Option Investor
Newsletter

Daily Newsletter, Monday, 12/7/2009

Table of Contents

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

Market Wrap

Mixed Message Monday

by Todd Shriber

Click here to email Todd Shriber
Monday's trade was a case of much ado about nothing as the Dow Jones Industrial Average eked out a 1.21-point gain to close at 10390.11 and the S&P 500 shed 2.73 points to finish the day at 1103.25. The Nasdaq lost 4.74 points to close at 2189.61. So two of the three major indexes declined and the Dow posted a meager gain on a day where investors seemed to take a pass on riskier assets in the wake of comments by Federal Reserve Chairman Ben Bernanke that the U.S. economy still faces significant headwinds in the forms of a weak labor market and constrained access to credit.

Stats Table

Perhaps more noteworthy than the action, or lack thereof in equities, were the declines in the commodities space, most notably with crude oil and gold. The two most heavily traded commodities both slid on the day, highlighting investors' desire for more conservative fare on Monday. Crude oil for January delivery slid below the all-important $75 a barrel level to close at $74.07. The $75 area had acted as significant resistance for black gold until late September when oil made its way above $80 per barrel. Recent weeks have not been kind to oil and futures now reside at an eight-week low as weak demand and concerns about the strength of the U.S. economic recovery continue to weigh on oil prices.

Crude Chart

Monday's trade did not feature big declines among the oil services group, the sector that is arguably most intimately correlated to oil prices, as stocks such as Halliburton (HAL), Diamond Offshore (DO), Schlumberger (SLB) and Transocean (RIG) were either unchanged, up fractionally or down fractionally. Even the Oil Services HOLDRs ETF (OIH) was only down 20 cents to close at $114.35. I say down ''only'' 20 cents because OIH has been under significant pressure since peaking at almost $127 in November. The ETF counts the aforementioned stocks and many others among its constituents and has been in a tailspin over the past month, trading below its 50-day moving average for about three weeks.

OIH Chart

While oil has been declining, the weak dollar trade certainly seemed to favor gold, which was making all-time highs on a near daily basis. I am not sure if this trade has gotten too crowded to use Wall Street speak, or if gold is just taking a little breather before rocketing higher again or if the bulls are completely vacating the gold trade altogether, but I will say that the last few days have been anything but dreamy for gold bugs. After soaring to a record high of $1227.50 last week, the yellow metal lost $50 after Friday's job report and shed another $5.50 today to close at $1164 an ounce.

Gold Chart

I have mentioned a couple of different ways to play gold over the past several weeks, mainly ETFs such as the SPDR Gold Shares (GLD) and the Market Vector Gold Miners ETF (GDX). For those that are new to watching the gold space, it is worth repeating that there is a big difference in owning physical gold, which GLD does, compared to owning shares of mining firms, which GDX does. Gold miners are like their oil services brethren in that there is a hard and fast price that the miners need gold futures to surpass to make their mining endeavors profitable. That price is usually around $350-$450 an ounce, so while we are a long way from seeing those levels on the downside, it is worth noting that down moves in gold are not a good thing for the miners.

As I mentioned in the Market Monitor today, there was some, shall I say curious options activity in Barrick Gold (ABX), the largest gold miner. More than 11,200 January 49 calls changed hands against open interest of just 398 contracts and most of those calls were sold, indicating that traders may be calling a top in Barrick's shares. Options activity in Barrick was more than 40 times the daily average with five calls sold for every one purchased. Put buying also exceeded sales furthering the bearish tenor options traders have toward Barrick Gold.

Now all of that glum news about gold and oil may have you thinking that the commodities trade that has helped lead the market higher since the March lows has expired. That may or may not be the case and it probably is not the case as investors are starting to favor another corner of the materials space and that is agriculture-related names. More specifically, fertilizers stocks look to be back in vogue. One catalyst is the mergers and acquisitions drama that permeates the fertilizer sector and that catalyst was at work today as CF Industries (CF) boosted its bid for Terra Industries (TRA) by $4.75 a share.

The new bid would give Terra shareholders $36.75 in cash and 0.1034 shares of CF common stock, valuing the new bid at $45.91 a share. The new offer, like the old one, includes $7.50 a share for a special dividend declared by Terra Industries earlier this year. Both stocks were up sharply on the news, as was Agrium (AGU), which is trying to acquire CF Industries. Agrium got a boost from a UBS upgrade and speaking of upgrades, Goldman Sachs upgraded Potash (POT), the largest maker of potash fertilizer.

Goldman lifted Potash to ''buy'' from ''neutral'' and set a 12-month price target of $140 on the stock. That is a fair bit above Potash's closing price of $121.17 on Monday. The market appears to be expecting a rebound in demand next year for crop nutrients after the epic collapse in 2008 and that rebound should benefit fertilizer names. One way to play this trend would be with the Market Vectors Agribusiness ETF (MOO), which counts Potash as its top holding. Other top holdings include Monsanto (MON), Mosaic (MOS) and Deere (DE).

MOO has a nifty looking chart, marked by a series of higher highs and higher lows, you know, the kind of stuff that technicians get really excited about. Maybe the commodities trade is not over after all, it may just be changing outfits.

MOO Chart

While the market action during traditional trading hours was fairly benign, that may change tomorrow as FedEx (FDX) brought an early Christmas package for the bulls after the market closed on Monday. The package delivery firm said it expects to earn $1.10 a share for the current quarter. Granted, that's down 30% from a year earlier, but well above the previous guidance of 65 cents to 95 cents a share. FedEx cited stronger-than-expected growth in its international priority and ground shipments segments as reasons for the bullish guidance.

FedEx shares finished down 41 cents at $87.52, but spiked more than 3% in the after-hours session to $90.27 at the time of this writing. The stock has not traded above $90 since August 2008 and despite the fact that FedEx shares are up more than 50% in the past six months, it appears there is more room to the upside. Jim noted in the weekend Market Wrap that the company hired over 35,000 seasonal workers and rival UPS (UPS) added 50,000. I have also noticed that when the big brown truck makes its daily stops on my street, there are two employees on board instead of just one. Anecdotes to be sure and this logically should be the busiest time of year for FedEx and UPS, but as I like to say, if you are a fan of the Dow Theory, good news for FedEx could mean good news for the Dow Jones Transportation Average, which confirms moves in the Industrials.

FedEx Chart

Looking at the charts, there really was not much to get excited about regarding the Dow on Monday. A one-point gain will usually temper enthusiasm. The Industrials still hover close to the important 10400 level and well above the 50-day moving average at 10054. A break below 10250 would be concerning, especially given the frothy look the Dow has to it. With just 17 trading days left in 2009, it is going to take a lot to get the Dow to 11000 before year end, but most investors will likely accept even a valiant attempt to get to that level.

Dow Chart

Again, the S&P 500 paints a somewhat different picture. The index traded in a tight 10-point range on Monday, making a low just below 1101, but managed to close above the psychologically important 1100 level. While continued closes above 1100 are appreciated, it bears repeating that real support for the S&P 500 is 1085 and true resistance is 1110. The bottom line is it was encouraging the S&P 500 did not dip below 1100 on Monday and the longer support at 1085 holds, the better. A violation of that level before the end of the year would certainly quell any hopes of a Santa Claus rally.

S&P 500 Chart

The Nasdaq led the decliners on Monday, but lost less than five points, so no big deal there. Or is it? Well, the positive side of the story is that the Nasdaq did briefly peak above 2200 and is still within earshot of that critical resistance level. Then again, it should be noted that the Nasdaq has been a laggard over the past couple of weeks and, believe it or not, Apple (AAPL) has been something of drag on techs as well. Both Apple and Amazon (AMZN) were down more than 2% on Monday, but if the former can make its way back to $200 and the latter back above $140, that might be enough to rejuvenate investor interest in tech stocks.

Nasdaq Chart

With a week light on key economic reports, the fate of the markets for this week lies not so much in macro themes as it does in the news that individual stocks provide to buoy positive investor sentiment. Granted, the final numbers on Monday did not reflect a bullish beginning to the week, but my gut tells me the FedEx news will have a positive impact on Tuesday's trade and there could be continued bullishness from the agriculture sector. So I lean toward not be picky and embracing good news on an individual stock level.

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New Option Plays

Spinning Wheels

by James Brown

Click here to email James Brown

Editor's Note:

The major market indices spent the session churning sideways in a very narrow range until stocks turned lower in the last two hours. Overall it was a forgettable day. Investors appear to be searching for a new catalyst to drive stocks higher. Until then we're just spinning our wheels. There are 17 trading days left for the year.

I don't see any changes from my weekend comments on the market. We still have multiple candidates with a trigger to open positions if the market can breakout higher. I'm not adding anything new tonight. The more this market narrows the closer we get to a breakout - one way or the other.



In Play Updates and Reviews

Stocks Seem Frozen

by James Brown

Click here to email James Brown


CALL Play Updates

Adobe Systems - ADBE - close: 36.37 change: -0.13 stop: 35.79

A quiet session for the stock market equaled a quiet day for ADBE as well. The stock traded sideways in the $36-37 zone. I am suggesting a trigger to buy calls at $37.25. If triggered our first target is $39.95. Our second target is $42.25 but this might be a little optimistic. We won't have much time. ADBE is due to report earnings on December 15th and we don't want to hold over the announcement.

Entry  on  December xx at $ xx.xx <-- TRIGGER @ 37.25
Change since picked:       + 0.00
Earnings Date            12/15/09 (confirmed)
Average Daily Volume =        4.8 million  
Listed on  December 05, 2009         


Bucyrus Intl. - BUCY - close: 51.35 change: +0.49 stop: 51.90

BUCY managed a bounce off the bottom of its trading range. I don't see any changes from my weekend comments. We have a trigger to buy calls at $55.65. More aggressive traders may want to buy calls on a move over $52.50. If triggered at 55.65 our first target is $59.90. Our second target is $64.00.

We also have a trigger to buy puts at $48.95. Our first target is $45.50 (just above the 50-dma). Our second target is $40.50.

Picked on  December 01 at $ xx.xx <-- TRIGGER @ 55.65  (or 48.95, small positions)
Change since picked:       + 0.00
Earnings Date            02/18/10 (unconfirmed)
Average Daily Volume =        2.8 million  
Listed on  December 01, 2009         


Caterpillar - CAT - close: 57.56 change: -0.74 stop: 58.49

CAT is slipping closer to short-term support near $57.00 and technical support at its 50-dma. There is no change from my weekend comments. I'll probably drop CAT if shares close under $57.00. Currently, the plan is to buy calls with a trigger at $61.51. If triggered our first target is $64.95. Our second target is $69.00.

Picked on  December 01 at $ xx.xx <-- TRIGGER @ 61.51
Change since picked:       + 0.00
Earnings Date            01/26/10 (unconfirmed)
Average Daily Volume =        7.8 million  
Listed on  December 01, 2009         


Capella Education - CPLA - close: 71.89 change: +0.39 stop: 69.65

CPLA is still trying to rally but it's not having much success holding on to any gains. I am not suggesting new positions at this time. Thus far the 50-dma and the $70 region are holding as support. Our target is $79.50.

I do consider this an aggressive, higher-risk trade. Currently the Point & Figure chart is bullish with an $85 target.

Picked on  November 24 at $ 72.55
Change since picked:       - 0.66
Earnings Date            02/11/10 (unconfirmed)
Average Daily Volume =        126 thousand 
Listed on  November 24, 2009         


Fedex Corp. - FDX - close: 87.52 change: -0.41 stop: 83.90 *new*

It was a lackluster session for FDX with the stock trading sideways. It looks like that's about to change tomorrow. After the closing bell tonight FDX raised its earnings guidance above Wall Street's estimates. FDX has raised its estimates from the $0.65-0.95 range to $1.10 for the quarter ending November 30th. Analysts estimates were at $0.85. This is a big improvement and shares of FDX have rallied over $90 in after hours. Even shares of UPS were moving on the news.

Our first target is at $89.95 and if FDX gaps open above $90.00 we'll immediately take profits. I am raising our second and final target from $94.00 to $94.90. No new positions at this time. I am raising our stop loss to $83.90.

Picked on  December 01 at $ 85.75 
Change since picked:       + 1.77
Earnings Date            12/17/09 (confirmed)
Average Daily Volume =        2.6 million  
Listed on  November 30, 2009         


Infosys Tech. - INFY - close: 51.65 change: -0.81 stop: 49.90

The stock gapped down at the open. INFY retreated with a 1.5% decline. Readers can choose to wait for a bounce in the $51.00-50.00 zone before initiating new positions. Our first target to take profits is at $55.75. Our second and final target is $59.50. We will plan to exit ahead of the January 12th earnings report.

Entry  on  December 05 at $ 51.88 /gap down entry point
                           /originally listed at $52.46
Change since picked:       - 0.23
Earnings Date            01/12/10 (confirmed)
Average Daily Volume =        1.4 million  
Listed on  December 05, 2009         


Ishares Financial - IYF - close: 51.38 change: -0.68 stop: 49.99

The financials continue to trade sideways although today's session had a bearish tone. The IYF is slipping closer to technical support near its rising 100-dma. I'm not suggesting new positions at this time. We need to see a clearly defined bounce from the 100-dma or a new move over $52.50 (more cautious traders can wait for a move over $53.00) before I'd consider new positions. Our multi-week target is $59.00. I would use small positions.

Entry  on  December 03 at $ 52.60
Change since picked:       - 1.22
Earnings Date            --/--/--
Average Daily Volume =        3.1 million  
Listed on  December 02, 2009         


MSC Industrial Direct - MSM - close: 46.70 change: -0.19 stop: 44.90

MSM quietly drifted lower on Monday. I'm not suggesting new positions. Our first target is $49.75. Our second target is $52.50.

Picked on  November 17 at $ 46.62
Change since picked:       + 0.08
Earnings Date            01/07/10 (unconfirmed)
Average Daily Volume =        513 thousand 
Listed on  November 17, 2009         


Norfolk Southern - NSC - close: 52.33 change: -0.51 stop: 49.75

Lack of follow through on Friday's rally in NSC is a bit frustrating but not out of the ordinary. Readers can wait for a new rise over $53.00 before launching positions.

Our first target to take profits is at $54.90. Our second target is $58.50. Our time frame is several weeks. FYI: The Point & Figure chart is bullish with a $65 target.

Picked on  November 21 at $ 51.84 (small positions)/gap higher entry
Change since picked:       + 0.49 
Earnings Date            01/27/10 (unconfirmed)
Average Daily Volume =        5.4 million  
Listed on  November 21, 2009         


Precision Castparts - PCP - close: 111.30 change: +0.40 stop: 104.95

PCP is still showing relative strength and hit another new 2009 high this afternoon.

Our first target to take profits is at $112.45. Our second target is $118.75. The Point & Figure chart is bullish with a $131 target.

Picked on  December 01 at $107.35
Change since picked:       + 3.95
Earnings Date            01/20/10 (unconfirmed)
Average Daily Volume =        817 thousand 
Listed on  November 28, 2009         


Valmont Industries - VMI - close: 77.75 change: -1.75 stop: 77.65

VMI displayed some volatility this morning with a gap open lower and a sharp bounce but overall the trend today was lower. We're still waiting for a breakout over resistance. I am suggesting a trigger to buy calls at $81.00. If triggered our first target to take profits is at $84.90. Our second target is $88.75. FYI: The most recent data list short interest at 9% of the very small 20.1 million-share float.

Entry  on  December xx at $ xx.xx <-- TRIGGER @ 81.00
Change since picked:       + 0.00
Earnings Date            02/10/10 (unconfirmed)
Average Daily Volume =        238 thousand 
Listed on  December 05, 2009         


Vertex Pharma - VRTX - close: 39.19 change: -0.44 stop: 38.35 *new*

VRTX retreated from last week's high with a 1.1% decline. Volume was very light today. The stock has some support near $38.50 and we need to fine tune our stop loss just a little bit. I'm adjusting the stop from $38.49 to $38.35. We can buy calls on a bounce from $38.50 or wait for a rise over Friday's high of $40.44. Our target to exit is at $44.25. My time frame is several weeks.

Entry  on  December 03 at $ 40.25
Change since picked:       - 1.06
Earnings Date            02/09/10 (unconfirmed)
Average Daily Volume =        3.2 million  
Listed on  November 23, 2009         


PUT Play Updates

FISERV Inc. - FISV - close: 47.01 change: -0.07 stop: 48.55

The intraday rally attempt in FISV failed again near resistance. More conservative traders might want to adjust their stops toward $48.00. I'm still suggesting caution here. Currently our bearish target o FISV is $42.25.

Picked on  November 28 at $ 46.29
Change since picked:       + 0.72
Earnings Date            02/02/10 (unconfirmed)
Average Daily Volume =        1.4 million  
Listed on  November 28, 2009         


Green Mountain Coffee Roasters - GMCR - cls: 60.39 chg: -0.80 stop: 66.15

GMCR is still flirting with support at the $60.00 level although shares did hit a new two-month low at $59.60 intraday. Shares are currently looking oversold and due for a larger bounce. More conservative traders may want to scale back their position sizes or tighten their stops. I am not suggesting new positions at this time. Our second and final target is $56.00. This is a higher-risk trade considering the risk of a short squeeze.

Picked on  November 19 at $ 64.75
Change since picked:       - 4.36
                                /1st target hit @ 60.25 (-6.9%)
Earnings Date            01/28/10 (unconfirmed)
Average Daily Volume =        1.5 million  
Listed on  November 18, 2009         


Goldman Sachs - GS - close: 163.85 change: -3.39 stop: 175.25

It's not looking good for GS. The stock erased Friday's bounce with another failed rally at the 10-dma. Shares are poised to fall toward $160 and probably lower. Our target is $155.50. More aggressive traders could aim for the $150 area or the simple 200-dma.

Picked on  November 25 at $168.75
Change since picked:       - 4.90
Earnings Date            12/15/09 (unconfirmed, could be in January)
Average Daily Volume =        9.5 million  
Listed on  November 21, 2009         


Research In Motion - RIMM - close: 60.28 change: +1.53 stop: 62.05 *new*

Shares of RIMM are up 2.6% on news it has reached a deal to start selling phones in China. I'm surprised the stock isn't up more on the news. Shares rallied toward resistance at the 30-dma. More conservative traders may want to exit early right here. I am lowering our stop loss down to $62.05. I'm not suggesting new positions.

Our first target is $55.25. Our second target is $50.50. RIMM can be a volatile stock so I'm suggesting smaller position sizes.

Picked on  November 16 at $ 61.80
Change since picked:       - 1.52
Earnings Date            12/17/09 (unconfirmed)
Average Daily Volume =       18.9 million  
Listed on  November 12, 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.)

Apple Inc. - AAPL - close: 188.95 change: -4.37 stop: n/a

The profit taking in AAPL is accelerating lower. Shares los 2.2% and closed under the $190 mark. The next level of potential support looks like it could be the $185 level. I am not suggesting new strangle positions at this time. FYI: The December $190 puts are currently trading around $5.00.

We have an aggressive December strangle and a less aggressive January strangle. The options in the December strangle were the December $210 calls (AJL-LV) and the December $190 puts (APV-XR). Our estimated cost is $3.83. We want to sell if either option hits $8.00 or more.

The options in the January strangle were January $220 calls (AJL-LV) and the January $180 puts (APV-XR). Our estimated cost is $5.60. We want to sell if either option hits $10.00 or more.

Picked on  November 30 at $199.91
Change since picked:       -10.96
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =       15.1 million  
Listed on  November 30, 2009         


Goldman Sachs - GS - close: 163.85 change: -3.39 stop: n/a

The weakness in GS reinforces the bearish trend of lower highs. I am no longer suggesting new strangle positions on the stock.

The options suggested were the December $180 calls (GPY-LP) and the December $160 puts (GPY-XL). Our estimated cost is about $4.61. We want to sell if either option hits $9.00 or higher.

Picked on  November 21 at $171.67 /gap open entry
Change since picked:       - 7.82
Earnings Date            12/15/09 (unconfirmed, could be January)
Average Daily Volume =        9.5 million  
Listed on  November 21, 2009         


Ultra(Long)-S&P500 - SSO - close: 37.46 change: -0.14 stop: n/a

The odds against this play working are starting to mount up. The S&P 500 has been stuck trading sideways for nearly four weeks. If the jobs report isn't going to spark a move then what is going to kick the market out of its trading range? We only have two weeks left before December options expire. I'm not suggesting new strangle positions at this time.

The options suggested for this strangle were the December $40 calls (SUC-LN) and the December $34 puts (SOJ-XH). Our estimated cost was $1.70. We want to sell if either option hits $3.00 or higher.

Picked on  November 11 at $ 37.08
Change since picked:       + 0.38
Earnings Date            --/--/--
Average Daily Volume =         32 million  
Listed on  November 11, 2009         


United Parcel Service - UPS - close: 57.87 change: +0.00 stop: n/a

I was starting to think we would have been better off selling options against UPS. The stock has been trading sideways for weeks. However, tonight after the closing bell, rival Fedex (FDX) raised their earnings guidance by a significant amount. Shares of FDX and UPS are both trading higher after hours. I'm not suggesting new strangle positions at this time.

The options suggested for this trade were the December $60 calls (UPS-LL) and the December $55 puts (UPS-XK). Our estimated cost is $1.05. We want to sell if either option hits $3.00 or more.

Picked on  November 21 at $ 57.99 /gap open entry
Change since picked:       - 0.12 
Earnings Date            02/02/10 (unconfirmed)
Average Daily Volume =        4.7 million  
Listed on  November 21, 2009