Option Investor
Newsletter

Daily Newsletter, Monday, 6/21/2010

Table of Contents

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

Market Wrap

Yuan News Not Enough To Boost Stocks

by Todd Shriber

Click here to email Todd Shriber
Stocks checked into Heartbreak Hotel for a second consecutive Monday as big gains on the back of China's move to relax the Yuan's peg to the U.S. Dollar evaporated to turn into another day of small losses. The Dow Jones was up as much as 144 points early in the session, but closed down eight points at 10,442. The S&P 500 slid four points to settle at 1113, barely above the 200-day moving average while the Nasdaq tumbled almost 21 points for a close of 2289. Small-caps were no better with the Russell 2000 shedding seven points to close at 660.

Stats Table

Overnight, China said it would relax a nearly two-year old Yuan/Dollar peg that was implemented in July 2008 during the nascent stages of the financial crisis in a bid by Beijing to support China's exporters. The relaxed peg sent the Yuan up 0.4% against the Dollar on Monday to 6.7976, but the reaction in equity markets may have been knee-jerk to say the least and that is probably why stocks could not hold their gains into the close.

The Chinese government, for all that can be said about it, is not known for doing business in hasty fashion and if it thought relaxing Yuan/Dollar peg would lead to dramatic near-term appreciation for the Yuan, the peg would not have been relaxed in the first place. On Friday, Yuan forwards were pricing in a 1.8% for the currency against the greenback over the next year. On Monday, that jumped to 2.7% over the same time frame.

In other words, this is by no means a dramatic move and Chinese policy makers said as much in their weekend statement, saying the action will result in only gradual changes while ruling out significant appreciation against the Dollar.

It should be noted that a stronger Yuan may not be good news for certain U.S. stocks. Retailers were the biggest losers among the 24 groups tracked by the S&P 500, tumbling almost 2% as a a group due to concerns that a stronger Chinese currency will increase the cost of importing Chinese products. Pick a marquee retail name and it is likely that the shares were down today.

Dow components Wal-Mart (WMT), the world's largest retailer, and Home Depot (HD), the largest home improvement reatailer, were both down more than 1% as was Target (TGT). Best Buy (BBY) tumbled almost 2% on the Yuan news, not surprising considering that so many of the retailer's items are produced in China. None of this was good news for the SPDR S&P Retail ETF (XRT), which slid 2.13% on the day.

XRT Chart

Industrials and materials names caught a bid on the Yuan news as speculation swirled China's demand for energy products and industrial metals would remain robust. Copper soared the most in a week on rumors Chinese demand will grow. September copper futures jumped 5.8 cents, or 2%, to $2.9595. That helped buoy gains in materials and mining stocks such as Freeport McMoRan (FCX), which gained 3.31% on the day.

Coal stocks also got a big boost on the currency news. China is the world's largest coal consumer and plenty of U.S. coal producers have already upped their production of metallurgical coal, a key ingredient in the steel-making process. This is the coal that Chinese steelmakers crave. Shares of Alpha Natural Resources (ANR), Cliffs Natural Resources, Massey Energy (MEE), Patriot Coal (PCX) and Walter Energy (WLT) all jumped between 3% and 4%. Good news for the Market Vectors Coal ETF (KOL), which is nearing a critical point on its chart. The ETF's 50- and 200-day moving averages are separated by just a few pennies and a move beyond those lines could be very bullish for KOL.

KOL Chart

Among financials, Visa (V) and MasterCard (MA) were solid performers, gaining 4% each as Congress mulled a compromise that would protect the transaction fees the companies charge to banks, according to Bloomberg News. The House may keep in place the Senate's proposal to limit fees charged to consumers for each swipe of their debit cards.

Essentially, the compromise is intended to protect consumers while not significantly altering the way Visa and MasterCard do business. One analyst said that if the proposal becomes law, the companies will see small changes to their business models, but nothing as extreme as was originally feared.

MasterCard Chart

What would a day in the market be without some news related to the Gulf of Mexico oil spill? BP (BP) shares tumbled 4.5% after the company said it has spent $2 billion on spill cleanup and containment efforts. That compares with the $1.6 billion the embattled oil company said it had spent on cleanup costs through June 14. Do the math and you'll find that BP's daily costs have jumped 10% to an average of $33 million per day.

To add to BP's pain, the U.S. Chemical Safety Board said it is starting an investigation into what caused the largest oil spill in U.S. history. The agency said the investigation will be handled by the same investigators that worked the two-year probe of BP's 2005 fatal blast at its Texas City refinery. The Chemical Safety Board does not have enforcement authority, but it can recommend new safety protocols.

BP is also locked in a schoolyard brawl with Anadarko (APC), the independent oil and gas producer that owned a 25% non-operating in the Macondo well project. BP is considering suing Anadarko over the latter's potential refusal to pay its share of the spill cleanup tab. Texas-based Anadarko said last week BP should absorb all of the costs because of the reckless way in which it operated the Deepwater Horizon rig.

Anadarko is considering arbitration rather than litigation to resolve the dispute and that would keep the proceedings private. Analysts have speculated the company could be facing up to $6 billion in spill-related costs, so if the company is able to reduce that amount, the news would likely be bullish for the stock. Speaking of Anadarko shares, Barron's reported that J.P. Morgan is recommending selling the August 45 calls against an existing position in the stock.

Anadarko Chart

Looking at the charts, not a lot has changed since I visited with you on Saturday, though the sell-off that ensued after enthusiasm for the Yuan news dissipated really hit the S&P 500 in a bad way. The index was looking quite strong early in the session, flirting with 1130 only to tumble all the way to 1110, where the index bounced off the 200-day moving average.

Certainly, it is a positive sign that the index found support at that critical line, but a close in the neighborhood of 1130 would have been decidedly more bullish as that would have given the index a chance to break the 50-day moving average at 1137 over the next day or two. I am still of the mind that if 1100 does not hold as support, the bears will gain control again.

S&P 500 Chart

I mentioned over the weekend that a move toward 10,550 for the Dow would be bullish. The Dow was actually trading close to 10,600 before the heartbreaking sell-off started. The 200-day moving average did not come into play, but investors are still left with the feeling of what could have been for the Dow on Monday. I reiterate a ''bullish above 10,550, bearish below 10,185'' feeling on the Dow.

Dow Chart

Earlier, I mentioned the effects a stronger Yuan would have on retailers and some of that same selling pressure was seen in technology issues, leading to a decline of almost 1% for the Nasdaq. Again, this was another gut-wrenching scenario because the Nasdaq traded as high as 2341, representing a flirtation with the 50-day moving average at 2350.

The flirtation was short-lived as the index collapsed below 2300 by the end of the session. This will not be a problem if the Nasdaq can starting making some gains soon, but a close at 2289 is not all that far away from support at 2250. Cautious is the word of the day with the Nasdaq.

Nasdaq Chart

The Russell 2000 was the biggest loser on a percentage basis. I noted over the weekend that from Friday's close at 667, the small-cap index could go anywhere and anywhere was down on Monday. The action here has been less than impressive over the past several days and I would be wary as the Russell 2000 approaches 650. We will need to see 675 to encourage some fresh buying here.

Russell 2000 Chart

I admit I liked the action in commodities and materials names today and if Chinese demand is legitimate, that is perhaps one catalyst that could boost these leadership groups, and in turn the broader market, over the summer. One day does not beget a trend, so I am not jumping for joy, especially due to the lack of catalysts out there until earnings season starts in earnest. Even with that, there are no guarantees. I think it is time to take cues from the technicals and use the numbers highlighted here to make bullish or bearish bets.


New Option Plays

Descending Triangle Play

by Scott Hawes

Click here to email Scott Hawes


NEW DIRECTIONAL PUT PLAYS

Dollar Thrifty Auto Group - DTG - close 44.46 change -0.27 stop 46.40

Company Description:
Dollar Thrifty Automotive Group, Inc. (DTG) is engaged in the business of the daily rental of vehicles to business and leisure customers through company-owned stores. The Company also sells vehicle rental franchises worldwide and provides sales and marketing, reservations, data processing systems, insurance and other services to franchisees. The Company has two additional subsidiaries, Rental Car Finance Corp. (RCFC) and Dollar Thrifty Funding Corp., which provide vehicle financing to the Company. Dollar Rent A Car, Inc., the Dollar brand and DTG Operations operating under the Dollar brand are individually and collectively referred to as Dollar. Thrifty, Inc., Thrifty Rent-A-Car System, Inc., Thrifty Car Sales, the Thrifty brand and DTG Operations operating under the Thrifty brand are individually and collectively referred to as Thrifty.

Target(s): 41.65, 40.05, 39.35
Key Support/Resistance Areas: 45.50, 43.50, 41.50, 39.00,
Time Frame: 1 week

Why We Like It:
DTG is forming a descending triangle on the daily charts. If DTG breaks support there is a gap to be filled all the way down to $39.35. The stock has support at its 50-day SMA and a trend line that began on 2/5, but I believe these will be broken on any further market weakness. So the question is whether or not to wait for the base of the triangle to break near $43.15 or initiate short positions at current levels. The stock made a double top with today's highs and the highs from 6/14 so it is a compelling area to initiate short positions at current levels. This also gives us a good reference point to place a relatively tight stop $46.40 which is above the double top and all of the highs since 6/4. More conservative traders may want to wait to initiate short positions if DTG trades below $43.15 as this should get things moving to the downside in earnest. Considering today's price action in the overall market, we will officially be entering short positions at current levels and playing the more aggressive route with a tight stop.

Suggested Position: Buy July $45.00 PUTS, current ask $2.70

Annotated weekly chart:

Entry on June xx
Earnings 7/28/2010 (unconfirmed)
Average Daily Volume: 1 million
Listed on June 21, 2010


In Play Updates and Reviews

Long Position Closed for Small Gain

by Scott Hawes

Click here to email Scott Hawes

Editor's Note: Good Evening. Today's price action was bearish as the SPX formed a bearish engulfing candlestick pattern and also turned down at its 50% retracement from the April highs to May lows at 1,130. The 61.8% retracement is at 1,150 and there is also the 50-day, 100-day, and 20-week SMA's all in the 1,130 to 1,140 area. I still anticipate all of these levels holding as resistance if there are any bounces higher from here. Our model portfolio is now firmly biased to the short side. We still need to stay nimble and protect profits on short positions as there appears to be no immediate end in sight for decreased volatility. Please email me with any questions.

Current Portfolio:


CALL Play Updates

Cisco Systems - CSCO - close 23.34 change -0.15 stop 22.20

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

Comments:
My comments from the weekend remain the same except I am adjusting the position to August $22.00 calls as opposed to July. I think we will see our trigger to enter long positions this week so I'll wait for $22.85. If there is a pullback in the market this is 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 August $22.00 calls for about $1.63 (current ask is $1.98). If CSCO then proceeds to rally to the top of its base at $23.65 we should make about 55 cents on the position for a +35% gain. If CSCO breaks out it could rally to fill a gap which is up near our more aggressive 2nd target of $24.20 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 once it is opening.

Suggested Position: Buy August $22.00 CALL if CSCO trades down near $22.85, current ask $1.98, estimated ask at entry $1.68

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 51.71 change -0.31 stop 50.90

Target(s): 52.70, 53.25, 54.75
Key Support/Resistance Areas: 54.00, 51.25, 50.00
Current Gain/Loss: -7.8%
Time Frame: Several weeks
New Positions: No

Comments:
In the weekend updates I provided adjusted targets for ESRX on the stock chart, however, I did not list the adjustments in the list above. The adjusted targets were $52.70 and $53.25. I apologize for the error as the adjusted target of $52.70 proved to be the proper exit for this position. The reason I chose this target was because it was a gap fill from Friday and near recent closing highs which I suspected would get sold into as the stock approached these levels. In lieu of Friday's news on ESRX and today's failure of the S&P 500 at the 50% retracement from the April highs to June lows, I am suggesting readers sell this position at the open tomorrow. If you have the ability to trade intraday I would place a stop below the opening range to see if ESRX can bounce. If the stock doesn't bounce I would get out of the way and protect your capital. From a technical perspective ESRX remains above its 20-day and 50-day SMA's which should provide support. But I feel like there will be more pressure coming in the broader market and ESRX could make a trip down to the lower end of its trading range which is almost $2 below current levels. If readers remain bullish on the position a tighter stop could be placed at $50.90 which is below the aforementioned SMA's.

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


PUT Play Updates

NetApp, Inc. - NTAP - close 40.53 change -0.69 stop 42.72

Target(s): 39.45, 39.05, 37.00, 35.25
Key Support/Resistance Areas: 41.84, 40.00, 39.00, 36.50, 35.00
Current Gain/Loss: +35%
Time Frame: 1 week
New Positions: Yes

Comments:
NTAP July $41.00 PUTS were initiated at the open at $1.30. The stock closed -3% off of its highs and our position has already gained +35%. Since we entered at a good price I'm going to list another target of $39.45 which is just above a double top high on 6/3 and 6/4. If NTAP trades down there our options should be worth about $2.30 which would equal a +56% gain. I don't want to get too cute with such a strong stock so fiercely protecting profits is highly recommended. A decline to this level would also represent a -5.7% decline from the stock's highs which is in the range of what I expected in the play release. At a minimum this is an area to tighten stops to see if we can get more out of the position. I'll leave my comments from the play release as they remain valid. 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. 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.

Current Position: July $41.00 PUTS, entry was at $1.30

Entry on June 21, 2010
Earnings 8/19/2010 (unconfirmed)
Average Daily Volume: 9.1 million
Listed on June 19, 2010


International Game Technology - IGT - close 18.11 change -0.24 stop 19.10 *NEW*

Target(s): 17.80, 17.30, 16.80
Key Support/Resistance Areas: 19.00, 18.75, 18.09, 17.55, 17.25, 16.60
Current Gain/Loss: +21%
Time Frame: 1 week
New Positions: Yes

Comments:
IGT opened at $18.62 which was near our trigger of $18.50 to enter short positions. The stock proceeded to make a new low and closing low and sits at it lowest closing price since late March. I've adjusted our first target up to $17.80 (+10 cents) which is near the early March closing prices that provided resistance. For options traders, the July $19 puts should be worth $1.35 if this target is hit which would give readers a +42% gain. This is definitely a place to consider taking profits or tightening stops to protect profits. I'm going to move the stop down to $19.10 which is above the 20-day SMA and the 6/16 high. My comments from the play release remain mostly the same. 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. I've provided three targets which are good places to tighten stops if IGT continues lower from our entry.

Current Position: July $19.00 PUTS, entry was at $0.95

Entry on June 21, 2010
Earnings 7/22/2010 (unconfirmed)
Average Daily Volume: 4.8 million
Listed on June 19, 2010


CLOSED BULLISH PLAYS


Ormat Technologies - ORA - close 29.54 change -0.13 stop 27.25

Target(s): 30.37 (hit), 30.95, 31.80
Key Support/Resistance Areas: 32.00, 30.60, 29.00, 27.50
Current Gain/Loss: +5%
Time Frame: Several weeks
New Positions: Closed

Comments:
ORA rallied up to our lowered target of $30.37 this morning so we are flat the position for a small gain. The stock remains above its 50-day SMA but retreated from its 100-day SMA this morning which was our lowered target $30.37. ORA remains in a bull flag and I am still bullish on the stock. But if it fails it could go down to retest its 20-day SMA just above $28.00, which would catastrophic to the price of our options. Today's price action is yet another example of how protecting capital is paramount in this volatile market. I'm disappointed with the option pricing as it did not give us the gains we anticipated. It appears that the volatility has been sucked out of the premium we paid for the options. If readers still have option positions I suggest one of two things: 1) placing a GTC sell limit order and try to unwind your positions on any strength in the stock (if there is any bounce in the stock from here you should be able to get $0.90 to $1.00), or 2) if you remain bullish on the stock consider rolling the option position to a later month so that time decay does not eat away at your premium. Regardless, if the market heads lower ORA probably will as well so be careful hanging on to option positions hoping the stock will rally higher. I'll leave my comments from the weekend. 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.

Closed Position: July $30.00 CALL at $1.05, 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