Option Investor

Daily Newsletter, Saturday, 4/19/2014

Table of Contents

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

Market Wrap

What Now?

by Jim Brown

Click here to email Jim Brown

After a three day rebound from critical support levels what does next week hold?

Market Statistics

I wish I knew the answer to that question but without a functional crystal ball we can only make an educated guess. The rebound lifted the major indexes back to resistance and Friday's gains were minimal. However, we can't determine anything from the lack of a material gain on Friday because the geopolitical risk over a three-day weekend most likely kept investors from adding to long positions.

On the positive side earnings have been better than expected or at least quite a few companies have beaten the lowered expectations for Q1. Future guidance seems to be improving and that could put the "sell in May" cycle in jeopardy.

The S&P had one of its biggest weekly gains in 2014 at +50 points. What happened to the correction? The extremely oversold conditions allowed plenty of opportunities for buying the dip not that tax selling ended and shorts were forced to cover. Conditions have now equalized and we get to start all over again on Monday with the three-day weekend behind us.

The economics were positive for Thursday but worry over geopolitical risk kept investors from buying the news. The Philly Fed Manufacturing Survey for April spiked from 9.0 to 16.6 and the highest activity level since September. It was also the second month of major increases. In March the headline number rose from -6.3 to +9. Apparently the February dip into contraction territory was temporary and has been quickly erased.

New orders rose sharply from 5.7 to 14.8 but backorders declined slightly from 2.6 to 2.0. The employment component rose sharply from 1.7 to 6.9. Shipments vaulted from 5.7 to 22.7. The internals of the Philly survey suggest that manufacturing sector in that region is roaring back to life after four months of weakness. With spring weather with us now the numbers should continue to improve.

Weekly jobless claims rose only 4,000 to 304,000 from a seven-year low of 300,000 the prior week. The sudden plunge from the 325-330,000 level suggests business is improving and companies are no longer laying off workers at the same rate. This would probably mean they are also hiring new workers and the April employment report could show a huge improvement. We could see job gains in the 250,000 range.

Next week there are three Fed activity reports from Chicago, Kansas and Richmond. The Richmond survey is the most important of the three. We also get the existing home sales and new home sales for March. Everything else is filler.

Earnings will remain center stage rather than economics. The highlights next week will be NFLX, AAPL, FB, AMZN and MSFT. By the end of next week we will have a very good idea on how the earnings cycle is going to end. All sectors will have seen some reports and analysts will be able to project the trends by sector and forecast the outlook for Q2. Most of the larger companies will have reported by next weekend and the small companies still to report typically have weaker earnings.

According to Bespoke Investments UTX, LMT, ISRG, UA and V have beaten estimates more than 90% of the time. HAL, ISRG, AAPL, FB, QCOM, CELG, UA, AMZN, BIDU, V and WYNN have averaged the strongest gains after their reports.

Several large names posted disappointing earnings last week but overall most were positive. Actually there were many more earnings beats than I expected. This is clearly the result of the lowered expectations more than a surge in business activity.

There were some exceptions with companies like Schlumberger and Baker Hughes posting sharp earnings gains BUT most of their increased activity came from the Middle East, Asia and Africa. Other stocks like SanDisk reported strong earnings because the comparison quarter in 2013 was weak.

It will take another week before the earnings totals will have any real meaning. Only about 10% of the S&P has reported and about 57% of those have beaten street estimates, 17% met estimates and 26% have missed estimates. That is an improvement over the prior week's numbers of 53%, 17%, 31% respectively.

Summary of just a few of the companies that reported over the last two days.

SanDisk (SNDK) shares rallied +9.4% on Thursday after reporting earnings that increased +62% as a result of a better product mix, rising gross margins and the rapid push into flash memory products for server storage. Flash drives or Solid State Drives (SSD) for servers are the hot commodity today. SSD storage is significantly faster than the average mechanical hard drive currently in use. It does no good to have a super fast server but populate it with hard drives that operate several hundred times slower than the processors. Flash drives remove some of that bottleneck by providing the data at memory speeds rather than mechanical drive speeds. SanDisk upgraded revenue guidance and margin projections.

Chipotle Mexican Grill (CMG) posted good earnings but was punished for them not being good enough. Profits rose +8.5% on a +24% rise in revenue. Same store sales rose +13.4%. Those numbers sound fantastic but shares declined -6% on Thursday.

Earnings were $2.64 but analysts were expecting $2.86. When you consistently blow away earnings estimates the analyst community will consistently raise those estimates until they reach a point where they are no longer attainable and this was the case here.

Another factor in the decline was the announcement they were raising prices +3.5% to offset rising food costs. Analysts and investors worried that higher prices would drive away business and impact future earnings. Personally I think raising the price of a burrito by 20 cents is not going to send people fleeing to Taco Bell. Chipotle serves high end organic food and we all know what you get at Taco Bell. People go to Chipotle for the quality not the price. If your $6 meal costs 20 cents more you are probably not going to notice. The average ticket in the "fast casual" sector occupied by Chipotle is $7.40 while the average price for "fast food" stores like Taco Bell and McDonalds is $5.30.

I would love to see CMG shares decline to support at $482. Any decline to less than $500 is a buying opportunity.

Sears Holdings (SHLD) rallied +14% on Thursday after director Thomas Tisch disclosed he purchased 475,000 shares to bring his total holdings to 3.7 million. Tisch has been on the board since 2005 and has had the opportunity to buy them as low as $26 during the company's rocky years. Sears completed the spinoff of Lands End (LE) on April 7th and shares of Sears declined from $50 to less than $32 after the spin. Evidently Tisch thought that was a buying opportunity and added to his hoard.

Sears shareholders received 0.3 shares of LE for each share of SHLD they owned. After the spinoff 85.3% of LE was owned by only four shareholders. ESL Investments (Eddie Lampert) owns 15.5 million, Fairholme Capital 7.3 million, Baker Street Capital 2.7 million and Force Capital 1.8 million. None of those hedge funds have posted notices of any sales. LE shares dropped -$6 in the week after the spinoff. Various analysts have suggested this was probably the result of funds not interested in holding a clothing retailer rather than what they are getting with Sears. That is a general lines retailer with massive land holdings. Fairholme and Baker Street have previously said they were in Sears because of the massively undervalued real estate holdings. Fairholme said in a presentation "Sears is one of the largest corporate real estate organizations in the world, with a portfolio of retail locations that is second to none." Sears has more than 256 million square feet of retail space.

Also on Thursday an article in Forbes by Robin Lewis said a takeover of Sears by Amazon was a no brainer deal. LINK Lewis said Amazon would gain 2,400 stores overnight in the U.S., which would become mini distribution centers and retail stores. Amazon has more than two million products for sale. They could turn every storefront into a megastore where customers could see, feel and touch the many Amazon products and browse for other impulse sales.

Eddie Lampert would get a golden parachute exit strategy from the nightmare that Sears has become for him. He has been closing stores, spinning off businesses and all the while trying to rebuild the brand. He may be nearing the finish line of that endeavor but selling Sears to Amazon would be a high profile exit of all the remaining Sears headaches. Amazon has plenty of high dollar stock to make the acquisition and the current $4 billion market cap of Sears would be pocket change for Amazon. It will be interesting to see if Amazon takes the bait dangled by Lewis.

Herbalife (HLF) is not getting any breathing room. Already under investigation by the FBI, DOJ and FTC the company found out on Thursday the Illinois Attorney General Lisa Madigan was launching an investigation as well. Madigan said they had received consumer complaints about Herbalife dating back to 2008 claiming it was a pyramid scheme. This mirrors the complaints by Bill Ackman claiming the company is a fraud and the stock should go to zero. Herbalife issued a statement saying they had "15,000 members and many more thousands of satisfied customers in Illinois and we look forward to resolving any complaints from the AG office." Shares declined slightly but they have been under pressure since January on similar complaints. This was simply another chapter in the same saga.

What is in store for us next week? The S&P posted one of its best weekly gains in 2014 at +50 points. However, I looked at several hundred charts on individual stocks this weekend and the vast majority are still broken. The actual rebound for the week was only a fraction of the prior decline. For instance the ETF for the Nasdaq 100 (QQQ) the obvious support produced only a lackluster bounce.

The longer term uptrend support was broken and is now going to be strong resistance. Investors trapped at higher levels are now going to be sellers when that uptrend resistance is reached. That assumes we actually reach it.

The Nasdaq Composite rebounded exactly to downtrend resistance on Thursday and stalled. The short covering is over and now stocks have to rebound on purchases made by investors coming back into the market. This close to the "sell in May" cycle it remains to be seen if investors are going to put that cash back to work for a week or two before the seasonal decline that normally begins in May.

Oversold conditions have now equalized and Monday starts a new week with the three-day weekend behind us. Will the real market please stand up?

The daily chart it is not a bullish chart. The lackluster rebound stalled at the 4,100 level and there are two strong resistance levels above that. The support at 4,000 appeared to be strong but if we dip back to that level again I expect it to fail. If this was a chart on an individual stock I would not be a buyer.

Art Cashin pointed out some research from Jason Goepfert regarding the Nasdaq decline. Jason noted that there have only been two other times where the Nasdaq declined more than -8% from its 52-week high but the VIX remained under 17.5. This shows relative complacency in the face of the decline. Those two occurrences were March 28th, 2002 and May 15th, 2008. In both cases the S&P declined more than -15% over the next three months. Past performance is no guarantee of future results but we should pay attention.

Even more concerning is the duplicate performance by the Russell 2000. When the Russell and Nasdaq are performing in lock step the outlook is seldom good. The small caps normally lead on the upside and they lead in sell cycles. They are not leading today. They are following the Nasdaq momentum stocks and there is a good chance those stocks are going to roll over. Resistance is 1,140.

The S&P rebounded +50 points from the strong support at 1,815 that held for three consecutive days. The last rebound stalled at 1,872 and Friday's rebound stalled at 1,869. We would normally expect some profit taking after a rebound of 50 points. When coupled with the normal seasonal trends with the Monday after Easter normally lower this suggests we could start the week out negative.

The wildcard here is the events in the Ukraine. There was a peace initiative announced on Thursday between Russia, the USA and Ukraine but only hours later Putin and the Ukraine leaders were firing headlines at each other again so the announced peace initiative may not have any impact on the market on Monday.

Resistance 1,872, support 1,840 and 1,815.

The Dow high on the prior rebound on March 9th was 16,456. The high on Thursday was 16,460. The Dow closed -50 points below its high with a loss of -16 points for the day. The 16,460 level is decent resistance dating back to early March. It was pierced in early April but the stronger resistance at 16,580 was rock solid and the index fell back into the congestion pattern.

I have serious doubts the Dow can break out of the current pattern to set a new high. I would be very surprised if the upper resistance level is even tested. The Dow rebounded nearly 400 points for the week and that used up all the oversold sentiment traders could generate. To move higher from here means traders are expecting a summer rally and I seriously doubt the bulls have that kind of conviction today.

Resistance 16,460 and 16,580. Support 16,065 and 16,025.

Next week is going to be a pivotal week. It is the heaviest week of the Q1 cycle for earnings with more than 250 companies reporting on Thursday alone. By Friday we will know how the quarter will turn out and what analysts are expecting for Q2 and beyond. If the majority of companies continue to beat on earnings and the economics continue to improve then possibly we could see a summer rally. I am not making any predictions until the end of April but today I am bearish until proven wrong.

The sell in May cycle may have turned into sell in April and we may not recover. However, if we do rally into the FOMC meeting on the 30th we could be hit with some bearish comments out of the Fed with markets and economics improving. I just think there are too many potential negatives over the next two weeks and very few potential positives but all of those headlines are constantly evolving.

Random Thoughts

Within minutes of the signing of the Geneva document between the U.S, Russia, EU and the Ukraine the Ukraine's acting Foreign Minister Andrey Deshchytsa said "Kiev is not bound by the documents recommendations. The troops in the East of the country are carrying out a special operation and remain where they are." The soldiers occupying the government building said the document did not pertain to them since they were not a party to the talks.

The document said everyone should de-escalate and disarm but apparently nobody wants to go first.

Partial text of the agreement:

All sides must refrain from any violence, intimidation or provocative actions. The participants strongly condemned and rejected all expressions of extremism, racism and religious intolerance, including anti-semitism.

All illegal armed groups must be disarmed; all illegally seized buildings must be returned to legitimate owners; all illegally occupied streets, squares and other public places in Ukrainian cities and towns must be vacated.

Amnesty will be granted to protesters and to those who have left buildings and other public places and surrendered weapons, with the exception of those found guilty of capital crimes.

NATO said it was sending four warships to the Black Sea to increase the security of the eastern European allies in response to the Ukraine crisis. The ships are from Norway, the Netherlands, Belgium and Estonia. NATO said the ships are not intended to escalate the situation but to "demonstrate solidarity" and improve NATO's readiness.

Paraphrased quotes from Putin. "I lied about the soldiers in Crimea with no markings on their uniforms not being from Russia. They were our soldiers. However, I am not lying about the unmarked soldiers in the Ukraine not being from Russia."

Also, "Russia did not annex Crimea by force, but created conditions, with the help of special formations and the armed forces, for people's self-determination. The decision to join Russia was made by the people themselves."

Here are some interesting facts from Ambrose Evans-Pritchard on the potential for a Russian-American confrontation. Apparently the U.S. has the capability to shutdown the Russian banking system but the backlash could be brutal. Russian cyber warfare could cripple the USA. Did you know a shutdown of an Illinois water treatment system in 2007 was traced back to Russia? Read the article here. Tail Risks are Rising

The bipartisan Congressional Budget Office (CBO) said they now see the U.S. debt rising from the current $17.7 trillion to $27 trillion by 2024. Claimed debt to GDP will be approaching 100% but including off balance sheet liabilities like Social Security and Medicare will push that ratio well over 100%. The consequence of the end of QE and the constantly rising debt will bankrupt the U.S. by 2025. With the Fed's interest rates at zero today the Federal government is getting a bargain rate on its monthly debt sales. In 2013 the government paid $415 billion in interest on its debt with interest rates near zero. When rates return to normal and the ten-year treasury yields somewhere in the 4.5% range the annual interest paid will double to something in the $1 trillion a year range. That accounts for the increased debt generated over the next two years before the Fed raises rates materially.

By 2020 that number could rise to $1.5 trillion and by 2025 $2 trillion a year in interest payments. That assumes we don't have another major recession to keep rates low. The challenge is that we pay the interest on our debt by selling more debt. This is the equivalent of getting a cash advance on your credit card every month to pay your monthly bill. Only the government's credit card has no limits. At least no limits until the world's investors start getting scared about the size of our debt and demand higher and higher rates of interest to buy our treasury notes.

The U.S. is on a path of destruction. There is no way out of this mess and it will end badly, very badly. Anyone with a fourth grade education can do the math and see the disaster ahead. We only take in about $3 trillion a year in taxes of which 66% goes to pay Social Security, Medicare and Medicaid bills, and there is no way we can pay that rising interest when rates begin to rise.

Hedge funds are having the worst start to a year since 2008. Research firm Preqin said hedge funds are up an average of 1.23% through the end of March compared to the +1.3% gain in the S&P. In Q1-2012 they earned 6.07% and in Q1-2013 they earned 3.76%. Funds are struggling and some are returning money to investors rather than continue to fight the volatility in the market. The long/short fund Coatue Management elected to return $2 billion to investors after a "gut wrenching" month of March.

Analyst John Ficenec listed five reasons we are going to see a market crash in 2014. The first is China's credit bubble. We have seen multiple credit defaults in an economy that is notorious for not allowing companies to default. The official government policy has changed and companies are scrambling to cover loan demands and refinance their businesses. This is the "under the headlines" problem that is going to create a lasting impact.

Second is the current IPO fever. We have had a near record number of IPOs in 2014 and they are still flowing. The IPO market is likely to peak when Alibaba appears in the coming months with a monster $150-$200 billion IPO. These IPOs are sucking up investor cash and leaving the broader market on a cash diet. Companies without profits are rushing to IPO just like in 2000. The valuations of these tech companies are very overextended and quite a few of these stocks are seeing their prices decline in the weeks after their IPO. Third, markets don't rise forever. The average bull market lasts for three years and the longest rarely make the five year mark. The current bull market started in March 2009 and is now in its 61st month. It is now the second longest bull market in the last 80 years at 266 weeks. The longest was 406 weeks and started in October 1990. The longer a bull market lasts the deeper the bear market that follows. The current bull market has delivered the fifth strongest performance in over 140 years. Fourth, the market is now the third most expensive (CAPE 10 method) beaten only by 1929 and 2000.

Lastly, the Fed is removing the punchbowl. The easy money is going away and despite the Fed's pledge to keep rates low until 2016 the QE stimulus is fading fast. Over the last five years when there was no QE in force the market declined. When there is no QE later this year and no hope of additional QE the odds are very good the market will decline.

Sell in April and go away? That is what several analysts are recommending. They reference the normal "worst six months of the year" period from May until Halloween and the profits still un-cashed from the 2013 gains. If you add in the strong seasonality of the midterm election year being the worst year for the markets of the four year presidential cycle then it makes sense to be cautious in the coming weeks. The Almanac Investor issued a sell on April 7th and Sy Harding's Smart Report expects to issue a sell on Monday based on the MACD turning negative.

The internals are diverging away from a bull market. Individual new highs peaked in May 2013 at 925. December, which closed at new highs on the Dow and S&P only produced 553 new individual highs. March sank to 512 new highs. The number of S&P stocks with a Point and Figure buy signal has declined to 66% and nearing the 2014 lows.

Did the U.S. Treasury Dept cause the market decline the prior week? Officials from the Treasury Dept and the National Security Council met with mutual-fund and hedge-fund managers the prior week and warned them they were going to add additional sanctions to Russia's financial sector. They warned the funds in advance so they could manage the risk. While the number of Russian stocks traded in the U.S. is minimal the impact of global sanctions on Russia's financial system could have serious consequences. As a result overseas funds may have been liquidating positions to raise cash and reduce that risk. When nations go to financial war there can be a multitude of unintended consequences. It is highly possible the market selling the prior week was fund liquidation ahead of the proposed sanctions.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"I believe that anyone who is intelligent, conscientious, and willing to put in the necessary time can be successful on Wall Street. As long as they realize the market is a business like any other business, they have a good chance to prosper."
Jesse Livermore


Index Wrap

50 to 100% Retracements Led to Upside Reversals

by Leigh Stevens

Click here to email Leigh Stevens

The S&P 500 (SPX) and 100 (OEX) retraced 50% of its prior advance, the Dow nearly so and 100 percent 'round-trip' retracements (and double bottoms) in the Nasdaq Composite (COMP) and Nas 100 (NDX) preceded the Market's upside reversal this past week.

I wrote in my recent (4/17/14) Trader's Corner about the tendency for retracements of prior upswings to be anywhere from a Fibonacci 38% to 50 percent in moderate to strong uptrends in an index or stock. And, for a tendency for retracements that EXCEED 62-66% of the prior advance (Nasdaq) to retest the prior low; in other words, a 100% 'round-trip' retracement. Such a successful (the trend reverses up after 'testing' the prior low) 'retest' is of course also referred to as a double bottom.

I wrote last week that the NDX, which I initially, and wrongly, thought might hold at a 2/3rds retracement of its prior advance "could be headed to a 100 percent 'round-turn' retracement relative to its 3419 intraday low of early-February." RIGHT!

We do have some key resistance areas ahead: SPX, OEX and the Dow 30 (INDU) at the top of their multiweek trading ranges dating from mid-February. In COMP and NDX, resistance can be seen or 'measured' at the their 21 and 50-day moving averages; first up is the 21-day moving average. SPX, OEX and INDU have cleared these same key trading averages already.

Also, as anticipated, the Nas 100 was in a 'position' to rally so to speak with its Volatility Index (VXN) over 22. See the daily VXN graph with the NDX chart below. There's a pattern seen in recent months with NDX and COMP upside reversals coming when VXN gets into the 21.5-22.5 zone. A VXN daily peak at 22.6 this past week is up from a prior 'baseline' of around 13.

The Nasdaq and Russell also got 'fully' oversold at this last low in terms of the 13-day Relative Strength Index (RSI), repeating the pattern the early-February bottom. Can it be this simple?! Sometimes!



The S&P 500 (SPX) Index remains in a relatively narrow 1820-1880, to 1900, trading range dating from the strong move above 1820 in mid-February. The SPX daily chart remains within its bullish uptrend channel and the overall trend remains up. The short-term trend is up given the upside move above SPX's 21 and 50-day moving averages. The intermediate-term trend is mixed. Some would say that the S&P is 'trendless', but a trend can be sideways; e.g., as confined to a trading range for a time.

The recent upside reversal came after SPX held the area of a 50% retracement of the prior advance (from intraday low to intraday high). The same approximate low in SPX was seen 3 days running, from last week into the trading week ending Thursday. These 3 OEX lows, ALSO representing the common 50 percent retracement support point, was a pretty sound tip off to get out of bearish positions at least and back into strategies to play the upside for the bulls.

Where to now? There's pretty immediate overhead resistance in the 1872 area, then at 1900 and a pivotal level. Having come this far I see no way that SPX is NOT going to the 2000 milestone. WHEN is the question! A couple of consecutive closes over 1900 and with buying interest/support found on pullbacks to this prior resistance, will suggest that another up leg is underway.

Near support is at 1840-1844, although not highlighted on my daily SPX chart below; my green support up arrows point to key support in the 1820 area, extending to 1805 at the current intersection of SPX's up trendline.


The S&P 100 (OEX) chart, like the broader S&P 500, retraced 50% of its last advance and then rallied strongly, crossing above its 50 and 21-day moving averages and suggesting that the short-term trend has reversed to the upside. The intermediate-term trend is mixed as OEX remains in an 805-830, to 840, trading range. The long-term trend remains solidly up.

The key bullish event but as noted last week OEX "has not taken out support in the low-800 area, at 805 specifically. OEX has now retraced 50 percent of its last major upswing." And of course the Index held that prior week's low and the 50% Fibonacci retracement level.

Immediate overhead resistance is seen at 828, with resistance extending to 836-838. A move above 838 and the prior intraday high with ability to hold in this area on pullbacks (prior resistance 'becoming' subsequent support), would suggest a new up leg could be underway.

I didn't 'green up arrow' highlight it, but near support comes in around 817, the low end of the recent OEX (overnight) upside price gap. 805 is pivotal support, with chart support extending to OEX's up trendline at 798.


The Dow 30 (INDU) daily chart turned from short-term bearish (within a longer-term uptrend) to short-term bullish. INDU, unlike the key S&P indices, did not quite touch support implied by its 50% retracement level. It pays to remember that the Dow consists of just 30 stocks. Sometimes INDU traces out 'picture-perfect' technical chart patterns, sometimes it doesn't match what happens in the broader S&P 100 and 500.

What we can do more easily in the Dow is to track the 30 individual stocks. I make a quick review of the 30 charts on a weekly basis. For a trend capable of going to a decisive new high, I anticipate seeing 15 or more of the Dow stocks in moderate to strong uptrends.

The 30 Dow stocks individually are a mixed bag and recent gains have much to do with resurgences in CVX, KO and XOM. Only DD, DIS, JNJ, MMM, MRK, MSFT, and UTX are in mostly still-strong uptrends. Most of the other 20 Dow component stocks are in sideways to lower consolidations after prior strong multimonth advances. I can't get super-bullish on INDU just yet. There was enough buying to hold not far under the mid-March bottom and above the 50% retracement point. There may not be enough upside momentum yet to lift INDU above near resistance at 16450 and then to tackle pivotal resistance around 16600.

Near support is at 16200, then at 16050 as highlighted on the chart and with deeper support back at 15800 at the Dow's up trendline.


The Nasdaq Composite Index (COMP) as I pointed out last week was "getting close to the 3968 area which would represent a 'round-trip' 100% retracement of its last advance. I've noted potential support at this prior intraday low."

Almost as if traders were 'conforming' to the chart, the prior intraday low was retested, with a little slippage, and held to make for a potential double bottom. I put considerable stock in trend reversals implied by double bottoms and double tops. (Triple tops/bottoms are often uncertain as to an eventual outcome.)

Also important (as I wrote last week) for an upside reversal was COMP dipping into it's oversold zone in terms of the Relative Strength Index (ditto for the Nas 100) and my call-put 'sentiment' indicator getting near another type of oversold extreme; i.e., daily CPRATIO lows suggesting traders are getting significantly more bearish. I noted: "In a contrary opinion sense, such times are a point to look for any confirming price action of an upside reversal."

What next? COMP is unlikely to soar from here. Key near resistance begins around 4100, extends to 4150-4180, with the most pivotal technical resistance at COMP's minor down trendline intersecting currently at 4230. Next resistance then is suggested at 4280. There's considerable ground to cover back up to 4230-4280. And traders have been (Gasp!) been reminded that high flyers have HIGH risk too!!

Pivotal near support in the Composite is at 4050, extending to 4000.


The Nasdaq 100 (NDX) chart parallels the broad Composite with the only difference being that NDX made an exact double bottom low. What more did a trader need than to see that intraday low pushed all the way back to the early-Feb (2/5) bottom, followed by a fairly rapid upside reversal, PLUS coming on the heals of an oversold extreme in terms of the 13-day RSI? NDX made a bottom you could anticipate ahead of time and not be glued to a screen all day, since a whole new down leg is highly unusual in an oversold market that remains in a long-term UPtrend. Yes I know that at the end of big sell offs we tend to group-think that there's nothing but AIR under the market, but it often ain't so.

I made another key point last time regarding VXN, the Nasdaq 100 volatility index, which was about the ..."tendency in recent months for bottoms in NDX to form with elevated VXN readings in the 21.5-22.5 area. One more dip might 'set' that up, especially if a potential double bottom low formed in the 3440-3419 area." There you have it.

Picking a bottom is often easier than forecasting how quickly an index or stock might get back up to prior highs. NDX has to pierce near resistance around 3500, then cross above its 21-day moving average (to suggest renewed short-term upside momentum) and take out 3600 resistance; last but not least is the resistance implied by the minor down trendline intersecting at 3635 currently. NDX might rally quickly to around 3600, but I anticipate more selling pressure to follow and no immediate move back above the highlighted down trendline.


The Nasdaq 100 tracking stock (QQQ) looks to have made a high-volume 'climax' low, with the Q's heavy volume as a good ancillary indicator. Heavy volume comes out mostly on liquidation of existing QQQ long positions, although there's shorting going on also. Of course the Nas 100 EFT also made a double bottom low and was oversold, with emphasis on its 'double bottom' chart aspect.

Near resistance comes in at 86.8, extending to the 21-day moving average (87.1); next chart resistance looks like 87.8 followed by pivotal technical resistance at the previously pierced UP trendline intersecting at 88.2 currently. Resistance then extends to the 89 area.

I don't see QQQ soaring higher from here but a move above the 21-day average and then holding mostly above this line would be a bullish plus and suggest more upside potential to come.


The Russell 2000 (RUT) has reversed up from its short to intermediate decline by moving back above its long-standing up trendline. RUT also held to a Close above the key 200-day moving average after a minor intraday dip below it. The 200-day moving average is a technical indicator but one seen as important by even the most dyed in the wool 'fundamental' (it's ALL about earnings!) market participants.

Pivotal next resistance looks like 1160, extending back up to 1190. Near support is highlighted in the 1120 area, extending to the key 1100 level.

Unlike the Nasdaq the Russell did not make a double bottom relative to its last intraday low but was getting close to it. Moreover, RUT got 'fully' oversold ahead of the recent upside reversal which as I said last time, "has often been significant for a bottom"... and "traders should be alert to an upside price reversal."


New Option Plays

Software, Consumer Goods, and Healthcare Technology

by James Brown

Click here to email James Brown


Adobe Systems - ADBE - close: 64.04 change: +1.00

Stop Loss: 59.45
Target(s): to be determined
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
ADBE is in the technology sector. The company makes software for the digital media industry. The company reported earnings on March 18th. Wall Street was looking for a profit of 25 cents a share on revenues of $973 million for ADBE's first quarter. The company beat estimates with 30 cents in earnings on revenues near $1 billion. The street likes what they see with ADBE's relatively new subscription model gaining momentum. Several firms raised their price target on ADBE following its earnings report in the last few weeks.

Technically the stock has produced a post-earnings correction, which is not uncommon. Yet the long-term up trend is still intact. Traders bought the dip near round-number support at $60.00.

We are suggesting bullish positions on Monday morning with a stop loss at $$59.45, under the early April low. More conservative traders may want to wait for a dip near $62.00 as an alternative entry point. We would like to hold this trade for several weeks.

- Suggested Positions -

Buy the Jul $65 call (ADBE1419G65) current ask $3.20

Annotated Chart:

Weekly Chart:

Entry on April -- at $---.--
Average Daily Volume = 4.8 million
Listed on April 19, 2014

Nu Skin Enterprises - NUS - close: 86.42 change: +1.90

Stop Loss: 79.75
Target(s): to be determined
Current Option Gain/Loss: Unopened
Time Frame: 3 to 5 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
NUS is in the consumer goods sector. The company distributes anti-aging personal care products and nutritional supplements. The stock was crushed back in January this year with a drop from $140 to $70 in just a few days. The big decline back in January was fueled by worry that the Chinese government was investigating NUS as a pyramid scheme. Naturally Wall Street is worried. China is one of NUS' most profitable regions and accounts for nearly one third of NUS annual sales.

NUS issued an earnings warning in early March as they continued to deal with the investigation in China. The story seems to have changed following the March 24th announcement that China's Administration of Industry and Commerce reviewed NUS' business and fined the company $524,000 for a few infractions that didn't line up with China's legal system. The $524K fine alleviated the black cloud over NUS' business. Previously no one knew how China's regulators would react? Would they kick NUS out of the country? How big would any fines be? This announcement removed a lot of the unknowns. For NUS, a company with $3.1 billion in annual revenues, the $524K fine is probably produced a sigh of relief.

NUS did give back most of its gains following the March 24th announcement but shares have found support near $80 and some key moving averages. Tonight we are suggesting a buy-the-dip trigger at $84.50 with a stop loss at $79.75. More aggressive traders may want to jump in early and buy calls at the open instead.

I anticipate the $100 level acting as round-number resistance for NUS. Currently the Point & Figure chart for NUS is bullish with a $102 target.

Earnings for NUS are expected in early May. No date has been set yet.

Trigger @ $84.50

- Suggested Positions -

Buy the May $90 call (NUS1417E90) current ask $4.00

Annotated Chart:

Weekly Chart:

Entry on April -- at $---.--
Average Daily Volume = 1.8 million
Listed on April 19, 2014


Catamaran - Corp. - CTRX - close: 39.09 change: -0.85

Stop Loss: 40.65
Target(s): to be determined
Current Option Gain/Loss: Unopened
Time Frame: Exit PRIOR to earnings on May 1st
New Positions: Yes, see below

Company Description

Why We Like It:
CTRX is in the technology sector. They're grouped in with the software industry. The company offers pharmacy benefit management services and healthcare information technology. The stock set its all-time high in summer of 2013. The current sell-off started after CTRX reported earnings in late February and the company lowered their guidance. After trying to hold support near the $44.00 level CTX broke down again in April. The stock looks broken and is underperforming the broader market. Traders just sold the bounce again under its 10-dma this past week.

Tonight we're suggesting bearish positions at the opening bell on Monday. We'll use a stop just above last week's high. CTRX is scheduled to earnings again on May 1st. We do not want to hold over the announcement. We're not setting at target to tonight but I would probably aim for the $35 region.

FYI: The Point & Figure chart for CTRX is bearish with a long-term $23 target.

- Suggested Positions -

Buy the May $40 PUT (CTRX1417Q40) current ask $2.25

Annotated Chart:

Weekly Chart:

Entry on April -- at $---.--
Average Daily Volume = 3.3 million
Listed on April 19, 2014

In Play Updates and Reviews

Up Every Day

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 index managed gains every day for the holiday-shortened week.

DVN hit our entry trigger. AAP and AVGO hit our stop losses.

Current Portfolio:

CALL Play Updates

Caterpillar Inc. - CAT - close: 102.83 change: -0.10

Stop Loss: 99.75
Target(s): 109.00
Current Option Gain/Loss: -1.3%
Time Frame: exit PRIOR to earnings on April 24th
New Positions: see below

04/19/14: Thursday was a quiet day for the S&P 500 and the Dow Industrials. Shares of CAT followed suit with a mild sideways move. The stock appears to be coiling for a breakout higher but we are quickly running out of time.

Earlier Comments:
Our exit target is $109.00. However, we do not have much time for CAT to perform. The company is scheduled to report earnings on April 24th and we do not want to hold over the announcement.

- Suggested Positions -

Long MAY $105 call (CAT1417E105) entry $1.52

04/08/14 triggered @ 102.35


Entry on April 08 at $102.35
Average Daily Volume = 5.9 million
Listed on April 07, 2014

Devon Energy - DVN - close: 70.70 change: +0.84

Stop Loss: 68.75
Target(s): 74.75
Current Option Gain/Loss: +7.2%
Time Frame: exit PRIOR to earnings on May 7th
New Positions: see below

04/19/14: The rally in DVN continued with a breakout past potential round-number resistance at the $70.00 mark. Our suggested entry point to buy calls was hit at $70.35. If you missed the entry I would consider waiting for a dip near $70.00 as an alternative entry point.

We will plan on exiting prior to earnings on May 7th. FYI: The Point & Figure chart for DVN is bullish with a $95 target.

- Suggested Positions -

Long May $70 call (DVN1417E70) entry $1.94*

04/17/14 triggered @ 70.35
*option entry price is an estimate since the option did not trade at the time our play was opened.


Entry on April 17 at $70.35
Average Daily Volume = 3.7 million
Listed on April 16, 2014

EOG Resources - EOG - close: 102.45 change: +1.44

Stop Loss: 99.65
Target(s): 109.00
Current Option Gain/Loss: + 9.4%
Time Frame: exit PRIOR to earnings on May 5th
New Positions: see below

04/19/14: It proved to be a bullish week for EOG. Shares added another +1.4% on Thursday and set a new all-time closing high. I am raising our stop loss to $99.65. I am not suggesting new positions at current levels.

- Suggested Positions -

Long May $105 call (EOG1417E105) entry $1.90*

04/19/14 new stop @ 99.65
04/16/14 triggered @ 101.75
*option entry price is an estimate since the option did not trade at the time our play was opened.


Entry on April 16 at $101.75
Average Daily Volume = 2.9 million
Listed on April 15, 2014

Diamondback Energy, Inc. - FANG - close: 73.34 change: +2.85

Stop Loss: 68.75
Target(s): to be determined
Current Option Gain/Loss: +55.8%
Time Frame: exit PRIOR to earnings in May
New Positions: see below

04/19/14: FANG is another energy stock hitting new all-time highs. Shares outperformed the market with a +4.0% gain on Thursday. I am raising our stop loss to $68.75. More conservative traders may want to use a stop loss closer to $70.00 instead.

Earlier Comments:
The stock looks poised to break out past resistance near $70.00. If that happens FANG could see some short covering. The most recent data listed short interest at 37% of the small 32.5 million share float. That's plenty of fuel for a short squeeze. FYI: The Point & Figure chart for FANG is bullish with an $85 target.

- Suggested Positions -

Long May $75 call (FANG1417E75) entry $1.70*

04/19/14 new stop @ 68.75
04/16/14 triggered @ 71.25
*option entry price is an estimate since the option did not trade at the time our play was opened.


Entry on April 16 at $71.25
Average Daily Volume = 948 thousand
Listed on April 14, 2014

Gulfport Energy - GPOR - close: 75.11 change: -0.08

Stop Loss: 71.70
Target(s): 79.50
Current Option Gain/Loss: - 6.4%
Time Frame: 3 to 5 weeks
New Positions: see below

04/19/14: After strong gains on Wednesday shares of GPOR hit a little profit taking on Thursday and closed with a very minor loss. I would not be surprised to see GPOR dip near $74.00 if the energy stocks see any profit taking on Monday. The stock is up six weeks in a row.

- Suggested Positions -

Long May $75 call (GPOR1417E75) entry $3.85*

04/14/14 triggered @ 74.25


Entry on April 14 at $74.25
Average Daily Volume = 1.45 million
Listed on April 12, 2014

iShares Russell 2000 ETF - IWM - close: 112.92 change: +0.56

Stop Loss: 108.60
Target(s): to be determined
Current Option Gain/Loss: + 2.9%
Time Frame: 4 to 6 weeks
New Positions: see below

04/19/14: The bounce in the small cap ETF continued with a +0.49% gain. Thursday's close is also a bullish move above its 10-dma and the 150-dma. The next challenge for the bulls is potential resistance near the $114.00 mark.

- Suggested Positions -

Long JUN $115 call (IWM1421F115) entry $2.37

04/16/14 triggered $ 112.15


Entry on April 16 at $112.15
Average Daily Volume = 55 million
Listed on April 15, 2014

QUALCOMM Inc. - QCOM - close: 81.32 change: +1.14

Stop Loss: 78.90
Target(s): to be determined
Current Option Gain/Loss: +40.6%
Time Frame: Exit PRIOR to earnings on April 23rd
New Positions: see below

04/19/14: QCOM was up every day last week. Shares ended the short week with a +1.4% gain on Thursday and setting a new multi-year closing high.

Earnings are coming up on April 23rd. We do not want to hold over the announcement. I am raising our stop loss to $78.90.

- Suggested Positions -

Long MAY $80 call (QCOM1417E80) entry $1.87

04/19/14 new stop @ 78.90
04/09/14 opened on Wednesday morning.


Entry on April 09 at $79.26
Average Daily Volume = 2.0 million
Listed on April 08, 2014

PUT Play Updates

Lumber Liquidators - LL - close: 86.87 chang6: +0.19

Stop Loss: 88.35
Target(s): to be determined
Current Option Gain/Loss: - 36.9%
Time Frame: exit PRIOR to earnings on April 30th
New Positions: see below

04/19/14: The oversold bounce in LL stalled a bit on Thursday. Shares gained +0.2%. While the overall trend is down the sharp bounce from Tuesday's low left the weekly chart with a potential bullish reversal forming.

I am not suggesting new positions at this time. Our stop loss is at $88.35. More aggressive traders may want to give LL more room to maneuver so consider using a stop loss above the 10-dma (88.55) or the $90.00 level instead.

Earlier Comments:
Readers may want to use small positions because there are already a lot of bears in this name. The most recent data listed short interest at 27% of the small 24.4 million share float. That could make any bounce a volatile one.

Plan on exiting prior to LL's earnings report on April 30th. We are not setting an exit target just yet. FYI: The Point & Figure chart for LL is bearish with a $72 target.

- Suggested Positions -

Long May $80 PUT (LL1417Q80) entry $3.25*

04/15/14 triggered @ 83.80
*option entry price is an estimate since the option did not trade at the time our play was opened.


Entry on April 15 at $83.80
Average Daily Volume = 761 thousand
Listed on April 14, 2014


Advance Auto Parts - AAP - close: 120.84 change: +1.33

Stop Loss: 120.25
Target(s): 110.50
Current Option Gain/Loss: - 23.4%
Time Frame: exit PRIOR to earnings on May 15th
New Positions: see below

04/19/14: AAP broke through the $120.00 level with Friday's rally. Shares rose to their 20-dma before paring gains. Early Thursday morning shares of AAP were rising rapidly and gapped higher one minute to close our play at $120.27 (instead of $120.25).

- Suggested Positions -

May $115 PUT (AAP1417Q115) entry $3.20 exit $2.45* (-23.4%)

04/17/14 stopped out
*option exit price is an estimate since the option did not trade at the time our play was closed.
04/11/14 triggered @ 117.25


Entry on April 11 at $117.25
Average Daily Volume = 752 thousand
Listed on April 10, 2014

Avago Technologies - AVGO - close: 60.89 change: +1.58

Stop Loss: 60.35
Target(s): 53.00
Current Option Gain/Loss: -51.9%
Time Frame: 3 to 4 weeks
New Positions: see below

04/19/14: AVGO displayed relative strength on Thursday. Shares rallied to and briefly pierced technical resistance at the 50-dma before paring their gains. Our stop was hit Thursday morning in what looked like some short covering. I suspected that a close below $60 could be a new entry point for bearish positions.

- Suggested Positions -

May $57.50 PUT (AVGO1417Q57.5) entry $2.10* exit $1.01** (-51.9%)

04/17/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
04/14/14 triggered @ 58.35
*option entry price is an estimate since the option did not trade at the time our play was opened.


Entry on April 14 at $58..5
Average Daily Volume = 2.1 million
Listed on April 12, 2014