PUT (IWM1322R95) current ask $0.77

05/18/13 adjust entry trigger to $99.75
adjust the stop loss to $102.25, adjust the exit target to $95.25.


Entry on May -- at $---.--
Average Daily Volume = 41.8 million
Listed on May 16 2013

Longer-Term Play Updates

Chicago Bridge & Iron Co. - CBI - close: 61.76 change: +2.18

Stop Loss: 54.90
Target(s): 62.00 for the July calls, exit 2014 calls now
Current Option Gain/Loss: July's: +231.8% or Jan's: +131.0%
Time Frame: 3 to 4 months
New Positions: see below

05/18/13: Target achieved!

The market's rally is fueling huge gains in shares of CBI. The stock shot higher on Friday to post a +3.65% gain. CBI also hit our $62.00 exit target for the July calls! That's a +231% rise in the 2013 July $55 calls.

Previously we moved the exit target for the 2014 January calls to $69.00. We're altering our strategy again tonight. Investors should be nimble and adjust to market changes. We suspect that CBI has moved too far too fast. Catching a +$10 move in less than one month is a huge gift. Therefore, tonight we are suggesting investors exit our 2014 calls immediately on Monday morning to lock in gains. We can re-visit CBI after it corrects lower since we're still long-term bullish on the name.

Please review our original play description on this page here.

- Suggested Positions -

(Target hit for July calls on May 17, 2013)
Long 2013 Jul $55 call (CBI1320G55) Entry $2.20* exit $7.30 (+231.8%)

- or -

Long 2014 Jan $60 call (CBI1418A60) Entry $2.90*

05/18/13 Adjust exit strategy on 2014 calls. Exit immediately! on Monday morning May 20th
05/17/13 $62 target hit for July calls!
05/16/13 Target for the July $55 calls is $62.00 on CBI
05/16/13 Target for the 2014 Jan. calls is $69.00 on CBI
05/15/13 new stop loss @ 54.90, adjust exit target to $62.00
05/08/13 new stop loss @ 51.90
*option entry price is an estimate since the option did not trade at the time our play opened.


Entry on April 22 at $51.53
Average Daily Volume = 2.5 million
Listed on April 20 2013


The Boeing Co. - BA - close: 98.92 change: +2.34

Stop Loss: 93.40
Target(s): 99.00
Current Option Gain/Loss: +145.0%
Time Frame: 3 to 4 weeks
New Positions: see below

05/18/13: Target achieved.

BA accelerated higher on Friday and hit our exit target at $99.00.

- Suggested Positions -

Jun $95 call (BA1322F95) entry $2.02 exit $4.95 (+145.0%)

05/17/13 target hit
05/16/13 re-adjust stop loss back down to $93.40
05/15/13 new stop loss @ 94.40
05/14/13 new stop loss @ 93.75


Entry on May 06 at $94.25
Average Daily Volume = 4.9 million
Listed on May 04 2013

O'Reilly Auto. - ORLY - close: 110.95 change: +0.24

Stop Loss: 109.75
Target(s): 119.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: see below

05/18/13: ORLY is not participating in the market's rally to the extent that we think it should be. Shares underperformed the broader indices on Friday. Our trade has not opened yet with the trigger at $112.25. I am removing ORLY from the newsletter tonight. We can re-visit it on a breakout higher or a correction back to support.

Trade did not open.

05/18/13 removed from the newsletter


Entry on May -- at $---.--
Average Daily Volume = 813 thousand
Listed on May 15 2013