Option Investor

Daily Newsletter, Saturday, 9/28/2013

Table of Contents

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

Market Wrap

Shutdown Looming

by Jim Brown

Click here to email Jim Brown

The market sank Friday as prospects of a government shutdown increased.

Market Statistics

The headline war heated up last week but has not yet reached the fevered pitch we expect to see on Monday. After a week of parliamentary maneuvering in the Senate the short term budget bill that now includes funding for Obamacare was sent back to the House. If the two sides cannot agree on a compromise by midnight on Monday the government will shut down. Neither side wants to be left holding the bill at midnight. It has become the proverbial hot potato and the blame game is in full swing.

House Speaker John Boehner has already signaled he will not accept the Senate passed version of the bill. The president took the bully pulpit on Friday afternoon and warned the republicans not to go down the road that leads to a government shutdown. The president said, "Undoing Obamacare is not going to happen." Since the president would have to sign any bill passed by the House and the Senate any bill without Obamacare is going to be vetoed by the president.

Lawmakers have got to decide what they want compared to what they can actually accomplish. The president is VERY persuasive in his speeches and the majority of the public will believe whatever he says. He will pin a government shutdown on the republicans regardless of how much the Senate votes play in the process. The democrats have already begun a preemptive campaign to aggressively blame the republicans. During the debate over the budget bill the democrats displayed a countdown clock to the "Republican government shutdown."

The absurdity of the situation amazes me. The republicans want to defund Obamacare and the democrats don't. Why do the republicans get all the blame for a government shutdown when 50% of the blame is on each party? Because the democrats are better at pressing their case with the public and the tiebreaking vote is President Obama. He gets to point the finger and there is nobody on his level to point it back. He is "above the fray" so it appears to the public that he is right.

The republicans will lose the budget battle. With the heat of the democratic spotlight already blaming them for the shutdown the representatives with weak knees will cave in and a compromise will be reached. There will be a last minute bout of shouting and parliamentary gymnastics but it will probably be passed in time to stave off a government shutdown or the shutdown will be minimal.

The real headlines will come next week when both houses take up the debt ceiling debate. This also has more potential to rock the markets than the budget battle. The debt ceiling debate has a long history of hostility and legislative impasses. The House has already said it was going to put a one-year delay of Obamacare in the bill along with further spending cuts and the Senate has again said it will be dead on arrival. Cue the harsh headlines. The Treasury said it will run out of money between October 9th to 17th. If that happens the administration will be forced to begin closing certain areas of the government to save money until a deal is reached. The IRS will be among the first to close and that can't be all bad.

The president took to the podium Friday afternoon to deliver a 10 min monolog on why he was not going to negotiate with republican extremists over the debt ceiling and why it would cause the U.S. to default on its debts. Every knowledgeable person knows there is no risk of a government default but it always makes a good sound bite. The government takes in $225 billion a month and the debt service is only $38 billion a month. There is plenty of monthly revenue to pay oll the debts. This is just an administration scare tactic that has been used for decades.

I believe the republicans will be successful in getting the one year delay in Obamacare. If they don't the actual implementation could be a disaster and the consumer uproar could change the outcome of the 2014 elections.

For traders it means we have a very good chance of buying stocks cheaper over the next two weeks. The daily headlines shouting gloom and doom should push the markets lower. Buy the debt ceiling dip.

The economics on Friday were uneventful. The final reading on Consumer Sentiment for September rose nearly one point from the earlier reported number. The headline number rose from 76.8 to 77.5 but that was still down from 82.1 in August. Expectations were for a rebound to 82.0 so this was a major miss. In fact it was the biggest estimate miss of 2013 and the lowest point since April. The present conditions component declined from 95.2 to 92.6. The expectations component declined from 73.7 to 67.8. You can blame that on the rising headlines in Washington and the Syria debacle.

Personal Income growth for August accelerated to 0.4% and the fastest rate since February. However, gains were led by rental income and proprietor's income. Clearly that does not apply to 95% of consumers.

Consumer prices as measured by the PCE deflator rose +0.1% to +1.2% over the trailing 12 months. Clearly there is still no inflation. Energy prices actually fell -0.2%. This report was ignored.

The economic calendar for next week is very busy and there are a lot of important events. Starting the week off is the potential for a government shutdown if a budget bill is not passed by midnight.

The Institute for Supply Management or ISM Manufacturing for September will be released on Tuesday. Expectations are for a slight decline.

Wednesday is the first major employment report for the week with the ADP report. Last month this report showed a gain of +176,402 private jobs in August. With the weekly jobless claims hitting six-year lows we may begin to see a pickup in new jobs. Jobless claims at 305,000 on Thursday were the lowest since Sept 2007.

Bernanke speaks to the St Louis Federal Reserve conference on Wednesday at 3:00 so Wednesday's market close could be interesting.

Thursday has the Challenger Employment report but that is less followed than the other major reports. The ISM services report for September is also expected to post a minor decline.

The big report for the week is the Nonfarm Payrolls on Friday. The estimate is for a gain of +180,000 jobs compared to a gain of +169,000 in August. The Fed wants to see "sustained" job gains in the 200,000 range before they will consider changing policy. Bernanke said after the last meeting and Bullard repeated it the next day, they want to see the unemployment rate decline from rising employment not falling labor force participation. The Fed realizes the "reported" unemployment rate is fictitious because more people are giving up jobs in favor of unemployment, welfare and disability checks rather than their inability to find jobs. The true unemployment rate is around 11.4% but to report that in the major news outlets would cause turmoil in Washington. Instead they continue to massage how they report unemployment to present a positive picture.

Since we have no control over the numbers we have to play the hand we are dealt. That means reacting to the headline as though it was a correct representation of reality. Any number over 175,000 could produce worry about QE tapering in October. Any number under 150,000 should be market positive because it means QE will remain in place.

I have heard several analysts over the last week that believe the decision not to taper in September had more to do with Janet Yellen now being the assumed nominee to replace Bernanke. On a scale of 1-10 with 10 being the most dovish, Yellen is probably a 12. If Yellen is nominated some believe there will be no taper until Q1.

On that same subject since there are no potential nominees that are anywhere close to Yellen in the pool of nominees several political analysts believe the president is holding her nomination back as a hole card to play if something blows up on him during the debt/budget battles. The nomination would be a positive headline to offset a negative. Time will tell if that analysis is correct.

Stock news was relatively scarce on Friday with all the headlines focused on Washington. However, JC Penny (JCP) was again on the hot seat. On Wednesday Reuters reported JC Penny was going to offer $1 billion in stock to raise money. Also on Wednesday the CEO, Myron Ullman, had breakfast with the analyst community, was questioned about the story and was reported by two analysts to have said the company was comfortable with its cash position and had no reason to go back to the equity markets to raise cash. Shares rallied on the news.

On Thursday the board announced cash reserves were falling faster than expected and JCP was going to sell 84 million shares at $9.65 each to raise close to $1 billion. They lowered their yearend cash reserve estimates from $1.5 billion to $1.3 billion. This caused the stock to plunge to another decade low. The CEO now claims he did not make that statement on Wednesday. He did not rebut the statement on Thursday when the stock was rising. He only rebutted it after the investor community cried foul when the stock collapsed on the secondary offering news.

The company also reported the CFO left on September 20th. Normally these events are announced in advance so why are they just releasing the news? This is not good. Shares of JCP crashed to $9.05 and well under where the offering was priced at $9.65. Goldman Sachs is the sole book runner for the offering. It will be interesting to see how many shares they actually sell.

BlackBerry (BBRY) made news again when it officially reported earnings that were in line with the preannouncement made last week. That was not the big news. The big news was that CEO Thorsten Heins will receive a $56 million golden parachute if he loses his job after the company is sold. That package will include a "special performance bonus" tied to the launch of the Z10 series of phones. That is the phone that cost BlackBerry almost $1 billion in the recent quarter when the launch failed. That parachute was recently enhanced when the company was put up for sale. To make it even more bizarre Heins has only been the CEO for just one year. A year ago the stock was trading for $6.22 and it closed at $8 on Friday. More than 4,500 employees are being laid off without a parachute. Is that worth a $55 million bonus for the CEO?

Lumber Liquidators (LL) received an unwelcome guest on Friday. Federal officials including the Dept of Homeland Security and U.S. Fish and Wildlife Service executed a sealed court-issued search warrant at the Virginia headquarters and at a Richmond VA store. The company said it had no idea what the Feds were looking for. They confiscated documents relating to imports and they suspect it has to do with the century-old Lacey Act. This requires companies to obey other country's laws when trading animal parts. Wood was added to the law in 2008 to try and curb illegal logging.

Analysts say the scope is similar to the Gibson Guitar raid in 2011 where wood and guitars were confiscated when the rosewood was suspected of being imported illegally. Importers are famous for skirting the laws. If a company in the U.S. wants to import a certain type of wood, say rosewood, from a particular country where the harvesting of that wood is illegal the importers can sneak it out of that country to a third country and then export it to the U.S. from there. Buyers think they are getting rosewood from country B where it is legal instead of country A where it is illegal. Gibson ended up paying a fine of $610,000 and the forfeiture of guitars and wood inventory to settle the matter.

The Gibson raid was later thought to be politically motivated because they gave large amounts of money to republican and tea party candidates during the last election. Lumber Liquidators is a big sponsor of Rush Limbaugh on talk radio. If the IRS can target the Tea Party and conservatives it is not a big stretch to extend that kind of political harassment to Gibson and Lumber Liquidators by Fish and Game and Homeland Security. I am just reporting the news not making a statement.

Lumber Liquidators buys wood from all over the world and they have a staff of 60 just to monitor imports. They receive more than 250 container loads of wood from international sources every week. They have more than 300 stores nationwide. LL shares fell -5% on the news.

Nike (NKE) rallied +5% after posting earnings of 86 cents that beat estimates of 78 cents. Revenue rose +8% to $6.97 billion. Performance was robust in all geographic areas except for China. Gross profits rose +11% to a whopping $3.13 billion. Gross margin rose +120 basis points to $44.9%. That is a phenomenal margin and it came after a 12% increase in operating expenses. However, "demand creation" expenses fell -16%. I thought that used to be called advertising. The company ended the quarter with $5.6 billion in cash and investments. Future orders for the next four months were up +8%.

As a new component to the Dow the $3.30 spike in Nike added about 24 points to the Dow and the index really needed it on Friday.

Another new Dow component knocked -20 points off the index. Goldman Sachs (GS) loss -2.44 on Friday after the company was downgraded by three different analysts. Sanford Bernstein cut earnings estimates by 15% saying trading could be down as much as 15%. He also downgraded Morgan Stanley (MS) earnings by -20%. He said Q3 trading volumes are normally slow but this quarter turned into a "full-scale rout" with very low trading activity.

Marty Mosby, an analyst at Guggenheim Securities, cut Goldman and Bank of America from buy to neutral on worries that revenue from capital markets had declined sharply in September. He said fixed income trading revenue from the big banks probably fell -20% in Q3.

Richard Staite, an analyst at Atlantic Equities cut estimates for Goldman by -18% and Morgan Stanley by -25%.

Obviously it was not a good day for the banks. Goldman shares have been in a steady decline since being added to the Dow. They traded at $168.50 on Monday morning and closed at $159.73 on Friday. That is roughly the equivalent of 70 Dow points out of the -192 the Dow lost for the week. Thank you Goldman Sachs.

Several analysts have been pointing to the Baltic Dry Index, an index of shipping rates on normally traveled routes, as evidence of a global economic rebound. I have to admit the more than 100% surge in rates over the last six weeks has been spectacular. However, the spike was the result of Brazil suddenly dumping massive amounts of iron ore onto the market in July and August after shipments fell to a two-year low in June. They depleted the supply of available "Capesize" vessels and drove up the shipping rates. The Baltic index declined -3.2% on Friday and -4% over the last two days. There is a surplus of shipping capacity and the rates should decline sharply in the weeks ahead.

The Q3 earnings cycle will begin the week after the debt ceiling debate and earnings estimates are actually improving. S&P Capital IQ said Q3 earnings growth is now expected to be +3.5% and, drum roll please, revenue is now expected to grow +4.8%. Only two weeks ago they were expecting revenue to be flat to down. This is a major change in the outlook.

When you combine the improving economics overseas, improving earnings and dramatically declining jobless claims a picture of growth emerges. The key will be maintaining that growth spurt. The Fed has been projecting an acceleration of growth for a couple years now to no avail. Even a stopped clock is right twice a day and eventually the Fed will be right. I hope I am still alive to see it.

Something is supporting the market and for lack of a better reason we can call it earnings optimism. In reality investors are expecting the Washington headline war to eventually end and remove the barriers to a Q4 rally. All the prior speed bumps have proven to be minimal and that has spiked investor confidence.

The S&P dipped to 1687 on Friday and just above decent support at 1680-1685. The rebound was minimal but given the potential for weekend event risk out of Washington it was amazing we did not close nearer the 1680 level.

The S&P has declined almost daily since the post FOMC high on the 19th. However, the pace of the decline has slowed over the last week as investors pass time waiting for the Washington fireworks to be over.

Resistance is 1700-1705, support 1680-1685.

S&P Intraday Chart - 45 Min

S&P Chart - Daily

The Dow remains the weakest index with a drop to within 11 points of 15,200 on Friday. At the open the Dow fell -116 points but recovered to close down -70. That is still a three-week low with IBM and GS responsible for most of the drop.

When support at the 15,300 level broke it opened the index up for a drop to 14,880. The close just above the 100-day (15,231) was token technical support. The Dow is not normally reactive to moving averages because of the impact of single stocks like IBM or Goldman. Still, a break and close under the 100-day is a technical failure of support.

The Nasdaq is holding the high ground and wedging up to what could be a powerful breakout or breakdown. All we know for sure is that the successive pattern of higher lows is more pronounced than the lower highs. When you consider the recent headlines, the extreme event risk and the lack of a material decline this suggests the break will be to the upside.

Obviously any unexpected headline could trash the pattern and cause a significant drop but I would bet almost every professional investor and trader already understands the potential for a debacle next week. This potential should already be priced into the market.

Nasdaq Chart - 45 Min

Nasdaq - Daily

The Russell 2000 remains a bullish sentiment indicator. The Russell 2000 and the Nasdaq posted gains for the week while every other index posted declines. The Dow lost -193 points, NYSE Composite -85, S&P -18 and Transports -95. The Russell gained a point. Granted it was not a big gain but compared to the big cap losses it was very telling.

Fund managers simply do not appear to be afraid of the future. They are staying invested in small caps as we head into month end. It will be interesting to see if they rotate out once into October and just ahead of the October 31st fiscal year end for funds. There are some monster profits accumulated in hundreds of stocks and managers might want to capture those profits and secure their bonuses.

The Russell is moving slowly higher using uptrend support with solid resistance at 1080. If we break that to the upside we could see some significant price chasing.

Monday is the end of the month and the quarter. We should see some window dressing as long as the major papers are not running three-inch headlines proclaiming a government shutdown.

As I stated above I believe everything less than Armageddon is already priced into the market. Traders and investors are expecting the headlines and rather than be afraid they are hoping for a buying opportunity. We have seen this debt ceiling story before and we know how it ends. There have been 18 government shutdowns since 1976 and the country is still intact.

I think we should buy the debt ceiling dip. That is different from any budget dip we may see early in the week. The debt ceiling debate will follow closely to the budget battle but it is a separate event.

You are going to hear a lot about the debt ceiling over the next couple weeks. It is currently about $17.4 trillion. We routinely talk about millions, billions, trillions of dollars and even quadrillions of yen. I don't think many people can comprehend how big a trillion really is. I had someone explain it this way.

A million seconds is 11.57 days
A billion seconds is 11,574 days or 31.7 years.
A trillion seconds is 11,574,074 days or 31,709.8 years.
17.4 trillion seconds is 201,388,889 days or 551,750 years.

If we applied $1,000 a second to paying off the $17.4 trillion in debt it would take 201,389 days or 551.8 years. That is assuming no interest. Add the $450 billion a year in interest at the current rate and you add another 5,208 days of payments for every year of interest. In other words every year that passed you would become 14.3 years deeper in debt if we only paid $1,000 per second. When interest rates return to "normal" it would add 10,000 days of payments for every 365 days we paid.

We would have to pay $14,269 per second ($1.233 billion a day) just to pay the debt service each year with nothing going to principle.

There is no mathematical way we can pay down the debt so the entire Washington exercise is the equivalent of rearranging the deck chairs on the Titanic. Eventually the size of the debt will matter to foreign investors and when that happens it is going to be a very bad decade for the United States.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"What beat me was not having brains enough to stick to my own game – that is, to play the market only when I was satisfied that precedents favored my play. There is the plain fool, who does the wrong thing at all times everywhere, but there is also the Wall Street fool, who thinks he must trade all the time. No man can have adequate reasons for buying or selling stocks daily – or sufficient knowledge to make his play an intelligent play."
Jesse Livermore


Index Wrap

Minor or Major Impact of Congressional Actions?

by Leigh Stevens

Click here to email Leigh Stevens

The S&P and Dow have retraced about half of their last run up. The Dow 30 (INDU) has also traced out a possible double top. Moreover, INDU has closed the week under its 50-day moving average which is showing its significant loss of upside momentum.

The Nasdaq has merely stopped advancing but acts like all this government stuff is a minor annoyance in a still strong tech market. I would note that the last sizable tech top (late-October, 2007) occurred with a similar (to now) long-term overbought condition.

I don't have too much more to say in a general way as the charts are all over the place. The Nasdaq looks like it wants to go up forever, damn the torpedoes, full speed ahead! It looks like upward progress is stalled here not because there is concerted selling but more an absence of buying.

The S&P 500 (SPX) is coming down slowly, the big cap S&P 100 (OEX) is starting to sink below some key support, but it's no rout. INDU looks to be the most bearish and INDU charts in 'unequivocal' bull trends are few and two are the newbie's NKE and V; the others are BA, MMM and UTX. 5 super strong stocks are not enough to substantially pull up the Dow.

All in all the chart picture looks like an artificial decline so to speak. Like an artificially induced coma, stocks could snap out of their lethargy if Congress wasn't likely to 'induce' an economic coma!

I think traders still want to be bullish and this past Thursday saw a jump in my call to put volume ratio for options on individual stocks, where call volume was double that of put volume. I'm more or less leery of 'over optimism' here especially because I've closely followed politics for a long time. The average trader and investor is not used to having to deal with such a wild card as this Congress and I think there's a belief that everyone ELSE is focused first and foremost on having the most rip roaring economy and rip roaring bull market possible. I can only wish that were true!

I'm struck by the long-term overbought condition of the Nasdaq Composite and how it was October of 2007 when the tech heavy Nasdaq topped out after getting as 'overbought' as it is currently. Beware of October surprises! Right now Nasdaq looks like it will NEVER come down but that's what it pretty much always looks like at a top. Stay tuned!!


As of this past Monday (9/23), AA, HPQ and BAC are OUT of the Dow Average (INDU) with Goldman Sachs (GS), Visa (V) and Nike (NKE) replacing them.



The S&P 500 (SPX) chart has gone from a bullish move to a new relative high to the inability to hold new highs. The subsequent drop below 1700 creates a bearish near-term chart picture. 1680 is an expected next support but even more pivotal is support implied by the current intersection of SPX's multimonth up trendline coming in around 1657 currently.

An intermediate-term downtrend would be suggested if the Index closed below its prior downswing low in the 1630 area, especially without a quick bounce back.

Key near resistance, at what was prior support, is highlighted on the chart in the 1700 area. Next resistance then comes in at 1730-1733.

SPX has retreated from an 'overbought' RSI situation seen above once again, as has been the case now 3 times in the period shown. What you may also notice in the pattern seen previously is that SPX went from an overbought to an oversold condition and the Index has some ways to go before that situation also repeats itself, if it does.

Bullish sentiment (my CPRATIO indicator) remains higher than I would expect given the current political kerfuffle, but not if going by the technical chart picture alone as SPX could be viewed as just having a 'normal' correction of around 50% back to its 50-day moving avg. Stay tuned on any 'normalcy' ahead!


The S&P 100 (OEX) chart is mixed: bearish now near-term, while at the same time OEX remains above its long-standing support/up trendline. The drop below the 'line' of prior lows, although not so far by much, is part of the bearish near-term chart pattern. A move back above 760 resistance would suggest renewed upside momentum; next resistance is then seen at 771-773.

If OEX continues to retreat under shut-down fever, key support suggested by the up trendline comes in around 743 currently. Next support then is seen in the 730 area. A couple of Closes in OEX below its prior cluster of downswing lows around 730 would turn the intermediate trend lower. Major support then comes in at 705-700.

OEX, along with big brother SPX, has also had a pattern of moving from an overbought high to an oversold low as seen above. We don't have the oversold condition yet but stay tuned for this possibility and assess/re-assess bearish strategies if that occurs. Price levels are also most key of course. A solid double bottom that formed in the 730 area for example, coupled with a 'fully' oversold RSI at 30 or below makes it tempting to exit puts and to unwind other bearish strategies. A debt default is a major wild card; we don't have a history to look at there.


The Dow 30 (INDU) chart is bearish near-term. The intermediate chart picture starts looking bearish on a retreat to below 15200, making a possible next downside target to 15000. There's a possibility of INDU having formed a double top. What 'confirms' a double top so to speak is a subsequent retreat to BELOW the prior downswing low(s); which, in the case of INDU, is to below a prior cluster of lows around 14800. 14800 is where I've highlighted a next projected support below 15000.

Some technicians would say that a confirmation of a significant top is for a retreat to below the Closing low that formed prior to a first peak; i.e., a Close below 14653. Hey, take your pick! A couple of daily Closes and/or a weekly close below 14800 would be bearish and set up a possible test of the prior closing low in the 14650 area. The Dow is the most bearish looking chart of the major indexes. If you look only at Nasdaq you might say: "WHAT bearish price action?!"

As noted above in my initial 'bottom line' comments, there's only 5 Dow stocks (BA, MMM, NKE, UTX, and V) in really solid uptrends. Many other of the Dow 30 stocks show 'congestion' at or near clusters of prior highs basis their weekly charts.

Near resistance is projected back at the previously broken up trendline which intersects currently around 15490, then at the prior double top in the 15658-15710 area.


The Nasdaq Composite (COMP) Index chart is bullish. Upside momentum has slowed somewhat but there's a pattern of higher lows although absent a move to new recent highs. Key near resistance is in the 3800-3810 area. 3900 is projected as a next possible resistance above resistance implied by the upper trendline.

Is it possible that the Nasdaq index is showing us that the threat of a shutdown is not any big deal in terms of slowing the economy? It is rare to see a sizable divergence between major indexes such as we're seeing. Almost enviably, weakness in the S&P and Dow will show up at some point in the tech-heavy Nasdaq; OR, conversely, the S&P will stabilize and start to turn higher and follow tech to some extent. Sell the rumored shutdown, buy the actual fact of it? Hard to say.

I don't see Nasdaq going its own way if the mainstream economic stocks of the NYSE keep sinking. This is unlikely over time. As noted above in my initial bottom line comments, the Composite is as 'overbought' on a long-term monthly chart basis (not shown) as it's been since a significant top formed in COMP in late-October 2007. I was struck by this as October has often been a reversal month over the years.

Let me stick to chart facts so to speak and avoid further speculation. A Close above 3800-3811 would suggest upside momentum was continuing in COMP. Next resistance then looks like 3900.

A dip below 3740 would suggest waning upside momentum, but a true test for COMP is whether 3700 holds up as support. Next support then looks like 3660. Fairly major support is apparent in the 3585 area.

As prices hold up internal relative strength (RSI) is declining as seen above which is minor bearish divergence. This may point to a possible top in COMP.

Also, bullish sentiment, especially due to a strong advance and further perceived upside in such sub-indexes as the Semiconductor Index (SOX), seems high to me. Speaking of SOX, a decisive downside penetration of 490 in this sector index would suggest that upside momentum could be waning. SOX is an important bellwether for COMP.


The Nasdaq 100 (NDX) chart is bullish and to date, weakness in the big cap S&P 100 hasn't had much effect in the big cap Nas 100. Less buying has been seen lately but not wholesale selling. Tech stocks 'seem' immune to what's going on in the rest of the Market. I've heard this claim before but it doesn't hold up much when you look at Market history.

Key near resistance in NDX is at 3250-3257. A Close or better, two back to back Closes, above 3257 would suggest a possible next target to the 3300-3315 area.

Near support is at 3200, which then extends to 3170-3158. It seems that it might take bearish news on some key tech stock(s) to generate much selling in the NDX as opposed to a government shutdown. Stay tuned on that.

NDX, like COMP, is going sideways on less relative strength than at its recent 3250 peak. This might be a warning of weakness to come. But price action, especially a near-term break of 3170-3158 support could be a reason to exit bullish strategies or to lighten up on positions. A Close below the 50-day moving average, (currently at 3128) and not reversed in the next trading day would be seen by traders as bearish. More bearish still would be a downside break below 3100.


The Nasdaq 100 (QQQ) chart is bullish but there is a minor bearish divergence with the On Balance Volume (OBV) indicator as OBV has been trending lower on balance while prices have trended mostly sideways.

Key resistance is highlighted at 80 with next resistance suggested at 80.5.

Pivotal near support is at 78.5, with next support at 77.6. A break of 77.6 would set off some selling in my opinion. We don't see volume really jump in the Q's until a key support gives way. Major support begins at 76, and extends to 75.3.


The Russell 2000 (RUT) chart looks somewhat like the Nasdaq charts but there is a more definitive line of resistance in RUT; currently at 1080-1082. Signs of at least an interim top? RUT has sometimes been a bellwether for Nasdaq.

A sustained move above 1082 is bullish and could lead to a rally up toward or to RUT's upper trend channel boundary, currently intersecting in the 1118-1120 area.

Conversely, a decisive downside penetration of key near support at 1060 would suggest further weakness to come. Next lower support comes in at the RUT's support/up trendline, currently intersecting in the 1035 area.

On balance, I see RUT heading lower but watch for its ability to hold 1060 or not, assuming it drops to this level. Fairly major support is seen in the low-1000 area; technical support is suggested at 1013-1008, extending very definitely to 1000.


New Option Plays

Small Caps & Off-price Retail

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate(s), consider these stocks as possible trading ideas and watch list candidates. Some of these stocks may need to see a break past key support or resistance:

(bullish ideas)


iShares Russell 2000 ETF - IWM - close: 106.58 change: -0.48

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

Company Description

Why We Like It:
The small cap Russell 2000 index has been outperforming its large-cap rivals. The $RUT hit new all-time highs about two weeks ago. Since then it has resisted the market's recent pullback and replaced it with a sideways consolidation at its highs. We think the larger trend higher continues.

Tonight we are listing two different entry points (and stop loss strategies). We have a breakout entry trigger at $107.75 with s suggested stop loss at $105.40. We have a buy-the-dip trigger at $105.25 and s suggested stop loss at $103.40.

I'm suggesting the 2014 January $110 calls but you may want to use another month or strike that better suits your trading style.

Breakout Trigger @ 107.75, stop loss @ 105.40
- or -
Buy-the-dip Trigger @ 105.25, stop loss @ 103.40

- Suggested Positions -

Buy the 2014 Jan $110 call (IWM1418a110) current ask $2.46

Annotated Chart:

Entry on September -- at $---.--
Average Daily Volume = 34.6 million
Listed on September 28, 2013

Ross Stores Inc. - ROST - close: 72.55 change: +0.19

Stop Loss: 69.95
Target(s): 77.50
Current Option Gain/Loss: Unopened
Time Frame: 6 to 9 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
ROST operates an off-price apparel chain of retail stores. It seems that Wall Street is favoring the discount retailers over worries about a slow-growth economy and a fragile U.S. consumer. Goldman Sachs said as much when they added ROST to their conviction buy list a few days ago.

Shares of ROST have continued to perform well. Bullish momentum has produced gains four weeks in a row and ROST broke out past its old highs near $70 this month. Right now ROST is hovering just below short-term resistance near the $72.80 area. I am suggesting a trigger to buy calls at $73.05. If triggered our multi-week target is $77.50. FYI: The Point & Figure chart for ROST is bullish with an $89 target.

NOTE: I'm listing our trade with an initial stop loss at $69.95 but more conservative traders may want to use a stop closer to $71.00 instead.

Trigger @ 73.05

- Suggested Positions -

buy the Nov $75 call (ROST1316K75) current ask $1.00

- or -

buy the 2014 Jan $75 call (ROST1418a75) current ask $2.40

Annotated Chart:

Weekly Chart:

Entry on September -- at $---.--
Average Daily Volume = 1.28 million
Listed on September 28, 2013

In Play Updates and Reviews

Large Caps End 3-Week Winning Streak

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 index snapped a three-week winning streak with a pullback from new all-time highs. Meanwhile the NASDAQ composite and the small cap Russell 2000 still look ready to breakout higher.

WDAY hit our entry trigger on Friday.

Current Portfolio:

CALL Play Updates

Actavis, Inc. - ACT - close: 144.30 change: +1.63

Stop Loss: 137.75
Target(s): 148.50
Current Option Gain/Loss: +60.0%
Time Frame: 3 to 4 weeks
New Positions: see below

09/28/13: There were new headlines for ACT today. The company conceded to FTC demands to divest itself of some generic drug assets so it can proceed with its $8.5 billion acquisition of Warner Chilcott Plc.(WCRX).

The stock reacted by hitting new highs and outperforming the market with a +1.1% gain. I am raising our stop loss to $137.75.

- Suggested Positions -

Long Oct $145 call (ACT1319j145) entry $1.50*

09/28/13 new stop loss @ 137.75
09/25/13 new stop loss @ 135.75
09/21/13 Shares of ACT were volatile right at the closing bell on Friday (09/20/13). Expected more volatility on Monday morning
*option entry price is an estimate since the option did not trade at the time our play was opened.


Entry on September 19 at $139.50
Average Daily Volume = 985 thousand
Listed on September 18, 2013

Anadarko Petroleum - APC - close: 94.53 change: +0.05

Stop Loss: 92.25
Target(s): 99.50
Current Option Gain/Loss: -30.8%
Time Frame: 3 to 5 weeks
New Positions: see below

09/28/13: Friday was another quiet day for shares of APC. Traders did buy the dip again near $93.50 and its 20-dma. Shares seem to have overhead resistance near $96.00. I am not suggesting new positions.

- Suggested Positions -

Long Oct $95 call (APC1319j95) entry $3.05*

09/21/13 new stop loss @ 92.25
*option entry price is an estimate since the option did not trade at the time our play was opened.


Entry on September 11 at $94.25
Average Daily Volume = 2.55 million
Listed on September 09, 2013

Boeing Co. - BA - close: 118.74 change: -0.64

Stop Loss: 117.75
Target(s): 127.50
Current Option Gain/Loss: Unopened
Time Frame: Exit prior to Oct. 23 earnings announcement
New Positions: Yes, see below

09/28/13: BA continues to get new orders for its trouble 787 Dreamliner. The news really didn't impact the stock today. Shares drifted toward the $118 level and tested its simple 10-dma before paring its losses. There is no change from my prior comments.

Earlier Comments:
Right now BA is consolidating sideways below resistance near the $120 level. The September 19th high was $120.38. I am suggesting a trigger to buy calls at $120.50. If triggered our target is $127.50 but we will plan on exiting positions prior to BA's earnings report in late October.

Trigger @ 120.50

- Suggested Positions -

Buy the NOV $125 call (BA1316K125)


Entry on September -- at $---.--
Average Daily Volume = 4.5 million
Listed on September 26, 2013

3D Systems - DDD - close: 54.79 change: -0.90

Stop Loss: 52.48
Target(s): 59.75 & 64.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks and two-to-three months
New Positions: Yes, see below

09/28/13: It was a down day for DDD with the stock underperforming the broader market with a -1.6% decline. Shares dipped to short-term technical support at the 10-dma before bouncing off its lows. Technically shares have created a bearish engulfing candlestick reversal pattern but it needs to see confirmation.

Bigger picture I don't see any changes from my earlier comments.

Earlier Comments:
DDD could see a short squeeze. The most recent data listed short interest at 33% of the 94.5 million share float. Tuesday's high was $56.23. We are suggesting a trigger to buy calls at $56.35. If triggered our short-term target is $59.75. Our longer-term target is $64.00. The Point & Figure chart for DDD is bullish with a $71 target.

Trigger @ 56.35

- Suggested Positions -

Buy the NOV $60 call (DDD1316k60)

- or -

Buy the 2014 Jan $60 call (DDD1418a60)


Entry on September -- at $---.--
Average Daily Volume = 4.1 million
Listed on September 24, 2013

Hanesbrand Inc. - HBI - close: 62.61 change: -0.56

Stop Loss: 62.25
Target(s): 68.50
Current Option Gain/Loss: -53.5%
Time Frame: 3 to 6 weeks
New Positions: see below

09/28/13: It was a down week for the stock market and shares of HBI have not been performing well either. Shares gave up -0.88% on Friday. The stock looks poised to breakdown under short-term support near $62.50 and hit our stop loss at $62.25. More conservative traders may want to just abandon ship and exit immediately to cut their losses. I am not suggesting new positions.

- Suggested Positions -

Long Oct $65 call (HBI1319j65) entry $1.40

09/28/13 HBI is not performing well and looks poised to hit our stop loss soon. Traders may want to exit early now
09/21/13 new stop loss @ 62.25


Entry on September 16 at $63.25
Average Daily Volume = 612 thousand
Listed on September 10, 2013

Magna Intl. - MGA - close: 83.45 change: -0.39

Stop Loss: 82.45
Target(s): 89.50
Current Option Gain/Loss: -20.8%
Time Frame: 3 to 4 weeks
New Positions: see below

09/28/13: The stock market's recent weakness is starting to take its toll on shares of MGA as well. MGA closed below short-term support at its 10-dma on Friday. Now shares look poised to break down under short-term support near $83.00 as well. More conservative traders may want to exit early. We are adjusting our stop loss up to $82.45. instead. I am not suggesting new positions.

- Suggested Positions -

Long Oct $85 call (MGA1319j85) entry $1.20

09/28/13 new stop loss @ 82.45
09/21/13 new stop loss @ 81.90
09/16/13 trade opened on gap higher at $82.76
trigger was $82.65


Entry on September 16 at $82.76
Average Daily Volume = 545 thousand
Listed on September 14, 2013

Northrop Gruman - NOC - close: 96.25 change: -0.16

Stop Loss: 95.30
Target(s): 99.50
Current Option Gain/Loss: (Oct97.5c:+118.1%) & 2014j100c: - 5.0%
Time Frame: 3 to 4 weeks
New Positions: see below

09/28/13: Friday brought more headlines that NOC had won hundreds of millions in new government defense contracts. Yet the news failed to move the stock price. There was almost no follow through on yesterday's bounce in the defense names.

Shares of NOC actually remain stuck inside the $95.50-96.50 trading range. The Monday, Sept. 23rd low was $95.40. I am raising our stop loss up to $95.30.

If you're looking for a new entry point consider waiting for a breakout past $96.50 or past $96.75.

- Suggested Positions -

Oct $97.50 call (NOC1319j97.5) entry $1.10 exit $2.40*(+118.1%)

- or -

Long 2014 Jan $100 call (NOC1418a100) entry $2.16

09/28/13 new stop loss @ 95.30
09/25/13 new stop loss @ 94.95
09/18/13 closed the Oct. $97.50 calls @ the open
*option exit price is an estimate since the option did not trade at the time our play was closed.
09/17/13 prepare to exit the Oct. $97.50 calls at the open tomorrow
09/17/13 new stop loss @ 94.75, adjust exit target to $99.50
09/16/13 new stop loss @ 94.25
09/14/13 new stop loss @ 93.30


Entry on September 12 at $95.25
Average Daily Volume = 1.2 million
Listed on September 11, 2013

Starbucks Corp. - SBUX - close: 77.33 change: +0.15

Stop Loss: 75.75
Target(s): 79.00
Current Option Gain/Loss:(Oct75c:+ 93.2%) & 2014Jan75c: +58.4%
Time Frame: 4 to 6 weeks
New Positions: see below

09/28/13: SBUX is still showing relative strength (+0.19% on Friday) and closed at its highs for the week. More conservative investors might want to consider taking profits early on our 2014 January calls. I am raising our stop loss up to $75.75. I am not suggesting new positions at this time.

NOTE: If SBUX were to see a correction I would look for a dip near its simple 40-dma or 50-dma as a new entry point to consider bullish positions.

- Suggested Positions -

Oct $75 call (SBUX1319j75) entry $1.18 exit $2.28 (+93.2%)

- or -

Long 2014 Jan $75 call (SBUX1418a75) entry $3.25

09/28/13 new stop loss @ 75.75, consider taking profits early!
09/19/13 new stop loss @ 73.90
09/18/13 new stop loss @ 73.40, adjust exit to $79.00
this morning we closed the Oct. $75 calls at the open.
09/17/13 prepare to exit the October $75 calls at the open tomorrow
09/17/13 new stop loss @ 72.40
09/14/13 new stop loss @ 71.75
09/11/13 SBUX at new highs. Cautious traders may want to lock in some gains.


Entry on September 05 at $72.35
Average Daily Volume = 3.0 million
Listed on September 04, 2013

SouFun Holdings - SFUN - close: 49.48 change: +0.19

Stop Loss: 47.90
Target(s): 57.50
Current Option Gain/Loss: -45.7%
Time Frame: exit prior to October expiration
New Positions: see below

09/28/13: SFUN seems to be having trouble getting its mojo back. The stock looked ready to pop a couple of days ago but then the Chinese market had a down day (-2%). Friday both the Chinese market and SFUN closed with only minor gains.

If you look at the intraday chart you can see a new trend of lower highs developing, which could be a warning signal. I am suggesting traders either wait for a rally past Thursday's high (50.55) or past the $51.00 level before considering new positions.

Earlier Comments:
This is an aggressive, higher-risk trade. I am suggesting we use small positions to help limit our risk. The recent high near $53.50 could be resistance but we're aiming for $57.50. The Point & Figure chart for SFUN is bullish with a $63 target.

*small positions* - Suggested Positions -

Long Oct $55 call (SFUN1319j55) entry $1.75*

09/24/13 trade opened on gap higher at $51.14. Trigger was 51.10
*option entry price is an estimate since the option did not trade at the time our play was opened.


Entry on September 24 at $51.14
Average Daily Volume = 1.2 million
Listed on September 23, 2013

Workday, Inc. - WDAY - close: 81.65 change: -0.72

Stop Loss: 79.75
Target(s): 89.00
Current Option Gain/Loss: -19.2%
Time Frame: 4 to 6 weeks
New Positions: see below

09/28/13: WDAY was trading at a new high for the week by lunchtime on Friday. Unfortunately the market's widespread weakness pulled WDAY lower by the closing bell. Our trigger to buy calls was hit at $82.75. At this point nimble traders may want to try and jump in on a dip near the rising 10-dma if WDAY continues to slip lower. Otherwise investors might be better off waiting for a rise past Friday's intraday high (82.85).

Earlier Comments:
The stock could see a short squeeze. The most recent data listed short interest at 18% of the 65.2 million share float.

- Suggested Positions -

Long Dec $90 call (WDAY1322L90) entry $2.85


Entry on September 27 at $82.75
Average Daily Volume = 1.2 million
Listed on September 26, 2013

PUT Play Updates

Energizer Holdings - ENR - close: 92.19 change: -1.06

Stop Loss: 94.65
Target(s): 88.00
Current Option Gain/Loss: -30.0%
Time Frame: 3 to 4 weeks
New Positions: see below

09/28/13: ENR erased almost all of Thursday's bounce. Shares also hit a new relative low on an intraday basis. I would be tempted to launch new put positions now or you could wait for a drop below Friday's low (91.78).

- Suggested *Small* Positions -

Long Oct $90 PUT (ENR1319v90) entry $1.00


Entry on September 26 at $92.36
Average Daily Volume = 424 thousand
Listed on September 25, 2013

The Fresh Market, Inc. - TFM - close: 47.59 change: -0.13

Stop Loss: 50.05
Target(s): 42.00
Current Option Gain/Loss: -33.3%
Time Frame: 3 to 4 weeks
New Positions: see below

09/28/13: Hmm... TFM really is not cooperating. The stock traded down to a new four-month low on Friday morning only to bounce back. Shares nearly erased all of its Friday losses. I am suggesting caution here. Traders may want to pare down their position size or lower their stop loss.

Earlier Comments:
Our target is $42.00. I am suggesting we keep our position size small because TFM can be a little bit volatile. Plus the most recent data listed short interest at 13% of its small 40.1 million share float. FYI: The Point & Figure chart for TFM is bearish with a $39 target.

- Suggested *small* Positions -

Long Oct $45 PUT (TFM1319v45) entry $0.45


Entry on September 25 at $47.50
Average Daily Volume = 591 thousand
Listed on September 16, 2013

Longer-Term Play Updates

Chicago Bridge & Iron - CBI - close: 67.28 change: +0.19

Stop Loss: 59.75
Target(s): 74.50
Current Option Gain/Loss: +88.2%
Time Frame: 4 to 6 months
New Positions: see below

09/28/13: The strength in CBI continues. The stock is up three weeks in a row and just closed at its highs for the week (and a new all-time closing high). More conservative investors may want to raise their stop loss.

I am not suggesting new positions at this time.

*Small Positions* - Suggested Positions -

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

09/21/13 new stop loss @ 59.75
09/11/13 new stop loss @ 57.65
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: 54.82 change: -0.01

Stop Loss: 50.95
Target(s): 58.50
Current Option Gain/Loss: +13.8%
Time Frame: exit PRIOR to 2014 March option expiration
New Positions: see below

09/28/13: The VGK European ETF is going nowhere - at least this past week. The VGK surged to new two-year highs on the Federal Reserve's no taper announcement. Then after a four-day pullback the selling has stopped. You could argue that's actually bullish, that selling has paused.

This ETF remains inside the $54.60-55.00 trading range. If it sees a breakdown I would look for a drop toward $53.00. I am not suggesting new positions at this time.

Earlier Comments:
We are taking a multi-month time frame with this trade. 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.

- Suggested Positions -

Long 2014 Mar $55 call (VGK1422L55) entry $1.80*

09/11/13 trade opens. VGK @ 53.60
*option entry @ 1.80 is an estimate. Ask closed at $1.75 yesterday
09/10/13 entry trigger met. open positions tomorrow.
09/10/13 new stop loss @ 50.95
08/24/13 adjust the option strike from 2013 Dec $55 to $2014 Mar $55.


Entry on September 11 at $---.--
Average Daily Volume = 3.0 million
Listed on August 10, 2013