Option Investor

Daily Newsletter, Wednesday, 1/26/2011

Table of Contents

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

Market Wrap

Market Holds Up Through President's Speech and FOMC. Now What?

by Keene Little

Click here to email Keene Little
Market Stats

The blue chips were all positive today but it wasn't anything for the bulls to write home about. The more oversold tech and small-cap indexes had a better day with a stronger bounce. Following yesterday's late-day flare up into the close and then another smaller one this morning, those higher-beta stocks tacked on quite a few points to yesterday's lows. But while the blue chips are making new highs (albeit only marginally higher highs) the techs and small caps have so far only retraced a portion of last week's loss.

Yesterday afternoon's rally and this morning's rally occurred on less volume than we saw during yesterday morning's selling and that continues to support the idea that we're in an ending pattern to the upside for the blue chips and potentially just a correction to the decline for the techs and small caps. But as I'll show on the charts, there is upside potential into next week if the market can continue to push higher, possibly into the end of the month. A rally on Thursday is essential to keep the bull's hopes alive. Otherwise the rally into the President's speech and FOMC will look like just a way to prevent a selloff on these two events. Holding the series of higher lows is very important for the bulls and it also makes it easier for the bears to identify the end of the run.

The economic reports this morning were mixed but it didn't really matter. There was an obvious agenda to get some more short covering and the rally was done before the first hour of trading was finished. The past two days have given us mixed news on housing. Yesterday's Case-Shiller 20-city index showed a decline in housing prices of -0.5% from November to December, which was the 5th monthly decline in a row. The -10% annualized decline (on a 3-month annualized basis) is the steepest decline since the spring of 2009, which of course was the bottom of the stock market decline.

Before the bell the MBA Mortgage Purchase index was released and showed a decline of -12.9% vs. a +5% the prior week. That knocked the futures down a bit but not for long. The futures were still up at the open and then a few buy programs kicked some more shorts while they were down. The negative news yesterday and this morning were not enough to dissuade the bulls from charging ahead (since bad news is good news for the Fed to keep doing what they're doing.

Then at 10:00 AM we got some good news about the New Home Sales which was good for flaming a few more shorts. All news is good right now for the bulls and until that changes we're going to see the bears continue to struggle to make sense of this market. The good news about home sales was that it showed an increase, which may be a result of the lowering of prices by the builders (and a reason for their continued sour sentiment). Sales rose in December at an annual rate of 329K, which is the highest level since April when home sales were helped by the home-buyer tax credit. Some of the good news was toned down by the revision for November, which were revised lower from 290K to 280K. The seasonal adjustments mean future revisions. Also, contract cancellations are taken into account in future revisions.

The bulk of the new sales (85%) occurred in the south and west. And while the increase in sales is good news we don't have an uptrend yet (monthly data tends to be volatile) and in fact the December sales number is still down -7.6% from December 2009. For the full year 2010 was 14% lower than 2009 sales, with 321K new homes sold in 2010 vs. 375K in 2009. In normal economic times home sales should be about 1000K so about 3 times higher. We've got some work to do to get there and as of now the drop in home sales fits with the drop in prices.

There's a lot of inventory to get through and inventory is likely to increase as additional people lose their homes to foreclosure, which won't peak until probably 2012 after the spike in mortgage resets passes through the system. And as long as there will be pressure on home prices, further depressing consumer mood, it's going to be tough for an economic recovery to get a foothold. Without a stronger economic recovery it will of course be difficult for the stock market to hold up as hopes for a continued recovery may run into trouble. As John Hussman observed recently, "So while the surface activity of the U.S. economy has observably improved, it is in the context of an overvalued, overbought, over-bullish, rising-yields market that is vulnerable to abrupt losses, a global financial system that remains subject to strains from sovereign default, a housing market where one-in-seven mortgages is delinquent or in foreclosure, and nearly one-in-four is already underwater with a huge overhang of unliquidated foreclosure inventory still in the pipeline, and a domestic financial system that lacks transparency and may still be slouching toward insolvency. The U.S. economy is progressing on the surface, but it remains a house built on a ledge of ice."

But the positive economic news over the past couple of quarters has nearly all the economists and market pundits feeling very bullish about this year. In a recent Bloomberg survey of market strategists, 13 out of 13 were bullish. Other surveys find the bullish sentiment just as lopsided -- USA Today has 5 out of 5 bullish and the Wall-Street Journal has 37 out 40 that are bullish. Barron's well-known Round Table had 10 out of 10 bullish participants.

Quoting from Barron's roundtable members, "Strong corporate profit growth heading into year-end portends a solid year in the equity market for the coming year. The consensus estimate for the S&P 500 is a +12% increase this year."

There's just one problem with the above quote -- it was from December 2007 when everyone was also unanimously bullish. That call obviously did not work out well for anyone buying the market in January 2008 and I strongly suspect 2011 will be just as disappointing to the plurality of bullish pundits. When all these economists and analysts line up on one side of the table, you can almost take it to the bank that you will do better by sitting on the other side of the table and taking their bets. Those same people did not see any of the market declines since 2000 coming, not one. They are bullish for a reason and that is to get the public's money to invest. They are not in the business to scare people away from the market. Listen to them at your own financial peril.

With the rally since July based to a large extent on the Fed's willingness to do whatever it takes to hold the stock market, um, I mean economy up, the market has been worried about the Fed offering any kind of hint about a policy shift. If the Fed talks about a stronger economy or if they express worry about inflation creeping higher it would be interpreted by the market as a Fed that's getting ready to shift direction. A shift in direction would mean they would become less accommodative and that could jeopardize the rally since it's been built on the hope that the Fed will continue to pump money into the economy (and stock market).

If the economy is improving and/or inflation is ticking higher (it is but the Fed will keep lying to us about it for as long as they can so as to justify pumping more money into the banks) then the Fed will be forced to back off on their QE program. It seems strange that the market should sell off on this kind of news since both an improving economy and inflation are actually beneficial for the stock market. That's how out of whack the market is right now -- it's putting more faith in government than the economy.

Traders were intent on seeing how the language about inflation might change from the previous meeting when the Fed said inflation "continued to trend down." Any change from that stance would send worries through the market, including the bond market which had sold off prior to the meeting and then held the steady following the meeting (other than the cha-cha-cha after the announcement). By leaving the language alone it indicates to the market that the Fed is not planning any course changes until at least the next meeting. Heading into the meeting most market pundits expected the Fed to leave the language unchanged and for the FOMC vote to have no dissents.

The market got exactly what it wanted and expected. FOMC's statement kept the language the same (and no rate change of course) will continue on course with their QE program. There was a slight change in the inflation wording, saying inflation is still trending lower, despite the rising commodity prices (well, duh, when you exclude food and energy prices from inflation measures it's not hard to figure that out). They said "the economy is recovering but the rate of recovery is still insufficient to bring about a significant improvement in labor market conditions." And the vote was unanimous.

After getting what it wanted the market barely moved but managed to finish near the highs of the day. I am wondering though if the market may see some profit taking tomorrow as a sell-the-news reaction hits. The charts are unfortunately not clear enough to make a bet for tomorrow morning so we'll need to let price lead the way and tell us what could be next.

Starting off with the DOW's charts tonight, the weekly chart shows a potentially important setup as it pushes above 12K (the day's high was 12,020). I show two price projections of interest here, one at 12008 and the other at 12035. The first one at 12008 is a projection for the leg up from July which reached 50% of the leg up from March 2009 to the April high. This will sometimes mark a reversal level and is at 12008. The second projection at 12035 is where the 5th wave of the rally from July equals the 1st wave, a very common relationship. It's a little hard to see but I've also drawn in increasingly steeper uptrend lines, indicating the rally is going parabolic and we know what happens when the parabola is broken. The steepest uptrend line, the 4th (and usually final once it's broken) is from the November low and is currently near 11860, which is shown better on the daily and 60-min charts below.

Dow Industrials, INDU, Weekly chart

The weekly candles since November look very similar to the ones leading up to the April high and the rally will likely finish the same way -- with a sudden selloff. Remember the May flash crash soon after the April high? Notice also the similarity of form between the March 2009-April 2010 rally and the July 2010-January 2011 rally. The latter is a smaller version (fractal) of the former and it's another reason the 50% projection at 12008 could be important here.

The daily chart below shows the DOW nearing the trend line along the highs since August, currently near 12075 and near 12100 by the end of next week. I added another uptrend line, this one from last Thursday, January 20th, and it's where the DOW found support yesterday and today. Therefore a break below today's low near 11962 would be a bearish heads up since it would be a break of the increasingly steeper trend lines and the breakdown from its parabolic rally could go very quickly. But it's bullish until proven otherwise. I'm showing a move higher into next week (with minor new daily highs along the way, as it's been doing) to reach the upper trend line. But all bullish bets are off if those uptrend lines start breaking. A break below the key level at 11750 would confirm we've seen the high.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 11,900 to 12000-12100
- bearish below 11,750

Zooming in closer with the 60-min chart below, a trend channel from early January, along with a rising wedge pattern from mid January, offer some guidance. As long as the uptrend line from January 20th holds, which is near today's low at 11961, upside potential remains to the 12100 area. A break below 11960 would be a bearish heads up but the bulls wouldn't be in serious trouble until the uptrend line from November breaks, currently near 11860. The short-term bearish divergence is not bullish but we've seen many of these divergences get overpowered by new buying. It's simply a warning at the moment.

S&P 500, SPX, 60-min chart

SPX has remained in a tight up-channel (actually a slightly expanding wedge) since early December. Tuesday's low near 1281 was the last test of the bottom of the channel and therefore any break below that level would be a confirmed breakdown from the channel. The bulls could be in trouble at that point but it takes a break below 1271 to confirm we've seen the top. In the meantime there remains upside potential to the 1310-1320 area if it can punch through resistance at 1300.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1292 to 1320
- bearish below 1271

NDX is showing the same picture as SPX. It has been in a tight up-channel since mid November and there is upside potential to the top of the channel near 2370 by the end of next week. The bottom of the channel is currently near yesterday's low at 2284 so heads up if that level breaks. Bears need to see the key level at 2239 break in order to confirm we've seen the high. Note that today's rally has brought NDX up to a broken uptrend line from November through the December 31st low. It's been kissing that trend line for the past 5 trading days since gapping below it on January 20th. A drop away from it would leave a bearish kiss goodbye and a sell signal.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 22330 to 2370
- bearish below 2239

The RUT is the one that looks the most bearish to me because of the break of its longer-term uptrend line from August and the rally today back up to the line. It's picture-perfect setup for a reversal back down, leaving a kiss goodbye at support-turned-resistance. If it does drop back down and below 771 it will likely sell off hard so it would make for a good one to short (buy puts on IWM or calls on the 3x leveraged inverse fund, TZA). Notice too that a break below Tuesday's low would also be a break of its 50-dma, the first to do so if it happens. In the meantime, if the rest of the market rallies we could see the RUT recover and make it back up to the trend line along the highs since

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 808 to 825
- bearish below 771

If I look to the Total Market index (DWC) for a tie breaker between the above indexes, since in reality it IS all of the other indexes, it doesn't help for a call for tomorrow. I could argue for an immediate drop from here, as it retests its broken uptrend line from November (notice how the previous break of an earlier broken uptrend line was retested as well), or I could argue for a little higher to the top of its larger rising wedge pattern from August, currently near 13810. In either case I will argue that the rally is within days of finishing, if today's rally did not finish it. Therefore the upside is not warranted compared to the downside risk.

Total Stock Market index, DWC, Daily chart

I've keep an eye on the bond market in an effort to determine what the "smarter" market is seeing. So far they look as confused as the rest of us. The most telling thing of course is the bond market's refusal to play in Bernanke's sandbox since yields are considerably higher than when QE2 was announced. The daily chart of TNX shows the same sideways consolidation it's been in since mid December. It continues to look like a bullish consolidation pattern for one more quick leg up before yields pull back and correct the rally from November. So we could see a little more selling in the bond market but then a multi-week rally in the bond market.

The below chart is the 30-year yield and it too looks like it should press marginally higher before at least pulling back. The downtrend line from 1994, which is the top of a parallel down-channel for TYX's 17-year decline, is currently near 4.69% so only about 0.1% higher than today's close. Once this leg up is finished, the bullish wave count calls for a pullback, perhaps to support around 4%, and then a continuation higher through the rest of this year. The bearish wave count calls for a continuation of the bond market rally which will drive TYX down to around 2%. This latter scenario would say deflation is upon us but clearly we won't have an answer to the question for a few more months at least. If TYX rallies above 4.86% it would be more immediately bullish (bearish for bond prices). It would mean inflation is the problem, regardless of what the Fed is trying to tell us. I'm still leaning into the deflationary camp because of the excess credit problems that have to be dealt with (destruction of debt is deflationary).

30-year Yield, TYX, Weekly chart

The banks were weak yesterday and today. The effort to rally the stock market is not being supported by the banks. If we're to follow the money we should remain skeptical of any stock market rally that does not include the banks. I show the possibility for XLF, the financial sector ETF, to rally back up to the 16.80 area to test its broken uptrend line from November (again) but so far the price pattern has me leaning to another leg down sooner rather than later. If the banks drop back down I'd follow them and a rally in the major averages.

Financial sector SPDR, XLF, Daily chart

The TRAN poked below its 50-dma yesterday but got that miraculous recovery yesterday afternoon. Today's bounce looks like a continuation of a correction to the decline from last week's high. While it could bounce all the way back up to its broken uptrend line from August, that's not the way I think it will go. Once the current bounce completes we should see the TRAN head south at a higher rate of speed.

Transportation Index, TRAN, Daily chart

The dollar has been struggling to get off the mat for the past few days but it continues to hold near its 62% retracement of the November rally. The setup remains a good one for the rally to continue and as shown on the chart, a rally up to 83.63 would be two equal legs up from November. I think it will eventually work its way up to at least 88 but it could be a choppy climb that takes several months.

U.S. Dollar contract, DX, Daily chart

Gold got a nice oversold bounce today and made it back up to its broken uptrend line from October 2008 (log scale). It could make it up to its downtrend line from January 3rd, currently near 1355, but should continue lower in a pattern similar to the depiction in dark red. If it breaks the downtrend line then all bearish bets are off since the bullish potential from there is a new high to complete the long-term rally. So far it's showing a classic rounded topping pattern so the bulls have some work to do in order to get their shiny metal turned around.

Gold continuous contract, GC, Daily chart

So while I'm showing a bearish resolution for gold from here I can't rule out the possibility for one more new high to the $1500 area to perhaps give us a cleaner wave count from February 2010. The break of its uptrend line was the first bearish signal and a top should be confirmed if it breaks below 1315, the October low. But until gold drops below its 200-dma near 1277, or certainly below 1200, the door needs to be kept open for another run up to a final high that finishes a larger wave count for its rally from 1999. That's why the new downtrend line is important to watch. It's bearish until proven otherwise.

While it might be very early to be predicting what kind of decline gold might experience in the coming year (assuming of course we'll get a decline), I wanted to share an idea so that gold bugs have something to think about. Whether you're a long-term holder, one who cost averages into a long-term position, or instead someone who would prefer to trade the big cycles in and out of gold, the below chart might affect your trading/investment plan.

The wave count for gold's rally from 1999 counts well as complete. A 5-wave move will be followed by a correction of that move and it's typical for the retracement to find support near the previous 4th wave. For gold that previous 4th wave is the pullback in 2008, near 700. It would also be a 62% retracement of the 1999-2010 rally. Perhaps it will only retrace 38%, at 982, and remain inside its long-term up-channel, the bottom of which crosses the 38% retracement in April. It should certainly be good for a bounce there. Only you can decide if you're willing to ride out that kind of correction in gold. You might want to think about hedging your long-term hold position with some puts that are several months out. A LEAP put on GLD would reduce your time decay into April. Remember that GLD is one tenth your physical metal. Just an idea to think about.

Gold continuous contract, GC, Monthly chart

Oil also got a big bounce back up today and it managed to almost get back up to its broken 50-dma. A test and drop back down would leave a bearish kiss goodbye and sell signal. It takes a rally back above 90 to have me thinking something more bullish for oil and in the meantime we should see it continue lower into February before it sets up a correction into March.

Oil continuous contract, CL, Daily chart

Thursday's economic reports include unemployment claims, durable goods orders and pending home sales. The home sales is for November as opposed to today's new home sales for December. November new home sales were lower than December so the negative expectation for tomorrow's pending home sales should not roil the market. A positive surprise could kick the market higher. Keep an eye on the futures pre-market to see if the durable goods orders have any impact.

Economic reports, summary and Key Trading Levels

Summarizing tonight's charts, which I basically tried to do with the DWC chart, the bulls retain control simply because they haven't given it up yet. I see enough evidence of a weakening rally (market breadth, momentum, etc.) in the face of very bullish sentiment that tells me to get ready for a downside disconnect. The relatively weak banks add to my concern. But so far the bulls are stubbornly holding on and we're seeing program buying hit at critical moments to save the market from breaking support. That could continue through next week and offer just enough help to close the month positive (to keep the pundits predicting a higher market this year -- "as goes January so goes the year" is what we'll hear). Remember, the Fed is all about creating the wealth effect through a rising stock market. The fact that the wealth is being created in the hands of the wealthy bankers is a different matter and we won't go there tonight.

The bears therefore need to continue to be patient and let price tell you when it's safe to get into the water. In the meantime the bulls cannot get complacent here. My concern is that the market has become far too complacent in the face of a weakening rally. The rising wedge patterns across the board (and which the RUT has already broken down from) is a warning that when the market breaks down it could go extremely fast (even another flash crash). There's no telling what the computer programs are going to do to this market when they flip into sell mode.

If you're trading the long side, keep those stops tight and think twice about carrying long trades overnight now. Play it safe and close to the vest. Preservation of capital is more important than gains on capital. The bears have already learned that lesson multiple times in the past year.

Good luck and I'll be back with you next Wednesday.

Key Levels for SPX:
- bullish above 1292 to 1320
- bearish below 1271

Key Levels for DOW:
- bullish above 11,900 to 12000-12100
- bearish below 11,750

Key Levels for NDX:
- bullish above 22330 to 2370
- bearish below 2239

Key Levels for RUT:
- bullish above 808 to 825
- bearish below 771

Keene H. Little, CMT

New Plays

Retailers and Big Cap Tech

by James Brown

Click here to email James Brown

Editor's Note:

I'm still seeing a lot of potential bullish candidates. Here's a handful that caught my eye today.

TIE - Metal-related stocks were big winners today and TIE just rallied past technical resistance at its 100 and 200-dma.

F - Ford still has a trend of higher lows and outperformed the market today.

AA - AA is another metal-related name that is nearing its early January highs. There is potential near $17.00-17.50 but once past its early 2010 highs AA has lots of room to move.

THO - This isn't a very fast moving stock but a move past resistance at $37.00 would be interesting.

OSG - This shipping stock has been hammered lower as shipping rates breakdown to new relative lows. However, if there was a spot to buy OSG at support then this could be it. OSG bounced from support near $32.00 yesterday. Traders could open a high-risk trade with a stop loss under $31.80 and look for an oversold bounce.

- James


Ann Taylor Stores Corp. - ANN - close: 22.06 change: +0.55

Stop Loss: 20.80
Target(s): 24.00, 25.00
Current Gain/Loss: + 0.0%
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
I suspect the sell-off and correction in ANN could be nearing an end, or at least it's due for an oversold bounce. Shares have seen a 50% correction from the late summer ally and ANN has found technical support at its 200-dma near $21. Plus, the RLX retail index looks like it is ready to breakout higher from its current sideways consolidation and if that happens it could drag ANN higher. Having said all that I would still consider this an aggressive, higher-risk trade. ANN has definitely been underperforming the market.

I'm suggesting small bullish positions now with a stop under yesterday's low. Our first target is $24.00.

FYI: Just because the calls are cheap doesn't mean you should over due it. Keep your position size small.

Small Bullish Positions - now at current levels

Suggested Position: ANN stock @ current levels

- or -

Buy the 2011 February $24 calls (ANN1119B24) current ask $0.35

Annotated chart:

Entry on January 27 at $xx.xx
Earnings Date 03/11/11 (unconfirmed)
Average Daily Volume: 2.5 million
Listed on January 26th, 2010

Oracle Corp. - ORCL - close: 32.56 change: +0.27

Stop Loss: 31.40
Target(s): 34.90
Current Gain/Loss: + 0.0%
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The stock market is marching to new two-year highs and big cap stocks are leading the way. ORCL has broken out to new multi-year highs and after a four-week consolidation under the $32 level, shares look rested and ready for another leg higher.

I am suggesting small bullish positions now. We want to keep positions small because I'm still concerned the market could roll over in the next couple of weeks. Our target on ORCL is the $34.90 mark since $35.00 looks like the next level of resistance.

small positions now at current levels

Suggested Position: ORCL stock @ current levels

- or -

Buy the 2011 March $33 calls (ORCL1119C33) current ask $0.86

Annotated chart:

Entry on January 27 at $xx.xx
Earnings Date 03/24/11 (unconfirmed)
Average Daily Volume: 27 million
Listed on January 26th, 2010

In Play Updates and Reviews

Microsoft Reports Tomorrow

by James Brown

Click here to email James Brown

Editor's Note:
The stock market continues to march higher as we move deeper into earnings season. Big cap tech titan MSFT reports earnings on Thursday night. We do not want to hold over the announcement.


Current Portfolio:

BULLISH Play Updates

BE Aerospace Inc. - BEAV - close: 39.55 change: +0.65

Stop Loss: 37.75
Target(s): 43.40
Current Gain/Loss: + 1.7%
Time Frame: 6 to 8 weeks
New Positions: see below

01/26 update: The rebound in BEAV continues. Shares are now above short-term resistance at $39.00 again and face round-number resistance at $40.00. The trend of higher lows is still intact. Strong volume on today's rally is encouraging. We can initiate new positions here but keep your position size small to limit your risk.

- (small positions to limit risk) -

Current Position: BEAV stock @ $38.89

- or -

Long the 2011 February $40.00 calls (BEAV1119B40) Entry @ $1.35

01/15: new stop loss @ 37.75

Entry on January 11 at $38.89
Earnings Date 02/01/11 (unconfirmed)
Average Daily Volume: 542 thousand
Listed on January 10th, 2010

Walt Disney Co. - DIS - close: 39.44 change: -0.42

Stop Loss: 37.85
Target(s): 39.90, 42.50
Current Gain/Loss: + 3.1%
Time Frame: 10 to 12 weeks
New Positions: see below

01/26 update: DIS is fading from resistance near $40.00. I am not suggesting new positions at this time.

Our first target has already been hit. We're currently aiming for $42.50.

- Current Positions -

Long DIS stock @ 38.25

- or -

Long the 2011 February $40.00 calls (DIS1119B40) Entry @ $0.45

- or -

Long the 2011 April $40.00 calls (DIS1116D40) Entry @ $1.10

01/19: Consider an early exit from the option positions.
01/15: New stop loss @ 37.85
01/05: 1st Target Hit. Stock @ 39.90 (+4.3%)
01/05: 1st Target Hit. Feb. call @ $1.20 (+166%). April call @ 1.80 (+63.6%)
01/05: new stop loss @ 37.49
01/04: Play triggered @ 38.25

Entry on January 4 at $38.25
Earnings Date 02/08/11 (confirmed)
Average Daily Volume: 8.6 million
Listed on December 25th, 2010

FLIR Systems Inc. - FLIR - close: 30.50 change: +0.56

Stop Loss: 28.90
Target(s): 30.90, 33.00
Current Option Gain/Loss: + 4.8%
Time Frame: 10 to 12 weeks
New Positions: see below

01/26 update: FLIR displayed relative strength with a +1.8% gain and a breakout over resistance near 430.00. Shares hit $30.74 intraday. Our first target is $30.90. Readers could buy this breakout but if you do keep your position size small. Honestly, I'm starting to think there are better candidates than FLIR for our money right now.

Current Position: Long FLIR stock @ $29.10

- or -

Long the 2011 April $30.00 calls (FLIR1116D30) Entry @ $1.60

01/25: New stop @ 28.90
01/19: Consider an early exit from the option position (bid $1.30)
01/15: New stop loss @ 28.49
01/10: FLIR provided another entry point near $28.50
01/08: New stop loss @ 27.90

Entry on December 22 at $29.10
Earnings Date 02/09/11 (confirmed)
Average Daily Volume: 1.6 million
Listed on December 18th, 2010

Hansen Natural Corp. - HANS - close: 56.00 change: +0.70

Stop Loss: 53.40
Target(s): 59.50
Current Gain/Loss: + 0.8%
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

01/26 update: The market strength allowed HANS to tag another high, this time at $56.66. Shares opened at $55.54 (our entry point). I would still consider new positions here or on a dip toward the 10-dma (currently near $54.70). Our target is $59.50. Small positions only to limit our risk.

- Small Positions to limit our risk -

Current Position: HANS stock @ $55.54

- or -

Long the March $60 calls (HANS1119C60) Entry @ $1.50

01/26 the CBOE listed the MAR $60 call's open @ $1.50

Entry on January 26 at $55.54
Earnings Date 02/24/11 (unconfirmed)
Average Daily Volume: 654 thousand
Listed on January 25th, 2010

Microchip Technology - MCHP - close: 37.43 change: +0.11

Stop Loss: 35.95
Target(s): 39.95
Current Gain/Loss: +1.1%
Time Frame: 2 weeks
New Positions: Yes, see below

01/26 update: MCHP hit another new two-year high intraday at $37.65. There is no change from my prior comments. Our plan was to use small positions to limit our risk. I would still consider new positions on a dip near the 10-dma. Our first target is $39.90. We will plan to exit ahead of the February 2nd earnings report.

small bullish positions

Current Position: MCHP stock @ $37.00

- or -

Long the 2011 February $38 call (MCHP1119B38) Entry @ $0.55

01/25 The CBOE listed the call option's open at $0.55

Entry on January 25 at $37.00
Earnings Date 02/02/11 (unconfirmed)
Average Daily Volume: 1.6 million
Listed on January 24th, 2010

Microsoft Corp. - MSFT - close: 28.78 change: +0.33

Stop Loss: 27.85
Target(s): 27.45, 29.75
Current Gain/Loss: +12.6%
Time Frame: 10 to 12 weeks
New Positions: see below

01/26 update: This is it! Tomorrow is our last day for this trade. We want to exit on Thursday at the closing bell to avoid holding over the company's earnings release. Wall Street expects to see a profit of 68 cents a share. Please note our new stop loss at $27.95.

Current Position: Long MSFT stock @ 25.55

01/26/11 New stop loss @ 27.95, exit tomorrow
01/19/11 New stop loss @ 27.85
01/15/11 New stop loss @ 27.49
01/14/11 Follow up. Exit Jan $25 calls @ 3.25 (+133.9%)
01/13/11 Plan to exit our January calls tomorrow at the close.
01/06/11 raised final exit target to $29.75
01/06/11 new stop loss @ 26.95
12/25/10 new stop @ 25.95
12/18/10 new stop @ 25.70
12/14/10 Target hit @ 27.45 (+7.4%), option @ $2.55 (+83.4%)
12/11/10 New stop @ 25.45
11/29/10 New stop @ 24.70

Entry on November 17 at $25.55
Earnings Date 01/27/11 (confirmed)
Average Daily Volume: 68.4 million
Listed on November 15th, 2010

NASDAQ OMX Group - NDAQ - close: 24.51 change: +0.21

Stop Loss: 23.49
Target(s): 26.50
Current Gain/Loss: + 2.1%
Time Frame: 3 to 4 weeks
New Positions: see below

01/26 update: The NDAQ is still drifting higher. There is no change from my prior comments. We're cautiously bullish but reluctant to open new positions. It was our plan to keep positions very small to limit our risk.

Current Position: Long NDAQ stock @ $24.00

01/22: New stop loss @ 23.49

Entry on January 19 at $24.00
Earnings Date 02/02/11 (unconfirmed)
Average Daily Volume: 1.5 million
Listed on January 18th, 2010

SXC Health Solutions - SXCI - close: 46.62 change: +0.98

Stop Loss: 43.40
Target(s): 49.00
Current Gain/Loss: + 5.2%
Time Frame: 8 to 9 weeks
New Positions: see below

01/26 update: SXCI was showing relative strength. The stock added +2% and closed at new all-time highs. There is no change from my prior comments. Readers might want to consider a tighter stop closer to $44. I'm not suggesting new bullish positions at this time.

NOTE: Buying the options is a higher-risk trade. The calls on SXCI have wider than normal spreads put option traders at a disadvantage here.

Suggested Positions: Long SXCI stock @ $44.31

- or -

Long the 2011 February $45.00 calls (SXCI1119B45) Entry @ $1.44

01/22: New stop loss @ 43.40, Consider an early exit.
01/19: New stop loss @ 42.65

Entry on January 10 at $44.31
Earnings Date 03/03/11 (unconfirmed)
Average Daily Volume: 292 thousand
Listed on January 8th, 2010

UnitedHealth Group - UNH - close: 40.25 change: -0.37

Stop Loss: 36.90
Target(s): 42.00
Current Gain/Loss: unopened
Time Frame: 8 to 10 weeks
New Positions: Yes, see trigger

01/26 update: The early morning rally in UNH failed at resistance near $41.00. There is no change from my prior comments. We're still waiting for a pull back toward support near $38.00. I am suggesting we launch bullish positions on a dip at $38.10 with a stop loss at $36.90. Our multi-week target is the $42.00 level.

Buy-the-Dip Trigger @ $38.10

Suggested Position: Buy UNH stock @ $38.10

- or -

Buy the 2011 March $40 calls (UNH1119C40) current ask $1.74

Entry on January xx at $xx.xx
Earnings Date 01/20/11 (unconfirmed)
Average Daily Volume: 5.9 million
Listed on January 20th, 2010

WellCare Health Plans, Inc. - WCG - close: 30.75 change: +0.12

Stop Loss: 29.85
Target(s): 33.75, 37.75
Current Gain/Loss: - 0.0%
Time Frame: 10 to 12 weeks
New Positions: see below

01/26 update: We're back to breakeven. Shares are still trying to bounce from support near $30.00. I would be tempted to launch new positions here. Keep your position size small to limit your risk. Readers could inch up their stops closer to the $30.00 mark.

Keep in mind that investors will have to decide whether or not they are willing to take the risk of holding over WCG's earnings report in late February.

Current Position: WCG stock @ $30.75

- or -

Long the 2011 March $35.00 calls (WCG1119C35) Entry @ $0.60

01/15: new stop loss @ 29.85
01/06: Play triggered @ 30.75.

Entry on January 6 at $30.75
Earnings Date 02/17/11 (unconfirmed)
Average Daily Volume: 410 thousand
Listed on January 4th, 2010

BEARISH Play Updates

Endo Pharmaceuticals - ENDP - close: 34.00 change: +0.08

Stop Loss: 35.75
Target(s): 31.00
Current Gain/Loss: unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

01/26 update: ENDP rallied to $34.26 intraday before fading back toward the $34 level. There is no change from my Monday night comments. The plan is to open bearish positions on a bounce at $34.50. We'll try and limit our risk with a stop loss at $35.75. If triggered our first target is $31.00.

Trigger @ $34.50

Suggested Position: Short ENDP stock @ 34.50

- or -

Buy the 2011 February $35 PUT (ENDP1119N35)

Entry on January xx at $xx.xx
Earnings Date 02/22/11 (unconfirmed)
Average Daily Volume: 1.3 million
Listed on January 24th, 2010

Informatica Corp. - INFA - close: 43.79 change: +1.39

Stop Loss: 44.25
Target(s): 39.00, 36.00
Current Gain/Loss: + 3.7%
Time Frame: 4 trading days
New Positions: see below

01/26 update: Uh-oh! The market's rally today inspired a rebound in INFA. Shares closed above their 50-dma but still below resistance near $44.00. Unfortunately we're almost out of time. The plan is to exit positions tomorrow (Thursday) at the closing bell to avoid holding over earnings. More aggressive traders might want to consider holding over the announcement given the stock's big run up. Shares could see some post-earnings sell-the-news, profit taking sort of move tomorrow. Obviously that depends on what the results are.

Our plan was to use small positions to limit our risk.

small positions

Current Position: Short INFA stock @ 42.20

- or -

Long the February $40 PUT (INFA1119N40) Entry @ $0.85

01/24 CBOE listed the PUT's opening price at $0.85

Entry on January 24 at $42.20
Earnings Date 01/27/11 (confirmed)
Average Daily Volume: 907 thousand
Listed on January 22nd, 2010

Reliance Steel - RS - close: 53.79 change: +1.77

Stop Loss: 55.05
Target(s): 45.05
Current Gain/Loss: + 4.6%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

01/26 update: I didn't see any news on RS this morning so the sharp move higher looks like short covering. Shares have rallied to resistance near $54.00 and on healthy volume. If this stock breaks out past $55.00 I would be tempted to open bullish positions. For now I'm not suggesting any positions. Let's wait and see if the resistance near $54.00 holds or not. Our stop is at $55.05. There is potential support near $48 but I'm targeting a drop toward the $45 level and its 200-dma. We do not want to hold over the earnings in mid February.

Current Position: Short RS stock @ $51.41

- or -

Long the February $50 PUT (RS1119N50) Entry @ $1.35

01/24 CBOE listed the $50 PUT opening price at $1.35

Entry on January 24 at $51.41
Earnings Date 02/17/11 (unconfirmed)
Average Daily Volume: 654 thousand
Listed on January 22nd, 2010