Option Investor

Daily Newsletter, Saturday, 3/15/2014

Table of Contents

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

Market Wrap

Market Quiet Ahead of Crimea Show Vote

by Jim Brown

Click here to email Jim Brown

The market continued its slide for the week but on Friday there was no rush to sell.

Market Statistics

When is a vote not a vote? The referendum on Sunday in Crimea is not a vote. It is a dog and pony show orchestrated by Russia to legitimize their takeover of Crimea. The outcome of the vote is not in doubt since there is no way to vote no.

The ballot has only two questions. The only possible answer to each question is yes.

1. Do you support Crimea joining the Russian Federation as a federal subject?

2. Do you support the restoration of the 1992 Crimean Constitution and Crimea's status as part of the Ukraine?

The only answer allowed is yes and you can only vote for one option. If both options are selected the ballot will be discarded. If no options are selected the ballot will be discarded. The ballots have a box where the voter is to place their X. Anything else in the box voids the ballot.

The option to support the restoration of the constitution is a vote to join Russia because that constitution allows the parliament to vote to join Russia and they already voted to join Russia two weeks ago. The "Crimea's status as part of the Ukraine" is a trick phrasing of the question.

There is no option to vote to remain as part of Ukraine or keep the status quo so the only outcome of the vote is to join Russia.

Crimean Ballot Link to full ballot

This means the vote is for show only and means nothing. None of the major powers will recognize the outcome but it will not matter. Sometime next week Putin will make a big show of welcoming Crimea into the Russian Federation for the benefit of the world's low information citizens. "Crimea just voted to join Russia. They got to vote on it. What was all the fuss about?"

The U.S. and EU will begin to enact their limited sanctions, which will be the equivalent of a slap on the wrist and the world will go on. What will change is the military posturing in the former Russian satellite nations that have not yet been invaded by Russia. Additional NATO forces are already moving into these areas as a warning to Russia not to try this again elsewhere. It is a bluff and Putin knows it. He can do whatever he wants and like Crimea nobody will do anything about it but gripe and moan.

Armstrong Economics posted this graphic on the web on Friday.

The markets were weak on Friday because of the "certainty" of the vote and the "uncertainty" of what will happen in the EU and at the G7 meeting on Monday. The G7 nations will have to say something and maybe threaten to take some economic action or risk becoming even more irrelevant on the issue.

The economics on Friday did not give the market any reason to rally. The Consumer Sentiment for March fell from 81.6 to 79.9 and a four month low. Analysts were expecting a rise to 82.0. The present conditions component rose from 96.4 to 96.1 but the expectations component fell from 72.7 to 69.4, also a four month low.

Analysts quickly tried to blame it on the weather but that does not compute since the expectations component looks ahead into warmer weather and it dropped. The current conditions component rose in spite of the severe winter storms over the survey period.

Blaming everything on the weather is simply denial over the declining economic numbers.

The Producer Price Index (PPI) saw prices fall for the first time in three months with a -0.1% drop compared to the +0.2% gain in January. This brings year over year growth in producer prices to a very slow +0.9% rate. There is definitely no inflation present in the system.

Core goods prices rose +0.2% but services prices fell -0.3%. This indicates a lot of excess capacity in the services sector and companies are cutting prices to compete. The weakness in the top line number is even more surprising since energy prices rose +0.5%, up from +0.3% in January as a result of the surge in natural gas prices and foods rose +0.6% thanks to higher meat and dairy prices.

Analysts said the weak internals in the report suggested further weakness in the months ahead and even slower inflation growth.

The calendar for next week will focus on the FOMC announcement on Wednesday. This is the first meeting under Janet Yellen's control and her first press conference. Nobody expects any change in the plan but the Fed should at least acknowledge the weak economic numbers so far in Q1. You can bet Yellen will be quizzed on her plans from every angle. I am sure she will stick to the script that the Fed is data dependent and the taper will continue on schedule unless the data changes dramatically. The Consumer Price Index is due out on Tuesday so the Fed will have the latest inflation data at the consumer level when making their taper decision.

The Philly Fed Manufacturing Survey on Thursday is also going to be key. It is the first major regional manufacturing report for March and it fell into contraction territory last month. The Philly headline number has fallen from a cyclical peak at 20.0 in September to -6.3 for February. The -15.7 point decline in February was the largest monthly decline since the 1970s. New orders have declined for four consecutive months and are now in contraction territory. Any further decline in the headline number would be negative for the market and any decent rebound would be positive.

Friday is also the quadruple witching option expiration and that normally produces market volatility in the days prior. However, with the volatility we saw last week those expiring March positions may have already been liquidated.

Gold rose to a seven month high at $1,381 on worries over a potential military confrontation in the Ukraine, sharply declining economics in China, the weak economy in the U.S. and the increasingly violent riots in Venezuela with the government blaming everything on the USA.

In the Ukraine Putin continues to amass large numbers of tanks on the Ukraine border despite saying he has no plans to invade the Ukraine. The last three major economic numbers from China have been seriously negative. The Chinese leader said on Friday something to the effect of "Don't be alarmed if the Q1 GDP comes in below our target" and "this year's challenges are severe." That was a clear signal that additional bad news is just around the corner. The building credit crisis in China could eventually develop into their "Bear Stearns moment" according to Art Cashin. If forced liquidations snowball because of the multiple loans on existing collateral it could get really ugly.

The U.S. economics continue to disappoint but analysts tell us to blame it on the weather. If the weather improves and the economics don't then Crimea will be the least of our problems. In Venezuela the government is claiming the U.S. is funding the violent protests and said anyone receiving money from outside Venezuela would be prosecuted. When things are not going well for the people in power a tried and true tactic is to create an outside entity to blame it on. This builds nationalistic pride and deflects from the true problems at home. Maduro is simply taking a page out of the Hugo Chavez play book by claiming the U.S. is trying to overthrow his government in an attempted coup. Iran does this all the time. They hold anti U.S. rallies in Tehran to keep the people focused on their hatred for the U.S. and Israel and not on the 26% inflation, 24% unemployment and shortages of all kinds of food and goods.

Russian forces now bearing down on the Ukraine despite Putin's claim he is not going to invade. Does anyone actually expect him to tell us ahead of time? Secretary Kerry says the U.S. and Europe have prepared "contingencies" in case Russia moves into the Ukraine. Really, contingencies? Is Europe going to quit buying caviar?

(Map from Zerohedge.com)

The following are images of tanks and military vehicles heading for the Ukraine border last week. Does this look like Putin has no interest in invading the Ukraine? The U.S. has issued a travel alert for U.S. citizens going to Russia warning of "potential military clashes either accidental or intentional." On Friday Putin again declared his right to invade the Ukraine to protect Russian citizens and compatriots. "Russia is aware of its responsibility for the lives of compatriots and fellow citizens in Ukraine and reserves the right to take people under its protection"

Russian airlines Aeroflot and S7 have both changed their air routes last week to avoid Ukraine's airspace. Did Putin give them advance warning of coming events?

Putin may have given everyone a preview of the future when he started deporting executives for minor offenses in 2014. Since year end he has cancelled work visa and deported more than 1,000 executives for offenses like jaywalking, parking tickets, smoking in prohibited areas, etc. The CEO of Deloitte & Touche was arrested when he arrived at an airport, kept in a cell overnight before being deported for a speeding ticket. Was Putin planning in advance for his new post Sochi initiatives?

The yield on the ten-year treasury is barely holding above the critical 2.6% level, which has been support for the last two months. The high yield last week was 2.82% so the rush into treasuries over the last several days is clearly evident.

The European markets fell an average of -3.3% for the week and the biggest decline since June. Germany saw the biggest drop since November 2011 and the Dax is at 5-month lows. Russian stocks are down -22% since February 18th and the yield on their 10-year bonds has risen to nearly 10%. If anything is going to put Putin's aggression on hold it is the crash in their market. His rich friends are losing millions in the market. However, it appears some of them had advance warning. Viktor Zubkov, chairman of Russia's energy giant Gazprom, dumped his entire stake in the company just a week before Putin invaded Crimea. Gazprom shares have fallen -25% since the invasion.

There was a record drop in U.S. treasuries held in trust by the Federal Reserve of $104 billion last week. These treasuries are held in trust for foreign central banks by the Fed. Russia had $138.6 billion in U.S. treasuries at the end of December. Analysts are speculating the drop in the trust accounts was the removal of those treasuries by Russia. They also believe Russia simply moved those assets rather than sold them because that amount would have dramatically impacted the treasury market. Previously the largest drop on record was in June at -$32 billion after the Fed said it was going to begin reducing QE.

European banks are reporting a run on the Euro. Russians are reportedly withdrawing large sums of money in cash using the Euro rather than the dollar because the Euro has 500 Euro bills and the dollar is limited to $100 dollar bills. Some banks have limited the amount of withdrawals. In the U.S. some banks have limited the amount of wire transfers overseas to $2,000.

Remember when the BRICs were the hot thing in the investment world. That was Brazil, Russia, India and China. If you owned them in 2014 your net worth is dropping like a brick. Russia is down -22%, Brazil -13%, China down -5% and India is barely positive at +3%.

Friday was pretty quiet after the big downdraft on Thursday. The Dow lost -387 points for the week but only 43 of those were on Friday. The momentum stocks are still losing ground amid talks of a new correction. Biotechs are the biggest losers after being up +31% year to date. Those gains have collapsed to leave them up "only" 17% for the year. That is still a respectable showing despite a -14% decline over the last two weeks.

Green Mountain Coffee Roasters (GMCR) reversed its -$20 decline over the last month with a +7 gain on Friday. The initial spike came after GMCR announced a revised agreement with Starbucks (SBUX) that improves the deal for both companies and allows Starbucks to expand its K-cup offerings and varieties. Starbucks can now sell K-cups with beverages other than coffee. SBUX shares were up early but ended the day with a fractional loss.

GMCR shares rallied again in afterhours after S&P said it was adding them to the S&P-500. Shares rallied from the $113 close to $116.

Liberty Media (LMCA) withdrew its offer for Sirius XM (SIRI) for $10.4 billion and decided to create two tracking stocks for two of their asset classes. The Liberty Media Group tracking stock will trade under the symbol LBRDA and the Liberty Broadband tracker will trade as LRBDB. Liberty Media will represent their remaining position in Sirius XM, Live Nation Entertainment (LYV), Barnes and Noble (BKS) and other media assets. Liberty Broadband will represent their stake in Charter Communications (CHTR), Time Warner Cable (TWC) and GPS tracking company TruePosition. Shareholders in LMCA will receive 1 share of LBRDA and 4 shares of LRBDB for each share of LMCA they own. Shareholders will also receive a subscription right to acquire one additional share of series A or B of Liberty Broadband for each five shares received as part of the distribution. The rights offer the extra stock at a discount and will have an expiration date.

Liberty said the $340 million of Sirius XM shares they had under the agreement with Sirius would be sold. Liberty will receive $3.64 for each of those shares. Sirius had put its share buyback plan on hold pending a resolution of the Liberty offer and now they can restart that process. Liberty had previously offered to pay $3.86 per share of SIRI using a non-voting class C share of Liberty Media. By acquiring all the shares Liberty did not already own they expected to increase their financial leverage and "strategic flexibility" as claimed in the press release. However LMCA shares had collapsed since the takeover plan was announced. Shares of LMCA spiked +9 on the tracking stock news. Analysts said the moves could be a prelude to a spinoff of these assets.

Aeropostale (ARO) fell to an 11-year low at $5.83 after posting lower than expected earnings and warning that Q1 forecasts were bleak. The company said it was closing 50 of its 980 stores. The company posted a loss of -35 cents per share and said it also expects losses in Q1, which will be the sixth consecutive quarter of losses. Q4 sales declined -16%. The company said it was exploring all options including going private. The company said PE firm Sycamore Partners was providing $150 million in additional capital and boosting its stake in Aeropostale to 12%.

Meanwhile Ann Inc (ANN) reported Q4 earnings of 10 cents and record full year earnings of $2.19 despite "tepid" consumer spending in Q4. The company operates the Ann Taylor and Loft store chains. The company guided to sales growth of low single digits in 2014 to $2.615 billion with gross margin at 54%. They expect to have 50 new stores, 30 store closures and end the year with 1,045 stores. ANN shares rallied +8% on the news. ANN is one of a very few select retailers that actually performed in Q4.

Castlight Health (CSLT) went public on Friday and saw a nice gain. The stock was initially targeted at $9-$11 in the initial IPO documents, rumored at $13 but priced at $16 and opened at $37.50. The stock traded as high as $41.95 and closed at $40. Apparently we have gone back in time to the dot.com days of stock valuation. The company offered 11.1 million shares and raised $184 million and gave the company a valuation of $1.4 billion. The spike to $40 at the close pushed their market cap to nearly $3.5 billion. The catch here is that Castlight only had 2013 sales of $13 million and no profits. In lost -6.28 per share in 2013.

The company is in the right sector for over pricing with its product a cloud based service for managing employee healthcare. They just need to make some money to justify their sky high valuations. The reason Castlight shares found such an audience is that they have amassed a portfolio of high profile clients including Walmart, Microsoft and CVS Caremark to name a few. They have 24 customers in the Fortune 500. They must be doing something right. I noticed these were Class B shares but I could not find any reference to Class A. I am betting Class B shares are missing some benefit like voting rights.

Mr. President, the Zuck is on the phone. Mark Zuckerberg called President Obama to complain that "breaches in internet security by the U.S. Government is damaging all of our future." Zuckerberg said obtrusive NSA surveillance is a disservice to Facebook's mission to connect. "If we can't trust the medium that connects us, is the medium threatened?"

Zuckerberg explained that Facebook had to put engineering resources to work to protect Facebook users from the government. "I've been so confused and frustrated by the repeated reports of the behavior of the US government. When our engineers work tirelessly to improve security, we imagine we're protecting users against criminals, not our own government."

Zuckerberg said after speaking with Obama "it seems like it will take a very long time for true full reform." In a blog post after his conversation with Obama he said, "So it's up to us -- all of us -- to build the Internet we want. Together, we can build a space that is greater and a more important part of the world than anything we have today, but is also safe and secure. I'm committed to seeing this happen, and you can count on Facebook to do our part." It sounds like he did not get much sympathy from the president.

Despite the Zuck going to battle for his users the shares of Facebook (FB) declined another $1 to close at $67.71.

Yahoo (YHOO) got some good news last week when Alibaba said it was working with a New York law firm in preparation for an IPO in the USA rather than Tokyo. By listing in the U.S. Alibaba will attract more buyers since very few investors want to go through the hassle of setting up an account that can trade stocks in Tokyo. Yahoo owns a 24% stake in Alibaba. Assuming Yahoo were to sell its stake in the IPO the company would net about $9.3 billion after tax assuming the $150 billion valuation on Alibaba. Yahoo would also retain nearly a $20 billion stake based on prior comments from the company. Yahoo has said they would use the proceeds for share repurchases.

I think Yahoo shares have already priced in the IPO but as we near the announcement date, rumored to be in April, they will probably tick higher. The actual IPO could be a sell the news event because there are no immediate plans to spend the money on share buybacks. Yahoo's board will probably consider their options, decide where they want to invest and then buy back shares with the rest. This could take months.

On April 2nd Google will finally split its stock. Current owners of Class A or B shares will receive a Class C share for each share they own. The Class C shares carry no voting rights. The Google founders announced this in 2012 and were sued by shareholders on the non-voting change. Shareholders felt a split of their existing A shares should carry voting rights on the new shares as well. Sergey Brin and Larry Page own the B shares which carry 10 times the voting power of the A shares. The founders said they were splitting the stock in this way to preserve their control and vision for the company. They claimed employee stock options and normal use of stock in acquisitions, etc, were diluting their ownership position. They propose to shift normal trading to the C shares and remove the A shares from active use.

S&P had to change the way they handle splits as a result of the class change. The new C shares will be added to the S&P-500 and 100 without removing the A shares. For a short time it will be the S&P-501 and S&P-101 with two shares in the index for Google. The indexes will still have 100/500 stocks but one company will have two different listings. Later, on June 20th the A shares will be removed from the indexes. It is unclear how Google will deal with the remaining A shares in the market. In theory they could slowly exchange A shares for C shares but that would be a logistical nightmare and lead to a premium for A shares. GOOG shares are down -$50 over the last six days. It will be interesting to see what they do as the split approaches.

As expected Quiznos has filed for Chapter 11 bankruptcy protection. Quiznos is not a public company. All but 7 of their 2,100 stores are individually owned so there will not be any disruptions at the retail locations. Executives said they had agreed to a restructuring plan that will reduce debt by more than $400 million. They also have a $15 million debtor in possession line of credit to keep the business running until the bankruptcy ends.

The Sbarro pizza chain filed bankruptcy five days ago after it was forced to close 40% of its U.S. locations. The bankruptcy was prepackaged with the agreement of 98% of investors and they will eliminate $140 million or about 80% of its debt. This is their second bankruptcy in less than three years. They closed 155 stores in February leaving them with 220 U.S. stores and 600 franchise locations in 40 countries.


It was not a good week in the markets. The Dow lost nearly -400 points, the Nasdaq more than -90 and the S&P -17. The Dow was the biggest loser at -2.35% and the Russell 2000 the smallest at -1.82%. I wrote on Tuesday night that I would be hesitant to buy any further dip unless we reached the 1,840 level on the S&P-500. We closed Friday at 1,841. That is close enough for me and I expect a rebound on Monday. However, as we all know we will be at the mercy of the weekend headlines from China and the Ukraine.

The S&P has given back -41 points since the high at 1,882 on Tuesday. That is a pretty good dip and my positions are feeling the pain but in the greater scheme of things it is just a pothole. The real damage would come on a breakdown of that support at 1,840. The bears would gain confidence and the bulls would run for the sidelines on a dip below that level.

If support at 1,840 really broke the next material level is about 1,775. There are some speed bumps along the way but real support is significantly lower at 1,740. I have no reason to expect a decline of that magnitude but the market does not always need a reason. The 50-day average at 1,829 could be one of those speed bumps of support.

The 100-day is currently 1,808 and if we go that far I would expect 1,800 to be tested. The 100-day has been support for the last year but it has been pierced briefly every time. I have to warn you that the MACD and RSI are very negative at this point and suggest we are going lower. They can reverse in a heartbeat if headlines reverse the market decline but today, just based on the chart, I would be cautious.

The Dow broke below support at 16,100 at the close and that setup a test of round number support at 16,000 for Monday depending on the events in Crimea. A break of 16,000 could see another leg down to 15,700 or even lower. The Dow was not materially negative on Friday and traded near the flat line late in the afternoon. There were not a lot of sellers but just no buyers although there was a lot of sell on close orders on the NYSE. Obviously some investors wanted out before the weekend just in case fighting broke out in the Ukraine.

The Nasdaq is also on the verge of breaking down if support at 4,245 fails. There is not much in the way of additional support until the 4,000 level except for a speed bump at 4,100 and the 100-day average. However, that 100-day has been solid support for the last year.

The Nasdaq is being dragged lower by the losses in the biotech sector and the decline in the momentum names. However, as I showed in the Google chart earlier it is down over $50 in the last six days. This is symptomatic of a lot of the high dollar Nasdaq names. There is some definite profit taking underway.

Note the names in the biggest loser list below. This is a who's who of the Nasdaq big gainers over the prior month.

Surprising everyone on Friday was a strong gain by the Russell 2000. Not only has it declined less than the other indexes for the week but it was the only major index to post a gain on Friday. In a normal market this would be a screaming buy signal but this is not a normal market. With the headlines out of the Ukraine, China and Malaysia along with the weak U.S. economics you would think investors would be exiting small cap stocks. Seeing fund managers buy small caps suggests they are positioning themselves for a post Crimean vote rebound. Let's hope it comes to pass.

The Russell still has another level of support to break at 1,165 before reaching free fall mode.

Despite the negativity in the markets more than 79% of S&P-500 stocks are still over their 200-day average. The number is declining but not near the levels we saw in the January decline. Of course the 200-day is a long term average. More than 67% are still over the 50-day and that number fell to 25% in January.

While the charts are setting up bearish we need to see that last line of support break before the trend is confirmed. So far it is just a dip and not a drop. Even though this has been headline related that does not mean it can't morph into a real correction. Don't get married to your positions and don't let your bias overwhelm your sense of capital preservation.

When you need expert advice on a position ask your kids. Seriously. The right age is about 8 years old. Show them a chart and without any prompting ask them if the stock is going up or down. More than 90% of the time they will get it right. Kids have no bias. It is just a chart. Compare that to your bias. We look at a stock with all the knowledge of our advanced years and experience and we look at the candles and see earnings, forecasts, analyst recommendations, news headlines, etc. We are confused by the multitude of facts. They just see a chart.

I have readers email me all the time saying I am long/short XYZ stock and it just keeps going against me and I would like your opinion on my position. I also have positions that I wish I did not have because my bias kept me in the trade when my grandson would have told me I was wrong. We all do it to some extent. At least most men do it. I have found that women are far better in exiting positions. For some reason their bias ends when the position turns to a loss. They don't continue holding a losing position.

Whatever your bias for next week I suggest your discard it. Trade what you see not what you want to see. The S&P support at 1,840 is a critical line in the sand. If we move higher look for long trades. If we move lower look for short trades. It is not rocket science. Ask an 8 year old.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"Don't delay! A good plan, violently executed now, is better than a perfect plan next week. War is a very simple thing, [like stock trading] and the determining characteristics are self-confidence, speed, and audacity."
General George S. Patton


Index Wrap

Correction Continues

by Leigh Stevens

Click here to email Leigh Stevens

As noted last week, the Nasdaq Composite (COMP), which has been 'leading' the Market mostly for months, was hitting some technical resistance and a further pullback was anticipated. The pullback was not huge on the week, but it was significant; just not quite as much as the start of a 3-week correction that began in late-January.

For the first time since June of last year bullish sentiment fell considerably this past week. It seems that trader's and investors have 'discovered' (duh!) that stocks have downside risk as well as unrelenting upside potential. The recent increase in trader bearishness (a drop in equities call volume relative to puts) bodes well for a correction bottom. A rebound becomes somewhat more likely as we get out of the common seasonal doldrums of March. Beware the "Ides of March"!? RETRACEMENTS:

I've noted the common 38 and 50 per cent Fibonacci retracements on my charts that follow, as measured from the last downswing low (early-Feb.) to the rally high around 3/4/14. Only the Dow 30 (INDU) has to date retraced as much as 38% or its last upswing.

38% tends to be a 'minimal' retracement amount and strong stocks and indices often don't retrace more than this. 50% is a common retracement for a stock or index that's having 'average' gains within a bull market.

An index or stock that's lagging the overall market will sometimes see a Fibonacci 62% retracement. INDU had a correction of this magnitude in the late-January to early-February downside sell off; I've noted what would hit that deeper (62%) correction amount (just) on the Dow chart.

I don't have a strong take on where our current correction might end, but if the current weakness in the major indices retraces around 50% of the last advance, gets to an oversold reading with the 13-day RSI and if bullish sentiment continues to drop, I would be primed for an upside reversal ahead.

The aforementioned conditions don't have to occur to 'signal' an upside reversal, or 1-2 may. My most favored condition to establish a bullish position after a pullback still within a dominant bullish trend, is when the indexes get 'fully' oversold and/or experience key upside reversals; e.g., a fall to a new low, sometimes a decisive new low, followed by a strong rebound that exceeds the prior 1-2 days high(s).

VIX, the S&P 500's implied volatility gauge has jumped recently to 18. VIX daily readings in the 20-21 zone tend to mark areas where corrective lows tend to occur.



The S&P 500 (SPX) index is in a short-term bearish correction within an overall bullish uptrend. The dominant trend remains up/bullish, and the extent of a further decline in SPX looks to at most to somewhere between 1830 and 1800, the two levels highlighted (with the green up arrows) as anticipated technical supports. I'm not anticipating another decline to as low as SPX's up trendline at this juncture.

As noted in my initial 'bottom line' comments, bearish sentiment as increased or I could state the reverse in that bullishness has fallen off after being on the high side for weeks and months. On a contrary opinion basis, this is an indication that the current correction may not go on for an extended period. March tends to see some givebacks of prior gains from early in the year.

Near resistance is seen at recent highs in the 1880 area; next resistance in the 1907-1910 area is implied by the upper end of the uptrend channel that I'm working with currently for SPX.


The S&P 100 (OEX) chart is bullish but a short-term bearish correction has developed recently. OEX could get back to 807, at the 38% correction level or to 800, which would be a 'nominal' 50% retracement of the prior advance.

785 should offer significant technical support, at the current intersection of OEX's up trendline. The overall trend is bullish as long as the prior 770 low is not pierced and exceeded.

To get this rally in gear again would require recent highs in the 830 area to be penetrated, with support then showing up on any subsequent pullbacks to this area. I've calculated next OEX resistance as coming in around 842.

Downside momentum is seen in the Relative Strength Index (RSI) indicator chart. If OEX should get 'fully' oversold again, as suggested by RSI readings in the 35-30 zone, I'd be looking at any time for an key upside (price) reversal to suggest getting into bullish positions.


Within an overall bullish trend, the Dow 30 (INDU) chart shows the short-term trend as down. This after INDU got into its congestion (resistance) zone in the 16455-16600 area. I could also note near-term resistance at 16300, then at 16400; on the daily chart below I've just highlighted the upper resistance range.

16000 is an initial anticipated support area I've highlighted, with a next key support coming in around 15800.

Of the 30 Dow stocks, we're down to 7, DD, DIS, JPM, MRK, NKE, UNH and V showing still-strong bullish trends and little giveback of prior gains, whereas last week this list included 13 stocks. Not for nothing has the Dow, among the other bellwether or major indices, retraced more of its prior advance; i.e., at just over 38% currently.

If the RSI gets down to the 30 area again and, at that juncture or thereafter, there was a decisive upside price reversal, this pattern would suggest a compelling reason to get into bullish strategies in the Dow Index options.


The Nasdaq Composite (COMP) chart has given back less of its prior gains on a percentage basis than the S&P and also remains bullish on a intermediate and long-term basis. COMP's downside correction came in picture-perfect technical fashion so to speak, as the most recent pullback occurred AFTER the Composite hit resistance implied by the high end of its uptrend channel.

Resistance at this upper channel line is now seen at 4400. Selling pressure/resistance at the recent high is at 4371. Immediate overhead resistance is suggested at 4300.

Near support comes in at 4200 and falls inside the zone that lies between a 38 to 50 percent retracement of COMP's prior upswing. I'd be a little surprised to see MORE than a 50% retracement but have noted a 'lowest' support at 4100, at the current intersection of COMP's up long-standing up trendline.


The Nasdaq 100 (NDX) chart remains overall bullish as it continued to trade within its well-defined long-standing uptrend price channel. The Index is experiencing a short-term bearish pullback. NDX is close to having retraced a Fibonacci 38% retracement of its last advance as highlighted on the daily chart below, which sometimes is about as much retracement as will be seen in the strongly bullish index leaders.

Near resistance is suggested in the 3700 area, extending to recent the recent 3736 intraday high; next resistance looks to then come in around 3800, at the high end of NDX's uptrend channel.

Near support comes in at 3600, more or less at the mid point of the 38 to 50 percent retracement levels relative to the NDX's last run up. Support implied by the 50% retracement level is at 3578. Support suggested by the current intersection of NDX's up trendline is highlighted at 3550.

I'm anticipating a low to this current correction at not more than a dip into the 3600-3580 area. If a key upside reversal (e.g., a new low for the current pullback, followed by a strong rebound to above NDX's prior day's high) occurred, especially if that pattern occurred in conjunction with a 13-day RSI reading at, near or under an 'oversold' 30, I anticipate looking to be in bullish positions such as long April ATM Nasdaq 100 calls.


The Nas 100 tracking stock, QQQ, is bullish on an intermediate to long-term basis but is experiencing a short-term downside/bearish correction. I anticipate a new support coming in around 88 even. Support implied by a 50% correction of the last advance is at 87.5, suggesting support at 88, extending to 87.5. Support in the 86 area is implied by the current intersection of QQQ's support/up trendline.

I anticipate support coming in on a further pullback, especially if the NDX 13-day Relative Strength Index (seen above) got back to the 37-35 area again.

On Balance Volume (OBV) is in a decline but that can of course turn on a time. We don't typically see a big volume spike on an upside price reversal but the OBV line can be expected to turn up.


The Russell 2000 (RUT) is bullish longer-term and bearish on a short-term basis. A bullish turnaround would start to be suggested if RUT rebounded back above near resistance at 1200; resistance then extends to 1210, then to the 1225 area, at the upper channel line.

Near support is anticipated in the 1165-1158 area; support implied by completion of a 50% retracement of RUT's last advance comes in at 1147, with support extending to 1140.

IF the Russell 2000 got into its RSI 'oversold' area again near 35, this kind of low reading could again be associated with an upside reversals at that time or soon thereafter. RUT actually hasn't often seen its 13-day Relative Strength Index in the current bull market get as low as 35, only it did hit such an 'extreme' at the early-February bottom.


New Option Plays

Small Caps & Financials

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)

(bearish ideas)


Russell 2000 ETF - IWM - close: 117.54 change: +0.49

Stop Loss: 115.25
Target(s): TBD
Current Option Gain/Loss: Unopened
Time Frame: exit prior to May expiration
New Positions: Yes, see below

Company Description

Why We Like It:
The IWM is the iShares ETF on the small cap Russell 2000 index. The IWM has only seen a -2.5% pullback from its all-time intraday highs set a few days ago. The IWM was showing relative strength on Friday with a bounce. Currently investors are holding their breath over the vote in Crimea (Ukraine) this weekend. Once the referendum is over and the Russians and Ukrainians do not start shooting at each other then stocks could bounce.

We are suggesting a trigger to buy calls on the IWM at $118.25. We are not setting an exit target yet but keep an eye on the trend line of higher highs. We will start this play with a stop loss at $115.25, just under the March low.

Trigger @ 118.25

- Suggested Positions -

Buy the May $120 call (IWM1417E120) current ask $2.25

Annotated Chart:

Entry on March -- at $---.--
Average Daily Volume = 43 million
Listed on March 15, 2014


State Street Corp. - STT - close: 64.73 change: +0.25

Stop Loss: 65.25
Target(s): 60.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
STT is in the financial sector. The company provides financial services and products to the asset management industry. The stock broke its long-term up trend following a post-earnings sell-off in late January. STT tried to recover but traders started selling the rallies at resistance. Now STT is poised to break below support near $64.00.

I am suggesting a trigger to buy puts at $63.90. If triggered our short-term target is $60.25. More aggressive traders could aim lower. The Point & Figure chart for STT is bearish with a $53 target.

Trigger @ 63.90

- Suggested Positions -

Buy the Apr $65 PUT (STT1419P65) current ask $2.25

Annotated Chart:

Entry on March -- at $---.--
Average Daily Volume = 2.9 million
Listed on March 15, 2014

In Play Updates and Reviews

XONE Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market suffered one of its worst weeks of the year as investors reacted to disappointing economic data out of China and growing tensions with Russia over its invasion of Ukraine and the upcoming Crimea referendum.

XONE hit our bearish target. GMCR hit our stop loss.

Current Portfolio:

CALL Play Updates

Chicago Bridge & Iron - CBI - close: 81.70 change: -0.60

Stop Loss: 80.90
Target(s): 89.50
Current Option Gain/Loss: -53.5%
Time Frame: 4 to 6 weeks
New Positions: see below

03/15/14: CBI closed near its lows for the week with shares forming a short-term, bearish trend of lower highs. If the market continues to sink this week we will likely see CBI hit our stop at $80.90. I am not suggesting new positions at this time. CBI should have support in the $81.00 area but there is no guarantee it will hold.

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: 63.06 change: -0.56

Stop Loss: 61.75
Target(s): 67.75
Current Option Gain/Loss: -80.0%
Time Frame: 3 to 4 weeks
New Positions: see below

03/15/14: CNC also closed near its lows for the week with shares underperforming on Friday (-0.8%). The stock looks like it is headed for short-term support near $62.00 or its 50-dma (near 61.55). I am not suggesting new positions at this time.

We only have FIVE trading days left on our March calls.

- 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

Greenbrier Companies - GBX - close: 46.22 change: +0.33

Stop Loss: 44.30
Target(s): April call target: $49.85, June call target: $53.50
Current Option Gain/Loss: Apr$50c: -16.6% & Jun$50c: + 0.0%
Time Frame: 4 to 6 weeks
New Positions: see below

03/15/14: The Association of American Railroads recently released data showing that crude oil transport by rail had surged over +70% in 2013 over 2012 levels. The current pace of crude oil transport by rail in 2014 is poised to outpace 2013.

Shares of GBX displayed relative strength on Friday with a bounce from its 10-dma. Traders could use this bounce as an entry point. More conservative traders might want to wait for a breakout past $47.00 instead.

Earlier Comments:
Please note that I am setting two targets. If you choose the April calls then plan to exit at $49.85. If you choose the June calls then we're aiming for $53.50.

- Suggested Positions -

Long Apr $50 call (GBX1419D50) entry $0.90

- or -

Long Jun $50 call (GBX1421F50) entry $2.00

03/13/14 opened at $46.25


Entry on March 13 at $46.25
Average Daily Volume = 608 thousand
Listed on March 12, 2014

Lockheed Martin - LMT - close: 162.42 change: -0.41

Stop Loss: 159.90
Target(s): 169.75 & 174.75
Current Option Gain/Loss: -39.2%
Time Frame: exit prior to April option expiration
New Positions: see below

03/15/14: I cautioned readers earlier in the week that LMT looked like it could retest the $160 area. Shares failed near their 10-dma on Friday and closed near their lows. The stock definitely looks poised to drop toward support near $160.00 and our stop loss at $159.90 may be too close. 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

Spirit Airlines - SAVE - close: 59.23 change: -0.13

Stop Loss: 57.25
Target(s): 65.00
Current Option Gain/Loss: -37.5%
Time Frame: 4 to 5 weeks
New Positions: see below

03/15/14: SAVE bounced near short-term support at its 10-dma but the rebound didn't get very far before fading. Friday's high was $59.87. Investors may want to wait for a new rally above $60.00 before initiating new positions.

- Suggested Positions -

Long Apr $60 call (SAVE1419D60) entry $3.20

03/11/14 triggered @ 60.50


Entry on March 11 at $60.50
Average Daily Volume = 1.0 million
Listed on March 10, 2014

Constellation Brands Inc. - STZ - close: 82.50 change: +0.23

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:+ 47.0% & Apr$80c: +33.3%
Time Frame: 6 to 8 weeks
New Positions: see below

03/15/14: STZ displayed some relative strength with a gain on Friday but shares still failed at short-term resistance near $83.50. We are quickly running out of time with only five days left for our March options. If the market sees any weakness on Monday I'm worried we could see STZ hit our stop at $81.45. I am not suggesting new positions at this time.

Our target to exit the March $80 calls is STZ at $84.50.
Our target to exit the April $80 calls is STZ at $88.00.

- 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

Varian Medical Systems - VAR - close: 84.25 change: +0.16

Stop Loss: 83.40
Target(s): 89.75
Current Option Gain/Loss: -35.0%
Time Frame: 4 to 6 weeks
New Positions: see below

03/15/14: VAR continues to churn sideways in the $83.50-85.00 zone. Fortunately the stock did not see any follow through on Thursday's bearish reversal-type of candlestick. Of course that doesn't mean shares won't breakdown on Monday. The low on Friday was $83.65 and our stop loss is at $83.40.

Traders will want to wait for a new rally past $85.00 before considering new bullish positions.

The Point & Figure chart for VAR is bullish with a $91 target.

- Suggested Positions -

Long Apr $85 call (VAR1419D85) entry $2.08

03/11/14 triggered @ 85.05


Entry on March 11 at $85.05
Average Daily Volume = 573 thousand
Listed on March 08, 2014

VMware, Inc. - VMW - close: 105.50 change: +1.53

Stop Loss: 99.75
Target(s): 114.00
Current Option Gain/Loss: +22.8%
Time Frame: 4 to 6 weeks
New Positions: see below

03/15/14: It has been a bumpy week for VMW but the trend has been higher. The stock was showing relative strength on Friday with a +1.4% gain. More conservative traders might want to move their stop loss closer to the 10-dma near $102.60. I am not suggesting new positions at this time.

Earlier Comments:
Our target is $114.00. More aggressive traders could aim higher. The point & figure chart just produced a brand new triple-top breakout buy signal this month and is forecasting at $121 target.

- Suggested Positions -

Long Apr $105 call (VMW1419D105) entry $3.50

03/11/14 triggered on gap higher at $104.08, suggested entry was $103.55


Entry on March 11 at $104.08
Average Daily Volume = 2.0 million
Listed on March 10, 2014

Workday, Inc. - WDAY - close: 100.91 change: -0.30

Stop Loss: 98.70
Target(s): 110.00-115.00
Current Option Gain/Loss: -36.0%
Time Frame: 4 to 6 weeks
New Positions: see below

03/15/14: WDAY traded below the $100 level during Friday's market weakness. Fortunately the stock pared its losses by the closing bell. Traders could use a bounce from current levels as a potential entry point. However, you might want to wait for a breakout past the 10-dma (near 103.50) as an alternative entry instead.

WDAY's recent volatility makes this a more aggressive, higher-risk trade.

Earlier Comments:
Our target is the $110-115 zone. We will tentatively set an exit target at $110.00 for now. The stock could move quickly. The most recent data listed short interest at 20% of the 80.2 million share float.

- Suggested Positions -

Long Apr $105 call (WDAY1419D105) entry $4.30

03/13/14 triggered on gap higher at $103.82. plan was a trigger @ 103.25


Entry on March 13 at $103.82
Average Daily Volume = 1.9 million
Listed on March 12, 2014

PUT Play Updates

Akamai Tech. - AKAM - close: 59.53 change: +0.50

Stop Loss: 61.25
Target(s): 55.10
Current Option Gain/Loss: -14.0%
Time Frame: 3 to 4 weeks
New Positions: see below

03/15/14: AKAM bounced from the 30-dma on Friday but shares struggled with resistance near $60.00. Traders could use a new drop below $59.40 as a bearish entry point.

- Suggested Positions -

Long Apr $57.50 put (AKAM1419P57.5) entry $1.42

03/11/14 triggered @ 58.95


Entry on March 11 at $58.95
Average Daily Volume = 3.0 million
Listed on March 10, 2014

Charter Communications - CHTR - close: 127.00 change: +1.28

Stop Loss: 127.05
Target(s): 1st target: 120.50, 2nd target: $116.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 5 weeks
New Positions: Yes, see below

03/15/14: CHTR did not see any follow through on Thursday's drop. Instead shares bounced and outperformed the market with a +1.0% gain on Friday. If the stock doesn't cooperate soon we will likely drop CHTR as a candidate. Currently, I am suggesting a trigger to open bearish positions at $124.60. If triggered I am setting two different targets. Our conservative target is $120.50, the February low. Our more aggressive target is $116.00. FYI: The Point & Figure chart for CHTR is bearish with a $110 target.

Trigger @ 124.60

- Suggested Positions -

Buy the APR $120 PUT (CHTR1419P120)


Entry on March -- at $---.--
Average Daily Volume = 2.5 million
Listed on March 13, 2014

Twitter, Inc. - TWTR - close: 51.92 change: -1.65

Stop Loss: 56.15
Target(s): 46.50
Current Option Gain/Loss: +25.0%
Time Frame: 3 to 5 weeks
New Positions: see below

03/15/14: TWTR displayed relative weakness with a -3.0% drop on Friday. The stock is hitting new four-week lows. We are turning more aggressive with our exit target. The $50.00 level is round-number, psychological support and TWTR has bounced there in the past. However, we are adjusting our exit target from $50.25 down to $46.50. I do expect that TWTR will see a short-term bounce on its test of the $50.00 mark. More conservative traders may want to take profits there anyway.

Earlier Comments:
TWTR currently has 544.7 million shares outstanding. There is a major lock up expiring on May 6th when another 474 million shares will come available for sale by insiders. It seems unlikely that TWTR is going to rally ahead of such a massive lock up expiration.

TWTR can be a volatile stock. Therefore we are suggesting small positions to limit risk.

- Suggested Positions -

Long Apr $50 PUT (TWTR1419P50) entry $1.80

03/15/14 adjust exit target from $50.25 to $46.50
03/12/14 trade opens at $54.25


Entry on March 12 at $54.25
Average Daily Volume = 11.4 million
Listed on March 11, 2014


Green Mountain Coffee Roasters - GMCR - cls: 113.25 chg: +7.09

Stop Loss: 112.25
Target(s): 101.00
Current Option Gain/Loss: - 37.9%
Time Frame: Exit prior to March option expiration
New Positions: see below

03/15/14: GMCR proved to be a big disappointment for the bears with a large bounce on Friday. The company announced they had amended their pact with Starbucks (SBUX) and agreed to new terms with a five-year deal. This is sparked some buying or some short covering and GMCR surged +6.6%. Our stop loss was hit at $112.25. Then after the closing bell it was announced that GMCR would be added to the S&P 500 index. Who knows if that information was leaked before the closing bell.

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 -

MAR $110 PUT (GMCR1422o110) entry $2.58* exit $1.60 (-37.9%)

03/14/14 stopped out
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: 39.93 change: -1.25

Stop Loss: 45.10
Target(s): 40.25
Current Option Gain/Loss: +77.7%
Time Frame: exit PRIOR to earnings on March 19th
New Positions: see below

03/15/14: Target achieved.

XONE continued to sink on Friday and underperformed the market with a -3.0% decline. Shares hit our suggested exit target a $40.25.

FYI: If you're still in this trade or planning to trade XONE again soon, do not forget that the company will report earnings on March 19th.

*Small Positions - Aggressive Trade*

MAR $40 PUT (XONE1422o40) entry $1.08 exit $1.92* (+77.7%)

03/14/14 target hit @ 40.25
03/13/14 readers may want to consider an early exit here
03/12/14 new stop @ 45.10
03/06/14 triggered @ 44.40


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