Option Investor

Daily Newsletter, Saturday, 5/25/2013

Table of Contents

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

Market Wrap

Taper Stupor

by Jim Brown

Click here to email Jim Brown

Worries over conflicting views on tapering QE3 put the market into a stupor.

Market Statistics

The volatility surrounding the Bernanke testimony and the FOMC minutes evaporated by noon on Friday and traders leaving early for the three-day weekend left the market in a coma. Volume slowed to almost nothing at barely five billion shares as the major indexes gravitated slowly back to unchanged as shorts covered before the holiday weekend.

The Dow actually closed positive with an 8 point gain after a -95 point drop at the open. The Nasdaq and S&P lost a fraction of a point at -0.28 and -0.91, respectively. The Dow Transports were the biggest losers at -34.

There was only one economic report on Friday and that was the Durable Goods orders for April. Orders rebounded +3.3% on the headline number, up from a decline of -5.7% in March. However, if you take aircraft orders out of the mix the gain was only +1.3%. Shipments fell -0.6% and inventories rose +0.4%. Shipments of core capital goods fell -1.5%.

The headline junkies thought the +3.3% rebound was strong and it was better than the +0.5% expectations but you have to factor in the orders Boeing received for planes to be delivered 2-5 years from now. An order for a 787 to be delivered in 2017 is not going to impact the manufacturing economy or jobs anytime soon. I view the report as neutral.

The economic calendar for next week is moderate with the Richmond Fed Manufacturing Survey and the Chicago PMI the highlights for information on current economic conditions. The Q1 GDP revision on Thursday could be a challenge if the revision were to fall under +2% from the initial estimate at +2.5%. Analysts believe it is going lower but how much is up for debate. The GDP for Q2 is expected to be 1.7% to 1.9%.

There is really nothing to get excited about for next week. The market should be slow as the first official week of summer and volume is expected to be light. The economics are not expected to provide much in the way of volatility.

Economic Calendar

Weighing on our markets last week, in addition to the Fed events, was a bad PMI number from China and a huge -12% move in Japan's Nikkei index. The HSBC flash manufacturing PMI for China for May came in at 49.6 compared to expectations for 50.4. That is a 7 month low and shows China to be in a contraction phase rather than expansion. The new orders component also fell into contraction at 49.5 and the lowest reading since September. The PMI report hurt the commodity sector as expectations for demand declined.

The government version of the Manufacturing PMI will be released Thursday evening. Because it is a Chinese government report it will likely be stronger than the flash PMI we got last week. Chinese governmental numbers tend to be overstated. China's full year GDP is expected to grow by +7.5% and that would be the worst performance in 23 years.

The Japanese Nikkei declined -12.5% from peak to trough on Thursday and ended with a -7.3% drop. This is the 10th time in the last 50 years the Nikkei has declined more than 7% in a single day. The -1,143 point decline was the equivalent of a -1,117 point decline on the Dow. Friday was not much better with a -500 point decline at the open but a rebound to close with a +127 point gain. How would you be feeling this weekend if the Dow had seen a -1,700 point move in the last two days? Markets can move suddenly against the trend. The Nikkei lost more than $314 billion in market cap on the two-day decline.

Nikkei Chart - Daily

The markets were all a twitter over the contradictory remarks from Bernanke and the disagreements among the participants in the FOMC minutes. The markets were shocked to hear that QE purchases could slow as soon as the June meeting. The rest of that sentence said if job gains continued and economic conditions improved in line with Fed guidelines. Since that is not likely to happen the worry was misplaced.

Some feel the Fed speakers are being purposefully vague and contradictory. By creating confusion in QE expectations they are restraining the equity markets to avoid an asset bubble. The Fed always wants to avoid having the market assume a particular condition will last for a long time because hedge funds can then bet with or against the Fed and cause an undesirable market reaction. The Fed may be all about "improving communication" compared to the Greenspan era but sometimes too much communication is a bad thing.

The Fed currently owns $1.583 trillion in ten-year treasury equivalents. That means they own 30.32% of all ten-year treasury paper. Private sector ownership has fallen to a record low of 69.68%. The Fed is effectively monetizing the U.S. debt. With the 2013 deficit shrinking the need for the government to sell more debt is also shrinking at least temporarily. That means if the Fed continues its QE program it will be extracting treasuries from the secondary market without any new treasuries being sold. That means the percentage of all treasuries held by the Fed will begin to accelerate sharply. If the current rate of Fed purchases continued they would own 45% of all treasuries in 2014, 60% in 2015 and 90% in 2017. Clearly the Fed is going to reach a point in 2014 where they will have to halt of modify their purchases even if the economy has not recovered. The Fed can't allow itself to continue to increase its total percentage of government debt.

Secondly, the global financial community will not allow it. There will eventually be another major downgrade by the ratings agencies and the associated rise in interest rates even with the Fed purchases continuing. The ratings agencies are not going to let the Fed continue to monetize the debt indefinitely.

The Fed will get some help from the government. The deficit, although shrinking this year, will continue to be a deficit and even at $600 billion a year it will require the sale of that much in new treasuries. Supply will continue to increase although at a slower rate.

The following chart shows the current durations of marketable treasuries with the black lines those held by the Fed.

Stone & McCarthy Research Chart

In stock news there were only a few events on Friday. Sears Holding (SHLD) declined -14% costing Eddie Lampert $467 million for the day. Lampert only receives $1 per year as salary since he took over as CEO of Sears on Feb 1st. He controls 55% of SHLD shares. However, he will receive $4.5 million in Sears stock per year. The company reported a Q1 loss of $279 million compared to a profit of $189 million in the year ago quarter. The loss was -$1.29 per share compared to estimates for -60 cents. Sears said costs for store closings and employee severance expenses hurt earnings along with poor weather and weak economic conditions. The company currently owns 1,211 Kmart stores and 851 Sears stores. Same store sales at Sears declined -3.6% and Kmart -4.6% and overall revenue declined -9% primarily due to closed stores and stores that were sold.

Sears Holdings Chart

Abercrombie & Fitch (ANF) reported same store sales declined -15% and Aeropostale (ARO) reported a -14% sales decline. These teen retailers have been slow to react to the need to change to the new looks in the quick changing teen fashion world. Weak consumer trends mean slow sales and high inventory levels and retailers are hesitant to slash prices to flush inventory and then spend millions buying new looks that might also be hit by the weak sales environment. Shares of ANF and ARO declined sharply on the news.

Abercrombie Chart

Aeropostale Chart

Salesforce.com (CRM) declined -5% on Friday after posting earnings of 10 cents compared to estimates for 12 cents. Revenue of $893 million fell short of estimates of $935 million. The CEO said they experienced severe currency headwinds with regard to the Japanese yen. When yen payments are converted back to dollars the value has been dropping sharply. Salesforce is fresh off a 4:1 stock split in mid April that brought the stock back into the range for normal investors at $44. Several analysts were quick to reiterate a buy on CRM after Friday's drop.

Salesforce.com Chart

Gamestop (GME) reported earnings of 46 cents that beat estimates of 40 cents but revenue of $1.87 billion was weaker than expected. The company raised full year estimates by a few pennies to $2.93-$3.15 but it was not enough to escape the Xbox curse. Microsoft announced the Xbox One earlier this week to rave reviews and it is clear the trend is moving even faster to online games. Amazing Microsoft Xbox One Announcement Video I think the new Xbox is even going to be a challenge for Apple TV. If you watch the video I think you will see what I mean. Analysts were quick to question the potential for the used game market in the future and Gamestop, which makes a market in used games, immediately declined. Shares of GME fell another -11% on Friday.

Gamestop Chart

The earnings cycle is over now that Hewlett Packard and Cisco have reported. They are typically the latest reporters of the major companies. About 67% of the S&P beat on earnings but only 41% beat on revenue. Guidance warnings for Q2 were rampant with companies lowering estimates at the fastest pace since 2001. The market ignored the guidance because the Fed was supplying the joy juice at the fastest pace in history. Eventually the economy will find some traction and companies will be raising estimates. By that time the Fed will need to reduce or end QE and the market will crash despite the better earnings news. If you want logic don't look in the equity market.

The rampant QE by the various central banks should be pushing currencies lower and commodities higher but lack of demand due to declining global economics is fighting that trend. When the Nikkei crashed on Thursday the price of gold rebounded to $1413 because suddenly the safety of equities was called into question. The rebound did not last long with the close on Friday at $1386. Global dealers claim purchases of physical gold are running 9:1 over sales since mid April as buyers take advantage of the cheaper prices. Purchases were 4:1 over sales during the first quarter. In a Bloomberg survey last week 12 analysts were bullish, nine bearish and eight neutral. That was the highest proportion of bulls since April 26th. "When" the equity market eventually corrects we could see a major short squeeze in gold. Until then owners of gold will continually fear the breakdown of support at $1360 with some analysts calling for $1200 before the bear market ends.

Gold Chart

The market blinked last week. After five months of gains the two day intraday dip of -1,961 points (-12.3%) on the Nikkei shocked some bulls out of their complacency. While nobody but Harry Dent believes that could happen in the U.S. the bulls had to at least consider the potential for a few seconds.

The resulting -346 point dip in the Dow from the Wednesday high to Thursday's low was a wakeup call for investors. The Thursday morning dip was bought as was the Friday morning dip but the volume was anemic and the rebounds lackluster. The bloom may be off the rose but I doubt it will be this simple. Factor in the desire to be cautious over the long weekend and that could have been the reason for the soft rebound.

On the bright side everyone has been looking for an entry point. Last week was the biggest dip since the mid April slide. In theory everyone has been waiting for a dip as an entry point. Now it will be interesting to see if they buy the dip or run and hide under the covers like scared children after a Dracula movie.

The S&P declined to 1,635 on Thursday and 1,636 on Friday. That should be enough to give us a decent guideline for trading next week. Any further move under 1,635 would tell us this is not a garden variety 2-3 day bout of profit taking. We have the additional warning of the lower high on Friday and the outside reversal signal on Thursday. An outside day is one where the intraday price exceeds the prior day's high significantly and then closes below the prior day's low. This is typically a trend reversal signal when it occurs at new highs. Obviously this was due to the abundance of headlines but it is still a valid signal. Technical analysis does not care why a chart event happened only that it happened.

If we were to get another lower high and lower low on Tuesday it would be technically negative. This is especially true because Tuesday's after a holiday weekend are normally bullish. The last week of a month is normally bullish and we have the Dow 20 trend to hold us up. If the Dow closes positive on Tuesday it will be the 20th consecutive week. Market makers like to game these stupid oddities so assuming Europe, Asia or the Middle East does not meltdown over the weekend they will probably try to close the Dow in positive territory.

Resistance from Friday would be 1,650 followed by Thursday's high at 1,655. If the S&P can rebound over 1,655 and hold it then the dip buyers would probably return in volume.

S&P Chart

The Dow chart has not changed in several weeks. I warned for the last two weeks the uptrend resistance would be difficult and the Dow did make a concerted effort to break through like we saw on the S&P above. It was simply not able to do it despite a strong spike on Wednesday. The +155 point intraday gain on Wednesday was squashed and resistance held. That resistance for next week is about 15,500 and a suitable round number for traders to target. Strong support is 15,000-15,050. However, initial support formed at 15,200 over the last two days so that is the line in the sand to watch for a breakdown. Short term resistance is 15,325 and Thursday's high. Watch for lower highs and lows or higher highs and lows. That sounds simplistic but the Dow traded in a narrower range on Friday so the next move will be a strong directional clue.

The Dow closed positive on Friday thanks to AXP +$1 and PG +$3.18. Procter & Gamble replaced their CEO with a prior CEO and the market celebrated. Other than that the individual gains and losses were minimal.

Dow Stocks

Dow Chart

The Nasdaq blasted through resistance at 3500 on Wednesday only to see the spike hammered back to a strong loss. The resistance held. Even more interesting the drop on Thursday declined to exactly the level of the previously plotted uptrend resistance, which has now become support. I have been using this chart for the last two weeks and I have not moved that red line. This was a textbook dip to support on both days.

The RSI has dropped back into a more relaxed mode at 63 but the MACD is completing its downward cross. On paper this would seem to be the perfect setup for a breakdown but we have to get past Tuesday to be able to better predict it. There are too many macro factors involved with the holiday and month end that could impact the technical picture.

Initial support is 3425 and resistance 3465.

Nasdaq Chart

I love the Russell chart. I pointed out last week how the 1,000 level was going to be strong round number resistance. The index fought that battle for three days. When it did punch through intraday on Wednesday the spike immediately hit the blue uptrend resistance line and failed. Like the Nasdaq this is a textbook chart.

Resistance is 985 then 1,000. Support is 970.

Russell 2000 Chart

The Dow Transports stalled at the new high from last Monday at 6568 and could go no further. I mentioned last week the rally was slowing as it approached that 6560 level. Now we are faced with a lower high and lower low on Friday and critical support at 6325. The Transports were the worst performing index on Friday and they tend to lead the Dow. This suggests trouble next week for the Dow.

Dow Transport Chart

When traders are looking for an excuse to take profits they will always find one. Sometimes it finds them. The confusion over which Fed member said what, when and what did they mean was joined by the contraction in China's manufacturing PMI and Japan's market crash. It was the perfect storm for the U.S. markets but despite the big plunge there was no real damage done. When the smoke cleared the S&P had only lost -1.2% or -20 points from Tuesday's close at 1669. Given the gains since the April dip this was all smoke and no fire.

For the S&P to have a meaningful dip of -3% from that 1669 close on Tuesday we would have to drop to 1618 and we closed at 1649 on Friday. A -5% dip goes to 1585. If I could order a dip on command I would ask for a dip to the 1585 level because that would be severe enough to trigger stops and convince those sideline fence sitters to join the party.

Fortunately or unfortunately depending on your viewpoint I can't order up a garden variety dip to 1585. I am stuck with the rest of the market participants in hoping the market declines for an entry point but at the same time hoping it doesn't so my other positions don't get killed. This is a fickle business. When we are in a bunch of long positions we don't want a dip and they normally occur anyway. When we want a dip we can go a month without more than a hiccup in the market. Fortunately, we learn at an early age in our investing career that patience pays and there will always be another dip and another rally. Impatience is costly.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"Nobody spends somebody else's money as wisely as he spends his own"
Milton Friedman

Index Wrap

Bull Market Shake Out

by Leigh Stevens

Click here to email Leigh Stevens

The prior overbought condition suggested by the RSI and especially high extremes in bullish sentiment finally set the stage for a correction. Price action traced out a key downside reversal although there's no break yet of the pivotal 21-day averages of the major indexes.

As I noted last week, a correction could come at any time as suggested by overbought extremes in the 13-day and 13-week Relative Strength Index and the 'extreme' bullishness suggested by the call to put volume ratios for equity options on the CBOE.

Indictors that suggest 'overbought' extremes mostly can't be used for any kind of precise timing of a top as you just can't usually know HOW LONG an overbought condition in a major bull market will last. The key added element that would suggest a downside reversal is for one or more of the major indexes to hit prior resistance, a resistance trendline OR to have a downside reversal chart pattern.

No prior chart/technical resistance was reached, nor did prices bump against resistance implied by the upper end of broad weekly uptrend channels. There are two exceptions implied by upper channel lines, since the Dow 30 (INDU) and Russell 2000 (RUT) hit, and reversed from, resistance implied by the high end of their bullish uptrend price channels; see my daily charts for INDU and RUT.

Price action that suggested at least an interim top in the major indexes was that all traced out 'key' downside reversals. In technical/chart terms a downside reversal is defined as a new high, followed by a close below the close of the prior day or prior two days. This is an event that's mostly too common to often suggest the start of a significant pullback. What makes for the rarer 'key' downside reversal is a new daily high, usually a decisive new intraday peak, followed by a Close that is below the LOWS for the prior 1-2 days.

The above pattern of a key downside reversal, when accompanied by a very high RSI (above 70 typically on a 13-day basis) and very high bullish sentiment, usually over a few day period, as measured by my CPRATIO model, shown with the S&P 500 and Nasdaq Composite charts, IS a pattern that usually 'signals' an intermediate top.

There's a subsequent pattern typical of an intermediate-term Market correction, which is that the major indexes pierce their 21-day moving averages. This hasn't happened yet and it bears watching as to whether the major indexes will do so. If this key trading average is penetrated for more than an isolated day, downside potential could be back to a retest of the S&P, Dow and Nasdaq up trendlines for example. Stay tuned on that.

While I think that the strong prior upside momentum is in check for now, to date the correction that set in last week could just be a relatively minor pullback. Or, one that will lead to more of a lateral sideways correction without much downside follow through.

Moderating any bubble-like fears is the fact that bullish sentiment, as suggested by my CPRATIO indicator seen with the SPX and COMP charts, fell sharply in the recent correction. It seemed that late-stage believers weren't so convinced after all that the Market would tack on another big up leg given how far prices had already advanced in 2013.



The S&P 500 (SPX) turned bearish on a short-term basis given the key downside reversal seen this past week; i.e., the conditions for that is, especially after a prolonged advance, a move to a new high, often a decisive such run up, followed by a collapse in prices and a Close below the prior 1-2 day lows. The intermediate and long-term trends remain up. An intermediate downtrend is 'signaled' only if and when the prior downswing low is pierced in the 1550 area.

The upper (gray) trendline, suggesting the high end of the broadest possible uptrend price channel, is from the long-term weekly chart (not shown) and transposed onto the daily chart. This upper channel line, intersecting above 1750, represents potential major resistance if it got there but isn't necessarily a projection of where SPX is headed next.

SPX fell back into its prior uptrend price channel and I've noted this line as suggesting very near-term resistance for the 1658-1660 area. Next resistance is implied by the prior 1687 intraday high at 1687.

Near support and a key one for SPX (and all the major indexes) is suggested by the current level of the 21-day moving average, suggesting support around 1630 currently, with support extending to 1600-1590. 1590-1587 should offer significant support at SPX's up trendline.


The S&P 100 (OEX) broke near support in the 745 area, which now is suggested as immediate overhead resistance. As with SPX, the big cap S&P 100's short-term trend has turned bearish; OEX's intermediate and long-term trends remain up. A move back above 745 would be bullish if prices stabilize above this level. Next resistance is at the recent 757 intraday OEX high. Major resistance is anticipated in the 770 area currently.

As noted in my initial 'bottom line' commentary for all the major indexes, a downside penetration of the 21-day day moving average, currently intersecting in the 732 area, would be a further bearish development and suggest potential back to support in the 720 area, extending to 713 and the intersection of key technical support at OEX's up trendline. A Close below the 693 prior downswing low that persisted would suggest that the intermediate-term trend had reversed to down.

Some of the key S&P big cap bellwethers like GE haven't fallen below technical support. In GE's case a weekly close ahead below 23.5 would suggest otherwise.


The Dow 30 (INDU) hit resistance this past week was deflected at the upper end of its trend channel as seen below on its daily chart. The higher upper (gray) channel line intersecting currently above 16000 is one implied by the broader uptrend channel suggested by INDU's weekly chart (not shown).

The existing and well-defined INDU daily chart uptrend channel, more so that the other major indices, was the one that looked most likely to stay intact and the upper resistance channel line deflected the rally into this past week. Quite often the Dow traces out the pattern that most reliably highlights either technical support OR chart resistance.

Key near support is implied by the 21-moving average currently intersecting in the 15100 area, with technical support then extending to 14930, the current intersection of the Dow's up trendline. Major support is seen in the 14500 area.

Near resistance is seen at 15550. Next resistance, well above current levels, is anticipated at 16000. An analysis of the 30 individual Dow stocks is noted below the INDU daily chart.


AXP, BA, BAC, CSCO, CVX, DIS, GE, HD, JNJ, JPM, KFT, MCD, MMM, MSFT, PFE, PG, UTX, VZ, WMT, and XOM remain in strong longer-term uptrends; at least no trend reversals are seen with these 20 stocks; HPQ continues to climb higher from what looks to be a major V-bottom. The aforementioned 21 stocks are of course 2/3rds of the Average and this group looks like they could continue to work higher or at least haven't set up any obvious downside reversal patterns. From this 'bottoms' up perspective, the Dow just appears to be pausing here rather than looking particularly toppy; not yet anyway!


The Nasdaq Composite (COMP) has pulled back to potential support implied by the uptrend channel COMP has been in over past months. The thinking here being that a breakout above resistance, or a resistance trendline in this case, 'becomes' an area of technical support on a subsequent pullback. Stay tuned on that but I've highlighted potential near support in the 3415-3440, with what should be substantial chart support at 3300, extending to the 3255 area.

If COMP is to resume its former strong upside rate of change or upside momentum it needs to climb back above its 3500-3530 resistance zone. Next resistance is then projected at 3600. The upper trend channel boundary is what is projected on the long-term weekly chart. Rather than also show the weekly chart, I've transposed this broadest uptrend channel to the daily chart for an all-in-one view.

Some disagree as to whether Apple Computer is a Nasdaq bellwether. I think it's an important Nasdaq stock to follow and I am watching for any breakouts by AAPL above technical resistance at 465, with even more pivotal resistance coming in at $500. A weekly AAPL close above $500 should see COMP also breaking out into a new up leg. Conversely, an AAPL close below $400 would suggest further tech weakness.


The Nasdaq 100 (NDX) chart, which had been in a strong accelerating uptrend coming into this past week, experienced a key downside reversal along with the rest of the major indexes. Unlike the broader Nas Composite, NDX fell back INTO what had been its uptrend price channel on a daily chart basis.

I wrote last time that: "Eventually, if this bull market rolls on into the summer, we could see 3300 in NDX eventually but a big further up leg would be surprising without a correction, even if more a sideways type move, coming first." It came!

Key near support is suggested by the 21-day moving average currently intersecting at 2960; next lower chart/technical support is seen at 2915-2900. Major support begins in the 2840 area, at the up trendline, extending to the area of the last downswing lows around 2740.

Near resistance is highlighted at 3006, extending to the recent intraday peak in the 3050 area. NDX needs to climb back above 3000 and hold this area to suggest that the index could resume its prior strong advance. It would be somewhat surprising to me to not see a more prolonged correction, even if that took the form of a mostly sideways move rather than a steep pullback. However, this market has often surprised on the upside.


The Nasdaq 100 (QQQ) tracking stock has pulled back of course but not by a lot if viewed on a close-only basis; i.e., a line chart as seen below.

Near support is highlighted at 73.3, but support probably should be viewed as extending to 72.6 at the 21-day moving average. Next lower support is seen in the 71.5 area.

Near resistance comes in around 74.3; next resistance is projected at 76 even.

Daily trading volume shot up on the dip on profit taking and stop-loss selling. On Balance Volume (OBV) has fallen. Volume considerations add little extra to the mixed, but mostly still-bullish, chart pattern.


The Russell 2000 (RUT) Index saw its recent dip begin after RUT got up to, or very close to, technical resistance implied by the upper end of its long-standing (and well-defined) uptrend price channel. RUT, along with the Dow, could be one of the two best harbingers or predictors of what the overall Market will be doing.

RUT looks like it may pull back further. Near support implied by the 21-day moving average could easily give way to test of support in the 953-950 area. Support implied by RUT's up trendline intersects currently at 933. I don't see the Index piercing its up trendline.

Upside resistance is at 1015, extending to 1050. The chart pattern suggests to me more likelihood of lower support(s) being tested over an immediate resumption of the prior advance and a test of upper resistance(s).


New Option Plays

Something for both Bulls & Bears

by James Brown

Click here to email James Brown


OpenTable, Inc. - OPEN - close: 67.73 change: +0.25

Stop Loss: 64.90
Target(s): 74.00
Current Option Gain/Loss: Unopened
Time Frame: 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
OPEN is an online reservation service for consumers to book a reservation at a restaurant. The stock has had a fabulous month of May with a rally from the $55 level to new 52-week highs. The breakout past resistance near $65.00 sparked some short covering. Traders bought the dip when OPEN retested this area near $65.00 and its rising 10-dma. If the rally continues OPEN could see another short squeeze. The most recent data listed short interest at 24% of the small 21 million-share float.

The last couple of days have seen OPEN hovering under the $68.00 level. Tonight we are suggesting a trigger to buy calls at $68.25. If triggered our target is $74.00.

NOTE: Keep in mind that OPEN is a volatile stock. Traders may want to limit their position size.

Trigger @ 68.25

- Suggested Positions -

buy the Jun $70 call (OPEN1322F70) current ask $2.00

Annotated Chart:

Entry on May -- at $---.--
Average Daily Volume = 823 thousand
Listed on May 25 2013


Caterpillar Inc. - CAT - close: 86.21 change: -0.74

Stop Loss: 87.05
Target(s): 80.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of CAT look like they are in trouble. The bullish breakout in early May broke the February-April down trend. Yet the rally failed at resistance near $90.00 and its 100-dma in mid May. Traders bought the dip at its 50-dma a couple of weeks ago but the rebound is rolling over. This looks like a new, lower high. Once again CAT is testing support at its 50-dma.

The slowing economy in China and the recent bearish Fed surveys in the U.S. could spell trouble for CAT. If shares break support near their current levels we might see CAT retest its April lows.

Tonight we're suggesting a trigger to buy puts at $85.50. If triggered our target is $80.50. More conservative traders might want to wait for a drop below $85.00 as an alternative entry point since it's possible that $85.00 could be round-number support.

Trigger @ $85.50

- Suggested Positions -

buy the Jun $85 PUT (CAT1322R85) current ask $1.31

Annotated Chart:

Entry on May -- at $---.--
Average Daily Volume = 7.0 million
Listed on May 25 2013

Concur Technologies - CNQR - close: 81.96 change: -0.21

Stop Loss: 82.25
Target(s): 76.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
CNQR provides solutions for travel and expense management. The company reported a bullish earnings report in early May. Earnings came in at 24 cents versus Wall Street's estimates of 16 cents. Management guided higher for its third quarter. It was a strong earnings report and the stock soared on the news. Shares rallied to new all-time highs.

We suspect that CNQR has moved too far too fast. The bullish market environment may have exaggerated the stock's valuations. Shares look ripe for a pullback.

We want to try and capture some of the profit taking so tonight we're suggesting a trigger to buy puts at $80.50. If triggered our target is $76.50, which is just above the 2012 highs, which may try and act as support.

Trigger @ $80.50

- Suggested Positions -

buy the Jun $80 PUT (CNQR1322R80) current ask $1.55

Annotated Chart:

Entry on May -- at $---.--
Average Daily Volume = 489 thousand
Listed on May 25 2013

In Play Updates and Reviews

Stocks Drift Toward Three-Day Weekend

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. markets rebounded from their Friday morning lows but eventually closed the day relatively flat.

Our BA and FB trades have been triggered.
We want to exit our MD trade at the opening bell on Tuesday.

Don't forget that the U.S. market is closed on Monday for Memorial Day.

Current Portfolio:

CALL Play Updates

The Boeing Co. - BA - close: 100.00 change: +0.25

Stop Loss: 97.75
Target(s): 104.50
Current Option Gain/Loss: - 3.5%
Time Frame: 3 to 4 weeks
New Positions: see below

05/25/13: The improvement in the durable goods orders report that came out Friday morning was fueled by a spike in aircraft orders for Boeing. Shares of BA saw a brief spike higher on Friday morning that rallied past round-number resistance at $100.00, hit our entry point at $100.25, and then reversed. Fortunately, traders bought the dip but shares closed right at the $100.00 mark. Resistance has not been broken yet.

Our trade is open but if you are looking for an entry point readers may want to wait for a new rally past $100.25 or a rally past Friday's intraday high of $100.58.

*Small Positions* - Suggested Positions -

Long Jun $100 call (BA1322F100) entry $2.55


Entry on May 24 at $100.25
Average Daily Volume = 5.0 million
Listed on May 23 2013

Ecolab Inc. - ECL - close: 87.14 change: -0.05

Stop Loss: 85.95
Target(s): 94.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

05/25/13: We are going to give ECL another chance after traders bought the dip near $86.00 on Friday morning. Right now the $88.00 and the simple 10-dma, also near $88.00, should be short-term resistance. Tonight we are adjusting our entry trigger to buy calls to $88.25. Now the $89.25 area and the $90.00 level could still be overhead resistance so I would consider a more aggressive, higher-risk entry point. If triggered at our new entry point of $88.25 we will start with a stop loss at $85.95.

Please note that I am adjusting our time frame and moving the option strikes out to July.

Earlier Comments:
I am encouraging traders to keep their position size small to limit risk.

Trigger @ 88.25 *Small Positions*

- Suggested Positions -

buy the Jul $90 call (ECL1320G90) current ask $1.00

05/25/13 adjust entry trigger to $88.25 (was 90.25)
adjust stop loss down to $85.95
adjust the option strike from Jun $90 to Jul $90 call
We are also moving the exit target to $94.75.


Entry on May -- at $---.--
Average Daily Volume = 1.0 million
Listed on May 21 2013

Lockheed Martin - LMT - close: 107.06 change: +0.76

Stop Loss: 103.95
Target(s): 109.00
Current Option Gain/Loss: +188.2%
Time Frame: 3 to 6 weeks
New Positions: see below

05/25/13: The dip-buying in LMT continues and shares outperformed the market on Friday with a +0.7% gain. I am moving our stop loss up to $103.95 while more conservative traders may want to use a stop under Thursday's low, which was $105.46.

- Suggested Positions -

Long Jun $105 call (LMT1322F105) Entry $0.85

05/25/13 new stop loss @ 103.95
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: 91.95 change: -1.06

Stop Loss: 90.75
Target(s): 98.50
Current Option Gain/Loss: -22.2%
Time Frame: 4 to 8 weeks
New Positions: see below

05/25/13: MD's failure to see any follow through on Thursday's bounce worries us. Shares underperformed the market on Friday. I am concerned shares are headed back down toward $90.00.

Tonight we are suggesting an immediate exit, which will be Tuesday morning since Monday the markets are closed. More aggressive traders might want to hang on and just adjust your stop so it's under likely support at $90.00.

Earlier Comments:
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

05/25/13 prepare to exit on Tuesday morning, May 28th
05/22/13 caution: today's session has created a bearish reversal candlestick pattern
05/20/13 new stop loss @ 90.75


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

Panera Bread Co. - PNRA - close: 190.19 change: +0.28

Stop Loss: 199.00
Target(s): 183.95
Current Option Gain/Loss: +16.6%
Time Frame: 3 to 4 weeks
New Positions: see below

05/25/13: PNRA also rebounded off its Friday morning lows. Shares managed to eke out a gain. It looks like traders lost interest ahead of the three day weekend and PNRA spent the rest of the session drifting along the $190 level.

More conservative traders might want to consider adjusting their stop loss toward Thursday's low (187.45) or toward the simple 10-dma (currently 187.62). I would not launch new positions at this time.

FYI: The Point & Figure chart for PNRA is bullish with a $234 target.

*Small Positions* - Suggested Positions -

Long Jun $190 call (PNRA1322F190) entry $3.60


Entry on May 20 at $187.00
Average Daily Volume = 558 thousand
Listed on May 18 2013

Western Digital - WDC - close: 62.30 change: +0.04

Stop Loss: 58.95
Target(s): 64.75
Current Option Gain/Loss: +37.2%
Time Frame: 3 to 4 weeks
New Positions: see below

05/25/13: WDC bounced from its Friday morning lows to end the week at all-time highs. WDC is now up five weeks in a row and seems poised for more gains. Investors may want to tighten their stops closer to the 10-dma or the $60.00 level.

*small positions* - Suggested Positions -

Long Jun $60 call (WDC1322F60) entry $2.55


Entry on May 21 at $60.65
Average Daily Volume = 3.3 million
Listed on May 18 2013

PUT Play Updates

Facebook, Inc. - FB - close: 24.31 change: -0.75

Stop Loss: 26.05
Target(s): 21.50
Current Option Gain/Loss: + 15.4%
Time Frame: 3 to 4 weeks
New Positions: see below

05/25/13: Friday was not a good day for shares of FB. The stock continued to sink and broke down below round-number support at the $25.00 mark and technical support at its simple 200-dma. Shares also hit our suggested entry price at $24.65. Our target is $21.50.

FYI: Another story on Friday was news that Google (GOOG) might make a bid for Waze. Previously rumors were circling that FB might buy Waze. It's estimated that Waze might be sold for $1 billion. If you are not familiar with Waze it's a free navigation app for your smartphone. Yet it's more than that and includes "crowdsourcing" real time information on traffic, road hazards, and speed traps.

- Suggested Positions -

Long Jun $25 PUT (FB1322R25) entry $1.10


Entry on May 24 at $24.65
Average Daily Volume = 38 million
Listed on May 22 2013

iShares Russell 2000 - IWM - close: 97.88 change: -0.02

Stop Loss: 102.25
Target(s): 95.25
Current Option Gain/Loss: +55.0%
Time Frame: 2 to 3 weeks
New Positions: see below

05/25/13: Traders were still in a buy-the-dip mood on Friday morning. The IWM rebounded from its lows but failed to rally back above its 10-dma. It looks like the $98.00 level could be new short-term resistance. I would still consider new positions now but I would be even more tempted to wait and see if the IWM produces another failed rally closer to $100 as a better alternative entry point.

Earlier Comments:
Readers may want to keep their position size small since this is a riskier entry point.

- Suggested Positions -

Long Jun $95 PUT (IWM1322R95) entry $0.60

05/22/13 triggered @ 99.75
05/21/13 added a secondary entry trigger at $98.75
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 22 at $99.75
Average Daily Volume = 41.8 million
Listed on May 16 2013