The bears continued their recent domination of the bulls as the market fell for the sixth-straight week. After a rough May, the selling pressure has continued into June with 7-out-of-8 losing sessions to start the month. The only positive day came on Thursday which was a much needed bounce but the momentum has picked up over the past few weeks as the bears continue to take out key support levels.
The lack of positive catalysts has hurt the bulls as global and the U.S. economies continue to struggle. Word of slower economic growth out of China sparked Friday’s decline along with an unexpected increase in U.S. import prices for the month of May. But, the news was bad all week and Friday’s decline was just the icing on the cake as the bears broke thru several psychologically significant levels for the major indexes.
The Dow fell 172 points, or 1.4%, on Friday to settle at 11,951. The index reached a low of 11,937 intraday and easily fell thru our downside target of Dow 12,000. The bulls tried to make a run back over 12,200 early in the week but resistance was heavy which led to the slow drift downward and Friday’s selloff. We said last week if the 12,000 level didn’t hold up there would be short-term support at 11,800-11,750. Watch these levels for the week and if penetrated all signs would point towards Dow 11,600-11,500. Upside resistance will now be 12,000 and then 12,200. For the week, the blue-chips fell nearly 200 points, or 1.6%, but are still up 3.2% YTD. A break below 11,600 would wipe out the gain and would put the Dow at even for the year.
The S&P 500 dropped 18 points, or 1.4%, and closed at 1,270. The index dipped to a low of 1,268 on Friday and was unable to mount a serious threat at 1,300 even with Thursday’s bounce back to 1,289. We mentioned downside pressure at 1,275 if the bulls couldn’t get back over the 1,300 level and there is now further risk down to 1,250. These two areas will be act as short-term resistance and support going forward. For the week, the S&P 500 dropped 29 points, or 2.2%, but is still holding on to a 1.1% gain for 2011. A break below 1,257 would put the index in the red for the year.
As far as the Nasdaq, it tumbled 41 points, or 1.5%, and settled at 2,643. The index fell below the 2,750 level the week before last and we said further risk was down to 2,700 once this level was breeched. By Tuesday, the bears were all over 2,700 and we said in our daily that 2,650 would come into play. Tech traded to a low of 2,641 on Friday and faces further risk down to 2,600-2,550 for the upcoming week. Resistance is now at 2,700-2,725. For the week, the Nasdaq plunged 89 points, or 3.3%, and is now down 0.3% for 2011 after starting the year at 2,652.
We also wanted to point out the decline in the Russell 2000 which we said was also in danger of falling below key support levels. The index went into Monday’s session above 800 but dropped 13 points for the day to finish at 795. By Friday, the Russell closed at 779, down another 13 points, which marked a 10% correction from the high.
And finally, the S&P 500 Volatility Index (^VIX, 18.86, up 1.09) jumped 6% on Friday but managed to stay below 20 all week. We have also mentioned that a break above 20 could cause panic as the index is used to gauge fear. A VIX reading under 20 indicates confidence and calm while a reading above 30 indicates nervousness and panic. So, if you think this is panic, you haven’t seen anything yet.
The recent debacle has brought the major indexes down to their mid-March closing lows which are Dow 11,613; S&P 1,256; and Nasdaq 2,616. If these levels are breeched then the VIX will be over 20 and could be headed to 30 on a continued selloff.
We mentioned a few months ago to start watching for lower Friday and lower Monday closes which indicate money is moving out of the market and that a trend is changing. From May 22, 2011:
“We mentioned last week that bull market rallies show signs of fading with weak Friday and Monday closes. We had also mentioned there had only been three occurrences where the S&P 500 finished lower on a Friday and the Monday after (for 2011). Make that four with last Monday’s lower close.
The problem the market faces on Monday if we do close lower will be a back-to-back consecutive lower Friday/ Monday finishes. We have said this could signal a trend change and we will continue to monitor this development but we still have this feeling the market is going to hit new highs in June.” (END)
On May 23, the following Monday, the Dow fell over 100 points. We had a higher Friday/ Monday close to end the month of May but the market started the month of June with lower closes on both days. If the bears win Monday’s session then it probably means the trend lower continues and we break the March lows. From there, it could get worse, or, we could start to see some nibbling at the support levels we have outlined. In any event, this week will be crucial for the bulls as they try to hold support and avoid a seventh weekly drop. If they can’t then we doubt we see new highs until the after summer is over.
Please remember, ALL “Exit Targets” and “Stop Targets” are targets. You should not have any “Hard Stops” entered to close any trades or “Exit Orders” in your brokerage account unless we list one. We will send out an “Alert” or “Trade Update” if we want you to close a position OR if a new trade comes out. Otherwise, follow instructions at all times in the 9am and 1pm updates. Also, we will usually give you a heads-up if we think we are going to send an email outside of these time frames but it is rare that we do.
RealD (RLD, $20.90, down $3.17)
July 20 puts (RLD110716P00020000, $1.30, up $0.70)
Entry Price: $0.45 (6/9/11)
Exit Target: $0.90+ (closed half at $1.60 on 6/10/2011)
Stop Target: 75 cents
Action: We closed half at $1.60 on Friday’s open, and with the current price, the average is $1.45 which gets our return of over 200% return. We said shares could fall into the teens when we initiated the trade, just above $24, and the stock traded to a low of $19.50 on Friday which is below the next layer of support (red line). However, we have the July options and we think a break below $18 is coming (blue line). We have now listed a stop of 75 cents on the other half.
Research In Motion (RIMM, $36.56, down $1.05)
July 32.50 puts (RIMM110716P00032500, $1.10, up $0.20)
Entry Price: $0.75 (6/6/11)
Exit Target: $1.50
Stop Target: None
Action: RIMM reports earnings on Thursday. Shares traded to a fresh 52-week low of $36.08 last Thursday and we will now target a drop below $35, its March 2009 lows (green circle, black line).
Zagg (ZAGG, $11.63, up $0.77)
July 12 calls (ZAGG110716C00012000, $0.65, up $0.25)
Entry Price: $0.35 (6/1/11)
Exit Target: $0.70
Stop Target: None
Action: Zagg went on a roll after our Friday midday update and hit a fresh 52-week high of $11.98. We have a near-term price target of $14-$15 which gets these calls to $2-$3. However, we may close half if we can hit a triple-digit return today.
Darling International (DAR, $18.20, up $0.10)
July 20 calls (DAR110716C00020000, $0.30, up $0.05)
Entry Price: $0.50 (5/27/11)
Exit Target: $1.00
Stop Target: None
Action: Shares reached a high of $18.83 on Friday but finished only slightly higher for the session. The recent breakout past prior resistance should hold as support (green circles). We still feel shares will be above $20-$21 by mid-July as the corn trade gains momentum. We mentioned last week the talking heads were drooling over this stock and as corn supplies get stretched, Darling should do well.
Vivus (VVUS, $7.78, up $0.02)
September 10 calls (VVUS110917C00010000, $0.35, flat)
Entry Price: $0.65 (5/20/11)
Exit Target: $1.30
Stop Target: None
Action: Vivus traded to a low of $7.66 for the week and this area has been acting as short-term support. However, if broken, it could lead to a trading range between $6-$8.
The company may have a winner with Qnexa on two fronts which is what most analysts are forgetting. The drug has completed Phase 3 trials for obesity and is still awaiting approval from the FDA. However, Qnexa has also completed Phase 2 clinical trials and is hoping to get approval to treat diabetes and obstructive sleep apnea as well. If shares trend lower, we may drop coverage until there is a push back towards $10.
Seattle Genetics (SGEN, $19.40, down $0.45)
September 20 calls (SGEN110917C00020000, $2.15, down $0.25)
Entry Price: $1.50 (5/9/11)
Exit Target: $3.00 (closed half at $2.20 on 6/8/2011)
Stop Target: $1.60 (HARD STOP on other half)
Action: Seattle Genetics reached a high of $20 again on Thursday but slipped 2% on Friday. There is strong support at $19 (black line) but we realize a test back down to $17 (red line, green circles) could come into play if $18.50 is taken out. This is our favorite stock to own over the next 6-12 months if you don’t play options.
Alpha Natural Resources (ANR, $45.69, down $1.22)
June 44 puts (ANR110618P00044000, $0.45, up $0.20)
Entry Price: $0.80 (5/13/11)
Exit Target: $0.80+
Stop Target: None
Action: These options expire this Friday and we are still looking for a drop below $44 (black line) which serves as prior resistance and near-term support (green circles). However, a drop below for $44 could lead to the low $40’s which should serve as support (black circles)
Other 2011 Portfolio OPEN positions (8): These are trades that are still open in the portfolio that have longer expiration dates or are on “hold” but are not worth mentioning until they turn around. This means we would not open any new positions. We are still keeping track of the trades and we will record the results, accordingly, when we close them or the options expire. Click on the 2011 Portfolio link in the Members Area to view ALL open/ closed trades.
Vivus June 14 calls (from January 2011)
eBay July 40 calls (from February 2011)
RF MicroDevices August 10 calls (from February 2011)
Dendreon August 50 calls (from April 2011)
KLA-Tencor June 48 calls (from May 2011)
Starbucks June 38 calls (from May 2011)
MGM Resorts International September 17 calls (from May 2011)
Rediff.com India October 15 calls (from June 2011)
WATCH LIST SECTION
These trades are NOT recommendations. They are trades that we like but have not added to the portfolio as an official recommendation because of market conditions or because we are waiting for better entry prices. We try not to have more than 12-15 open trades at any one time which is why we created a Watch List. We will not list entry prices because these stocks are on the verge of breaking out or they could sell-off.
Symantec (SYMC, $18.50, down $0.35)
October 20 calls (SYMC111022C00020000, $0.75, down $0.15)
Thoughts: There is risk down to $18 (black line and red circles) for shares of Symantec which is the first wave of support. A break below $18 could lead to $17.50 (red circles and green line) which is where would expect a trading range to form before the next leg up. However, if shares hold at current levels they could challenge new highs by October.
S&P 500 Spiders (SPY, $127.60, down $1.80)
July 125 put (SPY110716P00125000, $2.00, up $0.60)
Thoughts: All signs are pointing towards a test of 1,250 (black line, red circles).
Polycom (PLCM, $58.45, down $1.69)
July 62.50 calls (PLCM110716C00062500, $1.60, down $0.55)
Thoughts: The 2-for-1 stock-split hits this week and shares should hold $55-$56 if there is further weakness. Usually there is some consolidation after the split but a strong uptrend could resume shortly afterwards.
Wells Fargo (WFC, $26.28, up $0.06)
July 24 puts (WFC110716P00024000, $0.30, flat)
Thoughts: There could be a run back to $26.50 (black line) after Friday’s slight pop but we doubt any rally will stick over the short-term. If Wells hits new lows at $23 (red circles) these options would be worth $1 or 233% from current levels.
Kraft Foods (KFT, $33.79, down $0.43)
September 35 calls (KFT110917C00035000, $0.50, down $0.10)
Thoughts: We would like to see a drop down to $33 which is where support comes in.
Caterpillar (CAT, $96.79, down $2.47)
July 95 puts (CAT110716P00095000, $2.75, up $0.90)
Thoughts: We said all last week Caterpillar was headed below $100 which served as support and will now be resistance on its way to $95 (red line, green circles).
Freeport-McMoRan (FCX, $48.93, down $0.92)
July 55 calls (FCX110716C00055000, $0.40, down $0.15)
July 44 puts (FCX110716P00044000, $0.75, up $0.15)