Option Investor
Newsletter

Daily Newsletter, Saturday, 6/19/2010

Table of Contents

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

Market Wrap

Friday Action Is Lackluster As Stocks Inch Higher

by Todd Shriber

Click here to email Todd Shriber
The major U.S. indexes managed to eke out some small gains on Friday, trading in a tight range on quadruple witching day. The S&P 500 gained almost 1.5 points to close at 1117.51, extending a two-week winning streak that represents the index's best two-week run since November. The Dow Jones Industrial Average added just 16 points to settle at 10,450 while the Nasdaq remained above 2300, adding almost three points to close at 2309. Small-caps were about as boring as their large-cap brethren with the Russell 2000 adding just one point to close just below 667.

Stats Table

Stocks seemed to get a lift from speculation that Europe is actually making some progress on solving its sovereign debt crisis and that rosy outlook seemed to be fortified by a rally in the Euro as the beleaguered common currency used by 16 European countries gained the most against the U.S. Dollar in more than a year this week.

The Euro rose 2.3% to $1.2388 against the greenback as traders unwound bearish bets that the Euro's decline would continue. Hedge funds and other speculators reduced short positions in the EUR/USD pair to 62,360 contracts on June 15 compared to 111,945 a week earlier – a drop of 44%, according to Bloomberg News.

Analysts said most of the Euro rally was obviously fueled by short covering, but the fact that Spain was able to hawk $3.7 billion in 10-year bonds on Thursday did not hurt matters. Demand was almost twice the amount on offer, according to Bloomberg. The country was also able to successfully sell almost $592 million in 30-year bonds.

Euro Chart

Not to rain on anyone's risk appetite parade, but times have changed as the weekly gains for the major U.S. indexes lagged those seen in the Euro. A rally in the Euro used to encourage far more bullish action in equities than was seen this week and would have been seen by many investors as a sign that risk appetite was at work again. Not so fast. NYMEX-traded gold for August delivery closed at a record high on Thursday and moved to another record high of $1263.70 on Friday before settling at $1258.30. That is still good enough for a new record closing price.

Investors flocked to the yellow metal after the Philadelphia Federal Reserve Survey and jobless claims data released on Thursday provided less-than-encouraging assessments regarding the economic recovery. Gold's ascent has some pundits saying the trade is ''crowded,'' but there is no getting around the fact that gold futures are up 15% this year, dwarfing the returns offered by stocks.

Gold Chart

With the SPDR Gold Shares ETF (GLD), the second-largest ETF in the world by assets, trading well into the triple digits after touching a new all-time on Friday at $123.50, some investors may want to find other, more cost-effective ways to play gold's bullish ways. Caterpillar (CAT), the world's largest maker of mining and construction equipment, was the Dow's biggest gainer on Friday, jumping nearly 1%.

While that may not be saying much, if gold prices continue to soar, miners are going to want to pull more of the yellow metal out of the ground and that could spur sales of Caterpillar's heavy mining equipment, none of which is cheap.

Caterpillar Chart

Caterpillar was up almost 8% this week, but even more impressive gains could be spotted in the shares of Newmont Mining (NEM), the largest U.S. gold miner, which soared 10% on the week. Options traders seem to be feeling bullish on Newmont as more than 49,000 contracts traded in the name on Friday, more than twice the daily average. Nearly 60% of that volume was in the form of calls.

Volume in the stock was nearly 50% above the daily average on Friday as the stock traversed $60 for the first time in more than four years. After closing at $61.25, Newmont is within earshot of its all-time of $62.70.

Newmont Mining Chart

Gold talk may be a good segue to talk about Goldman Sachs (GS). Wall Street's most prestigious and vilified investment bank was back in the news on Friday. Fortunately for wary shareholders in this marquee name, the Goldman news broke late in the day and the stock was able to manage a small gain on the day.

Goldman has asked the Securities and Exchange Commission (SEC) for more time to reply to the April 16 lawsuit that accuses Goldman of defrauding investors in mortgage backed securities. The firm was originally supposed to respond on Monday, but asked a judge to grant it an extension until July 19. Now infamous Goldman employee Fabrice Tourre also has until July 19 to respond to the SEC inquisition.

The SEC did grant the extension, according to some press reports. Goldman has maintained that it did nothing wrong and that plans to fight the charges. It is the company's right to fight the charges, but given the dramatic plunge in Goldman shares since mid-April, it might be in the company's best interests to go ahead and cut Uncle Sam a settlement check, which everyone knows Goldman can easily afford, and put this issue to rest so the stock can get back to being the juggernaut it once was.

Goldman Chart

Speaking of some of the more controversial names out there, Friday was another event-filled day for BP (BP) and other names that are tied to the Gulf of Mexico oil spill. Rumors that BP may commence a bond offering as early as Tuesday started to pick up steam. In addition, some press reports said the embattled oil giant may seek up to $5 billion in loans from a syndicate of banks. Reuters actually reported that number may be as high $7 billion.

CNBC reported on Thursday that BP could issue between $5 billion and $10 billion in bonds, but investors fear the impact that a new issue could have on current BP bondholders. The bottom line with a BP bond issue is that the company is going to have to offer a juicy yield, perhaps in the order of 8%-10% to get investors interested in longer-term commercial paper.

CNBC said that BP is shopping the offering to the likes of Fidelity, PIMCO and other bond giants, but the results of those efforts remain to be seen. PIMCO does own $100 million in short-dated BP paper, but whether or not the world's largest bond fund manager embraces longer-term, riskier BP fare may be another issue altogether.

Not helping matters is the fact that Fitch downgraded BP's credit ratings on Tuesday, the second downgrade from that ratings agency in a month. Moody's followed that up with its own downgrade of BP on Friday. ''Moody's updated assessment is that the spill will have a sustained negative impact on the group's free cash flow generation and overall financial profile for a number of years,” the ratings agency said.

Lower ratings equal higher borrowing costs for BP and that is not the best of news for a company whose $20 billion contribution to an escrow account to compensate spill victims is viewed as a floor, not a ceiling.

Moody's also took the ratings knife to Anadarko Petroleum (APC), the independent oil and gas producer that owned a 25% interest in the Macondo well. The Moody's rating cut took Anadarko's credit rating to ''Ba1,'' which is junk status. Rising containment costs and the potential for further increases in litigation costs could hamper Anadarko, Moody's said.

Anadarko has been pretty quiet since the spill started, especially when considering this was almost a $74 stock on April 20. On Friday, Anadarko closed below $43. Well enough is enough as far as Anadarko is concerned and the company's CEO James Hackett was vocal in his assessment that the blame for the spill, now the largest in U.S. history, should be placed squarely at BP's doorstep.

Hackett said he was ''shocked'' at how BP operated the rig and that ''BP's behavior and actions likely represent gross negligence or willful misconduct.'' Anadarko claims that a joint-operating agreement between the companies means BP is responsible for damages related to the spill. Anadarko said it was surprised by the Moody's downgrade and that it will work ''diligently'' to regain investment graded investment grade status. The company also said something about protecting shareholders, but at this point, that is may just be perceived as idle chatter.

Anadarko Chart

There is something to the theme of appearing less liable for the spill than BP. Just take a look at shares of Transocean (RIG), the world's largest provider of offshore drilling services and the owner of the Deepwater Horizon rig. Transocean has seen its share price almost cut in half since the rig exploded on April 20 and heading into Friday's trading, the shares were down 14% this month alone, but the stock surged $5.18, or almost 10.5%, to $54.61, capping a 17% gain for the week. There was also some notable options activity in Transocean as traders scooped more than 95,000 calls compared to 61,000 puts. Some traders were even selling the Transocean June 50 puts after the stock moved above that level on Friday. Those options expired yesterday.

Most folks do not have warm and fuzzy feelings toward Transocean following the Gulf disaster. After all, the company's public relations team is only slightly more sensitive than BP's, as highlighted by a closed-door meeting in Switzerland to authorize a dividend and the company's attempts to get a Houston judge to cap its spill-related liabilities at $26.7 million.

What is becoming apparent is that the markets love to find a scapegoat, and in the case of the Gulf of spill, BP stands to be the biggest loser from the standpoint of how much cash the company is going to have to payout in the coming years. Another thing to consider is that perhaps some of the selling in names like Halliburton (HAL), Transocean, and yes, Apache, has been overdone.

Moody's lowered its ratings on Transocean last week for the same reasons it cut Apache and BP yesterday, but the more the blame for this epic disaster flows to BP, the more Transocean shares are going to benefit.

Transocean Chart

Looking at the charts, the Dow has broken out of the 10,250 range and further closes above 10,400 could be a bullish sign and support can be found at 10,200. A move above 10,550 would indicate further strength and perhaps bring about some fresh buying, but I would be cautious on the Industrials if the index peaks below the 10,185 level.

Dow Chart

More importantly, the S&P 500 has also broken out above the 200-day moving average and with Friday's close just above 1117, the index inched above a secondary resistance point. This is a moderately bullish sign and on the downside, a violation of 1100 might send the bulls running for cover. A move below old support at 1085 would clearly be bearish.

S&P 500 Chart

The Nasdaq continues to inch further away from 2300, though Friday's gains were lukewarm and that might be a generous assessment. Support can now be found at 2250 and there is a lot of real estate in between where the index currently resides and its next resistance point, which is just below 2400. Further strength in the S&P 500 would also lend a hand to the Nasdaq.

Nasdaq Chart

I am a bit more cautious regarding small-caps as the Russell 2000 probably needs to break above 675 in order to confirm bullishness. Laboring just below 667, the index could swing either way from here, meaning Monday and Tuesday could be important days in terms of where the Russell 2000 ends up next week. A move above 675 would be bullish, a retreat below 650 would be equally as bearish.

Russell 2000 Chart

I am always a little apprehensive about what the summer months can bring for stocks and I think that conservative posture is warranted this summer. The follow through after the major indexes reclaimed their 200-day moving averages has not been impressive and if earnings is indeed going to serve as a positive catalyst, the reports had better be a lot more encouraging than what we have seen from Best Buy (BBY) and FedEx (FDX), or the S&P 500 is going to have some challenges meeting the rosy year-end targets offered by so many analysts just a few months ago. Happy Father's Day to all the dads reading this.


Index Wrap

On Track To Move Higher

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

While upside momentum slowed from mid-week on, the recent mostly sideways movement looks like a consolidation before the indexes move still higher. How much higher is a big question however and whether the major indexes can exceed a half to 2/3rds retracement of the last big decline.

A weak rebound of a prior bearish move might typically be only about 1/3 to a Fibonacci 38% retracement. A next common retracement is around 50% of a prior move. Our strongest index, the Nasdaq 100 (NDX) has retraced slightly more than half of its late-April to early-June decline and looks to keep going to test potential resistance around 1950.

In terms of the 'main' indexes, the S&P 500 (SPX) would face a key test at 1160 (a 2/3rds retracement) and the Nasdaq Composite (COMP) would face a potential challenge in exceeding 2400. A move above these levels would suggest a potential to retest the late-April highs.

I haven't written anything in awhile on the long-term or primary trend based on the interplay of the Dow Industrials (INDU) and the Dow Transportation Average (TRAN) in terms of Dow Theory. The theory being and it's held up as a telling indicator for more than a century, that the two Averages should 'confirm' each other.

For example, if INDU falls to a new closing weekly low relative to its prior bottom, but TRAN is above ITS prior low, no sell 'signal' is given. (TRAN would also have to go to a new closing low to confirm the major trend has shifted from up to down.) This is exactly what happened when INDU fell under 10000 briefly as highlighted below. This chart shows how various past INDU/TRAN chart comparisons could or should have kept investors long since the March '09 bottom.

Of course, this trend model is a 'lagging' indicator in that Dow theory sell or buy 'signals' usually occur after prices have made a significant move already; e.g., the Dow falls from the 11200 area to under 10000, TRAN confirms and you exit the market.

This compares to a situation such as the Dow (or whatever major index) stopping dead in its tracks at a prior major high. Such a potential double top might suggest shorting the market or otherwise protecting your downside risk at close to the most recent high.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The move in the S&P 500 (SPX) above stubborn resistance and prior highs in the 1100-1105 area, was a 'confirming' follow through to the earlier bullish breakout above the down trendline highlighted on the chart. The further ability for SPX then to get back above its 200-day moving average was also a bullish plus.

After the sizable upside move of Tuesday, the subsequent Wed. to Fri. trade near the high end of Tuesday range, suggests a consolidation for a move still higher. That said, I view an upside penetration of 5/12's 1172 Close as 'confirmation' of a shift in the intermediate trend to up; the intraday peak was in the same area at 1173. It might be said that the move above the prior 1105 rebound high at 1105 marked a trend reversal but I would look for SPX to exceed 1160, a 66% retracement AND go on to pierce the 1172 mid-May closing high.

I've noted resistance (beside 1172-1173) for the 1142 area, then at 1160.

Near support is 1100, then at 1080. A Close below 1100 not reversed (back to the upside) in the following session, would suggest that prices might have to drop back again to attract buying interest. Fairly major support/buying interest should be found on dips to the 1050 area, extending to the double bottom low at 1041-1042.

MARKET SENTIMENT:

As I noted last week also, bullish sentiment readings seen above have moderated and are registering in a 'neutral' range or at least have not risen to an 'overbought' extreme on this latest recovery rally. This is an encouraging sign for those long calls and long stock trades. If and when traders get extremely bullish again, it will be time again to keep close tabs on price action for any signs of another pullback.

S&P 100 (OEX) INDEX; DAILY CHART

I'd no longer rate the S&P 100 (OEX) chart as mostly bearish since OEX pierced its prior 501 high. There's also of course the exact double bottom low seen to date at 473; as I wrote last week, this ..."suggests that the OEX can continue to recoup more of its recent steep decline dating from its late-April high into the recent twin bottoms."

There are of course some technical hurtles to overcome on the way to further significant upside, especially taking out the cluster of mid-May highs in the low-530 area. Resistance is noted at 510 and then in the 520 area. I should also note that a move above 524-527 would exceed the important 62 to 66% retracement zone (and always potential resistance) for the April-June decline.

Near support is at 500, extending to the 490 area.

DOW 30 (INDU) AVERAGE; DAILY CHART:

There's a change from last week as more of the 30 Dow stocks are trading above their 200-day moving average, a gauge of upside momentum as anticipated. We've gone from 10 to 15 or fully half of the 30 INDU stocks now trading above this key moving average.

Some profitable and quick trades could have been made by buying the stocks that best resisted the decline when they dipped to the line representing the 200-day simple moving average (SMA); e.g., BA, CAT, DD, KFT. (Not, so far, PG, which is 'lying' on top of this average.) This past week, joining the 10 from the week before in trading above the 200-day SMA, were INTC, MRK, MMM, TRV and UTX. Tech (UTX, INTC) got a tech boost but even MRK and TRV rebounded and drug and financial stocks haven't been in favor.

Pivotal resistance is noted at 10600, then at 10680-10685. Immediate support is around 10330, then at 10200.

Based on a bottoms up approach of studying the 30 individual Dow stocks, which I look at daily and weekly to help analyze the overall market, I'd say INDU is headed higher still. Key INDU retracement level tests exist at 10504 (50%) and then at 10681, representing a Fibonacci 62% (61.8) retracement.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) Index has continued to work higher after the index formed the second half of a "W" type bottom. And, as I expressed last week..."I wouldn't bet against tech just in here or going forward".

Key resistance now has moved from 2250 up to 2350, which also is in the area of the 50-day average, another widely followed momentum benchmark. Next resistance is noted at 2387 on the daily COMP chart. When I wrote last Saturday, COMP had already moved back above its 200-day moving average and the bullish omen of this proved correct.

I would see a move above 2400 and a 66% retracement (of the March to early-July decline), as putting this index back on a bullish footing. A close above the prior mid-May closing high at 2425 should also be significant in suggesting a retest of the prior highs above 2500.

Near support has also moved of course, now up to the 2250 area, extending down to 2200. I would take any close back below 2200 as renewal of a bearish chart. Right now the chart is mixed.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) continued to move higher, tacking on another 50+ points this past week when good follow through buying lifted the index after it pierced its down trendline. The chart and indicator patterns suggest more upside to come although the situation is still volatile in terms of potential Market influences, whether Greece, jobless numbers here, consumer spending here, Spain, China or beyond. One world economy anyone?

NDX is now the closest of the major indexes to a possible challenge of resistance implied by the 62-66% retracement levels. Piercing the down trendline at 1850, then the prior 1900 upswing high were big initial technical moves in suggesting a bottom was in place.

I've noted 1950 as a next key resistance area to be overcome in keeping the NDX bullish express rolling. A close above 1982-1983 would suggest that highs in the 2050 area might be retested.

Key support is at 1850, extending to around 1822.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

I never can quite get over how the Nasdaq Tracking Stock (QQQQ) can advance with almost no concomitant increase in daily trading volume, contrary to what you usually see in individual stocks. With QQQQ, volume is not often a 'confirming' type indicator for increased upside (or downside) momentum. When the Q's reverse lower however, we tend to see those daily volume bars really jump and this generally becomes part of a downside reversal pattern.

The chart and indicator patterns suggest more upside to come currently. This past week, after piercing its down trendline, the stock did end up retesting, then exceeding, its prior 46.8 upswing high. I've noted (per the red down arrow) next resistance at 47.7, then as being in the 48.8 area.

Pivotal support is now up to 45.4 this week, extending to 45 even.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) has seen a continued advance after it pierced its down trendline at 650. An immediate overhead line of resistance is at 670. Yet to come is then a test of the Big Kahuna of trendline resistance, RUT's previously broken long-term up trendline currently intersecting around 680. RUT's chart pattern suggests potential to get back this key trendline. I foresee resistance next coming in at 700, with fairly major resistance at 720.

I've noted support around 648, extending to the 636 area.



GOOD TRADING SUCCESS!



NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS

CHART MARKINGS:

1. Technical support or areas of likely buying interest and highlighted with green up arrows.

2. Resistance or areas of likely selling interest and notated by the use of red down arrows.

I WRITE ABOUT:

3. Index price areas where I have a bullish bias or interest in buying index calls, selling puts or other bullish strategies.

4. Price levels where I suggest buying index puts or adopting other bearish option strategies.

5. Bullish or Bearish trader sentiment and display the graph of a CBOE daily call to put volume ratio for equities only (CPRATIO) with the S&P 100 (OEX) chart. However, this indicator pertains to the market as a whole, not just OEX. I divide calls BY puts rather than the reverse (i.e., the put/call ratio). In my indicator a LOW reading is bullish and a HIGH reading bearish, consistent with other overbought/oversold indicators.

Trading suggestions are based on Index levels, not a specific option (month and strike price) and entry price for that option. My outlook often focuses on the intermediate-term trend (next few weeks) rather than the next several days of the short-term trend.

Having at least 3-4 weeks to expiration tends to be my guideline for trade entry choice. I attempt to pick only what I consider to be 'high-potential' trades; e.g., a defined risk point would equal in points only 1/3 or less of the index price target.

I tend to favor At The Money (ATM), In The Money (ITM) or only slightly Out of The Money (OTM) strike prices so that premium levels are not as cheap as would otherwise be the case, which helps in not overtrading an account. Exit or stop points, as well as projected profitable index price targets, are based on my technical analysis of the underlying indexes.


New Option Plays

Two Short Candidates

by Scott Hawes

Click here to email Scott Hawes


NEW DIRECTIONAL PUT PLAYS

NetApp, Inc. - NTAP - close 41.22 change -0.56 stop 42.72

Company Description:
NetApp, Inc. (NetApp) is a provider of storage and data management solutions. The Company offers solutions for storing, managing, protecting and archiving business data. The Company is engaged in the design, manufacturing, marketing and technical support of networked storage solutions. It offers storage solutions that incorporate its unified storage platform and the functionality of the data and storage resource management software. NetApp markets its products in the United States and in foreign countries through its sales personnel and subsidiaries. NetApp focuses on the data management and storage markets, offering an array of solutions from its high-end products designed for large enterprise customers to entry level products designed for mid-sized enterprise customers.

Target(s): 39.05, 37.00, 35.25
Key Support/Resistance Areas: 41.84, 40.00, 39.00, 36.50, 35.00
Time Frame: 1 week

Why We Like It:
NTAP printed a 5 year high this past week which was 28 cents higher than its highs in December 2006. The stock has gone parabolic since its 2008/2009 lows and for good reason. It is in a hot technology sector that is in high demand. However, the stock can not go straight up forever and I believe it is due for a pullback. The highs from 2006 and 2010 should provide enough "double top" resistance for a countertrend trade to the downside, i.e a blow-off top. The recent highs also give us a good reference point to place a protective stop just above if NTAP decides to continue its ascent so we can be right out of the trade if we are wrong. The pattern after big advances recently, such as the most recent, is for the stock to give a decent percentage of the gains back. There is typically a 5% to 10% correction so I have placed various targets along the way to help guide readers. In addition, percentage wise NTAP has surged more recently compared to its run up in 2009 which leads me to believe that if the selling gets started it may accelerate quickly as traders do not want to be holding the bag at the top of the range. I suggest readers initiate short positions at current levels with a stop at $42.72. I have provided a weekly chart below. NOTE: I view this trade as potentially being quick.

Suggested Position: Buy July $41.00 PUTS at current levels, current ask $1.55

Annotated weekly chart:

Entry on June xx
Earnings 8/19/2010 (unconfirmed)
Average Daily Volume: 9.1 million
Listed on June 19, 2010


International Game Technology - IGT - close 18.35 change -0.11 stop 19.26

Company Description:
International Game Technology (IGT) is a global gaming company specializing in the design, manufacture, and marketing of electronic gaming equipment and systems products. IGT maintains an array of entertainment-inspired gaming product lines. In addition to its United States production facilities in Nevada, it manufactures gaming products in the United Kingdom, and through third-party manufacturers in Japan and China. The Company derives its revenues from the distribution of electronic gaming equipment, systems, services and licensing. It operates in two segments: North America and International. North America consists of its operations in the United States and Canada, comprising 77% of consolidated revenues during the fiscal year ended October 3, 2009 (fiscal 2009). International consists of its operations in all other jurisdictions worldwide, comprising 23% of consolidated revenues during fiscal 2009.

Target(s): 17.70, 17.30, 16.80
Key Support/Resistance Areas: 19.00, 18.75, 18.09, 17.55, 17.25, 16.60
Time Frame: 1 to 2 weeks

Why We Like It:
IGT is in a solid downtrend and I expect it to continue. The stock is making lower highs and lower lows. The stock is below all its SMA's and a downtrend line that it recently touched on Tuesday 6/15 before a big gap down. All of this should provide plenty of resistance and if the overall market reverses lower anytime in the coming days IGT will be one of the first stocks to go. Ideally I would like to see IGT test $18.75 before initiating short positions which is Friday's highs and within the prior three day's trading range. But I'm not so sure we will see a bounce this high. I suggest we use a trigger of $18.50 to initiate short positions. Our stop is above 100-day, 20-day, and 200-day SMA's and the recent downtrend line. This is a wide stop for now to account for volatility and will be adjusted when a better price is determined. I've provided three targets which are good places to tighten stops if IGT continues lower from our entry.

Suggested Position: July $19.00 PUTS, current ask $1.15, estimated ask at entry $1.05

Annotated chart:

Entry on June xx
Earnings 7/22/2010 (unconfirmed)
Average Daily Volume: 4.8 million
Listed on June 19, 2010


In Play Updates and Reviews

Bias Starting to Shift

by Scott Hawes

Click here to email Scott Hawes

Editor's Note: Good Evening. I think the S&P 500 may have a little more upside left, but not too much until it runs into formidable resistance. The 61.8% retracement from the April highs to May lows is at 1,150, while the 50% retracement is at 1,130. There is also the 50-day, 100-day, and 20-week SMA's all in the 1,130 to 1,140 area. I anticipate all of these levels holding as resistance before we see more downside in the markets. As such, I am starting to position the model portfolio with more bias to the short side, especially as these levels approach. Current long positions should be managed with tight stops and I suggest being quick to take profits as targets are reached and I have made several adjustments to our long positions. Please email me with any questions.

Current Portfolio:


CALL Play Updates

Cisco Systems - CSCO - close 23.49 change +0.32 stop 22.20

Target(s): 23.55, 24.20
Key Support/Resistance Areas: 23.65, 22.55
Time Frame: 1 to 2 weeks

Comments:
I'm sticking with our set-up on CSCO and waiting for $22.85. If there is a pullback in the market this a stock I feel comfortable owning and will be looking for a bounce. Hopefully we can get filled this week so let's see what the market gives us. The stock hit a low of $23.05 on Thursday which was another entry for more aggressive traders. CSCO remains in the base it has built for the past 3 to 4 weeks and is trading in a $1 range (4.5%) between $22.55 and $23.55. $22.50 is key pivot level for the stock dating back to 2006. If the stock trades up to $23.80 and breaks higher out of the base that could also be used a trigger to enter for aggressive traders, but until that happens we are playing for a pullback. The remainder of my comments remain the same from the play release. CSCO looks stable here with a lot of support and I suggest we take advantage of the reliable price pattern that is being built. I would like to use $22.85 as a trigger to enter long positions. If triggered readers should be able to purchase July $22.00 calls for about $1.30 (current ask is $1.73). If CSCO then proceeds to rally to the top of its base at $23.55 we should make about 55 cents on the position for a +40% gain. If CSCO breaks out it could rally to fill a gap which is up near our more aggressive 2nd target of $24.40 and below the stock's 200-day SMA. Another entry could be considered at $23.05. Our stop will be $22.20. NOTE: I view this trade as potentially being quick.

Suggested Position: Buy July $22.00 CALL if CSCO trades down near $22.85, current ask $1.73, estimated ask at entry $1.30

Annotated Chart:

Entry on June xx
Earnings Date 8/5/10 (unconfirmed)
Average Daily Volume: 69 million
Listed on 6/16/10


Express Scripts, Inc - ESRX - close 52.02 change -0.72 stop 49.80

Target(s): 53.70, 54.75
Key Support/Resistance Areas: 54.00, 51.25, 50.00
Current Gain/Loss: +3%
Time Frame: Several weeks
New Positions: Yes

Comments:
ESRX gapped lower on Friday which triggered our entry to buy August $52.50 calls at $2.55. The stock bounced perfectly off of its 20-day and 50-day SMA's. This could also be a logical point for the stock to make a higher low and proceed higher. The early morning weakness was attributed to news in the industry which I wrote about in the market update on Friday and will reprint here: "CVS and Walgreens have settled their differences and signed a new Pharmacy Benefit Manager (PBM) network agreement. On June 7th Walgreens ended participation in CVS's PBM plans, citing that CVS's terms did not fit within their needs. Shares of WAG and CVS are up +3%. ESRX was seen as a primary beneficiary of the fall out between CVX and WAG. As a result of the news ESRX gapped lower this morning and is down -1%." Hmmm, just 12 days after terminating the agreement the companies are now back in cahoots. The news is simply something we can't predict but have to deal with it when it affects our positions. In the end, ESRX is a better stock than CVS and WAG and has been a strong performer despite the market weakness over the past six weeks. So I've adjusted the stop up a bit to $50.30 which is at the bottom of the congestion area and also provided some adjusted targets. These are areas to at least consider tightening stops to protect profits. I'll leave my comments from the play release as they remain valid. The stock has built quite an impressive congestion area between $50.00 and $51.50 since late March and recently broke out printing a new high. The stock is now turning back to retest the key pivot area and I suggest we take advantage of any weakness the stock gives us. In addition, the stock's 20-day and 50-day SMA's are near $51.25 which should provide solid support if the ESRX trades down there. I would like to use $51.90 as an area to initiate long positions. I believe the market will give us this level and allow ESRX to break out to new highs.

Current Position: August $52.50 CALL, entry was at $2.55

Annotated Chart:

Entry on June 18, 2010
Earnings Date 7/29/10 (unconfirmed)
Average Daily Volume: 5.5 million
Listed on 6/17/10


Ormat Technologies - ORA - close 29.67 change +0.06 stop 27.25

Target(s): 30.37, 30.95, 31.80
Key Support/Resistance Areas: 32.00, 30.60, 29.00, 27.50
Current Gain/Loss: -10%
Time Frame: Several weeks
New Positions: Yes

Comments:
ORA closed above its 50-day SMA for the fourth consecutive day and is forming a bull flag on its intraday and daily charts. I am looking for a move to $30.37 (adjusted first target) this week which is just below the 100-day SMA. This is an area where I suggest tightening stops to see if we can get more out of the stock, or simply taking profits. We should be able to get about $1.30 for the CALLS at this level. If it breaks through the 100-day SMA there is little resistance until our next two targets. Ultimately, I think ORA can make it up to the $31.80 area but it may take some time depending on the overall strength or weakness in the broader market. I suggest readers take advantage of any spikes and take profits on the trade. A strategy to consider would be placing a GTC sell limit order on your option at $1.25, for example, and see if you get filled. ORA has been stubborn to pullback so I wouldn't be surprised to see some sort of retracement before proceeding higher. We are keeping a wide stop to account for volatility and will adjust it this week. If readers want to keep a tighter leash on the trade a stop could be placed below the 20-day SMA or just below our entry price if you want it really tight.

Current Position: July $30.00 CALL, entry was at $1.00

Annotated Chart:

Entry on June 16, 2010
Earnings Date 8/4/10 (unconfirmed)
Average Daily Volume: 345,000
Listed on 6/15/10