Option Investor

Daily Newsletter, Saturday, 3/8/2014

Table of Contents

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

Market Wrap

Ukraine Overhang

by Jim Brown

Click here to email Jim Brown

The calm from Tuesday was erased by increasingly hostile threats and movements of military equipment towards the Ukraine. The markets noticed.

Market Statistics

While no shots have been fired other than warning shots there are increasingly hostile events taking place in the Ukraine. The Crimean parliament voted to join Russia and cede from the Ukraine. They moved the previously announced referendum on ceding from the Ukraine forward two weeks to March 16th. The Ukraine government increased its claims there would be no referendum and any vote would have no legal effect.

President Obama announced sanctions against Russia, freezing of assets and a ban on travel for those involved in the Crimea takeover. Putin was not targeted individually but numerous high ranking government officials were the targets of the sanctions. At an emergency meeting in Brussels the EU passed a set of limited sanctions against Russia and warned they were prepared to increase the severity of the sanctions unless there was a swift end to the standoff. Russia responded saying "Russia will not accept the language of sanctions and threats and will retaliate if sanctions are imposed." Putin said any sanctions would backfire on the U.S. with Russia seizing U.S. and EU assets. Russian lawmakers are already drawing up a bill that would authorize the seizure of U.S. and EU assets.

After an hour long call with Obama, Putin said he was ready to use force to protect the people of Crimea. European reporters arriving by private helicopter to report on the events were promptly escorted out of the country by Russian attack helicopters.

The 37 member observation team requested by the Ukraine and sent by the Organization for Security and Cooperation in Europe, including people from 18 nations, arrived at the border but Russian troops would not let them into Crimea. AP reporters had their equipment confiscated and were prohibited from filing news stories because they were considered "spies."

Ukraine International Airlines said all flights in and out of Crimea have been cancelled due to the closure of airspace over Crimea. At the Ukrainian naval base in Novo-Ozerne a decommissioned Russian naval vessel was sunk by the Russians in the channel leading to the Black Sea preventing Ukrainian naval ships from leaving port.

Russia's Gazprom threatened to turn off the supply of natural gas to Ukraine if it does not immediately pay the $1.89 billion for previously delivered gas. This is a Putin tactic that has been threatened many times in the past. He threatens the shutdown of gas supplies in order to move his agenda forward. Ukrainian television channels were turned off in Crimea and replaced with Russian state TV channels.

More than 30,000 Russian troops are now in Crimea. All the Ukrainian military bases in Crimea have either been taken over by Russian troops or they have been surrounded with no Ukrainian troops allowed to leave.

The U.S. guided missile destroyer USS Truxtun arrived in the Black Sea on what was called a "routine" visit by Washington. The U.S. sent six F-15 jets and a KC-135 refueling tanker to join NATO patrols in the Baltics. Another twelve F-16 fighters will be deployed there next week. The increase in military forces came after a Russian surveillance plane flew over Turkey along its Black Sea coast. Turkey scrambled six F-16 fighters to repel the surveillance craft. That was the second time this week the Russian plane had threatened Turkish airspace. I am sure Russia has extended its surveillance umbrella as far as possible to try and prevent being caught off guard by an attacking force staging in another country.

Last but not least the former Ukrainian president who fled to Russia, Viktor Yanukovich, is now said to be in a Russian hospital in "grave condition" after suffering a suspected heart attack. Am I the only one that believes that heart attack may have not have been caused by natural forces? The Ukrainian government had issued a formal request for extradition back to the Ukraine so they could interrogate him about billions in missing funds and thousands of documents he tried to burn when he fled the presidential palace. Yanukovich is expected of taking Russian payoffs to pave the way for Russian businesses in the Ukraine and for passing or rejecting treaties as dictated by Putin. He was considered a Russian puppet. I guess a dead puppet can't be forced to talk.

Is it any wonder the U.S. equity markets were weak on Friday? With events surrounding Crimea apparently escalating as each day passes the potential for a negative surprise over the weekend is very strong. I am not surprised that early gains on the stronger than expected Nonfarm Payroll report quickly evaporated. I am surprised we did not end the week a lot lower as traders took profits ahead of the weekend.

The markets rallied on the stronger than expected payroll report with the Dow reaching 16,505 before the sell down began. The S&P hit 1,883 before giving back -13 points to trade at 1,870. The Nonfarm report for February showed a gain of +175,000 jobs in February. This was well over the estimates of 125,000-150,000. The estimates had been lowered significantly after the ADP Employment report on Wednesday showed a gain of only +139,000 jobs. Surprise, surprise!

Despite the severe winter weather the service industries tacked on big gains. The service sector added +153,000 jobs and manufacturing and construction +22,000. January was revised higher by +16,000 and to 129,000 and December rose +9,000 to 84,000.

The unemployment rate rose +0.1 to 6.7% as more people joined the workforce. The labor force increased for the second consecutive month with a gain of +264,000 after a +523,000 increase in January. If the economy begins to improve and more people begin looking for jobs that unemployment rate will continue to grow before the eventual decline when the economy finally returns to historical activity levels.

Interestingly hospital employment has declined by -10,000 over the last three months and insurance company employment rose +10,000 over the same period. I would suspect that to be a result of Obamacare. Lower reimbursements means less money to pay hospital employees while the massive switch from private healthcare to Obamacare means a lot more workers were needed to process the applications and handle the nearly 80% exception rate from the online applications.

The unemployment rate for adult men was 6.4%, adult women 5.9%, teenagers 21.4%, whites 5.8%, blacks 12.0%, Asian 6.0% and Hispanics 8.1%. More than 3.8 million people have been unemployed more than 27 weeks. Those account for 37% of the unemployed. The labor force participation rate was unchanged at 63.0% in February. There were 7.2 million people employed part time for economic reasons. Those want full time work but cannot find a job or their hours had been cut back from full time. There are currently 2.3 million people classified as "marginally" attached to the labor force. They want work and are available to work but are not counted as unemployed because they had not applied for a job in the last four weeks.

The report was a surprise because of the strength in the face of the severe weather. This suggests that once the weather warms we could see a sharp increase in hiring. However, this conflicts with the weak economic reports for the month of February. If those were also weak solely because of the weather then we could be looking at a strong economic bounce in April. March could show improvement but the weather is still a factor. Unless winter extends for another six weeks like it did in 2012 the April economics could be strong.

Obviously there are conflicting opinions about the strength and direction of the economy. The next 60 days are going to be critical for directional clues.

The economic calendar for next week has little in the way of material events. The NFIB Small Business Survey was neutral last month with a minor gain of +0.2 points to 94.1. It would be nice to see a pickup by small businesses in February.

The retail sales for February are expected to rise +0.2% but the weather will again be the major excuse for a weak report. When the weather does warm up I expect an explosion of pent up demand in the retail sector but that will be in March and April.

Lastly the Producer Price Index (PPI) on Friday is expected to rise +0.3% as commodity inflation works its way into the manufacturing sector. Once producers pass that inflation on to consumers the Fed will have a lot tougher task in keeping and accommodative monetary policy.

An economic indicator from overseas came in the form of a corporate debt default in China. The failure of Shanghai Chaori Solar Energy Science & Technology to make a $14.5 million interest payment on Friday was the first corporate debt default in 17 years. China has a long tradition of not letting weak companies fail. That has undermined the country's path to meaningful financial reform.

The fact that China allowed a company to default is a major event. In the past investors have been accustomed to these companies being bailed out either by the state or some large state owned bank. Defaulting was basically unacceptable to the greater good. Investors tended to gravitate to the highest bond yield they could find because there was no risk. If everyone gets bailed out then put your money where it earns the highest return. This default is just the tip of the iceberg. If China has really decided to shake up the financial community and let the weak companies fail then millions of investors are in for a roller coaster ride. Starting next week we could see investors dumping debt from Chinese companies if investors don't believe the companies can be successful.

Borrowing costs for Chinese companies are going to soar. No longer will they have the implied backing of the state. Standard & Poor's analysts in Hong Kong called the default a "transformative event." S&P said it will force more discipline among the companies and lenders and will lead to tighter loan conditions and more due diligence by lenders.

China's $14 trillion corporate debt market has thousands of companies that have benefitted from the implied government guarantee. When these companies are forced to pay market rates and jump through credit hoops just to get the money they may not survive. There are thousands of Chinese companies that should have already defaulted and gone out of business but the government has prevented this from happening to maintain the status quo and keep people employed. Fitch said "this will lead to a more efficient allocation of capital among corporate borrowers." That is the good news and the bad news. Quality companies will continue to get funding but lower tier and bottom tier companies are going to see credit disappear.

The number of publicly traded non-financial companies in China whose debt to equity ratios exceed 200% has jumped +57% since 2007 according to Bloomberg.

How this is going to impact China's economy in the future is unclear. We know there will be a lot more defaults and business failures. In a capitalistic society that creates opportunities for new companies to fill the void and prosper or for existing companies to expand and become stronger. It is likely to be a bumpy road for the first couple years as businesses adjust to the new paradigm.

A casualty of the default was copper prices. The price of copper fell -4.14% on Friday on worries the credit default in China is the first of many. That was the biggest one day drop since December 2011. Metals like copper, nickel and gold are used as collateral against letters of credit. The copper pledged to the letter of credit is then "sold" to a third party who uses it as leverage in a different paper transaction. Once the phony transaction is completed the copper is sold back to the original purchaser and the process is repeated. The copper in each transaction is the same as each prior transaction and is never moved from the bonded warehouse.

According to Goldman Sachs the same metal in question can be used as collateral for these transactions between 10-30 times a year without it ever being moved. The point to the process is to show the metal as an asset on various balance sheets at the same time to qualify for additional loans. The more metal imported into China the larger the number of loans. This is a shell game that will end badly. As banks and investors begin to require verification of the assets and proof of ownership the scheme will end badly with billions in fictitious loans ending in default. Goldman says this will extract tremendous leverage from the system and will have adverse impacts on China's ability to absorb inflation and grow its economy.

On Saturday we had further bad news from China. Exports declined -18.1% in February compared to the average estimate from 45 economists for a gain of +7.5%. Imports rose +10.1% leaving a trade deficit of $23 billion and the largest in two years. The decline in exports was the worst since the 2008 financial crisis. Analysts were quick to try and blame the Lunar New Year holiday and the weather in the U.S. for the decline. I find that hard to believe. I doubt wholesalers in the U.S. called up their suppliers in China telling them to hold off on those February shipments because it snowed in January. We all know that the products shipped in February were ordered months ago. Total exports for January and February declined -1.6% compared to a gain of +23.6% in the same period in 2012.

This suggests China is going to miss their 7.5% growth targets for Q1. UBS economist Wang Tao estimated the underlying growth rate so far in 2014 is 6.0%.

In stock news Alpha Natural Resources (ANR) fell -12% after Goldman Sachs cut its rating to sell and lowered the price target to $4. Goldman also cut their forecast for metallurgical coal from $150 a ton to $141 due to increased output from Australia, the expected slowdown in Chinese imports and "limited U.S. supply rationalization." They expect the current oversupply to increase in the coming years. This goes against what Peabody Energy has been saying about increasing demand and improving prices. Peabody pointed out that high cost production has been shuttered and that has reduced supply to the market.

The patent case between Juniper Networks (JNPR) and Palo Alto Networks (PANW) was declared a mistrial. Juniper had filed a lawsuit in December 2011 claiming PANW products infringed six Juniper patents. The jury was unable to reach a decision. If Juniper wants to pursue this claim they will have to file a new case and start over. Juniper indicated they would probably re-file. PANW shares rallied +11% because a new filing will take another couple of years to wind its way through the courts. FBR Capital Markets said the dismissal of the suit will provide a major sigh of relief for PANW investors. They claim the stock price has been under pressure for the last year on worries over the outcome of the suit. The chart does not show a lot of overhang with a near doubling of the price since November.

Big Lots (BIG) shares rose +23% after posting earnings of $1.45 that beat by a nickel. However, revenue of $1.57 billion missed estimates of $1.61 billion and same store sales declined -3%. They also guided to 40-45 cents for the current quarter and below the 50 cent estimate. The company said the quarter was a week shorter than the comparison quarter and the impact was about 5 cents. That would have them beating by a dime. They also announced a $125 million share buyback. Apparently a lot of traders were expecting the troubled retailer to miss earnings because even with the multiple negatives the shares still exploded higher.

After spending a couple years as a penny stock Plug Power (PLUG) finally hit on the right combination of news events to power it higher. Higher as in up +75% for the week with +30% on Friday alone. Plug Power is a fuel cell company. They manufacture power systems for major companies. PLUG announced a contract to supply power with six Wal-Mart distribution centers. The company said it expects additional contracts with new and existing customers. Ballard Power (BLDP) provides fuel cell components to PLUG for use in its power systems was up +4.5% on Friday. Fuel Cell Energy (FCEL) rose +18% after the U.S. Dept of Energy awarded them a $2.8 million contract to develop a fuel cell plant capable of delivering hydrogen as well as electricity and heat to industrial companies on their own sites. FCEL rose +81% for the week.

The fuel cell industry has apparently come of age and with new technology reducing the costs for hydrogen fuel cell plants the entire sector is on fire.

Coupons.com (COUP) went public on Friday by selling 10.5 million shares priced at $16. Shares surged to $33 intraday and closed at $30. The site began in 1998 but has been unprofitable until last quarter. The company made $1.5 million in Q4. Full year sales were $168 million. They survived on a $200 million investment from institutional investors in 2011. Coupons.com offers printable coupons and they get paid when a consumer prints a coupon. I checked as I was writing this paragraph and they have 282 coupons available today. They change all the time so coupon clippers can go crazy. The reason for the 100% spike was the low number of shares offered at 10.5 million. With almost no float any demand at all sends prices higher. Volume on Friday was 11.4 million so quite a few IPO winners unloaded their shares and those shares traded aggressively. Institutions probably held their shares, which meant the big blocks were not in the market.

The S&P has stalled at 1,875 for the last four days. The S&P spiked higher on Tuesday to close at 1,874 and it has not wandered far from that level for the rest of the week. Thursday closed at 1,877 and Friday closed at 1,878. Those are some very weak gains after a strong breakout on Tuesday and a stronger than expected payroll report. Clearly the Ukraine is weighing on the markets. At least that is what most commentators are blaming for the lackluster performance. I would agree the increasing hostility in the Ukraine headlines on Friday was a strong reason to take profits before the close. I am surprised we did not close a lot lower.

On Tuesday when Putin appeared to rethink his invasion plans after the Russian stock market imploded, the U.S. markets exploded higher. At the time the consensus opinion was that the Crimean invasion would be over quickly. That is no longer the consensus opinion. Now it seems to be consensus that we are only in the first act of a four act play. The Crimean vote to join Russia is scheduled for next Saturday and that is going to be a major challenge for Europe. No major country is going to recognize the outcome of this vote especially since it will be at the point of a Russian gun. Military positioning is increasing and we are only one trigger happy 20 year old soldier away from a major confrontation. So far all the shots fired have been warning shots. Once people start dying the confrontation will take on an entirely new intensity.

I think this will weigh on the markets next week. The lack of any material economics and a lack of earnings to distract investors will allow them to focus on the Ukrainian headlines and begin to question the wisdom of being long the market.

At the same time we are closing in on S&P 1,900 and that is the yearend target for numerous analysts. Reaching that target this early in the year could convince investors to take profits and move to the sidelines.

I personally think we have a good chance of moving higher if the Ukraine situation were to ease again. I have been looking for a market high in April and then a decline into summer. Midterm election years tend to peak in April and bottom in August. Given the strong gains in 2013 that have not yet been taken off the table we could see an active "Sell in May" cycle this year.

For next week we are looking at initial support at 1,872 followed by strong support at 1,840. Initial resistance appears to be 1,882 followed by 1,885 and 1,900.

The Dow is pulling ever closer to the prior high at 16,576 with the close on Friday at 16,450. The Dow managed to close higher on Friday when the Nasdaq and Russell 2000 ended in negative territory. Have we gone back to having fund managers store money in the big caps in fear of a negative market event instead of "investing" the money in small caps for a larger return? I am not ready to make that call yet since the Russell only lost -1 point on Friday and closed only -5 points off its historic high.

The leadership in the Dow was varied and did not seem to suggest any specific sector or trend was in control. It was Friday and I don't think we can apply too much logic to the moves.

The Dow Transports are finally confirming the Dow move and they closed at a new high on Friday by about 20 points. We really need a couple more daily gains to avoid the possibility of a double top. The airlines, shipping companies and railroads all began to rally at the same time so hopefully this trend will continue higher.

The Nasdaq Composite gave back -16 points but that was down from a 14 year high on Thursday. The Nasdaq has been leading the pack and it was time for a pause. The Ukraine headlines may have been part of the picture but the Nasdaq was right under resistance and due for a breather. In reality the decline was due in part to a sudden dip in the biotechs. The sector was up nearly 25% for the year and it gave back -4% last week. It is still up +21% and those negative headlines from Ukraine may have given those investors holding biotech stocks a reason to take profits.

On the Nasdaq chart we see a dead stop on uptrend resistance at exactly where you would have expected a pause. The rebound from the Feb 5th lows may be slowing but there is nothing to suggest it is dead. We would need to see a drop under support at 4,250 before writing the obituary on the rally.

The Russell is a carbon copy of the Nasdaq. Strong uptrend resistance created a solid ceiling for the Russell rally. If the Ukraine headlines disappeared I think a breakout would be in order. However, wishes don't work as a trading strategy. We could expect a decline to 1,182 without really starting to worry about a correction. Resistance is 1,208 and the historic high.

With the markets back at the prior highs and no real catalysts on the horizon to propel them higher we need to start worrying about a peak in April. If this occurs we could see a sharp downdraft for multiple reasons. Q1 earnings are going to be very weak. The weather excuse should cover almost everyone but eventually traders are going to become tired of hearing it.

Another worry is how we got to this point. The market has become a combination of baskets of stocks rather than a market of individual stocks. Futures and ETFs account for the majority of the market volume. Compared to the rally in 2000 there are very few single stock investors. There are now ETFs for everything. Every time a ETF or a futures contract is bought or sold in quantity it triggers hundreds of individual buys and sells to match that move in the ETF.

When we eventually hit a real correction this selling in ETFs and futures is going to produce violent market swings. Stop losses on these vehicles could create the kind of volatility we saw in 1987 when program trading flushed the market or similar to the flash crash where computer trading blew through stops and triggered monster sell orders.

On the positive side there is nothing that says it will happen soon. The market could continue to move higher but with more frequent interruptions on the hope the economy is improving. We have shaken off the taper process and some really negative guidance from Q4 earnings and so far the invasion of Crimea. Eventually something will become the excuse for a significant market decline but until it happens we won't know what it is. Unfortunately, not all declines need an excuse. Sometimes the markets just run out of buyers.

The situation in the Ukraine may have a lasting impact on the U.S. even though the Ukraine has no direct impact on our economy. In grade school if a bully decides to pick on a kid that was previously unmolested and that kid does not respond forcefully, the lesser bullies will see an easy target and begin picking on him as well. Everybody in grade school understands this. If a country lets itself be pushed around by an aggressive regime, others will take note and try to push that country around as well. If they see no credible response to the aggressive action they will begin to think they can get away with aggressive action of their own.

For this reason America must act forcefully to this aggression by Putin. I am not saying we should go to war. I just think we need to act forcefully and make sure Russia pays a price for the invasion. If we do not act then Iran, North Korea, Syria and who knows who else, will decide we are a paper tiger and try to get away with their own brand of bad behavior. For this reason I view the confrontational aspect of the Crimean invasion as having more risk than what may be priced into the market today.

In 1964 Art Cashin joined the NYSE and now, 50 years later, he is the unofficial godfather of the exchange. He is also a fan of Option Investor. Art celebrated a birthday last week. I am not going to give away his age but he is 6 years older than me. Happy birthday Art!

Daylight savings time takes effect again on Sunday morning. Spring forward one hour. Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"Ideas are easy; it's execution that's hard."
Jeff Bezos


Index Wrap

Market Still Vulnerable For a Pullback

by Leigh Stevens

Click here to email Leigh Stevens

While the S&P and Nasdaq made gains this past week, the Nasdaq Composite (COMP) is now hitting some technical resistance. Near-term upside potential for S&P 500 (SPX) may be limited to 1900.

Last week I was anticipating a near-term correction but it was a day-long (Monday) affair only. The snap back rally on Tuesday continues to show the power of the primary bull market we're in. The Market however remains vulnerable for further dips or an overall sideways move.

A weekly Close above 1900 in SPX would continue the strong bullish trend as would a decisive upside penetration of 4375-4400 in COMP.

Extreme bullishness was seen in my sentiment indicator going into mid-week, although bullishness then tapered off some after that. Bullish expectations are high and investors continue to buy dips, such as was seen early this past week. The situation with Russia and the Crimea is a wild card as to how the Market views bearish Market potential in US/EU imposed sanctions on Russia and any potential disruptions to oil supplies and trade.

Best if I now go on to the individual indices for a view on each.



The S&P 500 (SPX) index chart is bullish. The first day of the past week saw a drop under 1850 support, but a strong rebound followed. Investors, especially funds, are buying every significant dip so far. A jump in non-farm job numbers at week's end helped confirm a continued bullish view of the U.S. economy.

Potential next technical resistance in SPX comes in at 1900-1905, extending to 1936-1940. There are a couple of ways to calculate upper trend channel resistance, as seen in the TWO parallel upper channel lines in SPX below. 1900 is a key next resistance as suggested by the LOWER channel line on the daily chart and 'confirmed' by the upper end of the weekly uptrend channel (not shown). My HIGHER daily chart channel line (drawn through the May 2013 price peaks) suggests potential resistance intersecting in the 1936 area currently.

Near support comes in around 1840, with fairly major support beginning at 1800 and extending to around 1775.

As seen above, the 13-day Relative Strength Index (RSI) indicator is nearing a 'typical' overbought extreme and bullish 'sentiment' has shot back up toward the high end of its range, with the caveat that indications of high bullish sentiment 'extremes' can persist for lengthily periods before a correction sets in a major bull market like this one.


The S&P 100 (OEX) chart is bullish, most lately seen by OEX clearing prior highs in the 824 area. The chart would remain in a 'maximum' bullish pattern if support continues to be found on pullbacks to what is now assumed to have 'become' support at prior highs in the 824-820 zone.

A next potential target and possible next resistance is seen at 840, extending to the 850 area, at the upper end of OEX's uptrend price channel.

Pivotal technical support is highlighted at 810, extending to 800. Major support is assumed at OEX's up trendline, intersecting around 785 currently.

The RSI indicator has now hit the low end of the area suggesting an 'overbought' market, although such readings can persist for lengthily periods in a strong bull trend. Nevertheless, an elevated RSI suggests caution in taking on new bullish positions.


The Dow (INDU) chart is bullish with the latest move to above 16400 resistance. Bullish uptrends are seen in just under half of the 30 Dow stocks; in 13 especially: AXP, DD, DIS, GE, HD, JPM, probably MMM, MRK, NKE, PFE, UNH, UTX, and V.

Next resistance and a key one in the area of prior Closing and intraday highs, is at 16600. Above this level I've highlighted a potential next target and possible resistance in the 16800 area.

Very near support looks like 16300, with key technical support then coming in 200 points lower at 16100, extending to 16000.

It seems unlikely that INDU will get this close its prior highs without re-testing this area. The question is will such a re-test be sooner rather than later. And, if there's a near-term move to 16600 resistance, will the Dow dip from there?

I have longer range targets in INDU to above 17000; eventually a move to the 17500 area or higher is possible looking out 2-3 months. It's the next 2-3 trading sessions that are hard to predict!


The Nasdaq Composite (COMP) chart is bullish but it should also be noted that as the Index has reached the upper end of COMP's uptrend price channel, upside momentum has slowed and Friday saw a new 4-day low Close. This doesn't suggest a downside reversal but the slowing momentum, if this is predictive of a near-term sideways to lower trend, is something to consider in holding bullish positions.

Immediate downside support is suggested in the 4284 area, at the low end of the upside price gap between Monday's high and Tuesday's low. Retreats to gap areas often find support/buying interest. I've noted chart support at 4250, with next key technical support in the 4150 area.

Overhead resistance suggested by the upper trend channel line comes in at 4375; next resistance is calculated for the 4440 area.

I'm neutral on COMP in terms of taking on new bullish positions or taking on new bearish options strategies for that matter. If there's another significant pullback, such as into the 4200-4100 zone, this might suggest taking on new Nasdaq positions. That much of a dip may be a long-shot. A minor dip back to the area of the 21-day average is a shallow correction possibility.


The Nasdaq 100 (NDX) chart is bullish but Friday's dip back to the 3700 area has suggested minor slowing of upside momentum.

The Composite, unlike the big cap Nas 100, has stalled some after reaching the high end of its uptrend price channel; which hasn't occurred yet in NDX. NDX may reach resistance in the 3785 area, as suggested by the Nas 100's upper channel line, but nothing says this 'has' to occur or will occur. I trade NDX options but sometimes COMP's chart pattern is the most telling as to the Nasdaq trend.

Immediate overhead resistance (not highlighted below) is assumed at Thursday-Friday's 3738 intraday highs. Next resistance, as already noted, is seen at the upper channel line.

Near support is seen in the 3650 area, extending to 3600. Fairly major support begins around 3530.


The Nas 100 tracking stock, QQQ, is bullish on an intermediate and long-term basis but there is slowing of near-term upside momentum as suggested by QQQ's dip below prior intraday highs in the 90.8 area. This may be something if it's suggestive of another downside correction, maybe longer than this past week's 1-day dip on Monday.

Assuming QQQ holds above its 21-day moving average, the stock could take off again, pierce its most recent intraday high (91.36) and keep going to resistance implied by its upper trend channel line intersecting at 92.3. Stay tuned on that.

Conversely if QQQ starts falling under 90-88.9, support is seen next at 89, then 88 even.

The On Balance Volume (OBV) line is zigzagging lower on lower volume than the week before last, suggesting a less bullish outlook in QQQ with the stock now above 90.


The Russell 2000 (RUT) is bullish and the near-term pattern looks most like a minor bullish flag, which suggests another spurt higher, perhaps next to the 1230 area. I've noted near resistance at 1220, at the upper end of RUT's long-standing and well defined uptrend price channel. There's nothing that says uptrend channels won't get pierced but more often these upper boundary lines are places where prices pause and trend sideways thereafter or form a starting point to a more significant pullback.

Near support is noted at 1180, extending to the 1150 area. Fairly major technical support begins around 1120.

Unlike most of the major indexes, the Russell 2000 has reached a 'fully' overbought extreme. This pattern has most often, not always, marked an area where the Index will see slowing upside momentum and a pullback occur. It's not a situation where you want to take on new bullish positions.

The question of buying puts is another consideration but I don't advocate counter-trend trades much given my market analysis is updated weekly only and 'fading' the dominate trend requires day to day observations. In terms of probabilities, I see more downside risk than further upside potential given that RUT is so close to the UPPER end of its broad uptrend channel. Buying at the LOW end of the channel was great on a risk to reward basis as the major trend was up.


New Option Plays

Services & Medical Devices

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)

I also like NKE above $80.50 but earnings are coming up on March 20th.

(bearish ideas)


ManpowerGroup, Inc. - MAN - close: 79.37 change: +0.95

Stop Loss: 77.90
Target(s): 85.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
MAN is in the services sector. The company provides permanent, temporary, and contract staffing services. The stock was a strong performer in 2013 but lost $15 during the market's January sell-off. Shares are trying to recover and they are poised to breakout past resistance near $80 and its converging 50-dma and 100-dma.

We are suggesting a trigger to buy calls at $80.55. If triggered our target is $85.00. More aggressive traders could aim for the highs near $87. The Point & Figure chart for MAN is bullish with a $90 target.

Trigger @ 80.55

- Suggested Positions -

Buy the APR $85 call (MAN1419D85) current ask $1.15

Annotated Chart:

Entry on March -- at $---.--
Average Daily Volume = 953 thousand
Listed on March 08, 2014

Varian Medical Systems - VAR - close: 84.69 change: +0.28

Stop Loss: 83.40
Target(s): 89.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
VAR is in the healthcare sector. The company makes and services medical devices. VAR last reported earnings in January and management offered disappointing guidance. Yet this failed to seriously impact VAR's upward trend. The stock has spent the last couple of weeks consolidating beneath resistance in the $85 area and looks like it's building up steam for a breakout higher.

I am suggesting a trigger to buy calls at $85.05. Resistance is closer to $84.70 and more aggressive traders could jump in early at $84.75 instead. If the newsletter is triggered at $85.05 our target is $89.75. The Point & Figure chart for VAR is bullish with a $91 target.

Trigger @ 85.05

- Suggested Positions -

Buy the Apr $85 call (VAR1419D85) current ask $1.90

Annotated Chart:

Entry on March -- at $---.--
Average Daily Volume = 573 thousand
Listed on March 08, 2014

In Play Updates and Reviews

Stocks Move Sideways On Friday

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market drifted sideways on Friday as traders digested the jobs number and new developments in Ukraine.

Don't forget that March options only have two weeks left.

We are removing COL as a candidate.
IMPV and PRGO have been stopped out.

Current Portfolio:

CALL Play Updates

BorgWarner Inc. - BWA - close: 61.31 change: -0.54

Stop Loss: 59.90
Target(s): 67.50
Current Option Gain/Loss: Unopened
Time Frame: exit prior to April expiration
New Positions: Yes, see below

03/08/14: BWA spent Friday's session consolidating sideways near the $61.50 level. Shares have spent the last two weeks in the $60-62 trading range. We are looking for a breakout higher.

We want to use a trigger to buy calls on BWA at $62.25. If triggered we'll use a stop loss at $59.90. Our initial target is $67.50.

Trigger @ 62.25

- Suggested Positions -

Buy the Apr $65 call (BWA1419D65)

03/05/14 corrected some numbers on the entry point, target and stop loss.
Use a trigger @ 62.25. Use a stop at $59.90. Target 67.50


Entry on March -- at $---.--
Average Daily Volume = 2.0 million
Listed on March 04, 2014

Chicago Bridge & Iron - CBI - close: 84.30 change: -1.06

Stop Loss: 80.90
Target(s): 89.50
Current Option Gain/Loss: -10.7%
Time Frame: 4 to 6 weeks
New Positions: see below

03/08/14: CBI saw some profit taking on Friday. Shares erased Thursday's gains with a -1.24% decline. Technically the move has created a bearish engulfing candlestick reversal pattern. More conservative traders might want to raise their stop loss closer to the simple 10-dma, currently near $83.14. I am not suggesting new positions at this time.

Earlier Comments:
Our target is $89.50. More aggressive investors could aim higher since the Point & Figure chart for CBI is bullish with a $111 target.

- Suggested Positions -

Long Apr $85 call (CBI1419D85) entry $2.80

03/04/14 triggered @ 84.50


Entry on March 04 at $84.50
Average Daily Volume = 1.16 million
Listed on March 01, 2014

Centene Corp. - CNC - close: 63.43 change: +0.60

Stop Loss: 61.75
Target(s): 67.75
Current Option Gain/Loss: -52.0%
Time Frame: 3 to 4 weeks
New Positions: see below

03/08/14: CNC managed a bounce and showed some relative strength on Friday with a +0.95% gain. I want to remind readers that we only have two weeks left on March options. I am not suggesting new positions at this time.

Earlier Comments:
Our target is $67.75. More aggressive investors may want to aim higher since the Point & Figure chart for CNC is bullish with a $78 target.

- Suggested Positions -

Long Mar $65 call (CNC1422C65) entry $1.25

03/01/14 new stop loss @ 61.75
02/24/14 triggered @ 63.60


Entry on February 25 at $63.60
Average Daily Volume = 656 thousand
Listed on February 24, 2014

Facebook, Inc. - FB - close: 69.80 change: -1.04

Stop Loss: 68.40
Target(s): 77.50
Current Option Gain/Loss: Unopened
Time Frame: exit prior to April expiration
New Positions: Yes, see below

03/08/14: FB has produced a two-day dip back toward what could be short-term support near $70.00 and its 10-dma. More aggressive traders may want to consider buying calls now. I am adjusting our trigger to buy calls from $71.25 down to $70.75.

More conservative traders may want to wait for a breakout past $72.00 (a new high) before initiating positions. If triggered our multi-week target is $77.50. Investors may want to aim higher. The Point & Figure chart is very bullish with a long-term target of $110.

Trigger @ 70.75

- Suggested Positions -

Buy the Apr $75 call (FB1419D75) current ask $1.79

03/08/14 adjust entry trigger from $71.25 down to $70.75


Entry on March -- at $---.--
Average Daily Volume = 58 million
Listed on March 06, 2014

Intl. Flavors & Fragrances - IFF - close: 95.30 change: +0.07

Stop Loss: 92.80
Target(s): 99.50
Current Option Gain/Loss: +40.0%
Time Frame: 4 to 6 weeks
New Positions: see below

03/08/14: IFF has spent the last three days consolidating sideways along the $95.00 level. More conservative traders may want to raise their stop closer to $95.00 or closer to the 10-dma currently at $93.92. Tonight I am adjusting our stop loss to $92.80.

- Suggested Positions -

Long Apr $95 call (IFF1419D95) entry $1.50

03/08/14 new stop loss @ 92.80
03/04/14 new stop loss @ 92.40
02/28/14 triggered @ 93.65


Entry on February 28 at $93.65
Average Daily Volume = 410 thousand
Listed on February 27, 2014

Lockheed Martin - LMT - close: 166.57 change: -0.27

Stop Loss: 159.90
Target(s): 169.75 & 174.75
Current Option Gain/Loss: +11.9%
Time Frame: exit prior to April option expiration
New Positions: see below

03/08/14: LMT is holding up reasonably well. I am growing concerned with its upward momentum stalling in the last couple of days. Shares have been churning sideways in the $166-168 zone. Combine that with the February peak near $168 and this is starting to look like a short-term bearish double top pattern. I am not suggesting new positions at this time.

We have two different targets. Our conservative target is $169.75. Our more aggressive target is $174.75. FYI: The Point & Figure chart for LMT is very bullish with a $221 target.

- Suggested Positions -

Long Apr $165 call (LMT1419D165) entry $4.20

03/04/14 triggered @ 164.35


Entry on March 04 at $164.35
Average Daily Volume = 2.3 million
Listed on March 03, 2014

Rock-Tenn Co. - RKT - close: 112.57 change: -0.05

Stop Loss: 109.65
Target(s): 119.50
Current Option Gain/Loss: -17.7%
Time Frame: 4 to 6 weeks
New Positions: see below

03/08/14: RKT dipped to short-term technical support at its 10-dma and bounced on Friday. I've been suggesting that RKT could dip toward $111.00 and the low on Friday was $111.00. Traders can use this move as a new entry point to buy calls.

Earlier Comments:
Our target is $119.50. FYI: The Point & Figure chart for RKT is bullish with a $129 target.

- Suggested Positions -

Long APR $115 call (RKT1419D115) entry $3.10*

03/04/14 new stop loss @ 109.65
03/04/14 triggered on gap higher at $113.35, trigger was 112.00
*option entry price is an estimate since the option did not trade at the time our play was opened.


Entry on March 04 at $113.35
Average Daily Volume = 809 thousand
Listed on March 01, 2014

Rockwell Automation - ROK - close: 124.72 change: +1.26

Stop Loss: 121.75
Target(s): 125.00
Current Option Gain/Loss: +61.7%
Time Frame: 3 to 6 weeks
New Positions: see below

03/08/14: ROK displayed some relative strength on Friday with a +1.0% gain but only hit an intraday high of $124.78. Our target is to exit at $125.00. More aggressive traders could aim higher but ROK is facing a trend line of resistance.

Please note our new stop loss at $121.75.

- Suggested Positions -

Long APR $125 call (ROK1419D125) entry $1.70

03/08/14 new stop loss @ 121.75
03/04/14 adjust exit target to $125.00
03/01/14 new stop loss @ 119.40
02/27/14 new stop loss @ 118.75
02/25/14 triggered @ 121.25


Entry on February 25 at $121.25
Average Daily Volume = 1.1 million
Listed on February 22, 2014

Constellation Brands Inc. - STZ - close: 83.91 change: +0.06

Stop Loss: 81.45
Target(s): Target for March calls @ $84.50
Target(s): Target for April calls @ $88.00
Current Option Gain/Loss: Mar$80c:+123.5% & Apr$80c: +66.6%
Time Frame: 6 to 8 weeks
New Positions: see below

03/08/14: STZ eked out a very small gain as shares consolidated sideways below the $84.00 level. Please note that I am adjusting our exit strategy.

I am suggesting we exit our March $80 calls if STZ hits $84.50, which could happen soon. We will move the exit target on our April calls to $88.00.

I am moving our stop loss to $81.45.

- Suggested Positions -

Buy the MAR $80 call (STZ1422C80) entry $1.70

- or -

Buy the APR $80 call (STZ1419D80) entry $3.30

03/08/14 new stop loss @ 81.45
move the target to exit the March calls to $84.50
move the target to exit the April calls to $88.00
03/01/14 new stop loss @ 79.65
02/25/14 new stop loss @ 78.75
02/22/14 new stop loss @ 77.80
02/18/14 new stop loss @ 77.40
02/13/14 new stop loss @ 76.40
02/12/14 triggered @ 79.00


Entry on February 12 at $79.00
Average Daily Volume = 1.5 million
Listed on February 11, 2014

Domtar Corp. - UFS - close: 110.32 change: -0.12

Stop Loss: 108.45
Target(s): 118.00
Current Option Gain/Loss: -28.5%
Time Frame: 4 to 6 weeks
New Positions: see below

03/08/14: UFS is struggling to build on any breakout higher. Friday saw shares fail near their Thursday intraday highs. I am adjusting our stop loss to $108.45. I am not suggesting new positions at this time.

Earlier Comments:
Our target is $118.00. The Point & Figure chart for UFS is bullish with a $135 target.

- Suggested Positions -

Long APR $115 call (UFS1419D115) entry $2.10*

03/08/14 new stop loss @ 108.45
02/28/14 triggered @ 110.50
*option entry price is an estimate since the option did not trade at the time our play was opened.


Entry on February 28 at $110.50
Average Daily Volume = 817 thousand
Listed on February 26, 2014

Vulcan Materials - VMC - close: 68.85 change: +0.86

Stop Loss: 66.25
Target(s): 74.50
Current Option Gain/Loss: -19.1%
Time Frame: 4 to 6 weeks
New Positions: see below

03/08/14: VMC delivered a bounce right on cue. Traders could use this move as a new entry point. More conservative traders might want to adjust their stop loss closer to $67.00.

- Suggested Positions -

Long APR $70 call (VMC1419D70) entry $2.35*

03/04/14 triggered on gap higher at $69.31. Suggested trigger was $68.75
*option entry price is an estimate since the option did not trade at the time our play was opened.


Entry on March 04 at $69.31
Average Daily Volume = 1.1 million
Listed on March 03, 2014

PUT Play Updates

Green Mountain Coffee Roasters - GMCR - cls: 106.00 chg: -1.12

Stop Loss: 112.25
Target(s): 101.00
Current Option Gain/Loss: +120.9%
Time Frame: Exit prior to March option expiration
New Positions: see below

03/08/14: Shares of GMCR continued to underperform on Friday with another -1.0% decline. Shares are now down two weeks in a row. Our put option has more than doubled and traders may want to take some money off the table. I am not suggesting new positions at this time. The simple 10-dma has fallen to $112.00. We will move the stop loss to $112.25.

Earlier Comments:
GMCR can be a volatile stock so we consider any trades to be more aggressive and higher risk. Use small positions to limit risk.

*small positions* - Suggested Positions -

Long MAR $110 PUT (GMCR1422o110) entry $2.58*

03/08/14 new stop loss @ 112.25
03/06/14 our put has doubled in value. Traders may want to take some money off the table.
03/05/14 new stop loss @ 113.55
03/01/14 new stop loss @ 115.05
02/27/14 triggered @ 114.65
*option entry price is an estimate since the option did not trade at the time our play was opened.


Entry on February 27 at $114.65
Average Daily Volume = 6.7 million
Listed on February 26, 2014

The ExOne Company - XONE - close: 44.92 change: +1.74

Stop Loss: 46.35
Target(s): 40.25
Current Option Gain/Loss: -21.2%
Time Frame: exit PRIOR to earnings on March 19th
New Positions: see below

03/08/14: XONE surprised us with a bounce on Friday. The stock surged +4.0%, which reversed a big chunk of Thursday's -4.7% decline. What makes XONE's decline even more surprising is that its peers were sinking on Friday. The rebound is most likely a reaction to Thursday's news of XONE's acquisitions.

It is worth noting that the bounce in XONE stalled in the $45.00-45.25 area and below its 30-dma, which has been recent resistance. I would wait for a drop under $44.20 before considering new bearish entry points.

Earlier Comments:
I do consider this an aggressive, higher-risk trade. The 3D printing stocks can be very volatile. Furthermore XONE has very high short interest. The most recent data listed short interest at 43% of the very, very small 7.9 million share float. That raises the risk of a short squeeze. This trade also has a short time frame. XONE is scheduled to report earnings on March 19th. We do not want to hold over the report. That gives us about two weeks.

*Small Positions - Aggressive Trade*

Long MAR $40 PUT (XONE1422o40) entry $1.08

03/06/14 triggered @ 44.40


Entry on March 06 at $44.40
Average Daily Volume = 444 thousand
Listed on March 05, 2014


Rockwell Collins Inc. - COL - close: 82.18 change: -0.17

Stop Loss: 81.75
Target(s): 89.50
Current Option Gain/Loss: Unopened
Time Frame: exit prior to April expiration
New Positions: see below

03/08/14: COL is not cooperating with us. The stock reversed at $84.00 three days ago and has continued to underperform. Our trade has not opened yet. We're removing COL as an active candidate.

Trade did not open.

03/08/14 removed from the newsletter. suggested trigger was $84.15


Entry on March -- at $---.--
Average Daily Volume = 915 thousand
Listed on March 04, 2014

Imperva Inc. - IMPV - close: 61.05 change: -4.48

Stop Loss: 61.40
Target(s): 68.00
Current Option Gain/Loss: -19.1%
Time Frame: exit prior to March option expiration
New Positions: see below

03/08/14: Friday proved to be a rough day for IMPV. The stock plunged from $66.25 on Friday morning to $60.15 before bouncing and settling with a -6.8% decline. I didn't see any news that might explain this sudden weakness. Our stop loss was hit at $61.40.

- Suggested Positions -

MAR $60 call (IMPV1422c60) entry $3.40* exit $2.75** (-19.1%)

03/07/14 stopped out
03/06/14 new stop loss @ 61.40
Traders may want to take profits now to lock in potential gains!
02/26/14 new stop loss @ 59.75
02/22/14 new stop loss @ 58.65
*option entry price is an estimate since the option did not trade at the time our play was opened.
02/21/14 triggered @ 60.50


Entry on February 21 at $60.50
Average Daily Volume = 264 thousand
Listed on February 18, 2014

Perrigo Co. - PRGO - close: 164.48 change: +0.59

Stop Loss: 162.75
Target(s): 169.50
Current Option Gain/Loss: -17.1%
Time Frame: Exit prior to March option expiration
New Positions: see below

03/08/14: PRGO continued to sink on Friday morning and hit our stop loss at $162.75 before bouncing back into positive territory.

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

*small positions* - Suggested Positions -

MAR $165 call (PRGO1422C165) entry $3.20 exit $2.65* (-17.1%)

03/07/14 stopped out
*option exit price is an estimate since the option did not trade at the time our play was closed.
03/05/14 new stop loss @ 162.75
02/26/14 triggered @ 162.50


Entry on February 26 at $162.50
Average Daily Volume = 1.3 million
Listed on February 25, 2014