Option Investor
Newsletter

Daily Newsletter, Monday, 6/22/2009

Table of Contents

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

Market Wrap

Monday, Bloody Monday

by Todd Shriber

Click here to email Todd Shriber
This probably was not the start to the week the bulls had in mind after last week's slump. News out of the World Bank that the global economic situation is more dour than originally thought spooked investors, sending the S&P 500 down 3.1% to 893.04. Monday's drubbing of the index surpasses the 2.6% it shed last week. The Dow Jones Industrial Average tanked 200.72 points, or 2.4%, to 8339.01, reminding investors the venerable index still knows how to execute a triple-digit tumble. Technology provided little respite as the Nasdaq fell 61.28, or 3.35%, to 1766.19.

Market Stats

Investors left disappointed by a lack of volatility during last Friday's quadruple witching day got it in spades today. It seems the market is no longer impervious to bad news, though it seems like only yesterday a host of dire forecasts could be released, banks could clamor for capital and earnings could disappoint, and the market would rally. Things have obviously changed. According to the World Bank, things might be getting worse.

The World Bank said today it expects the global recession to be deeper than originally estimated and when growth resumes, (hopefully) sometime in 2010, it will be at a 2% clip, not the 2.3% forecast just three months ago. For 2009, the World Bank expects the global economy to contract by 2.9%, but poverty and unemployment will continue to rise. Those are anything but the green shoots this market so desperately craves.

And don't think that because equities spent the day being taken to the woodshed that commodities provided any shelter for beleaguered investors. Crude oil continued to fall, closing below $67 and Treasury prices climbed. Monday was just a glum day for commodities period as the Reuters/Jefferies CRB experienced its biggest drop in three weeks, closing at 246.07. The index tracks 19 commodities, so pick one and it was probably down today. News that miner Anglo American (AAUK) spurned a takeover offer from rival Xstrata did not do much to bolster sentiment in the commodities space and may have dampened hopes for consolidation in the sector.

Not surprisingly, this was not good news for commodities stocks. Dow component Alcoa (AA) shed 98 cents, or 8.9%, to close at $10.02. That's well below the 200-day moving average at $10.73 and next support may appear at the 50-day moving average of $9.74. Honestly, that level could be breached as early as tomorrow.

Chart of Alcoa

Copper mining giant Freeport McMoran (FCX) joined in the commodities calamity for the day, plunging $5.75, or 11.3%, to $45.18. Last Tuesday, this was a $55 stock, meaning you had a triple-bagger on your hands had you bought the stock roughly a week before last Christmas. It appears Freeport topped out at $61.55 earlier this month. Giving up $16 in a span of two weeks is never a good sign and the stock sliced below its 50-day moving average of $48.99 today. Volume was about 33% higher than usual today, indicating the selling pressure was intense to say the least.

Freeport is a well-managed company and investors would be hard-pressed to find a better large-cap play on international copper demand. That said, Freeport's most recent bullish run appears to have not only stalled, but perhaps ended and the chart is below so you may draw your own conclusions.

Chart of FCX

Speaking of the end of bullish of runs, after more than doubling in just four months, crude oil appears to be pulling back as well. Just a few weeks ago black gold seemed like it would make its way to $75 a barrel and from there other lofty heights seemed obtainable. Crude for July delivery closed at $66.93 on the NYMEX, but the bright side is several press reports today noted a decline in gasoline prices as well. In fact, gasoline futures contracts are down more than 10% since last week, so that's a bit of good news for consumers. Whether or not that news is a green shoot, well, only time will tell.

Crude's pullback probably should not startle anyone. Over the past several weeks, in the Market Monitor and in our Market Wraps, rising oil inventories and less miles driven have been noted as two factors that made oil's ascent somewhat dubious. In other words, the fundamentals really weren't there to support crude's climb higher and enthusiasm on the part of speculators was probably the driving forces behind oil's surge.

Crude futures were also hostage to the expiration of those futures at the close today. The USO and DXO as well as other oil ETFs had to be out of that contract before the close. Just the USO/DXO volume equates to more than 30% of the open interest in the July contract so the panic expiration decline was not really a surprise.

The USO ETF, which tracks the daily price action in crude oil futures, finished the day down $1.72 to $36.25 and has shed more than $3 in the past five sessions. It is now well below its 200-day moving average at $41.08 and any more pain could bring the 50-day moving average of $33.22 into play.

Chart of USO

Another oil ETF getting tarred and feathered today was the Oil Services HOLDRs ETF (OIH), which tracks a basket of oil services, a group I had been quite bullish on starting back in early May. Holdings include companies such as National Oilwell Varco (NOV), Diamond Offshore (DO) and Transocean (RIG). All fine companies to be sure, but all were down over $2 today and the OIH was down $6.62, or 6.5%, to $95.04. That is its first close below $100 in three weeks.

A comparison to Freeport McMoran is relevant here not only because the OIH and its holdings are deeply correlated to a physical commodity, but also because like Freeport, companies in the OIH fold have been on fire since December. Any investor astute enough to have bought National Oilwell along with Freeport on, say December 15, was celebrating well past the holiday season. Now Mr. Market seems to be saying that he hopes you took some profits as the rally in oil services stocks looks to be taking a breather (and that may be the optimistic way of describing the recent declines).

The OIH looks to have topped at $115.93 earlier this month and the ETF slammed through its 50-day moving average of $98.44 today. The 200-day at $91.84 could be seen sooner rather than later unless the bulls can wrest control of the oil market this week.

Chart of OIH

On a day when culprits were not hard to come by, it was no surprise to find negative news in the banking sector. Two board members left Bank of America (BAC) and oddly enough, both have military backgrounds. Retired U.S. Navy Admiral Joseph Prueher and retired U.S. Army General Tommy Franks are leaving Bank of America's board, bringing the total board departures in recent weeks to six. Just a few weeks ago, CALPERS, the pension plan for California's public employees and a major Bank of America shareholder, was clamoring for changes on the bank's board. Unsuccessful at the annual shareholders meeting, it appears CALPERS ultimately got its wish.

Bank of America slid $1.28, or 9.68%, to $11.94, but misery loves company and JP Morgan Chase (JPM) tumbled 6% and Wells Fargo (WFC) fell nearly 7%. Financials were the biggest loser among 10 main industry groups. The KBW Bank Index (BKX), which tracks 24 of the largest US banks, fell $2.48 to $34.84 to close well below both its 50 and 200-day moving averages. After falling from its high of $43.80 in May, the BKX consolidated in the $38 area and today's move below the 50-day line could be a bearish signal.

Chart of BKH

So given all the glum news from Monday's session, Tuesday's trade becomes all the more important for the bulls. The primary catalyst for the day will be the release of existing home sales before the market opens. Economists are forecasting sales of 4.82 million units in May, up from 4.68 million in April. Any surprise, up or down, will likely set the tone for the markets tomorrow.

The housing market has been at the epicenter of the slacking economy and it is hard to envision a true recovery without substantial improvement in the housing sector. Unfortunately, that improvement may be a way's off as the Mortgage Bankers Association (MBA) said today it expects new home sales for 2009 to be 27% lower than they were in 2008 and that median home prices will fall by 10% with no signs of an uptick until next year. Proving that bad news often comes in droves, MBA also lowered its mortgage origination forecast for 2009 to $2.03 trillion from over $2.7 trillion. Yes, $700 billion is quite a chunk of change.

Assuming there is no dramatic upside surprise in the existing home sales data, the market may also be happy with some signs of stability, which may have started to appear last month. Actually, the charts indicate some stabilization in both new and existing home sales, so a continuation of that trend tomorrow would be encouraging.

Chart of Existing Home Sales

Chart of New Home Sales

In addition to the home sales data, all eyes will be on the Federal Open Market Committee meeting that commences tomorrow. A decision on interest rates won't be announced until Wednesday and economists expect rates to remain unchanged. Fed funds futures indicated a 55% chance of a rate increase two weeks ago and that number fell to 47% by last Friday's close.

And while earnings season has been over for a few weeks now, there are still some sporadic reports worth watching. Before the bell tomorrow grocery store giant Kroger (KR) is expected to report first-quarter results and analysts are calling for 62 cents a share in profits. Oracle (ORCL), the largest enterprise software maker, reports after the close and the average analyst estimate is 44 cents a share.

Taking a look at market techincals, today was the broadest sell-off for US stocks since May 13 and now that Dow 9000 doesn't seem to be a reasonable possibility in the near-term, attention may turn to the Dow's ability to find support at 8300. The index is now negative for the year and whether or not that gives the bears the impetus they need to growl once again remains to be seen.

While the 50-day moving average at 8377.89 didn't act as support today, this could be an important level for the Dow to surge past in the coming days to reestablish some positive momentum. Three recent tests of 8500 as support held until Monday's lambasting, so 8500 and the 200-day moving average at 8552.81 could be the Dow's next resistance levels.

Chart of the Dow

The S&P 500 is now negative for the year as well and is down 5.6% since June 12. Today's close below 900 probably was not a good thing and the close below the 50-day moving average at 898.63 may be worse. As I have lamented before it is hard enough to make up the losses after severe down days such as today. It is even more difficult in the summer with a lack of positive catalysts on the horizon. Not to be overly simplistic, but the S&P needs to get back above 900 in a hurry. Too many closes below that critical level and the bulls may wave a white flag.

Chart of the S&P-500

The Nasdaq situation may be a little trickier to decipher at this point. Was today's decline a result of what happened on the Dow and S&P 500? Were sellers buoyed by news of Apple (AAPL) CEO Steve Jobs covering up his liver surgery? Keep in mind Apple did say it sold more than 1 million iPhone 3G S units over the weekend. Perhaps it would behoove Apple's investor relations department to be a little more forthright about Mr. Jobs' health.

Either way, support for the Nasdaq probably rests at the 50-day moving average of 1741.75. Good news out of Oracle after the close tomorrow could sustain tech investors through the rest of the week and keep the Nasdaq out of bearish hands. At this point, it might be fair to say the near-term prospects for the Nasdaq are less bleak than they are for its major-index counterparts, but I would not stake all my chips here either.

Chart of the Nasdaq

Given the recent tenor of the market over the past couple of days, it is not hard to imagine the bulls keeping their fingers crossed for some positive news on existing home sales on Tuesday. My next guess is those that are still long will be on bended knee Tuesday night hoping and praying Chairman Bernanke can rustle up something positive to say at the end of the FOMC meeting on Wednesday.

Todd Shriber


New Option Plays

Melting Down and Cashing Out

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

POSCO - PKX - close: 78.35 change: -4.86 stop: 84.05

Why We Like It:
An upgrade to overweight this morning was not enough to save PKX's up trend. Commodity stocks are in retreat. This South Korean steel maker just broke its up trend with a drop under support at $80.00 and its 50-dma. I'm suggesting bearish positions now or on a bounce back toward the $80-82 zone. Our target is the $71.00-70.00 range.

Suggested Options:
I'm suggesting the July puts.

BUY PUT JUL 80.00 PKX-SP open interest= 200 current ask $5.70
BUY PUT JUL 75.00 PKX-SO open interest=  96 current ask $3.20
BUY PUT JUL 70.00 PKX-SN open interest=  50 current ask $1.60

Annotated Chart:

Picked on     June 22 at $ 78.35
Change since picked:      + 0.00
Earnings Date           07/09/09 (unconfirmed)
Average Daily Volume =       541 thousand 
Listed on  June 22, 2009         


Wynn Resorts - WYNN - close: 34.28 change: -2.58 stop: 37.65

Why We Like It:
The up trend in WYNN has been struggling. You could say the stock reversed into a new down trend with the early June failed rally at $42.00. Now shares are in the process of breaking support near $35.00. The World Bank's new forecast for the recession to deepen doesn't inspire any investor confidence for a consumer discretionary like WYNN. I'm suggesting bearish positions now. More conservative traders may want to wait for a little more confirmation. Our first target is $30.25. Our second target is $26.00.

Suggested Options:
I am suggesting the July puts. FYI: There are strikes available at $1.00 increments.

BUY PUT JUL 35.00 UWV-SQ open interest=2210 current ask $2.80
BUY PUT JUL 30.00 UWV-SF open interest=3264 current ask .85

Annotated Chart:

Picked on     June 22 at $ 34.28
Change since picked:      + 0.00
Earnings Date           07/30/09 (unconfirmed)
Average Daily Volume =       3.4 million  
Listed on  June 22, 2009         



In Play Updates and Reviews

Stocks Correct Sharply

by James Brown

Click here to email James Brown


CALL Play Updates

Apple Inc. - AAPL - close: 137.37 change: -2.11 stop: 134.45

Warning! AAPL has produced a bearish reversal pattern. The stock gapped open higher at $140.67 Monday morning. The move may have been fueled by news that AAPL sold over 1 million of its new 3GS iPhones since its Friday launch. That was significantly higher than analysts expected and at least one firm raised their earnings guidance on AAPL. Unfortunately, this positive sales news was hindered by reports that Steve Jobs, rumored to have been at work today after a medical leave of absence, had undergone a liver transplant a couple of months ago.

Overall the combination of the market's breakdown today and AAPL's bearish reversal candlestick has me turning very cautious. More conservative traders may want to up their stops or even abandon ship early. I would wait for a new relative high over $141.60 or a bounce from the $135.00 level before considering new bullish positions.

Our primary target is $149.00. I'm setting a secondary target at $157.50. More aggressive traders could aim higher. We plan to exit ahead of the July 21st earnings report. FYI: The Point & Figure chart is forecasting a $231 target.

Picked on     June 20 at $140.67 /gap higher entry
                               /originally listed at $139.48
Change since picked:      - 3.30
Earnings Date           07/21/09 (unconfirmed)
Average Daily Volume =        20 million  
Listed on  June 20, 2009         


Apollo Group - APOL - close: 64.35 change: -1.84 stop: 62.85 *new*

Traders need to turn more defensive here as well. APOL's bullish breakout over resistance last week has rolled over and shares are back under the $66-65 zone. More conservative traders may want to exit early. I'm raising our stop loss to 62.85.

I am not suggesting new positions at this time. Our first target to take profits is $69.95. Our second target is $74.00. The Point & Figure chart is forecasting an $82 target. We do not want to hold over the June 29 earnings report. We will plan to exit on Friday, June 26th or Monday, June 29th.

Picked on     June 17 at $ 66.10 *triggered  
Change since picked:      - 1.75
Earnings Date           06/29/09 (unconfirmed)
Average Daily Volume =       3.4 million  
Listed on  June 08, 2009         


Becton Dickinson - BDX - close: 68.23 change: -0.92 stop: 67.75

There is no change from my previous comments. We're still waiting for a breakout higher. Our trigger to buy calls is at $70.51.

If triggered our first target to take profits is $74.90. Our second target is $79.00. Currently the Point & Figure chart is bullish and forecasts an $86 target. We don't want to hold over the late July earnings report. Note: I'll admit that our second target at $79 is a little aggressive considering our time frame. Be sure to take some money off the table at $74.90.

Picked on     June xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       1.8 million  
Listed on  June 18, 2009         


Express Scripts - ESRX - close: 64.90 change: -1.49 stop: 59.99

Our buy the dip entry point at $65.25 has been hit. Traders bought the bounce near $64.00. Considering the market's weakness today more conservative traders may want to ratchet up their stops pretty tight. Our first target is $69.90. Our second target is $74.75. FYI: The P&F chart is bullish with a $77 target.

Chart:

Picked on     June 22 at $ 65.25
Change since picked:      - 0.35
Earnings Date           07/29/09 (unconfirmed)
Average Daily Volume =       3.7 million  
Listed on  June 18, 2009         


Teva Pharma. - TEVA - close: 46.75 change: -0.52 stop: 45.40

TEVA is still correction. I'm suggesting readers look for a dip in the $46.50-46.00 zone, which looks like it could happen tomorrow. Our exit target is $49.85. My time frame is very late July.

Picked on     June 03 at $ 46.49
Change since picked:      + 0.26
Earnings Date           07/29/09 (unconfirmed)
Average Daily Volume =       5.0 million  
Listed on  June 03, 2009         


PUT Play Updates

L-3 Comm. - LLL - close: 70.79 change: -0.91 stop: 75.55

LLL continues to sink toward $70.00. More conservative traders might be able to get away with a stop near $74.50 instead of ours at $75.55. We should expect some sort of bounce at $70.00. Our first target is $66.00. Our second target is $61.00.

Picked on     June 16 at $ 71.75
Change since picked:      - 0.96
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       976 thousand  
Listed on  June 16, 2009         


MDC Holdings - MDC - close: 29.24 change: +0.23 stop: 31.05

By some weird twist of fate MDC produced a bounce while the rest of the market was sinking. I wouldn't be surprised to see MDC move sideways while investors wait for the latest new home sales figures due out this week.

More conservative traders may want to lower their stop toward $30.50 or just start taking profits now. I'm not suggesting new positions. Our first target is $27.75. Our second target is $25.15.

Picked on      May 20 at $ 32.31 /gap down entry
                               /originally listed at $32.87
Change since picked:      - 3.07
Earnings Date           07/30/09 (unconfirmed)
Average Daily Volume =       1.1 million  
Listed on   May 20, 2009         


Symantec - SYMC - close: 15.07 change: -0.81 stop: 16.10 *new*

Shares of SYMC gave up just over 5% with a breakdown under its 30-dma, its 100-dma and almost the $15.00 level. I am lowering our stop loss to $16.10. Our first exit target is $14.10.

Picked on     June 16 at $ 15.73
Change since picked:      - 0.66
Earnings Date           07/29/09 (unconfirmed)
Average Daily Volume =      16.8 million  
Listed on  June 16, 2009         


Toll Brothers - TOL - close: 16.43 change: -0.19 stop: 17.75 *new*

The low today was $16.33. Our exit target is $16.25. More conservative traders may want to go ahead and start taking profits right now. I'm not suggesting new positions. Please note our new stop loss at $17.75.

Picked on      May 20 at $ 18.98
Change since picked:      - 2.55
Earnings Date           06/03/09 (unconfirmed)
Average Daily Volume =       4.7 million  
Listed on   May 20, 2009         


United Parcel Serv. - UPS - close: 46.84 change: -1.30 stop: 52.51

Uh-oh! It looks like UPS is going to decline without us. I was really expecting a bounce first toward $50.00 before seeing UPS decline. The stock lost 2.7% and hit new three-month lows today. Currently our trigger to open positions is at $49.50.

If triggered our first target to take profits is $45.50. We do not want to hold over the late July earnings report.

Picked on     June xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       5.2 million  
Listed on  June 17, 2009         


Strangle & Spread Play Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)

Walgreen - WAG - close: 29.64 change: -1.79 stop: n/a

WAG reported earnings this morning and the results disappointed Wall Street. Earnings were 3 cents under expectations and margins contracted. The stock gapped open lower at $30.06 and sank to $29.42 intraday. Shares closed with a 5.69% loss. I am not suggesting new positions at this time.

The options I suggested were the July $35 calls (WAG-GG) and the July $27.50 puts (WAG-SY). Our estimated cost was .50. We want to sell if either option hits $1.25 or higher.

Picked on     June 18 at $ 31.72 
Change since picked:      - 2.08  
Earnings Date           06/22/09 (confirmed)
Average Daily Volume =       6.3 million  
Listed on  June 18, 2009         


CLOSED BULLISH PLAYS

Amazon.com - AMZN - close: 79.15 change: -3.81 stop: 79.75

Monday ended up being a rather ugly day for stocks with plenty of breakdowns under support. Tech stocks were hit hard with the NASDAQ off 3.3%. Shares of AMZN gave up 4.5% and broke through round-number support at $80.00, technical support at its 50-dma and technical support at the bottom of its bullish channel.

Annotated Chart:

Picked on     June 12 at $ 82.50 *triggered     
Change since picked:      - 2.75 <-- stopped out (-3.3%)
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       6.9 million  
Listed on  June 01, 2009         


Intl.Bus.Mach. - IBM - close: 104.52 change: -0.44 stop: 104.90

Seven days in a row. It's been a while since IBM fell seven days in a row. Shares broke down under short-term support near $105.00 and hit our stop loss at $104.90 closing the play. At this time I would look for a pull back near $100 before considering new positions.

Chart:

Picked on     June 03 at $106.25 *triggered     
Change since picked:      - 1.35<-- stopped out @ 104.90 (-1.2%)
Earnings Date           07/16/09 (unconfirmed)
Average Daily Volume =       7.3 million  
Listed on  June 01, 2009         


Mastercard - MA - close: 156.78 change: -4.57 stop: 158.90

Our aggressive call trade on MA is over. MA tried to bounce this morning but as the market sank the stock slipped toward the $160.00 level. After hovering there for a couple of hours MA eventually capitulated and broke down under $160.00, broke down under its 200-dma and broke down under the bottom edge of its wide, bullish channel. Our play(s) was stopped at $158.90.

Chart:

-- New Trade @ 161.35 --
Picked on     June 20 at $161.35 
Change since picked:      - 2.45<-- stopped out @ 158.90 (-1.5%)
Earnings Date           07/30/09 (unconfirmed)
Average Daily Volume =       4.0 million  
Listed on  June 20, 2009

-- Original Trade --
Picked on      May 04 at $176.07 *gap down entry
                               /originally listed at $178.99
Change since picked:      -17.17<-- stopped out @ 158.90 (-9.7%)
Earnings Date           07/30/09 (unconfirmed)
Average Daily Volume =       4.0 million  
Listed on   May 04, 2009         


Navistar Intl. - NAV - close: 43.50 change: -1.66 stop: 42.40

NAV recent bounce has failed. The stock gapped open lower at $44.37 and quickly fell past last week's lows and hit our stop loss at $42.40. Our new play was over in less than 40 minutes. I would keep an eye on NAV. A dip near $40.00 and its 50-dma or a dip near its exponential 200-dma might be a new entry point.

Chart:

Picked on     June 20 at $ 44.37 /gap down entry
                              /originally listed at $45.16
Change since picked:      + 1.97<-- stopped out @ 42.40 (-4.4%)
Earnings Date           09/03/09 (unconfirmed)
Average Daily Volume =       1.1 million  
Listed on  June 20, 2009