Option Investor

Daily Newsletter, Monday, 1/27/2014

Table of Contents

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

Market Wrap

Money Talk

by Linda Piazza

Click here to email Linda Piazza
Market Internals


Last night, equity markets around the globe responded to adverse currency moves along with concerns about this week's FOMC decision and rumors of further problems in China. Some experts noted that today's gyrations in the U.S. markets tended to be in oppositions to moves in the yen: when the yen would strengthen, equities would turn down, and vice versa. Which was the cause and which was the result was not always proven, but equity markets are certainly displaying heightened sensitivity to currency moves.

The SPX dropped 0.49 percent; the Dow, 0.26 percent; and the NDX, 0.92 percent. The RUT lost 1.43 percent, and the SOX, 0.68 percent. The Dow Jones Transportation Index, the DJT, lost 0.82 percent. These moves happened on strong volume. A look at a heat map showed a sea of red, with a few bright spots courtesy of CAT, HON, UTX, and GE, along with a few telecoms and others. Technology stocks were mostly weak, as were consumer discretionary stocks and transports.

Yields on the ten- and thirty-year treasuries steadied and then climbed, as flight-to-safety moves subsided and the market looks forward to taper announcements. The yield on the ten-year closed at 2.7660 percent, up 1.13 percent. The yield on the thirty-year closed at 3.68 percent, up 0.79 percent.

The metal futures produced small-bodied candles today, taking a rest from recent big moves. Gold futures for February delivery (/GC) settled at 1263.40, down -0.9. Silver futures for March delivery (/SI) settled at 19.793, up 0.028. Copper futures for March delivery settled at 3.2590, down 0.0125.

Natural gas futures (/NG) for March delivery dropped today, with profit-taking and a forecast for higher East Coast temperatures from February 1 through February 10 credited with the drop. They settled at 4.674, down 0.324. Light sweet crude futures (/CL) for March delivery settled at 95.72, down 0.92.

Monday's Developments

Last night, Japan's trade balance showed a deficit of 1.15T rather than the expected deficit of 1.33T. Nevertheless, the Nikkei 225 futures predicted a rough day in Japan as the yen soared against the dollar in early trading. Within a few minutes of the opening, the Nikkei 225 had dropped more than 400 points. Soon, the yen weakened against the dollar. The Nikkei steadied, although it never did gain a lot of traction when it tried to bounce off the lows.

Those rumors about further problems associated with a Chinese wealth fund were later quashed. A Forbes contributing writer, Gordon G. Chang, had issued a warning in the wee hours this morning that has since been taken down from the site. He noted last night that China's central bank, the People's Bank of China, announced that system maintenance would require a delay of domestic RMB (renminbi) fund transfers from January 30 through February 2 ("China Halts Bank Cash Transfers"). In addition, foreign currency transfers would be delayed from January 30-February 7, a delay in converting RMB to foreign currency. He termed this abnormal behavior and speculated that this announcement had nothing to do with system maintenance and everything to do with the possible default of a large fund in China and the need to preserve cash or ward off a panic.

Later, that article was removed from the Forbes site, and news circulated that the risk of default by Chinese Credit Trust Co. had lessened due to a deal that returns the principal but not all the yield to investors. The deal was reportedly made possible by an investment by an unnamed entity in the particular product that was sparking the default fears.

Asian bourses dropped hard. The Nikkei 225 percent bounced enough off the low to end right above 15,000, at 15,005.73. The Nikkei 225 was, however, down 2.51 percent; the Hang Seng, 2.11 percent, and the Straits Times, 1.09 percent. China's Shanghai Composite dropped 1.03 percent.

While the yen soared, currencies in emerging markets tended to slide or be pressured. That included currencies in Turkey, South Africa, and South Korea. In Turkey, the central bank announced steps it would take to stabilize the currency in a meeting Tuesday, and the lira jumped off its lows. Many will be watching the results of that meeting.

Europe faced its own pressures. The Organisation (British spelling) for Economic Cooperation and Development (OECD) believes that European banks have a combined capital shortfall of 84 billion euros, several media sources reported. The original report stemmed from an article in the German weekly WritschaftsWoche. The weekly magazine named Credit Agricole, Deutsche Bank and Commerzbank as having shortfalls.

Ongoing Eurogroup meetings produced headlines, including the ECB chairman's admonition that rates should not be kept low any longer than necessary. The monthly report of Germany's Central Bank (Bundesbank or Buba) also produced headlines, as did Germany's Ifo Business Climate for January. As the CESifo Group says, the ifo report is widely watched in Germany. The ifo Business Climate beat expectations. Meanwhile the Bundesbank said that the debt crisis cannot be solved with monetary policy.

European bourses turned lower. The FTSE 100 lost 3.19 percent; the DAX, 0.29 percent; and the CAC 40, 0.41 percent. Spain's IBEX 35 dropped 1.12 percent, and Italy's FTSE MIB, 0.44 percent.

In the U.S., several reports were issued, and all were certain to be examined with this week's FOMC meeting in mind. The January Markit Flash Service PMI beat expectations. January's number rose to 56.6, beating December's revised-lower 55.7 and the expected 56.2. Markit's bullet points included the conclusion that service providers "signal [the] most upbeat business outlook for three years." Business activity, new business, employment, prices charged, input prices and business expectations all showed expansion. Employment rose at a slower rate than December's, however. Outstanding business dipped to 49.5, into contraction territory.

Markit's chief economist, Chris Williamson, concluded that the results pointed to a U.S. 3.5 percent growth rate for the final quarter of 2013, with the growth rate accelerating in the beginning of the first quarter of 2014. The firm thought job creation would continue to be about 200,000 per month. With these numbers, the FOMC should be "comfortable in sanctioning a further tapering" at this week's meeting, his report concluded.

Later, the U.S. Department of Housing and Urban Development and the U.S. Census Bureau jointly released December's New Residential Sales, also known as New Home Sales. Experts predicted those sales would drop to 457K from November's 464K, with the last month's infamously cold weather likely receiving much of the blame.

The weather was worse than expected, and so were the new home sales. They totaled a seasonally adjusted annual rate of 414K. This dropped the sales figure 7.00 percent from November's result, but sales were still 4.5 percent above the year-ago level. The 171K houses for sale at the end of the month represented a 5-month supply at the current rate, and some experts pointed to low inventories as one reason for the disappointment. A 6-month supply of homes is believed optimal.

New home sales dropped in the Northeast, South and West, but rose in the Midwest. The polar vortex brought cold weather to areas that typically have mild winters.

Moody's Weekly Business Confidence Survey results eased to 37.7 from last week's 38.4. Moody's issued last week's report on time although markets were closed, and they made no big changes in a report that has glowed with optimism and "no discernible blemishes" in recent weeks. This week, the report admitted that business confidence had eased "a notch." The summary pointed to possible concerns over emerging markets.

The Federal Reserve Bank of Dallas reported the results of January's Texas Manufacturing Outlook Survey. January's report includes annual seasonal factor revisions. After those revisions, performed on historical data each January, the bank reported that the production index rose to 7.1 from December's 6.0. That rise reflected growth at a strong pace, the bank said.

New orders soared to 14.4 from December's 1.3. Shipments also surged above December's results. The bank determined that respondents felt optimistic about broader business conditions and were increasing hiring and workweeks. Prices and wages also were increasing, however. Still, expectations about future business conditions remained optimistic.

Story stocks today included AT&T (T, 33.56, up 0.14 or 0.40 percent). T denied today that it had plans to purchase Vodafone (VOD, 36.80, down 1.24 or 3.26 percent), noting that the U.K. Takeover Code prohibits the company from making a bid for VOD. That code specifies that T cannot make an offer within six months unless another bidder first makes an offer. Bloomberg reports that VOD is interested in purchasing Spanish Company Grupo Corporativo ONO SA, currently owned by a private equity group.

Google (GOOG, 1,101.23, down 22.60 or 2.01 percent), however, affirmed an acquisition. GOOG will buy privately held DeepMind Technologies, an artificial intelligence company. As this reported was prepared for publication, GOOG was down a further 8.89 in afterhours trading.

Pfizer (PFE, 29.66, down 0.43 or 1.43 percent) reported the results of two randomized Phase 3 studies of its drug dacomitinib, evaluating its results when treating advanced non-small cell lung cancer. Neither of the trials met all their objectives, but a third Phase 3 trial that evaluates effectiveness in a different patient population will be concluded in 2015.

Edwards Lifesciences Corp. (EW, 66.38, down 2.43 or 3.53 percent) received European approval for a heart valve. However, a J.P. Morgan analyst said that the company's share of the valve market would not be as strong as previously believed.

Moody's Investors Service downgraded Sony Corp.'s (SNE, 16.23, down 0.49 or 2.93 percent) debt to junk status. That was a downgrade from Baa3 to Ba1. The rating firm expects the company to encounter continued downward earnings pressure for most of its core businesses.

United Technologies Corp. (UTX, 113.79, up 1.99 or 1.78 percent) shook off a nervous start after Defense News speculated that the company might be spinning off its Sikorsky helicopter unit or considering other options. Sikorsky manufacturers the Black Hawk.

In addition to the story about shortfalls in European banks, Several overseas stories could have impacted U.S. stocks or sectors today. BG Group in the U.K., an international integrated natural gas company, has lowered guidance for 2014 and 2015, blaming difficulties in Egypt. That stock saw a 16.45 percent drop. LG Electronics disappointed, blaming currency fluctuations among other problems.

Companies reporting earnings today included AAPL, CAT, and STX, among others. CAT (91.29, up 5.12 or 5.94 percent) blew through EPS expectations, reporting earnings of $1.54 a share against expectations of $1.28 a share. Revenue was $14.4 billion against expectations of $13.64 billion. The EPS figure was well above the $1.46 a share EPS of the year-ago period, but revenue dropped from the $16.08 billion of the year-ago period. Cost cuts were responsible for at least some of the beat, and, while cost cuts are celebrated, most investors want to see beats made on growing business. CAT did do something else investors liked. The company guided expectations for 2014 higher. The company also announced a $10 billion share buyback.

Royal Caribbean (RCL, 48.04, up 0.91 or 1.93 percent) beat on EPS and revenues. Guidance was mixed. The company guided lower on Q1 EPS but guided higher on full-year 2014.

Apple (AAPL, 550.50, up 4.43 or 0.81 percent) reported after the close, and the stock was driven lower on disappointing iPhone sales and revenue outlook. It was last down more than 44 points from the day's close as this report was sent off for tonight's publication.

Many subscribers actively trade AAPL, watching it avidly and knowing minute details about its product mix and expectations. I do not trade it nor do I follow it closely, and I'm only a recent iPhone convert. Therefore, what you will find on this page today is a brief summary of results and not a learned analysis of future prospects.

Factset forecast earnings of $14.09 a share, and the company reported earnings of $14.50 a share. Revenue was forecast at $57.47 billion and was reported at $57.6 billion. Analysts were going to be looking closely at sales of iPhones and iPads. Apple reported iPhone sales of 51 million and iPad sales of 26 million. Some analysts expected 54.7-55 million iPhone sales. iPad sales were higher than the expected 25 million, and Mac sales also slightly beat expectations.

The company said that the second-quarter revenue would be $42-44 billion, but expectations, according to one source, were for $46.10 billion. Carl Icahn says he has increased his stake in AAPL to $3 billion and has been pressuring AAPL to increase its share buyback plans.

Seagate (STX, 58.05, down 0.52 or 0.89 percent) reported profit of $1.32 a share, excluding items, against expectations of $1.38 a share. Earnings on the same basis were $1.38 a share in the year-ago period. Revenue was $3.53 billion, also below the expected $3.56 billion and year ago $3.67 billion. The CEO said that cash flow was strong. The stock was down an additional $3.94 or 6.79 percent from the day's close as this report was prepared for publication.

U.S. Steel's (X) earnings were listed on one calendar for today. However, the company's website lists tomorrow as the day it will release earnings.

STMicroelectronics (STM, 7.68, up 0.06 or 0.79 percent) reported earnings "in line with expectations," according to the company's conclusion. Those results were "in the mid-point" of the company's guidance, the president and CEO said. The company reported a net loss of $0.04 per share for the quarter and $0.56 per share for the full year. Excluding items, the adjusted loss measured $0.01 per share, roughly in line with the expected break-even report.

Samsung has agreed to pay Ericsson (ERIC, 11.91, up 0.37 or 3.21 percent) $650 million plus royalties to settle their patent disagreement. Few details were available, but ERIC did say that the first payment will increase Q4 sales by 4.2 billion Swedish crowns and net income by 3.3 billion Swedish crowns. Net income had previously been expected to be 4.0 billion crowns.

Attorneys for FB, GOOG, LNKD, MSFT, and YHOO have received letters from the Justice Department detailing the ways they can report to their customers on the government's requests for information. More detailed disclosures will be allowed by these providers and perhaps other communication providers. Those details would include the number of customer accounts targeted, for example.

Let's look at daily charts. They're ugly and AAPL's after-hours performance doesn't engender much hope, but several indices did leave behind lower candle shadows or wicks as they bounced today. That's at least something to leaven the doom and gloom even if it doesn't promise a bounce.


Those new to my Monday Wraps might find the following paragraphs useful when interpreting my charts. Those who have read the Wraps can skip straight to the charts. I set up nested Keltner channels on my charts. It's a run-of-the-mill channeling system like the more familiar Bollinger Bands. As with those more familiar BB's, channel boundaries are often targets for upside or downside moves. They also mark levels where prices might find support or resistance on closes. When several channel lines converge, that potential resistance or support might appear stronger, just as it would if 20-, 50- and 100-sma's all converge in one spot.

For the benefit of subscribers, I mark potential upside and downside target/support/resistance levels with rectangles, usually green for upside and red for downside. Orange rectangles are sometimes used when the darker-colored ones would not allow for a clear examination of the next target. From now on, I will mention the nearest potential support or resistance level in the discussion on the chart, but not the further-out ones. They can be located on the charts if price breaks through the nearest levels on consistent daily closes. If an interpretation such as "support levels appear stronger than resistance, so up looks more likely than down" is possible, I'll tell you. Often we traders must be able to defend our trade against a move in either direction.

As with any type of potential support or resistance, those with profits should be protective of those profits as support or resistance is tested. If prices find support and climb, look to the next higher rectangle, even one just broken through, as potential resistance. Do the reverse when resistance is breached. Hopefully, this format provides you with the information you need without requiring all night to read as happens when I list each potential support or resistance level individually.

Annotated Daily Chart of the SPX:

With Friday's close below 1,805, the SPX set a tentative downside target of 1,755-1,775, and the top of that target was reached today. Past tests of this particular Keltner configuration have resulted in bounces, as is visible from the tests on the left-hand side of the chart. Those bounces, of course, did not always occur immediately, and past performance is no guarantee of what will happen this time. Trading required several days of choppy trading in August and early September, for example, before bounces got underway.

If this is just a painful but run-of-the-mill pullback, then daily closes will remain at or above about 1,755 and the SPX will subsequently rise again to retest resistance at about 1,805-1,821. If those events should unfold, bulls should guard their profits as 1,800 is approached. Bulls should be particularly watchful if the SPX moves higher within that 1,805-1,821 potential resistance zone and then stalls. The chart setup suggests that could happen, to be followed by another decline.

Sustained daily closes below about 1,755 mean that this is not a routine pullback, and that the SPX's pattern over the last year has changed. Technically, the SPX would then have set a potential Keltner target at the lowest red rectangle. However, I would certainly be aware of potentially strong historical support that could kick in around 1,700-1,720. I attempted to draw a line right at 1,700, but my hand is not steady enough, so you got one at $1699.67 instead.

Annotated Daily Chart of the Dow:

Friday's close set a tentative downside price target for the Dow at 15,700-15,850. The Dow, of course, hit that potential support level today. If the Dow should bounce, potential historical resistance could kick in at 16,000, of course, and bulls should be protective of their profits at that level. However, the Keltner setup doesn't suggest that 16,000 would be any more of a hurdle going up than it was going down. The possibility of strong resistance increases as 16,110-16,270 is approached. Bulls should be wary of rollover potential in that zone, especially if the Dow stalls there over a period of days.

The Dow's pattern with respect to the particular Keltner configuration it was testing today, from 15,700-15,850, is not as clean as the SPX's. The Dow has tended to overrun that support on recent tests, bulging the (purple) 45-ema below the original configuration. Therefore, if the Dow cannot hold support on daily closes above about 15,700, I would look to an interim potential support level near 15,600, based on prior swing highs. Technically, a new downside Keltner target would be set at the lowest red rectangle if the Dow cannot maintain daily closes at or above 15,700, but be aware that potential support could kick in sooner instead.

Annotated Daily Chart of the NDX:

We can see the NDX's outperformance when viewing this chart. The NDX has not dropped to test the same Keltner configuration (converging purple 45- and green 120-ema's) as the other two indices had. Today it was testing a higher potential Keltner support zone, from about 3,595-3,540. The NDX pierced that potential support level intraday but did not close below it on a daily close. If the NDX can manage a continued bounce--something AAPL's afterhours results questions--resistance might be found as soon as the top of that zone, near 3,540.

Sustained daily closes above about 3,540, however, might see the NDX run up to retest 3,570-3,620. However, bulls should watch for rollover potential if the NDX bounces that high, particularly if it stalls there a few days.

If the NDX instead rolls down immediately and sustains daily closes below about 3,595, then it sets a potential downside target at about 3,350-3,420. The NDX has not tested that potential support configuration in recent months, so it's difficult to predict how strong that support would be, if tested. A lower potential target is also marked in case the NDX cannot maintain daily closes above about 3,350, but there's also potential round-number, historical and gap support from about 3,300-3,330.

Annotated Daily Chart of the RUT:

On today's drop, the RUT fell through the potential support at 1,135-1,150. Now that former potential support zone must now be considered potential resistance. Let's talk about potential upside moves first. It's not until the RUT sustains daily closes back above about 1,150 that it sets a new potential upside target. Resistance could kick in as soon as 1,154-1,163, with a higher potential resistance zone also marked. Relief rallies can be rabid, so I wouldn't rule out any action, but remain aware of rollover potential.

However, the RUT didn't move up today other than a small bounce off the low of the day. Sustained daily closes below 1,135 maintain a potential downside target of about 1,098-1,111, but the Keltner evidence and the trendline evidence are not converging exactly. The long-term trendline suggests no new downside target would be set unless the RUT maintains daily closes below about 1,132. The RUT of course landed below that level on the close today, but the drawing of a trendline is an inexact science and the RUT also tends to overrun boundaries and then act as if it hadn't done so. The best we can conclude is that the RUT may have set a new downside target today, but there's still slight hope that it just overran the target and will bounce.

If the RUT heads lower, it will head into a target at a Keltner configuration now at 1,098-1,111 that it hasn't tested in a long time. It's uncertain how well that support would function, but of course it coincides with round-number and historical support, too, so it may be strong. A lower potential downside target is marked in case that support doesn't prove strong enough.

Annotated Daily Chart of the VIX:

Friday and today, the VIX shot higher out of the Keltner channel that usually contains its movements. While the VIX does sometimes overrun the boundaries of this purple channel based on the 45-ema, it doesn't often overrun them for long in a regular pullback or rally. That doesn't guarantee anything, because there's no guarantee yet that this is a regular pullback. However, the VIX has achieved the conditions it typically achieves on the Keltner channels before pulling back, which would be what equity bulls would want to see. It's also close to hitting the 20-ish level that often prompts VIX pullbacks, too. On a what-usually-happens-basis, then, bears should be cautious about protecting profits, especially if the VIX should drop below about 16.50 and maintain levels below that.

Bulls should be careful, too, especially if the VIX maintains its breakout above 17.00 for more than a few more days. That could mean it's setting a higher potential target.

Tomorrow's Economic and Earnings Releases

This week's important economic events are carried forward from Jim Brown's weekend Wrap.

Companies reporting earnings tomorrow include AMGN (After Market Close), CHKP (Before Market Open), DD (BMO), DHI (BMO), F (BMO), LXK (BMO), VMW (AMC), X, and YHOO (AMC). The earnings cycle for the rest of the week can also be found by referencing Jim Brown's weekend Wrap in the archives.

What about Tomorrow on the Intraday Charts?

Because of the outsized moves of the last two trading days, I've switched to 60-minute intraday charts. They will provide a better perspective of meaningful levels to watch.

Annotated 60-Minute Chart of the SPX:

Today, the SPX pierced the bottom support of its widest Keltner channel on the 60-minute charts. After overrunning that barrier, it bounced back into the channel, testing the resistance on 60-minute closes in the range of 1,788-1,791. Although the SPX managed a single 60-minute close above that resistance, it couldn't maintain those closes. Resistance held. If the SPX should jump above about 1,791 tomorrow and maintain closes above that level and particularly above that late-afternoon peak high, it would then have set a new potential upside target at about 1,799-1,803.

Sustained 60-minute closes above about 1,803 set a potential upside target of about 1,818-1,826. Both from a Keltner standpoint and a historical support/resistance standpoint, that may be strong resistance on 60-minute closes. If there's a rabid rally underway, such potential resistance may not matter at all, but bulls should be careful of the potential for a reversal from that level or even from near last week's swing low. Other potential upside targets are also marked on the chart in case the SPX should break above that resistance, but they will by then have been pushed slightly higher by the price action.

But the SPX wasn't breaking higher this afternoon: it was sustaining another 60-minute close beneath 1,788. There's light potential support on 60-minute closes at about 1,775-1,781. If the SPX maintains 60-minute closes beneath that or spends more than an hour or so beneath today's low, turn to the daily chart for next potential targets.

Annotated 60-Minute Chart of the Dow:

The Dow's setup is similar. The Dow overran the lower channel boundary at today's low. It, too, zoomed up to retest the channel boundary for resistance, a test that was unsuccessful. Sustained 60-minute closes back beneath about 15,890 suggested a test of potential support on 60-minute closes near 15,800-15,839, and that's what happened late this afternoon. If the Dow sustains 60-minute closes beneath about 15,800 or spends much time at all beneath today's low, look to the daily chart for a next potential downside target.

If the Dow can instead bounce back to and sustain 60-minute closes above about 15,936, it sets a next potential upside target near 15,990-16,027. Next potential upside targets are at about 16,150-16,190 and 16,260-16,330, with resistance on 60-minute closes possibly particularly strong at 16,260-16,330. Another higher potential target is also marked, but it would likely be pushed higher by a price move that brings the Dow close to that level.

Annotated 60-Minute Chart of the NDX:

The NDX nudged the lower boundary of its widest Keltner channel lower, but it did not break through that boundary. Instead, it found support on a support level now ranging from about 3,472-3,485. It then zoomed up to and tested its next target, where potential resistance was likely to be--and was--found. That target is from about 3,525-3,537. Until the NDX can sustain 60-minute closes above about 3,537 and especially if it's sustaining 60-minute closes beneath about 3,525, it's vulnerable to another drop to retest today's low. If today's low should be exceeded for any length of time, especially with 60-minute closes beneath about 3,472, look to the daily chart for a next potential downside target.

If the NDX can instead bounce and maintain 60-minute closes above about 3,537, it sets a potential upside target near 3,566-3,577. That could be strong resistance on 60-minute closes, so plan accordingly if you're in bullish trades. Sustained 60-minute closes above 3,577 set the next target, at about 3,610-3,621, but that target is likely to be nudged higher by a rally up toward it.

Annotated 60-Minute Chart of the Russell 2000:

The RUT also overran the boundaries of its widest Keltner channel today. It bounced back into the channel, set the conditions to test the 1,135-1,138 resistance zone and tested it. That resistance held today. As long as it's holding and the RUT is maintaining 60-minute closes beneath 1,135, the RUT is vulnerable to a retest of potential support on 60-minute closes at 1,126-1,131 or perhaps even today's low. If the RUT sustains 60-minute closes beneath about 1,126 or spends much time at all beneath today's low, look to the daily chart for the next potential downside target.

If the RUT instead maintains 60-minute closes above about 1,131, it sets another target back at that 1,135-1,138 potential resistance zone. Once it's maintaining 60-minute closes above 1,138, it sets a next potential target at about 1,143-1,147. Sustained 60-minute closes above 1,147 set a potential upside target near 1,155-1,158, where resistance on 60-minute closes may be particularly strong. Other potential targets are also marked, but they're likely to be shoved higher if the RUT should rally high enough to set those targets.

What happened today when all was said and done? Today's early bounce was hit, at least partially, by the margin call selling that Jim Brown mentioned this weekend. Whatever technical analysis method one uses--historical support and resistance, esoteric measurements and even my beloved-by-me-alone nested Keltner channels--SPX 1770-1775 was being touted everywhere as a benchmark level. Likely some successful bears decided to start locking in profits as that 1,775 level was hit and exceeded. Likely, some venturous bulls were ready to buy, and more bears decided to lock in profits. We had a technical bounce that was in turn trounced in the last few minutes of trading as worries about overnight risk and Apple earnings escalated. Still, some indices left respectable candle shadows or wick below their candle bodies on a day when volume was strong. That can sometimes mean that big money is buying the dip. Only big money can produce large volume.

Big money can be wrong, too, or can be stepping in to the market, willing to do some initial buying at this level, cognizant that they'll likely also be doing some buying at lower levels. Here's the truth. Many indices are testing levels that have produced bounces in the past. I don't know whether they will this time, but I do know that the tenor of the markets will have changed from recent patterns if they don't.

Lots of analysts with big firms predicted the downdraft could continue. We know it can from what we see on the charts, but we also know that if this was destined to be just a regular old pullback, we may be approaching the destined levels already. What is a trader to do? We have levels to watch to guide our choices with our trades. They're marked on the charts. Be aware of the risks in the market right now, including the risk of a rabid relief rally. Don't take on excessive risks in either direction. Markets can become quite volatile in both directions after the kind of move we've had.

Linda Piazza

New Option Plays

Industrial Goods & Consumer Goods

by James Brown

Click here to email James Brown


General Dynamics - GD - close: 99.95 change: +1.64

Stop Loss: 97.75
Target(s): 107.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
GD is in the industrial goods sector. They are one of the major military contractors. The stock was showing relative strength last week following its better than expected earnings report. The relative strength returned today with a +1.6% gain.

Today's high was $100.37. I am suggesting a trigger to buy calls at $100.50. If triggered our short-term target is $107.00.

Trigger @ 100.50

- Suggested Positions -

Buy the Mar $100 call (GD1422C100) current ask $2.70

Annotated Chart:

Entry on January -- at $---.--
Average Daily Volume = 2.6 million
Listed on January 27, 2014


Philip Morris Intl. - PM - close: 80.78 change: -0.72

Stop Loss: 81.55
Target(s): 75.25
Current Option Gain/Loss: Unopened
Time Frame: Exit PRIOR to earnings on Feb 6th
New Positions: Yes, see below

Company Description

Why We Like It:
PM is in the consumer goods sector. The company makes cigarettes and tobacco products. The big cigarette makers used to be considered safe-haven stocks thanks to their addictive products and high dividend yields. PM currently sports a 4.6% yield. Yet that hasn't saved the stock from its bearish trend. PM was showing relative weakness again today and looks poised to breakdown below what could be round-number support at $80.00.

We're suggesting a trigger to buy puts at $79.85. If triggered our short-term target is $75.25. Please note that this is a short-term trade. PM is due to report earnings on February 6th and we do not want to hold over the report.

Trigger @ 79.85

- Suggested Positions -

Buy the Feb $80 PUT (PM1422N80) current ask $1.14

Annotated Chart:

Weekly Chart:

Entry on January -- at $---.--
Average Daily Volume = 5.9 million
Listed on January 27, 2014

In Play Updates and Reviews

Not Done Yet

by James Brown

Click here to email James Brown

Editor's Note:

The stock market's sell-off that began last week continued on Monday. The intraday bounce has rolled over suggesting the correction is not done yet.

GMCR hit our stop loss. QQQ hit our entry point. We are adjusting our entry point on the IWM trade.

Current Portfolio:

CALL Play Updates

Chicago Bridge & Iron - CBI - close: 75.71 change: -0.07

Stop Loss: 72.40
Target(s): 82.50
Current Option Gain/Loss: -11.7%
Time Frame: Exit PRIOR to CBI's earnings report in February
New Positions: see below

01/27/14: The sell-off in CBI continued this morning. Shares opened at $76.17 and then plunged to $73.22 before bouncing back to $76.00. Our plan was to buy calls at the open but I suggested more nimble traders buy a dip near $75 or its 100-dma (near 74.50). More conservative traders may want to wait for a rally above today's high (76.47) before initiating positions.

- Suggested Positions -

Buy the Mar $80 call (CBI1422C80) entry $1.70

Entry on January 27 at $76.17
Average Daily Volume = 1.5 million
Listed on January 25, 2014

Honeywell Intl. - HON - close: 90.29 change: +1.82

Stop Loss: 84.75
Target(s): 94.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

01/27/14: Shares of HON displayed relative strength today thanks to a couple of analyst upgrades and some $100 price targets. Today's bounce (+2.0%) completely erased Friday's decline. Currently our plan is still a buy-the-dip trigger at $87.25 but if we see HON breakout past the $91.50 area we might switch and buy calls on the breakout to new highs.

Trigger @ 87.25

- Suggested Positions -

Buy the Mar $90 call (HON1422C90)

Entry on January -- at $---.--
Average Daily Volume = 2.2 million
Listed on January 25, 2014

iShares Russell 2000 ETF - IWM - close: 111.79 change: -1.66

Stop Loss: 108.85
Target(s): 118.00
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

01/27/14: The profit taking in the small caps continued and the IWM hit an intraday low of $111.15. That's not low enough since our suggested entry point was $111.00. The afternoon bounce failed near $113.00. We suspect that the market could see another sell-off tomorrow thanks to weakness in shares of AAPL. Tonight we're adjusting our entry point strategy here in the IWM and moving it down to $110.30. We are essentially aiming for the simple 100-dma (currently at $110.26). We'll adjust the stop loss to $108.85.

Trigger @ $110.30

- Suggested Positions -

Buy the Mar $115 call (IWM1422C115) current ask $1.66

01/27/14 adjust the entry point trigger to $110.30 and move the stop loss to $108.85.

Entry on January -- at $---.--
Average Daily Volume = 31.7 million
Listed on January 25, 2014

NASDAQ-100 ETF - QQQ - close: 85.90 change: -0.84

Stop Loss: 83.90
Target(s): 92.00
Current Option Gain/Loss: - 7.5%
Time Frame: 6 to 8 weeks
New Positions: see below

01/27/14: As expected the sell-off continued and the QQQ hit our new buy-the-dip trigger at $86.00. Shares actually hit an intraday low of $85.25. I am worried that the QQQs could hit new relative lows tomorrow as the market reacts to Apple's (AAPL) earnings. AAPL is one of the biggest stocks inside the NASDAQ-100 index and AAPL is currently down -$43.00 in after hours trading tonight. I am adjusting our stop loss to $83.90. That does raise our risk on this trade.

*small positions* - Suggested Positions -

Long Mar $87 call (QQQ1422C87) entry $1.60

01/27/14 adjust stop loss to $83.90
01/27/14 triggered at $86.00

Entry on January 27 at $86.00
Average Daily Volume = 29 million
Listed on January 25, 2014

PUT Play Updates

Currently we do not have any active put trades.


Green Mountain Coffee Roasters - GMCR - close: 77.63 change: -1.05

Stop Loss: 77.95
Target(s): 88.00
Current Option Gain/Loss: -50.5%
Time Frame: exit PRIOR to earnings on February 5th
New Positions: see below

01/27/14: I cautioned readers over the weekend that GMCR would likely hit our stop loss today if the market continued to sink on Monday morning. Sure enough GMCR broke down below short-term support near $78.00 and hit our stop at $77.95.

- Suggested Positions -

Feb $85 call (GMCR1422B85) entry $3.66 exit $1.81 (-50.5%)

01/27/14 stopped out
01/23/14 triggered @ 81.75


Entry on January 23 at $81.75
Average Daily Volume = 2.3 million
Listed on January 22, 2014