Option Investor
Newsletter

Daily Newsletter, Tuesday, 6/8/2010

Table of Contents

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

Market Wrap

Weekly Short Squeeze

by Jim Brown

Click here to email Jim Brown

After the Dow and S&P closed at the lows for the year were due for a short squeeze.

Market Stats Table

It was time for a short squeeze but as squeezes go it was fairly lackluster. The markets came off their lows around 2:PM but there were still sellers hitting the tape around 3:PM. A buy program triggered at 3:20 that took the Dow up to 9940 by 3:40 and that is where it stalled. There was no buying in the last 20 minutes and that is not like a normal short squeeze where traders are racing to cover into the close. I suspect most traders are still expecting lower lows.

The economic calendar was very light with only a couple of employment reports. One was forward looking into Q3 while the other was lagging for April. The Job Openings and Labor Turnover Survey (JOLTS) for April showed that job openings spiked sharply from March. In April job openings rose to 3,078,000 from 2,785,000 in March. However, hiring fell slightly to 4,304,000 from 4,331,000. Separations also fell by 50,000.

This was a lagging report and the non-farm payrolls already showed us there were 290,000 jobs added in April. Of course we also know that private hiring fell in May to only 41,000 new jobs. Since the JOLTS survey crosses collection boundaries for the non-farm payrolls we could see a smaller decline in the May report but it does track the non-farm numbers well over time. Layoffs have now fallen to the same levels seen in 2006 and prior to the recession so there is hope. In April there were 4.96 workers for every available job but well off the 6.25 workers for each job at the recession low.

The chart is deceiving because the job openings are reported by the government in a year over year fashion so the 3,078,000 job openings in April 2010 is a 24.4% increase over the 2,531,000 from April 2009.

JOLTS Chart

Also providing hope for a continued recovery was the Manpower Employment Outlook Survey for Q3. Survey respondents in the U.S. seemed much more optimistic about their hiring plans. 18% of the respondents planed to increase hiring in Q3. That was up from 16% in the prior survey. Those that planed to decrease hiring remained flat at 8% while those planning no change declined to 70% from 73%. Since this is forward looking it was a positive report.

Reports due out on Wednesday include the Mortgage Applications, Wholesale Trade, Oil & Gas Inventories and the Fed Beige Book Report. The most critical is the Beige Book with a current look at the economic activity in each of the Fed's 12 districts. In the last monthly report for April activity increased across all the districts with the exception of the St. Louis district where manufacturing weakened. However, lending standards remained tight and credit quality had not improved except in the Dallas district. The next Fed meeting is two weeks from today.

The economic reports through April had been buoyed by the surge in home buying ahead of the April 30th tax credit expiration. We are already seeing the fallout from the end of that program although the normal reports have yet to be released. Ziprealty.com reported today that home sales in May declined by -5% and contract signings declined by more than -10%. There was probably some hangover from shoppers who did not meet the April 30th deadline but decided to buy anyway so June is likely to be the first really bad month. However, May/June are normally good months for sales and we don't know how many of those sales were pulled forward into the tax credit period. I would bet quite a few. Once these housing reports start appearing with seriously negative declines it should weigh on investor sentiment.

This week was the starting point for companies to warn about currency translation issues. 3M announced today that recent weakness in the Euro would knock five cents off their earnings. Since their earnings are in the range of $4 that is not a major problem for MMM but the floodgates have opened. Burger King (BKC) reported on Monday they could lose -2 cents per share on currency issues. HJ Heinz (HNZ) also said they would be hit with currency issues. However, Honeywell (HON) said no problem and McDonald's (MCD) did not mention currency problems when they said global same store sales were up +4.8% in May. Expect more companies to warn, especially tech stocks. Google has been downgraded twice this week on currency translation concerns.

Apple (AAPL) lost -1.61 today but that was much better than the -5.34 at the day's lows. Apple normally retreats for a couple weeks after the June iPhone announcements and it was well on its way until the short covering began. Apple suffered another blow today after the high profile Steve Jobs presentation where the page for the New York Times would not display. The problem was actually in the WiFi network in the room rather than the iPhone. However, you can't get the New York Times at all today. The NYT took issue with the application (Pulse) because it took content from the newspaper site and profited from it through application sales. Pulse sold for $3.99. However, Apple was forced to remove the application from its site because of complaints from the NYT. Apple is 20% of the Nasdaq 100 and the -$5 drop intraday was weighing heavily on the index.

Apple CEO Steve Jobs was the victim of friendly hecklers during the presentation. At one point when the applications would not load content he asked a person off the stage names Scott if he knew what he could do to fix the problem. Several people in the crowd yelled back "Verizon" and even Steve laughed and shook his head at the response. Obviously Apple is taking some serious flack over the failings of the AT&T network.

Apple Chart

Apple evidently failed to impress consumers because there was a monster wave of buying of other phones after the iPhone 4 was announced on Monday. Sprint sold out of the HTC EVO 4G both online and in stores. Volume eclipsed the prior record unit sales day by a factor of six. In fact Sprint completely sold out of Android smart phones. RadioShack and Best Buy also sold out of the Android phones. Stores claim they already have reservations for the Android phones for the next month of deliveries.

Apparently the iPhone 4 failed to impress those who were waiting on the sidelines to see if the new features would win them over. That so many people all rushed to buy the Android phones in a space of just hours is a testament to how many people were waiting for the announcement. Since most consumers are not so proactive to rush out and buy a different phone within hours of the announcement it suggests Android sales are going to continue strong in the months ahead as they work through the backlog.

Goldman Sachs downgraded the deepwater drilling sector today to neutral and warned that the moratorium could be extended from six months to 12 months. Goldman said dayrates for deepwater rigs could come under substantial pressure as available rigs increase due to inactivity in the gulf. Diamond Offshore (DO) was cut to a sell along with Atwood Oceanics (ATW). FBR cut Baker Hughes (BHI) from outperform to market perform due to impacted client base in the gulf.

Diamond Offshore was also knocked for a loss as an Internet rumor suggested DO had another leaking well in the same part of the gulf as the BP well. A YouTube video documented what the photographer called an oil plume from the Diamond Offshore Saratoga rig operated by Taylor Energy. The Internet rumors had the MMS and Coast Guard covering up the "new" leak. Late in the day Taylor Energy issued a press release saying the leak dated back to 2004 and Hurricane Ivan. The production platform on the well had been toppled by subsurface mud slides and 100 foot waves for 16-18 second periods during the storm. Taylor has been working on repairing or plugging wells in the area since the 2004 event. The Saratoga has been leased by Taylor for this effort. Taylor has used three subsurface containment domes and six well interventions since 2004. Yes, oil is leaking but at a much lower rate and everyone has known about it for years. Still, Diamond Offshore lost -4% on the news and they are the ones trying to fix it not the ones that caused it.

BP reported they collected 14,800 barrels of oil on Monday from the leaking well. The Enterprise drill ship only has the capacity to process 15,000 bpd so they are at capacity. They also flared 30.6 million cubic feet of gas. BP claims they should have a second rig operating by the weekend in an effort to boost that capture capacity to 20,000 bpd. They also have lowered some new containment domes to the seafloor and have more in route to the well site in an effort to find the right answer to capturing all the oil currently escaping. The relief wells will not be completed until August so the potential for more damage remains very high.

I believe the real damage is not from the oil being leaked into the gulf. I believe the real damage is going to come from the hazardous chemical Corexit being used to disperse the leaked oil. More than a million gallons has been sprayed into the gulf and this stuff is highly toxic. It has been banned around the world for its potential "to kill the entire food chain." It is toxic to any life including humans and adding this much to the gulf could produce fish and human casualties including birth defects, cancer, liver, kidney, skin and eye problems for a decade to come. I wrote a long article about this danger last night on OilSlick.com. Click here to read it.

Data showing how much Switzerland had benefited from the European debt crisis pushed the Swiss Franc to a new high relative to the euro. Swiss currency reserves rose to CHF232.4 billion at the end of May from CHF153.6 billion at the end of April. Analysts believe that prompted Switzerland to intervene in the currency market early this morning by buying euros with francs and/or dollars. The spike in the euro was short lived and it returned to the lows by late afternoon. The Swiss franc was seen as a safe haven for European investors while the euro has been under attack. Switzerland has said it will not allow the franc to continue to appreciate because it weakens exports.

Euro Chart

Gold prices hit a new record high at $1252 intraday on continued worries about the European debt crisis and the potential for a double dip recession. Analysts are starting to talk about $1500 gold as more European countries begin to exhibit debt stress.

Gold Chart

Analyst Richard Bove was on CNBC again warning against investing in some banks ahead of the coming stress. The financial reform law is back in the news and we still don't know what will be in the final bill. Credit card companies and banks will be subjected to new rules and limits on what kind of fees they can charge. At risk to the credit card community are $20 billion in fees currently collected from merchants and issuing banks. The banks are at risk for higher reserve requirements, fewer allowed activities and a cutback on fees. JP Morgan was mentioned as one bank that could lose $500 million just in fees on checking accounts. The banking sector as evidenced by the XLF has pulled back to support as it awaits the final version of this bill.

XLF Chart

Banks got more bad news on Tuesday that bond insurer Ambac Financial Group will only be paying pennies on the dollar on loan guarantees issued by Ambac. The company tried to unwind its guarantees on billions of dollars of collateralized debt obligations or CDOs. Those securities turned toxic leaving Ambac on the hook and liable for billions. The company was finally taken over by the State of Wisconsin earlier this year. The agreement disclosed today gives the insured parties $2.6 billion in cash and $2 billion in notes. In return the banks will cancel $16.4 billion in guarantees on those CDOs. Most banks have already taken the hit to their books when Ambac was taken over but for those hoping for a reprieve this is the final nail in the coffin.

May was a bad month in the markets and a bad month for hedge funds. The hedge fund composite index lost -2.26%. Equity only funds lost an average of -3.7% and the worst month since Nov-2008.

After the lowest close for the year at 9816 on Monday the Dow was fairly reserved today after trading down to 9757 in the opening hour. Traders bought the dip and returned it to 9850 until 1:PM when another sell cycle knocked it below 9800 again. The late day buy programs triggered some short covering but as I said earlier it was lackluster. The closing stall at 9950 was resistance from Monday so there was no real gain despite the +123 close.

I believe it was simply time for a short squeeze and it was not a signal that the bottom is behind us. I would be thrilled if the was the case but there are still too many unknowns heading into the earnings warning cycle.

If the Dow does squeeze over resistance at 9960 on Wednesday then we are right back into the range that kept us trapped for the last three weeks with 10250 the next decision point. If the Dow loses traction again and falls below today's intraday lows at 9800 then we could be in for a new leg down. The action yesterday and today is clearly bearish on the chart.

Dow Chart

The S&P broke 1050 again intraday for the third time this year but managed to recover by the close. However, even with the positive close it remains under 1065 and technically in danger. The 1050-1065 level is the line in the sand on the downside. If this level fails we could be looking a significantly lower numbers as in 960. Resistance is still the 200-day at 1107 but that is well above our close. This is not a bullish chart.

S&P-500 Chart

Tech stocks declined on multiple downgrades on Google, weakness in Apple and multiple downgrades on chip stocks. The second quarter is not normally good for tech stocks and analysts are cleaning up their recommendation lists ahead of potential earnings warnings as we near the Q2 reporting cycle. The SOX came perilously close to breaking intraday support at 325 but stopped just short. It is not a pretty chart. The Nasdaq bounced off 2150 twice intraday but failed to really produce a rebound. This is a critical support level.

Nasdaq Chart

Semiconductor Index Chart

Despite the late day bounce I am still not positive about the market. I believe it was lackluster but on decent volume. Over 11.3 billion shares were traded. However, the sentiment is still negative. I continue to see no compelling reason to be long this market. Earnings warnings will continue and we are sure to hear of some new crisis in Europe. I am bearish until proven wrong.

Please excuse any editing errors tonight. I am posting this unedited in the middle of a lightning storm. I am trying to get it uploaded before the power goes out.

Jim Brown


New Option Plays

Long and Short Candidates

by Scott Hawes

Click here to email Scott Hawes


NEW DIRECTIONAL CALL PLAYS

Petroleo Brasileiro SA - PBR - close 37.10 change +1.00 stop 35.45

Company Description:
Petroleo Brasileiro S.A. (Petrobras) is an integrated oil and gas company. The Company operates in five segments: exploration and production; refining, transportation and marketing; distribution; gas and power, and international. The exploration and production segment includes oil and gas exploration, development and production in Brazil. The refining, transportation and marketing segment includes downstream activities in Brazil, including refining, logistics, transportation, oil products and crude oil exports and imports, petrochemicals and fertilizers. The distribution segment includes distribution of oil products through the BR retail network in Brazil. The gas and power segment includes gas transportation and distribution, electric power generation using natural gas and renewable energy sources. The international segment includes exploration and production, refining, transportation and marketing, distribution and gas and power operations outside of Brazil.

Target(s): 39.25, 39.95
Key Support/Resistance Areas: 37.45, 36.25
Time Frame: 1 week

Why We Like It:
PBR is has been forming an ascending triangle on its hourly and daily chart since June 1st. The pattern could also be considered a bull flag. I believe the stock is poised to break out to the upside for a quick profitable trade. I suggest readers use a trigger to enter long positions if PBR trades up $37.52 which would be a breakout of the triangle. More aggressive traders could initiate positions at current levels or on weakness and use a tight stop if it fails. Our stop is $35.45 which is below the low where the ascending triangle begins. Investors are treating oil and gas stocks like they will never be able to drill oil again and I believe they are poised to bounce from here. In addition, PBR shouldn't be affected more than it already has from the domestic headline risk in the US.

Suggested Position: Buy July $37.00 CALL, current ask $2.22, estimated ask at entry $2.37

Annotated Chart:

Entry on June xx
Earnings Date 8/13/10 (unconfirmed)
Average Daily Volume: 19.6 million
Listed on 6/8/10


NEW DIRECTIONAL PUT PLAYS

Toronto Dominion Bank - TD - close 66.50 change +0.92 stop 69.90

Company Description:
The Toronto-Dominion Bank is a Canadian bank. The Bank and its subsidiaries are collectively known as TD Bank Financial Group (TDBFG). The Bank serves approximately 17 million customers in four segments: Canadian Personal and Commercial Banking, including TD Canada Trust and TD Insurance; Wealth Management, including TD Waterhouse and an investment in TD AMERITRADE Holding Corporation (TD Ameritrade); U.S. Personal and Commercial Banking, including TD Bank, America's Most Convenient Bank, and Wholesale Banking, including TD Securities. The Bank also acts as online financial services firm, with more than 5.5 million online customers.

Target(s): 64.50, 62.20, 60.50
Key Support/Resistance Areas: 69.15, 68.00, 66.50, 65.50, 64.50, 63.00
Time Frame: 1 to 2 weeks

Why We Like It:
TD is in a downtrend and I am looking for the stock to bounce up to its secondary downtrend line to make a lower high in the coming days. The stock is also forming a descending triangle with the base near $64.50, which is also a prior resistance area from the fall of 2009. Buyers have stepped in to support the stock, but I believe they will wane and this level will break. The stock has barely been hanging on to its 200-day SMA and I expect BNS to eventually break that too and trade down to new lows. I suggest readers use $67.80 to initiate short positions. Our stop is $69.90 which is above the highest closing price since May 14th. Readers may also consider initiating short positions at current levels but this is a decision to be made intraday depending on market conditions.

Suggested Position: Buy July $65.00 PUT if TD trades up near $67.80, current ask $2.60, estimated ask at entry $2.10.

Annotated chart:

Entry on June xx
Earnings 9/2/2010 (unconfirmed)
Average Daily Volume: 1.4 million
Listed on June 8, 2010


In Play Updates and Reviews

ACI, ARO Opened

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:


CALL Play Updates

Direct TV - DTV - close 37.61 change -0.10 stop 35.70

Target(s): 38.20, 38.50, 39.50, 41.50
Key Support/Resistance Areas: 38.60, 37.00, 36.30
Current Gain/Loss: N/A
Time Frame: Several weeks
New Positions: Waiting to be triggered

Comments:
I am going to shift gears on this trade and lower our trigger to enter long positions to the rising 50-day SMA near $36.50. It feels like DTV wants to trade down there so lets limit our risk in the trade and pounce on the stock if it gets there. The 50-day SMA is currently $36.40 but is rising.

Suggested Position: Buy July $37.00 CALL if DTV trades down to its 50-day SMA currently near $36.50, current ask $1.91, estimated ask at entry $1.40

Entry on June xx
Earnings Date 8/5/10 (unconfirmed)
Average Daily Volume: 12.3 million
Listed on 6/5/10


Qualcomm Inc - QCOM - close 35.27 change +0.26 stop 34.20

Target(s): 20-day SMA, 36.45 (hit), $36.75, 38.00, 38.95
Key Support/Resistance Areas: 37.50, 37.00, 36.25, 35.25, 34.50
Current Gain/Loss: -15%
Time Frame: 1 to 2 weeks
New Positions: No

Comments:
QCOM found buyers step in late in the day and closed +0.74% on the day. The stock is still holding the long term support area dating back to 2007 in the $35.00 to $35.25 area. Our first target of $36.45 was hit on Thursday last week and I am looking for the stock to bounce towards these levels from here. This is still a valid target but I suggest readers watch the 20-day SMA and tighten stops if QCOM trades up this level this week. I've also listed $36.75 as a target which is just below Thursday's highs. If the markets bounce QCOM should do well as it is a quality name in a good industry. I'm going to move the stop up to $34.20 which is below the stock's recent lows to protect capital if things proceed lower.

Current Position: July $36.00 CALL, entry at $1.30

Entry on 6/1/2010
Earnings Date 7/21/2010 (unconfirmed)
Average Daily Volume: 26 million
Listed on 5/29/10


Quest Software - QSFT - close 18.78 change -0.10 stop 18.10

Target(s): 19.60, 20.00, 20.50, 21.00
Key Support/Resistance Areas: 18.40, 18.60, 19.36, 20-day SMA, 50-day SMA
Current Gain/Loss: -29%
Time Frame: Several weeks
New Positions: Yes

Comments:
QSFT traded down to its 20-day SMA today and bounced nicely. If the market gets some legs here I expect QSFT to make a run at its recent highs. But I also urge readers to protect capital and tighten stops if QSFT gains strength. The stock closed above the recent breakout of resistance at $18.70 which are highs from April, January, and October that should continue to act as support. I am expecting a quick bounce and suggest not hesitating to take a quick profit if QSFT spikes higher from here. Our stop remains at $18.10 which is just below its 50-day SMA. This may be a little to close to the 50-day SMA so the overall market strength or weakness should be considered if QSFT is trading down at this level. If there is a bar that closes below $18.10 I would suggest placing the stop below the low of that bar to see if the stock can reverse.

Current Position: July $20.00 CALL, entry at $0.85

Entry on June xx
Earnings Date 8/10/10 (unconfirmed)
Average Daily Volume: 1.9 million
Listed on 6/2/10


PUT Play Updates

Apple Inc - AAPL - close 249.33 change -1.61 stop 267.50

Target(s): 246.00, 239.00, 233.00
Key Support/Resistance Areas: 265, 260, 258, 254, 250, 243, 237, 232
Current Gain/Loss: +29%
Time Frame: 1 to 2 weeks
New Positions: Yes, but only on bounces

Comments:
AAPL traded to within 65 cents of our first target before reversing at the end of the day so I am going to raise our first target by $1.00 to $246. The stock closed below its 20-day and 50-day SMA today and I am expecting more downside but we may have to endure a bounce first. Our stop is way up at $267.50 which is above recent highs. But I urge readers who have positions to protect profits if APPL trades too much higher from here. I see intraday resistance at $254 and $258 which are good areas to place tighter stops. These are also areas where new positions could be initiated with tight stops. AAPL remains in a solid downtrend on its hourly chart but I wouldn't be surprised to see AAPL test our entry area near $257.00 in the next day or two. AAPL has a developers conference this week. The stock typically spikes on the keynote announcement by Steve Jobs then struggles the next couple of weeks. Apple has stubbornly refused to give up much ground and I believe the stock is due for a correction.

Current Position: July $250.00 PUT, entry at $10.70.

Entry on June 7, 2010
Earnings 7/20/2010 (unconfirmed)
Average Daily Volume: 29 million
Listed on June 5, 2010


Aeropostale, Inc. - ARO - close 27.94 change +0.22 stop 29.55

Target(s): 27.00, 26.35, 25.25
Key Support/Resistance Areas: 29.35, 28.50, 27.50, 27.00, 26.30, 25,00
Current Gain/Loss: +3.78%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
ARO traded up to our entry trigger at $28.20 so we are own July $27.00 PUTS at $1.35. Our entry point is a key pivot area for the dating back to March when it acted as support for the stock prior to its big run into April. ARO's 20-day SMA is also near $28.20 and I expect this are to hold as resistance before ARO takes a bigger fall. The stock has been mostly below this area for the past 3 to 4 weeks. Our stop is $29.55 which is above the congestion area and above the 50-day SMA. If the market bounces from here we may need to exercise some patience prior to the stock declining. The retail sector has some catching up to do with the broader market declines as the sector is still several percentage points away from its February lows. I believe ARO is vulnerable and is ready to make a trip down to its 200-day SMA which is near our second target of $26.35. But I also urge readers to protect profits as ARO approaches $27.00.

Current Position: Buy July $27.00 PUT, entry was at $1.35

Entry on June 8, 2010
Earnings 8/19/2010 (unconfirmed)
Average Daily Volume: 3.3 million
Listed on June 7, 2010


Arch Caol - ACI - close 21.21 change +0.61 stop 22.05 *NEW*

Target(s): 19.30, 18.00
Key Support/Resistance Areas: 22.00, 21.75, 21.40, 21.00, 20.40, 19.25
Current Gain/Loss: -4.50%
Time Frame: 1 to 2 weeks
New Positions:

Comments:
ACI traded up to our target of $20.95 so we are now long July $20.00 PUTS at $1.10. Our stop is $21.80 which is above yesterday's high's, however, it is just below the 20-day SMA which should also provide resistance. This may be a little tight to withstand a bounce higher so I am going to raise this the stop to $22.05 which is well above the 20-day SMA and the highs from last Wednesday. This should be enough to withstand a spike and if it goes higher than $22.05 we'll just have to step aside. My comments from the play release remain the same. ACI is forming a bear pennant on its daily and weekly chart and I believe it is poised to test its recent lows near $19.30. There is also an upward trend line from its November 2008 lows near $18.00 that ACI could easily trade down to if the overall market continues to be weak.

Current Position: July $20.00 PUT, entry at $1.10

Entry on June 8, 2010
Earnings 7/22/2010 (unconfirmed)
Average Daily Volume: 6.4 million
Listed on June 7, 2010