9:00am (EST) continued…

The Dow added 93 points, or 0.75%, to finish at 12,554 on Friday.  The blue-chips fell to a low of 12,035 to start the week but the bulls held support at 12,000.  The first wave of resistance was at 12,200-12,350 which was tested on Tuesday and cleared on Wednesday.  The second wave of resistance was tested on Thursday at 12,600 as the Dow pushed 12,555 before fading.  Friday’s close was a point away from the prior day’s high.  A break above 12,800-13,000 could be a possible trend change as you can see on the longer-term chart while a close below 12,200 this week would confirm the bears are still in control.  The Dow started Monday at 12,118 and soared 436 points, or 3.6%, for the week.  For 2012, the index is back into positive territory by 337 points, or 2.8%.

 

 Longer-term chart:

The S&P 500 advanced 11 points, or 0.8%, to settle at 1,325.  The index tested a low of 1,266 on Monday but never really came close to testing the 1,257-1,250 level which is major support and an area the bulls must hold going forward.  The close at 1,278 was a sign 1,275 would hold, which it did on Tuesday, and set up a run to 1,300 which was cleared on Wednesday’s close at 1,315.  The second wave of resistance at 1,325 proved to be a bit strong as Thursday’s test to 1,328 ended with a close at 1,314.  The bulls were hoping to clear this level on Friday and push 1,350 but ran out of time.  A move above this level brings 1,375-1,400 back into play.  The S&P 500 started Monday at 1,278 and soared 48 points, or 3.7%, for the week.  For the year, the index is showing a gain of 68 points, or 5.4%.

 Here is the longer-term S&P 500 chart:

The Nasdaq jumped 27 points, or 1%, to close at 2,858.  Tech traded to a low of 2,726 at the beginning of the week and slipped below crucial support at 2,750 before finishing at 2,760 on Monday.  The bulls made a run at 2,800 on Tuesday and cleared this level of resistance with Wednesday’s close of 2,844.  The next wave of resistance at 2,850-2,900  on Thursday also proved to be a challenge as the Nasdaq pushed a high of 2,873 before fading to end the day lower (-13 points) at 2,831.  Friday’s push to 2,860 still keeps 2,900 in play and a possible run to 3,000.  The Nasdaq was at 2,747 on Monday and advanced 111 points, or 4%, by Friday’s close.  YTD, the Nasdaq is higher by 253 points, or 9.7%. 

 Here is a 30-month chart for Tech:    

 

The Russell 2000 popped 9 points, or 0.8%, to finish at 769.  The small-caps kissed a low of 729 on Monday’s bottom as the bulls held 720 which was short-term support.  Tuesday’s push to 750 was a sign the760 level was going to be tested which was the first wave of resistance.  This area was cleared on Wednesday’s rally as the Russell closed at 765.  Thursday’s trip to 775 was just shy of the brick wall at 780 and the failed test was enough to knock the index back to 760 by the close.  Friday’s test to 770 is still a sign the bulls could push 800 on continued momentum this week but only if 780 is cleared.  Coming into the week, the Russell was at 737 and tacked-on 32 points, or 4.3%.  The index is back in the green for 2012 by 29 points, or 3.8%.

Here is a longer-term chart of the Russell 2000:

 The S&P Volatility Index ($VIX, 21.23, down 0.49) came into the week at 26.66 and traded to a high of 27.73 on Monday but had fallen to a low of 20.74 on Thursday’s open.  A VIX reading under 20 is usually bullish while a print over 30 is bearish.  If the bulls break the next layer of resistance (or two), the VIX could fall to 17.50 if 20 is taken out.  The bears will target a move back above 22.50 and then 25.

The market was at crucial support to start the week with the bulls needing to hold the 50-week and the 200-day MA’s (moving averages).  These levels got “stretched” on Monday’s drop at the open but the bulls were able to reclaim support while pushing new highs.  Resistance at the top also got stretched but the bulls are eyeing a breakout.

Ben Bernanke’s comments on Thursday were reserved but the rally faded because the bulls were expecting the Fed to actually do something.  Big Ben refused to commit new money to stimulate the economy but said he was ready to act although he didn’t say when or how the Fed would do so.  We talked about the game of poker that the European leaders are playing but they are pot committed which is why we saw some resolution with Spain over the weekend.

Spain is the fourth eurozone country to ask for a bailout and will get $125 billion ($100 billion euros) to shore up their banks.  The EU (European Union) finance members didn’t provide any details on where this money will come from but if its “joint-euro bonds”, expect Germany to throw a fit.  We still say Germany should cut the kids off (Portugal, Ireland, Italy, Greece, Spain) and go back to their own currency which would really throw the market for a loop.

Nothing will be final until June 21 with Spain as their banks will have to undergo stress tests but the money will be funneled through the country’s bank-rescue fund.  The strongest banks will get the bulk of the capital but what they do with it will be the main issue.  The EU is stressing this is a “loan”, not a bailout.

A week doesn’t make a trend but the S&P 500 had its first Friday/ Monday up close since late March, early April.  The week after on April 5 Thursday (the market was closed for Good Friday), the S&P closed lower by a point and was at 1,398.  The following Monday the index fell 16 points and on the Friday afterwards, the index fell 17 points and we wrote “Bingo” on our research notes as we had possible confirmation of a bear market for the rest of April and into May. 

The bearish trend was confirmed in late April and early May which lasted until June 1, Friday, as the S&P ended the session at 1,278, down 22 points.  The index was at 1,419 on April 2 and fell 141 points, or 10%, in 2 months.  It was one of the main reasons we loaded up on over 35 put option trades over that time frame.  

Friday/ Monday up or down closes are important to us and are one of many indicators we use to get a feel for a possible trend change.  The past Monday and Friday were positive closes for the S&P which hasn’t happened in over 2 months and today looks positive. 

Greece will have their elections this upcoming weekend and a new party could force the country out of the eurozone anyway.  Spain’s news will be short-lived as the focus quickly turns back to Greece.  June option triple-witching is on Friday and it can bring volatility.  Also, we have mentioned the week after June options expiration is extremely bearish, historically, for the market.

Second quarter earnings season will start in July and from now and until then, companies use this period to “pre-warn”.  China appears to be slowing down and cut rates to spur growth over the weekend.  

Obviously, the Spain news has had a positive impact on futures and will likely lead to a huge pop on Wall Street this morning.  We expect the second layers of resistance we have charted to come into play but something just doesn’t feel right.  While the bulls’ momentum has been strong, the bears’ bite was just as powerful during the prior week sell-off or did everyone forget?

It’s hard to say the “trend” is up until the market breaks out past stronger resistance so let’s just say the rally could continue this week.  The bulls love to climb a wall of worry but the bears like to lay back and attack when you least expect it. 

As we head to press, futures are showing a higher open and look like this.  Dow futures are up 70 points to 12,573 while the S&P 500 futures are higher by 7 points to 1,329.  The Nasdaq 100 futures are advancing 14 points to 2,571.       

 

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 a “Profit 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.

Special Note:  While the temptation was there to buy short-term June call options last week (and still is), we held off and started some put positions because we didn’t trust the Fed’s Beige Book or the jobless claims numbers.  We also expected a Spain train wreck and there is still some uncertainty there.  Greece takes center stage this weekend.   

We added 3 new positions last week and they were all July options which have nearly 6 weeks before they expire.  The only real trade in trouble is the RealD (RLD, $11.98, up $0.42) June puts which expire Friday and will probably snap our 20-trade win streak.  We should of went with July put options on RLD.  We still feel really, really good with our current trades and we love the Apollo puts and may even add to our position if shares move past resistance at $35 and up to $37-$38.  There are a few call options (3) we have left over from March and our bullish streak but we aren’t expecting much from them although they could get a pop if the bulls break resistance and push new highs for the year.  They have been dead money for weeks.  Our Arena trade is safe for a triple-digit gain no matter what happens at the end of the month.

Overall, the portfolio is light so we are going to see how the next week or two unfolds before we get “nervous” which is why we said traders will need to keep their emotions in check.

 

iShares Russell 2000 (IWM, $76.97, up $1.03)

July 70 puts (IWM120721P00070000, $0.90, down $0.25)

Entry Price:  $1.20 (6/6/12)

Exit Target: $2.40
Return:  -25%
Stop Target:  60 cents

Action:  Shares closed above their downtrend line on Friday and a close above $78 gets $80 into play.  Our stop target might come into action but it is not a hard stop so don’t take action unless we decide to close the position.  The July options have 6 weeks before they expire and the bears will be looking for a close below $75 this week or next.

 

Veeco Instruments (VECO, $34.60, up $1.08)

July 30 puts (VECO120721P00030000, $1.00, down $0.30)

Entry Price:  $1.00 (6/6/12)

Exit Target: $2.00
Return:  0%
Stop Target:  50 cents

Action:  Shares fell to a low of $32.94 at the open but surged to test $35 by the close.  A move above $37 would be bullish but we are expecting a drop below $30 by mid-July.   

 

Illinois Tool Works (ITW, $56.01, up $0.15) 

July 50 puts (ITW120721P00050000, $0.60, down $0.05)

Entry Price:  $1.05 (6/4/12)

Exit Target: $2.10
Return:  -43%
Stop Target:  None

Action:  Shares ended slightly higher on Friday but not with much zing.  A break above $57 would be bullish but we are looking for a drop below $53.50 over the next 2 weeks which will quickly bring $50 into play.

 

Constant Contact (CTCT, $20.00, down $0.41)

July 17.50 puts (CTCT120721P00017500, $0.70, up $0.15)

Entry Price:  $0.55 (5/24/12)

Exit Target: $1.10
Return:  27%
Stop Target:  None

Action:  Shares touched a low of $19.77 and we were looking for a close below $20.  Shares could run to double-deuces ($22) on another bounce which would get the 200-day and 50-day MA’s back into the picture but we are expecting a drop below $18 over the next 6 weeks.  

 

First Solar (FSLR, $12.80, down $0.04)         

July 10 puts (FSLR120721P00010000, $0.50, down $0.03) 

Entry Price:  $0.62 (5/23/12)

Exit Target: $1.20
Return:  -19%
Stop Target:  None 

Action:  We were looking for a close below $11.50 on Friday as Monday’s low was $11.43.  Shares rebounded to test $14 on Thursday’s market surge but settled below $13 for the day and for the week.  This company is running out of cash which should get shares to single-digits by mid-July.

 

Best Buy (BBY, $19.98, up $0.44)   

July 16 puts (BBY120721P00016000, $0.26, down $0.03)

Entry Price:  $0.85 (5/21/12)

Exit Target: $1.70
Return:  -68%
Stop Target:  None

Action:  Shares traded down to $18.19 on Thursday after the co-founder put his 20% stake in the company up for sale.  Best Buy is reminding us a lot of RadioShack (RSH, $4.34, down $0.04) and $20 has been holding.  Below is a 10-year chart and you can see the break below the long-term uptrend line.  We will keep this trade open until expiration but there could be a test to $22.50 on continued strength.  A close below $17.50 should get the stock to $15 or worse which will get these options back in the green.    


 

Apollo Group (APOL, $34.98, up $0.68)

August 27 puts (APOL120818P00027000, $0.55, down $0.05)

Entry Price:  $0.90 (5/10/12)

Exit Target: $1.80
Return:  -39%
Stop Target:  45 cents

Action:  These options have until August before they expire and we are pretty confident shares will be below $30 by July.  From there, we are expecting a test down to $25-$20.

Interest rates on student loans are set to DOUBLE on July 1.  Last week, the Vice President said Congress wouldn’t accept the latest proposals on ways to pay for extending low interest rates on student loans.  Our government is likely to drop the ball on a bubble they created by handing out a trillion dollars to people who were out of work and decided online colleges were going to get them the training for a real job.

We are sure you have seen the commercials with TV models lounging in their PJ’s saying how easy it is to get approved for a loan and go to school.  Yeah, a good school is supposed to be hard and many of these “students” used this money to pay rent, buy groceries, party, or put gas in their cars.  If the rates double, more defaults will occur.    

Arena Pharmaceuticals (ARNA, $6.62, up $0.20)  

July 3 calls (ARNA120723C00003000, $3.80, up $0.20)

Entry Price:  $1.00 (4/30/12)

Exit Target: $2+ (closed half on 6/5/12 at $3.40)
Return:  260%
Stop Target:  $3 (Hard Stop on other HALF)

Action:  This is a 10-year chart for Arena.  Shares traded to a high of $6.53 to start the week but fell to $6.15 the following day.  Shares closed above $6.50 on Fridaywhich was bullish but we are still looking for a run past $7 which has been strong resistance.  

We have a price target of $10+ if there is no delay with their obesity drug, Lorcaserin, which could go to market by the end of the year if all goes well.  For those of you just joining us, the company will meet with the FDA on June 27 and we did a big update on the company in our last Weekly Wrap.

 

Other 2012 Portfolio OPEN positions (3):  These are trades that are still open in the portfolio but are down over 50%.  They have longer expiration dates and 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 if the options expire.  Click on the 2012 Portfolio link in the Members Area to view ALL open/ closed trades.

E*Trade Financial July 12 calls (from March 2012)

Bank of America January 12.50 calls 2013, July 12 calls (from March 2012)

RealD June 10 puts (from May 2012)

 

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 but these are the trades we are watching as new candidates.

 

Coinstar (CSTR, $62.10, up $1.09)   

July 52.50 puts (CSTR120721P00052500, $0.60, down $0.20)

July 55 puts (CSTR120721P00055000, $1.05, down $0.20)

Thoughts:  A close below $60 would get us interested in Coinstar again.

 

KLA-Tencor (KLAC, $47.33, up $1.39)

July 44 puts (KLAC120721P00044000, $0.80, down $0.40)

September 37 puts (KLAC120922P00037000, $0.75, down $0.15)

Thoughts:  We would like to see a quick pop to $50 which is where we might start half positions.  We may add the September 37 as a speculative trade with the 200-day south of $34.

 

Apache (APA, $82.97, down $0.51)

July 72.50 puts (APA120721P00072500, $1.10, up $0.15)  

Thoughts:  We mentioned shares could get a quick run back to $85 and Apache tested $85.47 on Thursday before fading.  We are still waiting for another break below $80 before possibly going short.   

 

Schlumberger (SLB, $64.54, up $0.11)

July 57.50 (SLB120721P00057500, $1.05, down $0.10)

August 55 puts (SLB120818P00055000, $1.30, flat)

Thoughts:  Shares easily look like they are headed below $60 but there could be a bounce to $65 over the near-term. 

 

PowerShares QQQ (QQQ, $62.87, up $0.60)

July 60 puts (QQQ120721P00060000, $0.95, down $0.20)

July 65 calls (QQQ120721C00065000, $0.70, down $0.15)

Thoughts:  Watch for now.

 

Potash (POT, $38.38, down $0.22)       

July 37 puts (POT120721P00037000, $1.30, up $0.05)

July 35 puts (POT120721P00035000, $0.70, flat)

Thoughts:  Resistance at $40 has held and we would like to see one more failed test to this level which is where we may purchase some put options.