Option Investor
Newsletter

Daily Newsletter, Wednesday, 6/30/2010

Table of Contents

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

Market Wrap

Look Out Below!

by James Brown

Click here to email James Brown

Market Stats

It has been a rough month for the bulls with the S&P 500 index off nearly 9% since the failed rally on June 21st. The selling pressure has been consistent with the index down seven out of the last eight sessions. Yesterday's fears over European banks ability to payback their emergency loans eased somewhat thanks to a better than expected 3-month loan auction by the ECB.

Unfortunately the ADP employment report this morning was significantly worse than expected and portends dour results for the non-farm payroll data on Friday. An afternoon headline that Moody's could downgrade Spain's credit rating again only added to the sour mood. Stocks were flirting with a minor gain most of the day until the last couple of hours. There is some speculation that fund managers did some end of quarter window un-dressing to sell their losers before they have to print quarterly statements.

It's June 30th and thus ends the second quarter of 2010. The stock market rally that began in February peaked in April and it's been a rocky road lower ever since. According to Bloomberg, investors have lost about $7 trillion (with a T) from global equity markets around the world since the April 15th peak. The S&P 500 is down almost -12% for the quarter and off -15% from its April highs. The NASDAQ Composite is down -12% for the quarter and down -16.6% from its April highs. Second quarter results for the DJIA and Russell 2000 are -10% (each) with the Dow Industrials down -12.7% from its April highs and the $RUT down -17.8% from its April highs. This was the worst quarter for U.S. stocks since 2008.

Commodities also suffered their worst quarterly decline since 2008. The combined commodity index fell 11% thanks to big declines in industrial metals and oil. Gold and natural gas managed to outperform the rest of the commodity group with an +11% rally in gold and a +17% rally in natural gas for the quarter. Speaking of commodities the weekly inventory numbers were out this morning. The Energy Information Administration reported that crude oil inventories fell two million barrels while gasoline supplies rose 500,000 barrels marking their first gain in eight weeks. Oil ended the day down 69 cents to $75.25 a barrel. Gold futures closed with a fractional gain at $1,243.20 an ounce.

Asian markets continued to struggle following yesterday's sharp revision for China's leading economic indicators. If you missed it the Conference Board adjusted April's gain from +1.7% to +0.3% suggesting China might be overdoing it with their attempts to slow down their economy. Last week the Japanese NIKKEI index broke through support at 10,000 and the 9,800 level. This week the sell-off continues with the NIKKEI falling -2% today to break key support near the 9,400 level. The Japanese market is off more than 8% from its June 21st peak. The next level of support appears to be the 9,000 level. The Chinese Shanghai index lost more than 1.1% on Wednesday and closed at new lows not seen since April 2009. The Chinese market has broken several support levels and appears to be in free fall. Meanwhile the Hong Kong Hang Seng index lost 0.59% for the session.

Stocks in Europe managed a meager oversold bounce following yesterday's turmoil. Markets were worried that European banks might not be able to pay back the 442 billion euros in emergency loans that come due tomorrow (Thursday). The results from the European Central Bank's short-term three-month loans this morning helped ease concerns. Demand for loans at 1% interest was smaller than expected and light demand suggests banks were not in a cash crunch. News that Moody's put Spain under review for a possible downgrade again did sour investor sentiment. Although one has to wonder why investors would react to this headline. S&P and Fitch have already downgraded Spain's credit rating and the industry has been widely criticized for being late to the party with these evaluations. Looking at the major indices the German DAX index is down 5% from its June 21st peak when it failed at resistance near the 6300 level. The English FTSE has fallen under its May low near 4940. Now that support is broken I don't see any significant support for the FTSE. At the end of the day the DAX gained +0.23% and the FTSE eked out a gain of +0.05%.

Economic data in the U.S. was mixed this morning but the ADP employment numbers overshadowed any growth in the ISM-Chicago report. Economists were expecting the monthly ADP employment report to show a gain of +60,000 jobs in the private sector following last month's reading of +57,000 jobs. Unfortunately ADP said that private companies only added +13,000 jobs in June. This appears to be a very bad omen for Friday's jobs report. Analysts do not have a clear picture for the government's non-farm payroll numbers but the average estimate is for a loss of -110,000 jobs but that includes about -350,000 in lost temporary census jobs. The Friday morning non-farm payrolls report could be a huge surprise either way but odds are growing it will be a big disappointment.

Meanwhile manufacturing in the U.S. is still growing although at a slower pace. The Chicago-area ISM number was released this morning with a drop from 59.7 in May to 59.1 in June. This was in-line with estimates. Figures over 50 indicate growth or expansion and June marked the ninth month of growth in a row. Tomorrow the Institute for Supply Management will release their national ISM figures and economists are predicting a decline toward 59 from 59.7 in May.

Company-specific news was a little sparse today but there were a couple of mergers and earnings report. Biotech firm Celgene (CELG) announced it was buying Abraxis BioScience (ABII) for $2.9 billion in cash and stock. Abraxis' only FDA approved drug is the breast cancer treatment Abraxane but there are hopes this same drug could be used to treat lung, pancreatic, and skin cancers. Shares of CELG fell -4.5% to $50.82 while shares of ABII gapped open higher to close up +21% at $74.20. Elsewhere in the biotech indusry Sanofi-Aventis (SNY) agreed to buy privately held TargeGen for an undisclosed amount.

The Q2 earnings season has not officially begun but we did get results from APOL and SCHN. Apollo Group (APOL) provides educational services for undergraduate, graduate, and doctoral levels. The company reported their Q3 results tonight after the bell and beat estimates. Wall Street was looking for $1.55 a share. APOL delivered $1.74 on revenues that also exceeded expectations. Yet guidance for the next quarter was mixed. Shares are trading lower after hours suggesting the ten-week decline in APOL is not over yet.

It will be interesting to see how the market reacts to Schnitzer Steel's (SCHN) earnings report. The company blew away the estimates. Analysts were looking for a profit of $0.87 a share. SCHN reported $1.43 a share thanks to an +84% jump in revenues. SCHN is heavily involved with recycling scrap metals and steel production. Here's an excerpt from the company's press release: "We delivered our best earnings performance since the downturn began, with improved operating profits in each of our three businesses," said Tamara Lundgren, President and Chief Executive Officer. "Our sales volumes of ferrous metals in the first three quarters of fiscal 2010 have remained near the levels of the boom year of fiscal 2008 and we achieved record third quarter ferrous processing sales volumes, underscoring the long-term strength of the global demand for recycled metals."

Technically the market looks pretty ugly. The last hour sell-off in stocks produced some key breakdowns. The 1040 level was very significant support for the S&P 500 and the index clearly broke this level on Wednesday. Several market pundits are calling this a new sell signal and the herald of a new bear market. Traditionally stocks don't enter a bear market until they're -20% off their highs, for the S&P 500 that would mean a breakdown under 964. The bad news is I think we'll get there!

Chart of the S&P 500 index:

Depending on which method you choose to apply the S&P 500's breakdown today is forecasting a drop toward the 950 area or the 860 level. You will probably hear analysts talk about the bearish head-and-shoulders pattern. This pattern has been building for months and you can find it on several major indices and dozens of stocks. The S&P 500's H&S pattern, now that the neckline is broken, is forecasting a drop toward 860, which is relatively close to the July 2009 lows near 869. This level is also close to the 61.8% Fibonacci retracement of the entire 2009-2010 bounce.

Weekly Chart of the S&P 500 index:

Right now you could easily argue that the S&P 500 is short-term oversold but it can always get more oversold. On a short-term basis we could look for an bounce at 1020 or the 1,000 mark. I suspect the S&P might also bounce near the 950 area since the 50% retracement of the 2009-2010 rally shows up around 942ish. Keep in mind that we will see bounces and they will likely be sharp rebounds but the path of least resistance is down.

The NASDAQ doesn't look much better. The tech-heavy index broke down under its "double bottom" near the 2140 level but there is still potential support at 2100. If that breaks the H&S pattern on the NASDAQ would forecast a drop toward 1700 or lower.

Chart of the NASDAQ index:

The Dow Industrials has fallen toward support near its May 25th low. Odds are this support will not hold. The Dow also has a bearish H&S pattern and a breakdown of the neckline would suggest a drop toward the 8250 area or more likely the July 2009 lows near 8100. A quick glance at the small cap Russell 2000 index shows that small caps have yet to break down under the 600 level but if the trend continues then the Russell 2000 will probably produce a much larger consolidation back toward the 550 area.

Chart of the 10-yr Yield:

Overall investors are in defense-mode. No one wants to own risk. You can see that as money moves into the safety of U.S. bonds. The yield on the 10-year treasury has fallen under 3.0% to close at new 14-month lows. Tomorrow we'll get the National ISM number and unless it's wildly off the mark it shouldn't be much of a market mover. Instead the focus will be on China's PMI number and the PMI data out of Europe. Investors are very concerned that growth has stalled in Europe and that China may have pushed too hard to slow down their economy. If we can get past the rush of PMI data on Thursday then the focus will be on the non-farm payrolls (jobs) report on Friday morning.

Odds are Friday morning will be very volatile and then volume will tail off as traders go home for the long weekend. There is going to be a real temptation for active traders to close their books without any open positions ahead of the three-day holiday since U.S. markets are closed on Monday, July 5th.


New Option Plays

Long and Short Candidate

by Scott Hawes

Click here to email Scott Hawes


NEW DIRECTIONAL CALL PLAYS

NYSE Euronext - NYX - close 27.63 change -0.25 stop 26.69

Company Description:
NYSE Euronext is a global operator of financial markets and provider of trading strategies. The Company offers an array of products and services in cash equities, futures, options, swaps, exchange-traded products, bonds, market data and commercial technology solutions. It is an equities exchange group. As of December 31, 2009, 64 of the 2009 Fortune Global 100 companies were listed on NYSE Euronext. During the year ended December 31, 2009, the Company operated under two segments: United States Operations and European Operations. United States Operations and European Operations consist of providing various services in its United States and European markets. It operates the New York Stock Exchange (NYSE), Euronext, NYSE Liffe, NYSE Arca, NYSE Arca Europe, NYSE Alternext, NYSE Amex, NYSE Liffe US, LLC (NYSE Liffe US), NYSE Technologies, Inc (NYSE Technologies) and SmartPool.

Target(s): 29.35, 29.80, 30.20
Key Support/Resistance Areas: 30.50, 29.40, 27.50, 26.80
Time Frame: 1 week

Why We Like It:
NYX Broke out of a steep downtrend line, rallied to test its 50-day SMA and has now to a key support level near $27.50. The stock has upward trend line from the its 2/5 lows to its 6/8 lows. This has outperformed the overall market by a mile. NYX should also benefit from the FinReg bill and I suggest we play this stock for a bounce. Our stop is below the trend line and our targets are fairy tight and achievable. $29.35 is +6% from current levels.

Suggested Position: Buy August $27.00 CALLS, current ask $2.05

Annotated Chart:

Entry on July xx
Earnings Date 8/3/10 (unconfirmed)
Average Daily Volume: 3 million
Listed on 6/30/10


NEW DIRECTIONAL PUT PLAYS

Children's Place - PLCE - close 44.02 change +0.34 stop 48.10

Company Description:
The Children's Place Retail Stores, Inc. is a pure-play children's specialty apparel retailer in North America. It provides apparel and related accessories for children from newborn to ten years old. It designs, contracts to manufacture and sells merchandise under the The Children's Place brand name. The Children's Place has differentiated departments and is dedicated to serving the needs of Girls and Boys (sizes 4-14), Baby Girls and Boys and newborn (sizes 0-12 months.). Its merchandise is also available at its online store located at www.childrensplace.com. As of January 30, 2010, the Company owned and operated 947 stores throughout North America, as well as its online store. During the fiscal year ended January 30, 2010 (fiscal 2009), it opened 38 stores and closed eight stores. It has 589 stores located in regional malls, 182 in strip centers, 129 in outlet centers and 47 street stores.

Target(s): 43.40, 41.70, 40.70, 40.05
Key Support/Resistance Areas: 46.40, 47.00, 46.00, 44.50, 43.40, 41.50
Time Frame: 1 to 2 weeks

Why We Like It:
PLCE has two consecutive closes below an upward trend line that began in December 2009. The stock has broken below its 20-day and 50-day SMA's and they are declining. I am anticipating a bounce up towards its 50-day SMA and a key resistance area near $46.00. I suggest readers initiate short positions at $45.75 which is an ideal entry. However, if PLCE breaks below today's low and trades to $43.19 use that as a trigger also, whichever occurs first. Our targets are down near the stock's recent lows. Our stop is $48.10 which is above the 20-day SMA and lots of congestion that I think PLCE will have a hard time navigating through on any bounces. It will be adjusted once we are in the position.

Suggested Position: Buy August $45.00 PUTS if PLCE trades to $45.75 or $43.19, whichever occurs first, current ask $3.70, estimated ask at $45.75 entry is 2.80

Annotated chart:

Entry on June xx
Earnings 8/19/2010 (unconfirmed)
Average Daily Volume: 700,000
Listed on June 30, 2010


In Play Updates and Reviews

Three Winners Closed

by Scott Hawes

Click here to email Scott Hawes

Editor's Note: Good Evening. June was a good month. We closed 3 positions today which were all winners. This leaves our model portfolio flat heading into tomorrow. I'm trying keep targets and stops fairly tight so we can limit losses and book nice gains. This strategy has caused the trades to be quick and the portfolio to be somewhat narrow, however, I'm trying to release trades daily to keep things active and book quick gains. The SPX has closed down 7 of the past 8 sessions and is oversold. I've released a long play on NYX that I think will benefit from the FinReg bill and an ensuing bounce in the market. Please email me with any questions.

Current Portfolio:


CLOSED BULLISH PLAYS

Hanson Natural Corp - HANS - close 39.11 change -0.42 stop 38.65

Target(s): 39.95(hit) , 40.50 (hit), 41.25, 42.40, 43.25
Key Support/Resistance Areas: 42.50, 41.00, 40.25, 39.30, 38.50
Final Gain/Loss: +13.63%
Time Frame: 1 to 2 weeks
New Positions: Closed

Comments:
6/30: HANS hit our target of $40.50 on Monday and then the market sold off hard on Tuesday. As such, we suggested selling into strength and revised our target to exit HANS at $39.95 which is where the stock struggled with resistance on Tuesday. HANS traded up past this level several times this morning but could never break through $40.00. We are flat the position for a small +13.63% gain. Selling intensified this afternoon so this proved to be the right call. HANS ended the day by closing below the upward trend line from 5/7 and its 20-day SMA so the bullish case for the stock is starting to wane. HANS remains above its 200-day SMA (currently $38.92) and there is support at $38.79 but I would not want to be involved on the long side much below that. Although the stock could bounce from here as the market conditions are oversold, and if that happens HANS should do well. I would still be a seller into strength.

6/29: HANS held up relatively well until the end of the day. The stock is maintaining its upward trend line from 5/6 and is still above its 20-day and 200-day SMA's. We still have a small gain on this position and if the market bounces HANS should do well. I am going to tighten the stop to just below the 200-day SMA at $38.65. Our first target was hit yesterday and considering today's events I suggest readers consider selling into strength, or at least protecting profits if HANS proceeds higher from here. I've listed a new target of $39.95 which is where HANS struggled to break through today. This is an area to tighten stops to see if we can get more our of the stock.

6/28: HANS closed above it 50-day SMA today and is maintaining the upward trend line that started on 5/7. The stock also traded to a new high that hasn't been since 5/18. Our first target of $40.50 was hit today but I think we have a good chance of hitting $41.25 so I am going to leave this open to see if we can get some follow through in the coming days.

Closed Position: August $40.00 CALLS at $2.50, entry was at $2.20

Annotated Chart:

Entry on June 23, 2010
Earnings Date 8/5/10 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on 6/22/10


CLOSED BEARISH PLAYS

Avon Products - AVP - close 26.50 change -0.57 stop 29.65

Target(s): 26.60 (hit), 25.80, 25.25, 24.25
Key Support/Resistance Areas: 29.50, 29.00, 28.00, 27.17, 25.75, 25.00
Final Gain/Loss: +34.45%
Time Frame: Several weeks
New Positions: Closed

Comments:
6/30: Per last night's updates we are flat AVP as it traded down to $26.60. The stock has declined -4.6% in two days and I wanted to take profits on this trade today at this target because of the quick decline in the stock. We have a decent gain of +34.45% and I think booking profits is the right thing to do considering the oversold conditions. If readers still have positions I suggest protecting profits against a reversal. There is formidable intraday resistance between $26.90 and $27.10. AVP can be shorted on bounces and I will be looking for the stock to test its 20-day, 50-day, or downward trend line from below which should provide a another good shorting opportunity.

6/29: AVP is back below its 20-day SMA and I think the stock ultimately moves lower, but there could be bounce first. If the decline continues I don't anticipate it lasting too long considering the oversold conditions. As such, I have listed $26.60 as a new target which could be a logical bounce point for the stock. This is near the highs from 5/26 and 6/3. I would be quick to tighten stops or simply take profits at this level if it is hit tomorrow. However, if we bounce higher from here first I think that level becomes less important and we may see more downside.

6/28: AVP found some support at its 20-day SMA which also corresponds to its late May highs. AVP could bounce from here if the market does but I believe it will be short lived. Our stop is high enough to account for volatility and I expect the stock to trade down to $25.80 within the next week or so.

Closed Position: August $27.00 PUTS at $1.95, entry was at $1.45

Annotated Chart:

Entry on June 28, 2010
Earnings 7/29/2010 (unconfirmed)
Average Daily Volume: 4.2 million
Listed on June 26, 2010


Owens Corning - OC - close 39.91 change -1.51 stop 34.72

Target(s): 29.75, 28.80, 27.60
Key Support/Resistance Areas: 34.55, 32.90, 32.60, 31.00, 29.50, 28.50, 27.00
Final Gain/Loss: +43.64%
Time Frame: 1 to 2 weeks
New Positions: Closed

Comments:
6/30: OC collapsed late in the day hitting our first target of $29.75. We are flat the position for a +43.64% gain. The stock has declined -6.2% since our entry yesterday and -7.8% since Monday's close. This is a big move in basically two days of trading so it is time to take profits. I still think there is more downside in this stock's future but I don't want to sit through a bounce, especially with a put option position in an oversold market when time is not on our side. If readers still have positions I suggest protecting profits from a reversal. There is intraday resistance at $30.55 and again at $31.10. I would not hold a short position above these levels as it will most likely trade up to the $32.00 area, where OC becomes another interesting short play.

6/29: August $32.50 PUTS were opened this morning at $2.75. OC saw some buyers step in late in the day and stock closed +1.6% off of its lows. It was down -2.57% on the day and the closing price of $31.42 was the lowest since June 9th. However, the market is oversold and stocks could bounce from here. OC remains below the 20-day and 50-day SMA's and its downward trend line from the May 13 highs. All of this should provide enough resistance to keep bounces under control.

6/28: OC has made a lower high and a lower low and I believe the stock will make a another lower low, or at least retest its recent lows which is almost -5% lower than current levels. The stock is testing its 20-day and 50-day SMA's from below which I also think will hold as resistance. If OC bounces there is also a downward trend line and congestion above to keep things in check. Our stop will $34.72 which is above the downward trend line and its highs from late May and Mid June.

Closed Position: August $32.50 PUT at $3.95, entry was at $2.75

Annotated Chart:

Entry on June 29, 2010
Earnings 8/4/2010 (unconfirmed)
Average Daily Volume: 2.3 million
Listed on June 28, 2010


Penn National Gaming, Inc. - PENN - close 23.10 change -0.67 stop 27.60

Target(s): 24.05, 23.60, 23.05
Key Support/Resistance Areas: 27.00, 26.45, 26.00, 24.60, 24.00, 23.50, 22.50
Current Gain/Loss: N/A
Time Frame: 1 to 2 weeks
New Positions: DROPPED

Comments:
6/30: PENN never gave us our entry and has run away from us. The stock has hit all of our profit targets and I can not chase it at these levels. As such we have to drop the play and may reconsider it in the future.

6/29: Our trigger to enter shorts positions at $24.80 remains the same. If PENN trades up there in the coming days I suggest initiating short positions. There is a lot of overhead congestion and resistance above $24.80 to hold the stock down.

6/28: PENN traded to within 26 cents of our entry trigger and reversed hard to the downside, closing -4.65% on the day. The position has run away from our trigger and I do not suggest chasing it lower. Let's wait for a bounce and be ready to pull the trigger on short positions if the stock trades to our new trigger of $24.80 to enter short positions. This equates to about a 50% retracement of today's losses.

6/26: PENN has a primary and secondary downtrend line as overhead resistance along with all of its SMA's which are declining. It is also below a key support resistance area at $26.45 dating back to late 2009. I believe the stock will bounce a tad higher from here before it makes new lows in the coming days/weeks. Let's use a trigger to enter short positions at $25.75. My primary target is $23.60 but I have also listed $24.05 as a target where the stock may find some support. If the selling intensifies PENN will probably trade down to the $22.50 area which is below our most aggressive target. I'm going to place a wide initial stop at $27.60 to account for volatility and will adjust it once we are in the position.

Suggested Position: August $25.00 PUTS, current ask $2.50, estimated ask at entry $1.90

Annotated Chart:

Entry on June xx
Earnings 7/26/2010 (unconfirmed)
Average Daily Volume: 738,000
Listed on June 26, 2010