9:00am (EST) continued…
The Dow added 4 points, or 0.03%, to end at 12,815 on Friday. The downside channels we drew up last week were spot on as the blue-chips held 12,800 but the drop to 12,743 opened the door for a test down to 12,600 and possibly 12,350 on an overshoot as you can see in the chart. Resistance will be at 13,000 followed by 13,200. The Dow started the week at 13,093 and was down 278 points, or 2.1%, by Friday’s close. For 2012, the index is showing a gain of 598 points, or 4.9%.
Last week’s chart for the Dow:
The S&P 500 gained 2 points, or 0.2%, to settle at 1,379. The index closed just below its 200-day MA and right at the bottom of last week’s downside channel. We have been calling for a pullback to 1,350 and a break below this level could lead to 1,325-1,300. Resistance is at 1,400 followed by 1,425. The S&P500 started Monday at 1,414 and lost 35 points, or 2.4%, for the week. For the year, the index is up 122 points, or 9.7%.
This is the S&P’s chart from last week:
The Nasdaq advanced 9 points, or 0.3%, to finish at 2,904. Our downside target of 2,900 was hit on Thursday when Tech traded down to 2,895 which nailed our 5% pullback target from mid-October. The next wave of support is at 2,850 but 2,800 could be in play if some of the bigger market-cap names continue to fold like a cheap lawn chair. Resistance is at 2,950 and then 3,000. The Nasdaq came into the week at 2,982 and was down 78 points, or 2.6%, by the weekend. YTD, the index is higher by 299 points, or 11.5%.
Here is how Tech looked last week:
The Russell 2000 popped 2 points, or 0.3%, to finish at 795. We said the small-caps needed to hold 810 on Monday and they did before clearing 820 on Tuesday. However, the index fell below 810 and tested 800 on Wednesday’s sell-off. The break below the 200-day MA gets our 780 target in play from mid-October. There could be an overshoot to the downside of 760 if there is panic selling and from there it gets ugly. The bulls will need to clear 800 to start the week and then 810 to stop the bleeding. A move back above 820 would be bullish and would signal a bottom is in. The Russell 2000 was at 814 before Monday’s open and gave back 19 points, or 2.4%, by Friday’s closing bell. For 2012, the index is showing a gain of 54 points, or 7.3%.
Here is the Russell 2000 from last week:
The S&P Volatility Index ($VIX, 18.61, up 0.12) came into the week at 17.59 and traded to a high of 18.70 on Monday’s which gave us a clue 20 could trigger if 17.50 held. On Tuesday’s push higher, the VIX briefly fell below 17.50 to 17.19 but finished the session at 17.58 which favored the bears. We have been calling for the VIX to test 20 and said this is when the panic selling would start. Wednesday’s high on the selloff was 19.40.
We said last week there was a good chance the mini trading range the market had been in was about to crack and all signs were favoring the bears. The move lower from the previous 5-week trading range served as serious resistance and the breakdown from the current trading range could lead to a possible correction if the zombies aren’t careful.
Of course, the big worry as soon as the Presidential Election ended was the Fiscal Cliff and the rhetoric that would come on Friday. The Republicans have made it clear they are against raising taxes on individuals and businesses making more than $250,000 because of the impact it will have on future economic growth. They argue 7 million jobs will be lost.
The Democrats want to raise taxes, implement ObamaCare which is already forcing companies to cut back on employee hours so they won’ t have to offer healthcare benefits, and increase taxes on capital gains and dividends.
Needless to say, this is going to get nasty and it won’t be solved anytime soon. If the zombies can’t come to agreement on nearly $600 billion in spending cuts and tax increases by yearend, the talk is the U.S. economy will go into another recession. Unemployment could surge above 9% by the end of next year, or 20% if you count the people who have given up working that the government doesn’t count.
We aren’t Vegas, but the odds of the zombies pushing the U.S. off the cliff are running at 5-to-1, or 20%, but could increase if Congress drags its feet. There are talks scheduled for this Friday at the White House (Monday or Tuesday was just way too soon we suppose) and Thanksgiving is next week. Given the lines in the sand that were drawn this past Friday, this leaves the earliest we see something getting done is December.
This leaves the bulls in a volatile situation which is only likely to pick up from here on out until these issues are resolved.
As the rest of the world watches our soap opera play out, headlines from across the pond could also come back into play. There were more riots in Greece last week after the country approved additional austerity measures to ensure an upcoming aid payment. The country continues to blow through cash and will try to raise 3 billion euros on Tuesday in an attempt to sell debt through bonds. Why any investor would buy these bonds or why Greece continues to get more money baffles us because they can’t ever pay it back.
Same deal with Spain. The country so far has refrained from asking for an “official” bailout that would trigger bond purchases from the European Central Bank but it could be coming. We aren’t sure how the markets will react to this news that could also hit this week but the ECB wants Spain to ask for a handout so that it will reduce the yields on their bonds.
The fight over money, taxes, and power between the zombies will weigh on the market over the near-term as earnings wind down and the holiday’s comes around. However, we did mention the week before Thanksgiving is usually bullish and the indexes are due for a bounce. It is also November options expiration week and it will only add to the volatility.
Over the past 18 years, the Dow has traded higher for the week in 15 of them. However, Monday’s have been bearish 7 out of the last 12 during November option expiration week with a nasty loss of nearly 3% in 2008. The index fell from 8,497 to 8,273 which would be roughly 350 Dow points at current levels.
Friday November expiration has seen the Dow rally 7 out of the last 9 years with 2008 showing jaw dropping gains. The blue-chips surged nearly 500 points, or 6.5%, after moving from 7,552 to 8,046. We mentioned on Friday some of the wild price swings the Dow endured in 2008 and while we don’t believe the index will see a 3% or 6% single-day drop, it could happen over the next few weeks if there is continued weakness and the finger-pointing becomes middle fingers between the Republicans and Democrats.
While we have penciled in a possible rebound, we still believe our 5% targets for all of the indexes will trigger and we often remind you that once there is a breakout or breakdown out of a trading range there are fluff targets.
From our 10/28/12 Weekly Wrap:
“There are a ton of fund managers that are underperforming the market and some of them have been caught on the wrong side of the recent volatility trying to make up for lost ground. At some point, there could be a bottom and strong rally but we have to be prepared for both cases. It was good to break out of the trading range to the downside but they too can sometimes get “stretched” at the top and at the bottom so we have to realize this as well.
So how low could the indexes go if the 200-day MA’s break and there is panic selling?
The Dow touched a low of 12,035 in early June and the mid-July low was 12,492. The June 4 low for the S&P 500 was 1,266 while the July low was 1,325. The Nasdaq lows were 2,726 and 2,837 in June/ July while the Russell 2000 kissed 729 and 765, respectively.” (END)
As we head to press, futures are showing a slightly higher open this morning. Dow futures are up 31 points to 12,795 while the S&P 500 futures are higher by 4 points to 1,380. The Nasdaq 100 futures are advancing 13 points to 2,594.
MEMBERS AREA
Do not risk more than 5% of your trading account on any one trade but do try to take ALL of the trades. 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. Closed Trades for 2012 (144-50, or 75% win rate, including the Weekly Wrap which is 26-0).
KLA-Tencor (KLAC, $46.24, up $0.58)
December 43 puts (KLAC121222P00043000, $0.80, down $0.15)
Entry Price: $0.60 (11/7/12)
Exit Target: $1.20
Return: 33%
Stop Target: 60 cents
Action: We would like to see shares hold $47 if there is a rebound but there is risk up to $48. We are expecting a near-term test to $44 but if this level fails shares could push $40.
LifeLock (LOCK, $8.08, up $0.24)
December 10 calls (LOCK121222C00010000, $0.30, flat)
Entry Price: $0.10 (11/6/12)
Exit Target: $0.50
Return: 200%
Stop Target: None
Action: We got our close above $8 on Friday and a close above $8.20 this week would be bullish. A drop below $7.60 would be bearish.
Apollo Group (APOL, $18.75, down $0.64)
December 18 puts (APOL121222P00018000, $1.00, up $0.15)
Entry Price: $0.88 (10/25/12)
Exit Target: $1.70
Return: 14%
Stop Target: None
Action: Wednesday’s kiss of $18.46 was a 52-week low and we would like to see shares close below $18.50 this week. If there is a rebound we would like to see $20 hold. We have said all year long shares could test the mid to low teens and we are already looking at longer-term options to play a continued slide.
Other 2012 Portfolio OPEN positions (7): 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.
***November Options Expire This Friday***
O’Reilly Automotive November 70 puts (from October 2012)
American Express November 60 calls (from October 2012)
Buffalo Wild Wings November 70 puts (from September 2012)
LeapFrog November 10 calls (from November 2012)
Bank of America January 12.50 calls (2013) (from March 2012) – continue to hold
Knight Capital Group January 2.50 calls (2013) (from August 2012) – takeover target
Solazyme December 12.50 calls (from September 2012)– continue to hold
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.
PowerSharesQQQ (QQQ, $63.43, up $0.27)
December 65 calls (QQQ121222C00065000, $0.85, up $0.05)
December 61 puts (QQQ121222P00061000, $0.85, down $0.10)
Thoughts: Watch the Nasdaq and reference the chart for a test to $60 or a break back above $65.
S&P 500 Spiders (SPY, $138.16, up $0.12)
December 144 calls (SPY121222C00144000, $0.75, up $0.05)
December 130 puts (SPY121222P00130000, $1.15, flat)
Thoughts: Watch for now and use the S&P chart to watch support and resistance.
HealthCare REIT (HCN, $58.64, down $0.01)
December 60 calls (HCN121222C00060000, $0.65, flat)
Thoughts: Wait for a close above $59.50 to go long or we may go short on a close below $57.50.
Halliburton (HAL, $30.56, up $0.08)
December 32 calls (HAL121222C00032000, $0.65, flat)
Thoughts: Support is at $30 but if this levels fails
SolarWinds (SWI, $51.82, up $0.13)
December 45 puts (SWI121222P00045000, $0.60, down $0.10)
Action: We have been hoping shares would do a back test to $55 but $52 is sticking If $50 fails, shares could test the mid to low $40’s.
Wellpoint (WLP, $56.16, up $0.15)
December 60 calls (WLP121222C0006000, $0.60, down $0.05)
December 52.50 puts (WLP121222P00052500, $0.80, down $0.05)
Thoughts: This would have been a great strangle trade last week after the failed test to clear resistance at $60 and the 100-day and 50-day MA’s. A move below $54.50 would be super bearish and could lead to a drop below $50.
