Option Investor

Daily Newsletter, Saturday, 8/17/2013

Table of Contents

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

Market Wrap

Headline Headache

by Jim Brown

Click here to email Jim Brown

August seasonality arrived and along with it a flurry of negative headlines to accelerate the decline.

Market Statistics

We knew the markets were going to weaken in August and that seasonality arrived right on schedule. Economic headlines, weak earnings guidance and geopolitical events combined to accelerate that seasonal decline. When investors are worried they will find a reason to sell and there were plenty of reasons last week. The markets posted their worst loss of the year and the odds are very good there will be more declines in our future.

Helping to push us lower was weaker than expected guidance from Wal-Mart, Macy's, Nordstrom, Kohl's and Joseph A Bank.

Wal-Mart, the nation's largest retailer reported same store sales that declined -0.3% compared to estimates for a +1.0% gain. They missed the revenue target of $118.47 billion by nearly $2 billion. The CEO said, "We have seen customers both in mature and emerging markets curb their spending. We believe that environment is going to remain through the end of the year." Customers were buying underwear, socks and toothpaste instead of video games, tablets and TVs.

Nordstrom (JWN) reported same store sales rose +4.4% and well below estimates of 6.8%. They cut full year sales growth estimates from 3-5% to 2-3%.

Macy's reported earnings that missed estimates and sales fell -1% for the first decline in four-years. The CFO said, "We believe that much of our weakness is due to the health of the consumer."

Kohl's beat estimates on earnings but profits declined -3.5% and they lowered their full year outlook on sales and earnings.

The slowing pace of retail sales produced fears of consumer exhaustion. With 70% of GDP coming from consumer buying a sharp decline in purchases would push the economy closer to a recession.

Those earnings were offset slightly by good news and rising sales at Michael Kors and Dillard's. Those upscale retailers command a much smaller market share while lower end retailers WMT, Macy's and Kohl's have 20 times the annual sales and better exemplify the average retail shopper.

On the economic front a six-year low in the weekly jobless claims suggests employment is rising and that could put the Fed on track to taper in September. That sent yields on the ten-year treasury to a two-year high of 2.85%. Yields have risen +75% since the bottom in May. That is the largest percentage gain in a similar timeframe since 1962. Good economic news is bad news for the market.

Ten-Year Yield Chart

However, bad news was also bad news when it came from the Philly Fed Survey and the NY Empire Survey. The Philly Fed survey collapsed from 19.8 in July to 9.3 in August. New orders and employment fell sharply and back orders remained in contraction for the seventh consecutive month. The NY Empire Manufacturing Survey declined from 9.5 to 8.2 and new orders fell from 3.8 to 0.3 and barely above contraction territory. Backorders remained in contraction for the seventh consecutive month. The employment component for the NY area did rise from 3.3 to 10.8.

Industrial production came in flat for July after only a +0.2% gain in June. Consensus was for a +0.4% gain. The average for the last four months is -0.1%.

Industrial Production (Source: Marketwatch)

Consumer Sentiment for August fell -5.1 points from 85.1 to 80.0. The prior month reading was a six-year high and analysts were expecting another gain to 86.5. The -5.1 point drop was the largest monthly drop since records began in 1999. The present conditions component fell from 98.6 to 91.0 and expectations component from 76.5 to 72.9. Both were the lowest readings since April. The sudden decline in sentiment with the markets at new highs and gas prices fading is troubling for analysts. Couple the sentiment readings with the slowdown in sales at the mass market retailers and trouble could be brewing. The headline number for August equates to annual retail sales growth of only +2.0%. That is borne out in the weak retailer earnings.

Housing starts rose +5.9% from 836,000 to 896,000 for July but analysts were expecting 925,000. This compares to the July 2012 level at 741,000 so we should not complain about the weak gains.

If you look below the headline number the number of starts for single family homes actually declined -2.2% while multi-family starts increased +26%. Housing permits, a preliminary to starts, fell -1.9% for single family and rose +12.6% for multi-family. Single family activity has fallen to its lowest level since November. This was the second consecutive monthly miss for starts.

Rising interest rates is tempering expectations by builders and they are cutting back on the number of new homes unless there are existing orders. Nobody wants to get caught overextended again if the economy begins to fade. Plus, a smaller inventory of new homes means they can charge higher prices.

The economic calendar for next week is headlined by the FOMC minutes on Wednesday. There should be nothing new in the minutes since nearly all the Fed heads have been making speeches trying to talk up their position on QE changes. However, with the market expecting a taper announcement in four weeks every piece of Fed data will be analyzed under a microscope.

The home sales data will be updated on Wednesday and Friday and assuming there are no major surprises the market reaction will be minimal.

The Chicago Fed National Activity Index and the Kansas Fed Manufacturing Survey are two more bricks in the wall of worry over QE tapering in September.

Economic Calendar

Every piece of news last week was analyzed for its potential impact on QE. Analysts are pretty evenly split on whether it will happen in September or later in the year but almost all agree it will happen. A positive jobs number the week after Labor Day will be the nail in the QE coffin according to many analysts.

Another factor is the shrinking issuance of Treasuries. With the deficit for 2013 running in the $750 billion range compared to $1.2 trillion in 2012 the number of treasuries being issued is declining. If the Fed does not taper they run the risk of buying up the majority of the new issuance and dramatically impacting the treasury market. After the spike in yields last week that may be a good thing but the Fed has to be conscious of their impact.

Also, we saw in the international capital flows data on Wednesday that China and Japan, the two largest holders of U.S. debt were both sellers in June. Net sales were $66.9 billion and more than twice the $25 billion average over the prior two months. This was the largest sale of treasuries by foreigners in six years. This may be just a blip on the radar or it may indicate the increasing worry over the stability of the U.S. because the Fed is monetizing the debt. Think about it. How credible can a country be when the central bank is buying the majority of the debt at ridiculously low rates? Once the Fed halts QE it will be interesting to see if the overseas buyers come back to the market and at what yield they will be interested in investing. I would bet it is not 2.7%.

U.S. Securities Sales (Source: Reuters)

Hedge funds tripled their short positions against 10-year treasuries last week. According to the Commitment of Traders report (COT) the large speculators increased their net short position from 20,096 contracts to 66,432 contracts. This is the largest net short position since July 2012.

(Source Business Insider)

Bill Gross said last week, "We are in a war, a very bloody bond war." Also, "I think QE is changing and I think September is probably the time. We give it 80-percent and here’s the reason. We think the future fed policy will increasingly rely on what’s being called forward guidance as opposed to asset purchases or quantitative easing. To the Fed’s way of thinking, that (QE) is a tired horse which has inflated asset prices but has done little to stimulate growth. In addition, according to some Fed numbers, it puts the Fed balance sheet at future risk with potential higher interest rates. This implies to us our reliance on future guidance and forward guidance which is a reverse type of twist from back in September of 2011. This is a reverse twist in which the fed wants the market to buy securities with the comfort of forward guidance and withdrawing the purchasing of 85% of the gross issuance of 20 year and 30 year treasuries."

My personal opinion is that the Fed will not change the QE program in September unless there is a very strong jobs number. The rest of the economics are simply too weak and nearly every Fed speaker has repeated over and over the taper will be data dependent. We will have another jobs report, GDP revision and Retail Sales for August before the September 17th FOMC meeting. Inflation also remains too low.

The Producer Price Index last week showed zero inflation in the headline number and only +0.1% in the core rate. Trailing 12-month core inflation fell to +1.2%. The Consumer Price Index headline number rose only +0.2% with a +0.2% increase in the core rate. The trailing 12-month core rate was only +1.7%. These declining rates of inflation should keep the Fed on hold unless jobs really spike higher.

The Fed may want to taper in September but the data does not support it. The market is acting like it is a sure thing and the Fed is going to slash QE immediately. I don't believe the Fed invested $2 trillion to push the market and economy higher only to jerk the rug out in September. The economy is just not that strong. Lastly, Bernanke has to be thinking about his legacy. He may not want to go down in history as tanking the market and economy just about the time it started to gain traction. There is far more risk in an early taper than there is in a few more months of QE. This is especially true because of the risk from the debt ceiling debate in September and the pending announcement of a new Fed chairman. The market normally declines on a change in Fed chairmen because investors don't know what to expect and the new guy may want to assert his authority and rock the boat as soon as he takes office. Analysts are afraid Larry Summers could do just that while Janet Yellen would maintain the status quo.

The precious metals market is in extreme rally mode. Silver rose +13% for the week and gold gained +4.8%. The reasons for the rally are many. The rise in violence in Egypt and news that Syria is hacking U.S. banks, newspapers and government websites contributed somewhat to the return of the Armageddon trade. The Syrian Electronic Army (SEA) hacked the Washington Post and readers were redirected to the SEA website. CNN, Time Magazine and the New York Times were also hacked. Various banks including Wells Fargo were experiencing repeated attacks. The SEA was more of a nuisance than a real threat but the headlines were the same.

The violence in Egypt is continuing with another 82 protestors killed on Friday and more than 800 arrested. Vigilantes at neighborhood checkpoints battled Muslim Brotherhood protestors as they tried to torch government buildings, police stations and riot against the general population. In the last week more than 800 people have been killed although the Brotherhood claims it was a lot more.

The official numbers only count the dead at hospitals and morgues. Hospitals and morgues are no longer releasing bodies unless the family accepts a death certificate claiming death was from some other cause like suicide, fall, illness, accident, etc, because the government does not want the "official" count of deaths from the military to go higher. In Muslim countries bodies are supposed to be buried immediately for religious reasons and families are accepting the "other than military" cause of death in order to comply with the rules.

Friday's battles took a serious turn for the worst as armed civilians joined the military in the conflict against the Brotherhood. Protestors claimed they were ready to die for the cause and began writing phone numbers with markers across their chest so the next of kin could be notified. Commercial buildings were set on fire by the protestors. This could easily spiral into a full civil war with a lasting impact. Dozens of churches were attacked and numerous Christians were killed. Morsi supporters have accused the Christian minority of siding with the military against the Brotherhood. Companies all across Egypt closed up shop and began evacuations of personnel. Analysts continue to worry the violence will spread to neighboring countries and possibly spark other rebellions.

The return of the Armageddon trade was just one reason for the spike in precious metals. The dollar fell sharply on Thursday after the unemployment claims. A falling dollar pushes commodities higher.

Many gold bulls announced last week they had exited their positions. John Paulson with a billion dollar position in the GLD sold half of his position. Dan Loeb said he closed his 130,000 share GLD position. George Soros said he closed his GLD position of 530,900 shares and all of his 2.67 million shares in the Gold Miner ETF (GDX). With the bulls leaving the game the shorts had nothing more to hope for. If you are short in hopes of a big downdraft when the bulls leave and suddenly you found out they left already there is no further reason to be short.

Gold and silver have been heavily shorted for most of 2013. Those shorts were getting killed last week. The low price of gold has caused a buying binge around the world. India said gold purchases rose +71% in Q2 and China's purchases spiked +87%.

Lastly the paper gold market is exploding. Paper gold is where you buy some instrument that says you own gold but you really don't. Banks and major dealers are leveraged as much as 100:1 on paper gold. That means they may have a ton of gold in their vaults and own hundreds of futures contracts but they have sold or pledged 100 tons. The paper gold market exploded over the last decade as gold prices soared. Investors may have a certificate saying they own gold and that was ok until the Internet started filling up with stories about empty vaults. More and more retail investors are demanding delivery of physical gold and that is squeezing the banks and dealers to buy gold to cover their short positions. I would not be surprised to see some big firm go belly up and that will cause an even greater buying panic.

Silver has broken above several levels of resistance including the 50 and 100-day averages. If this short squeeze continues next week it could really accelerate with a move over $24.50. Investors who have been putting off buying silver in hopes of getting a lower price have suddenly found themselves chasing the price higher. Those of us that have been buying physical coins every week are celebrating.

Gold has surged nearly $100 since the $1275 low on August 7th. Current resistance is now $1400 and $1420. Over $1420 the short squeeze should accelerate but $1475 is major resistance.

Silver Chart

Gold Chart

I have mentioned several times that China's government produced economic numbers are a farce. We now have proof of that fact. Christopher Balding, associate professor at Peking University's HSBC Business School decided to study the matter and found that China's GDP is overstated by as much as $1 trillion. He said through "significant and systematic irregularities" China is overstating their GDP by 8% to 12% or roughly $1 trillion.

Balding looked at the data between 2000-2011 and found that inflation numbers had been systematically manipulated in a way that distorted other data like GDP. Balding said, "If inflation data is not accurate, or is willfully fraudulent, as appears to be the case, it will impact many other areas of economic and financial data leading to large disparities over time. It is disturbing that a statistical body would so obviously manipulate and produce blatantly fraudulent data."

Everyone knows of the bubble in China's urban housing prices. We have seen those prices more than double over the last five years. However, China's reported inflation data for urban housing was a gain of only +0.53%. Rural home prices were pegged at a gain of +1.67% even though rural home prices are imploding as people move to the city and abandon their rural properties. To assume that rural home prices rose three times faster than urban homes is blatantly false. "Claiming that the housing component of the CPI grew by only 8.14% over the prior 11 years is nothing less than comical" according to Balding.

Balding claims the real GDP growth number in China today is closer to +6% than +7.5% as they reported. Now the real question is whether or not the market will care. I doubt it since most investors are headline readers only and don't actually understand economics.

JC Penny and Bill Ackman have agreed to an uncontested divorce. Ackman and JCP have agreed on a share sale method to allow Ackman to sell his 39 million shares. The deal was a condition relative to his resignation from the JCP board. Ackman will be able to register and sell a portion of his shares up to four times during the agreement. Each time he will have to offer more than 5 million shares. The agreement ends when his 17.7% stake falls below 5%. Under the agreement JCP can also impose blackout periods of up to 90 days. There cannot be more than three blackout periods in a 12-month period. The board could determine that a major share sale could interfere with company plans to sell its own shares, make an acquisition with shares or interfere with a "material transaction" and impose the blackout. Apparently Ackman is calling it quits on his attempt to restructure JC Penny and is willing to accept his losses. Reportedly his cost in those JCP shares is around $25.

JCP Chart

There was very little stock news on Friday. For an option expiration Friday volume was light at 6.5 billion shares. Volume was 3:1 declining over advancing despite the averages flirting with positive territory late in the afternoon. There were 386 new 52-week lows and 70 new highs, 5535 decliners and 1252 advancers.

This was the worst week of the year for the major indexes and the odds are very good we are going to see additional new lows in the weeks ahead. The S&P closed at 1655.83 and slightly below the 50-day average at 1657.40. On three of the last four dips since November the 50-day average has been support and a rebound occurred. In June the S&P fell -58 points below the 50-day before a rebound appeared. In theory this should be support but there are extenuating circumstances.

At the risk of repeating myself twice a week for the next month there are some very negative headlines in our future. The debt ceiling debate will begin on Sept 9th when the House returns from the August recess. However, hardly a day goes by now that the coming battle is not discussed in the news. Investors remember how destructive the August 2011 battle was and that will cause investors to move to the sidelines ahead of the event.

The September 17th FOMC meeting will also be a serious hurdle. Regardless of how many analysts are saying taper or no taper there will still be a lot of angst ahead of that meeting.

Add in the potential for fund managers to take profits ahead of these market moving events and the next several weeks could be very volatile.

Noted bull Ralph Acampora has been predicting new market highs for months and saying buy, buy, buy. He changed his tune last week and is now expecting a -15% decline, which would take the Dow to 15,333. Since Ralph has mixed success in picking market direction for more than a week I would not normally put much faith in his prediction. However, he arrived at the number by analyzing each of the individual stocks on the Dow and predicting their future levels. He then calculated the impact to the Dow. I actually think this is a worthwhile endeavor. I routinely go through the individual Dow 30 stocks and try to determine market direction so I am familiar with the process. Today there are a lot of "heavy" charts. That means there are a lot of Dow stocks that have negative patterns and are currently in a decline or about to decline.

I am not going to predict a 15% correction but I do believe we could see a return to the June 24th lows. On the S&P that is 1560 and a decline of -149 points or -8.7%. The 100-day average is 1631 and the 200-day average is 1550.

Depending on the weekend headlines I would expect the S&P to rebound from the 50-day average on Monday but the rebound should fail and we eventually go lower.

S&P Chart

The Dow lost -344 points for the week to close at 15,081. That was below the 100-day average of 15,103. That is a decline of -577 points since the closing high at 15,658 on August 2nd. The Dow has already broken both the 50 and 100-day averages and could easily retest the June lows at 14,551 for a decline of -7%.

Given the events in our future a decline of 7% on the Dow and 8% on the S&P would be easily justified. That is just a hiccup in the greater scheme of things.

The next most likely target for the Dow is 14,880 followed by 14,600 where I believe the decline would end.

Like the S&P, assuming there are no major headlines over the weekend, I would expect the Dow to rebound slightly from the 100-day average but the rebound should eventually fail. Nothing says we have to rebound but the bulls may find some added confidence by Monday. Volume will be very light so any buying could push it higher.

Dow Chart

The Nasdaq gapped down on Thursday to close at -3606 and failed to venture too far from that level on Friday. The index used round number support at 3600 all day and traded in positive territory by late morning. Late day selling pushed it near the lows for the day.

Next level support is 3575-3580 and that is sure to be tested next week. Resistance is now the Thr/Fri high at 3620-3625 and then 3650.

Nasdaq Chart

The Russell 2000 declined -2.3% for the week and broke below critical support at 1040. The Russell is now in free fall territory with the next material support at the 1000 level. The 50-day average at 1018 has not been support on the last two tests but the 100-day average at 986 has produced rebounds. Once the Russell index broke 1040 support the trend should continue lower. Maybe not lower on Monday not over the coming weeks.

Russell 2000 Chart

S&P earnings for Q2 were up only +3.3%. However, bank earnings were up +27%. If you subtract the bank earnings the rest of the S&P saw earnings decline -1.2%. Bank earnings are done going up as mortgage originations are declining, the bond market is also in decline and onerous regulations are rising. That means Q3 S&P earnings could be even worse than Q2.

According to Birinyi & Associates the trailing PE for the major indexes is far in excess of what earnings are projected to be over the next 12-months. That even includes the fact that earnings for future quarters are still projected to be much better than past quarters. Q4 earnings growth is still projected to be in double digits. The last three quarters have seen estimates cut by two thirds from the prior quarter. Guidance for Q3 has been so bad the estimates are dropping like a rock but Q4 is still projected to be a double digit blowout.

The Russell 2000 small caps led the rally for most of the year and it has gotten way ahead of reality. Estimates for Russell earnings are so bullish that the Price to Earnings ratio (PE) is expected to drop by more than 60% if they come true. Saying that in another way, it means that earnings are expected to more than double over the next 12-months. Do you believe that earnings for small caps are going to double over the next 12-months especially with sharply rising interest rates? I seriously doubt it.

Birinyi PE Table

Scott Minerd at Guggenheim Partners said, "The trailing 12 month earnings for S&P companies rose only +2.4% for all of 2012 and another +2.5% for the first seven-months of 2013. That is the slowest earnings growth in non-recession years since 1998. Without renewed earnings growth, a continued rally in stocks driven by multiple expansion may not be sustainable."

Nominal GDP growth over the last year has been the slowest ever recorded outside a depression. This comes at a time when monetary stimulus is the highest ever recorded and is being practiced by central banks all around the world. Trees don't grow to the sky and QE will not go on forever. Eventually these central banks will have to stop injecting their crack cocaine into the financial markets and the withdrawal symptoms are going to be extreme and without the benefit of a movement limiting strait jacket.

Since 1952 the U.S. has averaged a recession about every five years. They typically come after stock market peaks. Will the end of monetary stimulus allow a new recession to form? With GDP already declining i would not bet against it.

S&P-500 Chart - Monthly

The markets today are more worried about how long QE will last than earnings growth. When QE ends and earnings growth returns as the primary market indicator the results are going to be ugly. While I am not a fan of QE I certainly hope cooler heads prevail at the Fed to keep the money flowing until actual economic growth and earnings appear.

The end of prior QE programs has produced serious market volatility. Why would this time be any different especially at our current market levels?

S&P-500 Chart - Weekly

If anyone does not believe the Fed has created this multi-year rally with its QE programs they only need to look at this chart. The red line is the S&P and the black line is the Fed balance sheet. What do you think will happen when that QE support is taken away? Chart is from StreetTalkLive.com

There is also the presidential cycle to contend with. In the second year of a presidential cycle the markets tend to decline because the administration is doing things that are not very popular. This is especially true of the second year in a second term. The last two years of the four year term are typically bullish because the party in power is doing everything they can to get reelected. The giveaway mentality takes over and consumer sentiment rises. The chart below is from TheChartStore.com via AllStarCharts.com. It is a composite of the last 21 presidential cycles dating back to 1928. For a larger chart click HERE.

Presidential Cycle Chart

Fewer and fewer stocks are holding up the market. The percentage of S&P stocks trading over their 200-day average fell to 81.8% and those over their 50-day average fell to 52.4%. Translation = market strength is declining.

Percentage of S&P over the 200-Day average

Percentage of S&P over the 50-Day average

In a 13F filing George Soros disclosed he had increased his shorts using puts on the SPY from 2,618,700 shares to 7,802,400 shares. These reports come 45 days after the end of the quarter so he could have even more by now.

The current bull market is in its 53rd month. The average since 1962 has been 48 months according to Birinyi & Associates. September is historically the worst month of the year for the market even when there is not a heavy calendar of potentially negative headlines.

The market collapsed last week when 10-year yields went over 2.7%. When the Fed halts QE the real yield on the 10-year will return. Historically that has been about 2% over inflation, which is currently 1.2%. If the Fed is successful in returning inflation to the 2.5% target that will push 10-year yields to 4.5%. Using basic math that will reduce the value of stocks by 30% or more. The bond market has done the math and they see the QE writing on the wall. Once stock investors begin to see the non QE value ratios returning the equity market will not be so attractive.

We need to be cautious with long positions and keep our stops tight. Traders can remain bullish as long as they are aware of the risks and plan accordingly.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"The only thing to do when a person is wrong is to be right, by ceasing to be wrong. Cut your losses quickly, without hesitation. Don't waste time. When a stock moves below a mental-stop, sell it immediately."
Jesse Livermore

Index Wrap

Temper Tantrum Sell Off; Don't Take the Punchbowl!

by Leigh Stevens

Click here to email Leigh Stevens

While the news has generally been upbeat on the economy and corporate earnings, it was time to get spooked by news 'good' enough to cause the Fed (famously as they say) to kill the power and take the stimulus punchbowl away!

An overbought Market trumped previously bullish charts and corrections followed as did of course bearish chart formations that slightly preceded the Thursday rout. The S&P 500 and 100 finished tracing out Head & Shoulder's (H&S) Tops this past week, as did the Russell 2000 (RUT).

By Wednesday's (8/14) Close, SPX had made a slight bearish penetration of its H&S neckline and Thursday's Market 'temper tantrum' followed: I don't care if economic-related reports are bullish, don't stop priming the pump or I'll dump!

The Dow 30 (INDU) made a 'picture perfect' rounding top before the Average got really whacked. The SPX H&S Top could be seen in DETAIL on its hourly chart, along with a projected/suggested 'minimum' downside target to 1660-1657. The aforementioned INDU rounding top was also quite apparent on its hourly chart. I highlighted these patterns in my companion Trader's Corner piece I wrote Thursday (8/15). If you want to peruse that short article, more chart-rich than wordy, check it out with a quick CLICK.

Of course anxiety about fall Fed actions came in and also retail sales being down at the low-cost end (e.g., Walmart) of the spectrum (duh - no income gains there!). Also, Cisco (CSCO) went from its stock going to the moon to time to jump and dump. CSCO is more of a Nasdaq bellwether than Apple, where I was playing, based on very bullish chart pattern; i.e., a bullish falling 'wedge' into late-April, a subsequent double bottom and completion of a 50% Fibonacci retracement, which I've been pointing out in prior articles. AAPL closed the week above $500 which is a strong follow through move.

I was still seeing the possibility of the Nasdaq Composite taking out 3700 resistance, although COMP made the exact same 3695 top for 3 weeks running, so I could have been more of a bear there! Google also saw weakness. So, CSCO and GOOG, as well as some other key tech holies, finally brought in tech stock profit taking. Tech was going up too fast and too far, absent Santa Claus coming in August.

Watch the Dow, as the Average was AT its long-standing up trendline at the Friday Close. There could be a near-term rally as hourly oscillators are fully oversold; if so, after that, watch for an decisive downside penetration of Dow 15050 on a closing basis; it could touch 15000 intraday however. The S&P 500 has potential up trendline support lower down, coming in around 1636 currently; OEX trendline support is at 740.

More on the individual chart aspects in my commentaries from here. One other thing I'd note is my long-standing suggestion to keep a daily ratio of CBOE daily equities call volume divided by daily equities put volume. You see this ratio (CPRATIO) plotted on my SPX and COMP daily charts from week to week, but I don't update this chart during the week. Doing this simple division only takes a daily minute and Tuesday (a big 'change' day) saw CBOE equities call volume double that of puts (2.03 was the ratio) which is a danger 'signal' for a downside reversal that could follow within 1-5 trading days.



The S&P 500 (SPX) chart turned short-term bearish after piercing the low end of its prior trading range. SPX would turn intermediate-term bearish if it was to fall under its prior (down) swing low, which was a Close at 1572 and an intraday low at 1560. I'm not anticipating that but that's the chart determinate.

There are other lesser bearish events such as continued Closes below SPX's 50-day average and especially a decisive downside penetration of its up trendline, currently intersecting in the 1636 area. This trendline is not as well 'defined' as some, such as the Dow's support trendline, but is the current 'best fit' trendline; one pretty close to showing SPX's upside rate of gain since its mid-November lows.

Near resistance is seen in the 1680-1683 area, extending to 1700. A close above 1700, with an ability to hold above this current line of resistance would demonstrate renewed upside momentum.

Trader sentiment as plotted above (my daily call-put volume ratio line) continues to reflect a mostly neutral to bullish outlook even after the recent sharp break. It appears that traders remain predominately bullish and expect that August is just a typically corrective month but not necessarily reflecting the dominant trend; part of the summer doldrums.

The RSI is almost at a 'fully' oversold extreme at least on a daily chart basis which often doesn't last long in a continued bull move. Low RSI readings around and under 30 often are seen at or near a bottom, although not in a bear market cycle and we're far from that. The long-term trend is still clearly up.

The SPX September 1660 calls were last on Friday at 28.75, -2.21 on the day. The Sept 1660 puts were last at week's end at 31.80, -1 from Thursday. Too much premium built into them on Thursday when the sky didn't fall on Friday.


The S&P 100 (OEX) chart has turned short-term bearish after the break of its prior trading range and after formation of a Head & Shoulder's Top. A 'minimum' downside objective implied by that formation has nearly been met.

OEX is now nearing support implied by its up trendline, currently intersecting in the 740 area. 720 is next support, extending to the low-700 area. A couple of back to back closes below 700 would turn the chart bearish as far as the intermediate-term chart picture and would be a bearish on the weekly chart (not shown).

Near resistance is in the 752-754 area. A Close above 760 would be encouraging as to renewing upside momentum, with 765 as the upside 'breakout' point.

The OEX September 740 calls were last on Friday at 12, -2.21 from Thursday. The Sept 740 puts traded at week's end at 9.7, -1.5 on the day.


The Dow 30 (INDU), which as I noted last week had had a more significant pullback than the broader S&P indices, when INDU dipped below key support at 15400. This past week's break took INDU well below that and Dow has now reached possible support implied by its up trendline. The odds of support developing in this area is somewhat greater given the low level of the Relative Strength Index, suggesting what I call a 'fully' oversold condition. Support is seen at 15070 with next support seen at 14900.

Key Dow stocks that have most contributed to the sell off in the 30 Dow Average are CSCO, DIS, HD, IBM, JNJ, MCD, UTX, WMT and XOM. All of these were the most 'overbought' and were due for a correction so to speak. If these 9 continue to slide as sharply as recently, the Dow could wind up in the 14600 area again. This is more or less my 'worst case' bearish scenario currently.

Key near resistance is at 15400, then back at 15600-15650. A couple of closes back above 15400 would suggest renewed upside momentum. I don't think such a rebound will be seen anytime soon, but that's the pivotal resistance overhang looking out over the next 2-3 weeks.

The Dow Index (DJX) September 151 calls were last on Friday at 2, -.43 on the day. The DJX Sept puts traded at 2.5 at week's end, +.36 from Thursday.

. The largest DJX call Open Interest (OI) is currently in the Sept 153 calls; in DJX puts the biggest OI is also at the 153 strike.


The Nasdaq Composite (COMP) Index turned short-term bearish with the break of this past week. As I was speculating last week, COMP's ability to continue to maintain its very steep run up into early-August was in question after touching resistance implied by the upper end of its uptrend channel. Trending sideways after that was telling. Old trader saying: bull trends 'die' of their own weight; stocks stop finding so many new/willing buyers after prolonged and increasing steep advances and after that it doesn't take huge selling to drive prices lower.

A key near-term line of support at 3650 gave way midweek and the overnight downside gap put COMP below another pivotal support implied by its 21-day moving average. Next support is another prior line of lows at 3575 as highlighted on the chart. Still lower support then comes in around 3523. Major support looks like 3450, at the up trendline.

Near resistance is seen now at 3645, extending up to the 3-week line of prior highs just under 3700.

Unlike say the Dow, the Relative Strength Index (RSI) is not at an oversold extreme but if 3575 support was successfully 'tested' I'd be looking for a possible bottom there or a bit lower. The strongest indexes in a any given market cycle don't make for an easier buying decision by getting 'fully' oversold in terms of RSI and similar momentum indicators.


The Nasdaq 100 (NDX) chart turned near-term bearish after the break below 3100-3105 chart support.

I wrote last week that "it would be logical to assume that NDX will pull back some more near-term after the Index has come off such an overbought RSI extreme. I can envision getting interested in calls again on a pullback to the 3050-3030 area, risking to a Close below 3000." This still mostly reflects my view except that I anticipate technical/chart support closer to 3030, with the possibility of NDX dipping intraday to the 3000 area.

Near resistance is at 3100, then in the 3145-3150 area.

The NDX September 3075 calls were last on Friday at 55.96, +1.46 on the day. The Sept 3075 NDX puts last traded at week's end at 55.7, +.75 from Thursday. This strike had the most volume and biggest Open Interest in both calls and puts.


The Nasdaq 100 (QQQ) chart picture reflects the bearish near-term chart picture outlined above after the decisive downside penetration of support in the 76-76.2 area. What was 'support' is now seen as near-resistance, with next resistance in the 77 area.

Pivotal technical support in my estimation comes in back at a prior line of support in 74.3 area; technical support then extends to around 73.6 which would 'fill in' the prior upside price gap. Major support is suggested at QQQ's up trendline, currently intersecting in the 71.5 area.

Daily trading volume spiked on the break per usual with this ETF tracking stock for the Nas 100. There's likely more volume to 'come out' on a further dip to the 74.3 area or below which would be a bearish break under the QQQ's 50-day moving average.

The QQQ September 75 calls last traded on Friday at 1.7, -.18. The September 75 puts traded at 1.42 at week's end, -.03.

The QQQ 79 strike in calls was also actively traded. The largest Open Interest is currently in the Sept 78 calls and Sept 72 puts.


The Russell 2000 (RUT) chart saw a bearish break of support last week similar to the Nasdaq in terms of the decisive downside penetration of prior support (the 1040 area) on an overnight price 'gap'. And, like the S&P (and unlike Nasdaq), a Head & Shoulder's (H&S) top had formed before the 'confirming' break of the H&S neckline at 1045. A 'minimum' downside objective implied by the Head & Shoulder's top formation has been met already but could extend to 1020.

For a couple of weeks, I've suggested that 1040 was a key support as was a break of that level as suggesting at least a short-term downside reversal. My view is still also the same in that I don't see this correction falling below 1000. Near support is 1020, fairly major support in the 1000 area at the up trendline. However, the intermediate-term trend wouldn't reverse lower until or unless the prior downswing low in the 950 area was pierced.

Technical resistance is suggested in the 1020 area, but the most pivotal support and area of buying interest looks to come in around 1000 as already noted.

The RUT September 1025 calls were last on Friday at 21.4, -2.6. The Sept 1025 puts were last at week's end at 24.6, +2.6

Largest call Open Interest is in the RUT Sept 1050 calls, as well as in the Sept 1050 puts, closely followed by the 1030 strike (in puts).


New Option Plays

Industrials, Internet, Oil, and Gaming

by James Brown

Click here to email James Brown


Fluor Corp. - FLR - close: 66.19 change: +0.24

Stop Loss: 64.95
Target(s): 74.00
Current Option Gain/Loss: Unopened
Time Frame: 6 to 9 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
FLR is in the industrial goods sector. The company provides construction services. FLR reported earnings on August 1st. The company missed Wall Street estimates by three cents and management actually lowered their 2013 guidance. Yet there was very little reaction to the news. Traders bought the post-earnings dip. Shares have actually been showing relative strength the last few days with a sideways consolidation while the rest of the market sinks.

FLR looks like it is coiling for a bullish breakout higher. The $67.00 area is major resistance and a breakout could signal a big move higher. Tonight we're suggesting a trigger to buy calls at $67.25. If triggered our multi-week target is $74.00. FYI: The Point & Figure chart for FLR is bullish with an $82 target.

Trigger @ 67.25

- Suggested Positions -

Buy the Oct $70 call (FLR1319j70) current ask $1.20

Annotated Chart:

Entry on August -- at $---.--
Average Daily Volume = 1.7 million
Listed on August 17, 2013

SINA Corp. - SINA - close: 79.99 change: +0.78

Stop Loss: 77.70
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:
SINA is a Chinese Internet stock and shares have been soaring higher. The company is currently getting a lot of attention for its Weibo service, which is essentially the Chinese version of Twitter. The stock broke out past key resistance in mid July. Since then momentum traders have steamrolled past the shorts and pushed SINA to new 18-month highs.

The stock market's recent weakness did spark some profit taking in SINA after it peaked above $85 just four days ago. You'll notice that traders stepped in to buy the dip at short-term technical support on its rising 10-dma.

If SINA rebounds from here we want to be ready to hop on board. Tonight we are suggesting a trigger to buy calls at $81.35. If triggered our target is $89.00.

Trigger @ 81.35

- Suggested Positions -

Buy the Sep $85 call (SINA1321i85) current ask $1.90

Annotated Chart:

Entry on August -- at $---.--
Average Daily Volume = 2.9 million
Listed on August 17, 2013


Apache Corp. - APA - close: 78.99 change: -1.28

Stop Loss: 80.55
Target(s): 71.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
APA is an independent oil and gas producer. Crude oil and energy prices have been rising on worries about Egypt and the increase in violence that could threaten to push the country into a civil war. Unfortunately for APA nearly 20% of their production comes from Egypt. All the violence has prompted a growing number of businesses to shut down and evacuate their personnel. That could crimp APA's production and thus their revenues for the quarter.

Shares of APA have been consolidating with a bearish pattern of lower highs. That bearish pattern just produced a breakdown below support near $80.00 and its simple 200-dma. We suspect the next move will be much lower. Tonight I'm suggesting a trigger to buy puts at $78.75, which is just below Friday's low. If triggered our target is $71.00. FYI: The Point & Figure chart for APA is bearish with a $72 target.

Trigger @ 78.75

- Suggested Positions -

Buy the Oct $75 PUT (APA1319v75) current ask $1.50

Annotated Chart:

Entry on August -- at $---.--
Average Daily Volume = 2.6 million
Listed on August 17, 2013

Bally Technologies - BYI - close: 70.51 change: -2.68

Stop Loss: 71.65
Target(s): 65.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
BYI manufacturers gaming systems and equipment (e.g. slot machines). The company reported earnings on Thursday night and beat estimates by a penny. Revenues also came in better than expected. Yet in spite of the positive results traders sold the news. BYI spiked to a new high above $75.00 a share and then collapsed to end Friday with a -3.6% decline.

We suspect that now earnings are over BYI could see more profit taking. This could be a volatile stock given the high short interest. The most recent data listed short interest a 21% of the 39.4 million share float. I am suggesting small positions. We'll use an entry trigger at $69.75. Our target is $65.25.

Trigger @ 69.75 *small positions*

- Suggested Positions -

buy the Sep $70 PUT (BYI1321u70) current ask $1.75

Annotated Chart:

Entry on August -- at $---.--
Average Daily Volume = 522 thousand
Listed on August 17, 2013

In Play Updates and Reviews

Another Weekly Decline

by James Brown

Click here to email James Brown

Editor's Note:

Friday's close marked a two-week decline for the U.S. stock market. The S&P 500 is testing its 50-dma while yields on the 10-year U.S. bond hit two-year highs.

CONN and UA were stopped out. TWC was triggered.

Current Portfolio:

CALL Play Updates

Shire plc - SHPG - close: 112.85 change: +2.16

Stop Loss: 109.40
Target(s): 118.50
Current Option Gain/Loss: + 5.7%
Time Frame: 3 to 6 weeks
New Positions: see below

08/17/13: SHPG continues to march to the beat of its own drum and that drumbeat was higher on Friday. The stock gapped open higher on Friday morning and continued to drift higher throughout the session. Then late on Friday there was a huge spike from about $112.25 to $116.00 before profit taking pulled shares back down under the $113 level. SHPG ended the session with a +1.9% gain. The rally was accompanied by a surge in volume as well. I couldn't find any catalyst to explain the surge higher.

I am not suggesting new positions.

Earlier Comments:
The plan was to keep our position size small to limit risk.

*small positions* - Suggested Positions -

Long Sep $115 call (SHPG1321i115) entry $2.60

08/10/13 new stop loss @ 109.40

5-minute chart:

daily chart:

Entry on August 02 at $111.50
Average Daily Volume = 347 thousand
Listed on August 01, 2013

PUT Play Updates

Boeing Company - BA - close: 103.47 change: +0.74

Stop Loss: 105.55
Target(s): 100.25
Current Option Gain/Loss: -13.1%
Time Frame: 1 to 2 weeks
New Positions: see below

08/17/13: BA erased about half of Thursday's losses with a bounce on Friday. Yet the rebound stalled exactly where we expected it would with resistance near $104.00 and its 50-dma. Traders can use Friday's bounce as a new entry point to buy puts. More conservative traders may want to lower their stop loss closer to the $104.00 level.

Our target is $100.25. More aggressive traders may want to aim lower.

- Suggested Positions -

Long Sep $100 PUT (BA1321u100) entry $1.75

08/15/13 trade opened on gap down at $103.19. Trigger was $103.75


Entry on August 15 at $103.19
Average Daily Volume = 4.6 million
Listed on August 14, 2013

Digital Realty Trust - DLR - close: 52.30 change: -1.08

Stop Loss: 55.35
Target(s): 50.25
Current Option Gain/Loss: +14.2%
Time Frame: 3 to 4 weeks
New Positions: see below

08/17/13: REIT stocks have been getting crushed lately. Shares of DLR continued to sink on Friday with a -2.0% decline and a new 18-month low. I am surprised that our put option did not see a bigger gain on Friday.

Earlier Comments:
If triggered our short-term target is $50.25. More aggressive traders may want to aim lower since the Point & Figure chart for DLR is bearish with a $42 target.

- Suggested Positions -

Long Sep $50 PUT (DLR1321u50) entry $1.05


Entry on August 14 at $53.75
Average Daily Volume = 1.8 million
Listed on August 13, 2013

iShares Russell 2000 ETF - IWM - close: 101.68 change: -0.43

Stop Loss: 106.05
Target(s): 98.50
Current Option Gain/Loss: + 8.7%
Time Frame: 3 to 6 weeks
New Positions: see below

08/17/13: The Russell 2000's performance on Friday was almost an exact copy of the S&P 500's with stocks moving lower again on Friday afternoon.

The Russell 2000 and the IWM could see support at the rising 50-dma. The IWM might also see potential support at the $100.00 level. Yet we are aiming for $98.50. Right now we're expecting a drop towards technical support at its rising 100-dma (currently near $98.00).

I am not suggesting new bearish positions at this time.

- Suggested Positions -

Long Sep $100 PUT (IWM1321u100) Entry $1.48

08/15/13 adjust exit target from $97.00 to $98.50
08/03/13 readers may want to consider an early exit


Entry on July 30 at $103.69
Average Daily Volume = 31 million
Listed on July 29, 2013

Time Warner Cable - TWC - close: 109.94 change: -0.27

Stop Loss: 111.60
Target(s): 105.00
Current Option Gain/Loss: -19.1%
Time Frame: 3 to 4 weeks
New Positions: see below

08/17/13: TWC continued to sink on Friday but actual losses were pretty mild. The stock did breakdown below short-term support at $110 and its 50-dma but it was not a very convincing breakdown. Our trigger to buy puts was hit at $109.50. Readers may want to wait for a new drop below Friday's low of $109.37 before initiating new positions.

Earlier Comments:
We do want to keep our position size small. There is potential support at $108.00. The next level of support is $104.00. If we are triggered at $109.50, our target is $105.00.

- Suggested Positions -

Long Sep $105 PUT (TWC1321u105) entry $2.35


Entry on August 16 at $109.50
Average Daily Volume = 2.3 million
Listed on August 15, 2013

Longer-Term Play Updates

Chicago Bridge & Iron - CBI - close: 61.27 change: +0.87

Stop Loss: 55.75
Target(s): 74.50
Current Option Gain/Loss: - 1.9%
Time Frame: 4 to 6 months
New Positions: see below

08/17/13: Traders have been in a buy-the-dip mood with CBI the last few days. Shares displayed relative strength on Friday morning with a surge to new three-week highs.

I am not suggesting new positions at this time.

*Small Positions* - Suggested Positions -

Long 2014 Jan $65 call (CBI1418A65) entry $2.55

07/20/13 new stop loss @ 55.75
06/29/13 CBI might be poised to dip into the $57-55 zone again.
06/24/13 triggered @ 56.75
06/22/13 adjust entry trigger to $56.75
06/15/13 entry strategy change: change the breakout trigger at $65.25 to a buy-the-dip trigger at $56.50. Adjust the stop loss to $53.75.
Adjust the option strike to the 2014 Jan. $65 call


Entry on June 24 at $56.75
Average Daily Volume = 1.8 million
Listed on June 01, 2013

Vanguard FTSE Europe ETF - VGK - close: 53.09 change: +0.14

Stop Loss: 51.25
Target(s): 58.50
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to 2013 December option expiration
New Positions: Yes, see below

08/17/13: After an 18-month recession the Eurozone GDP finally turned positive again with a +0.3% growth rate. The recent bullishness for Europe has been tempered somewhat by several analysts telling investors to be cautious on Europe since many of its core problems remain. Yet the overall up trend for the VGK remains intact. Traders bought the dip on Thursday at its rising 20-dma. This ETF remains near a closing high for the year. I don't see any changes from my prior comments.

Earlier Comments:
We are taking a multi-month time frame with this trade. I am suggesting we wait for the VGK to close above $53.50 and then buy calls the next morning. If we are triggered our target is $58.50 but we'll adjust it as the trade progresses.

FYI: The Point & Figure chart for VGK is bullish with a $63 target.

Trigger: Wait for a close above $53.50,
then buy calls the next morning.

- Suggested Positions -

Buy the 2013 Dec $55 call (VGK1322L55) current ask $1.25


Entry on August -- at $---.--
Average Daily Volume = 3.0 million
Listed on August 10, 2013


Conns Inc. - CONN - close: 64.17 change: -0.62

Stop Loss: 64.40
Target(s): 74.00
Current Option Gain/Loss: -40.7%
Time Frame: exit PRIOR to earnings in early September
New Positions: see below

08/17/13: The profit taking in CONN continued on Friday and shares slipped to a new low for the week. CONN is now testing its 20-dma. Our stop loss was hit at $64.40.

The long-term trend is still higher and readers may want to keep CONN on their watch list for a dip near $60.00 or its 50-dma as a potential bullish entry point.

- Suggested Positions -

Sep $70 call (CONN1321i70) entry $2.70 exit $1.60 (-40.7%)

08/16/13 stopped out


Entry on August 12 at $66.65
Average Daily Volume = 394 thousand
Listed on August 10, 2013

Under Armour, Inc. - UA - close: 68.93 change: -1.67

Stop Loss: 69.75
Target(s): 74.75
Current Option Gain/Loss: -27.0%
Time Frame: 3 to 4 weeks
New Positions: see below

08/17/13: Shares of UA are reversing sharply. The three-day plunge has erased more than $5.00 from the stock and reversed almost two weeks of gains. Friday's sell-off (-2.3%) also broke down below the $70.00 level and hit our stop loss at $69.75.

- Suggested Positions -

Sep $72.50 call (UA1321i72.5) entry $1.85 exit $1.35 (-27.0%)

08/16/13 stopped out
08/14/13 new stop loss @ 69.75
08/12/13 readers may want to take profits now
option bid at $3.30
08/10/13 new stop loss @ 69.25


Entry on August 08 at $70.50
Average Daily Volume = 1.3 million
Listed on August 06, 2013