Option Investor
Newsletter

Daily Newsletter, Monday, 9/20/2010

Table of Contents

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

Market Wrap

Breakout Monday

by Todd Shriber

Click here to email Todd Shriber
This could be the day the bulls point to at year-end if the S&P 500 is sitting well above 1200 or flirting with 1250 or higher. Getting excited about just one trading day is not a prescription for successful investing, but this is September and September is supposed to be ugly for stocks. History shows us that, but here we are 14 trading days into the month and the S&P 500 now resides at a four-month high and the Nasdaq is poised for its best September performance since 1998.

Stats Table

Call me a doubting Thomas, but volume remains light, but the bulls have flipped the script on the bears and that is worth noting. The bears seemed to feast on light volume in August, but the bulls are enjoying a light-volume party of their own this month. Volume was just over 2 billion shares on the NYSE and the Nasdaq, not terrible, but nothing to write home about either.

News flow was fairly light for a Monday with one of the marquee headlines coming from the National Bureau of Economic Research, which said the recession officially ended in June 2009. That was enough to propel the S&P 500 above 1143 at one point, the index's highest intraday level since mid-May. The index is now up almost 6% in the past three weeks and with only eight trading days left in September, the bears are clearly running out of time to make their case.

Of course, a good day for equities rarely carries over into a good day for the U.S. dollar, which fell against most of its major counterparts today after falling to a five-week low against the euro last week. In another sign that risk appetite is starting to pick up a little bit, the Australian dollar moved higher against the greenback and traders seem to be speculating that when the Federal Open Market Committee meets tomorrow, the Fed's low interest rate posture will remain in tact. Either way, the U.S. dollar has been in a bad way since June.

Dollar Index Chart

Low interest rates are not good for the dollar and the negative sentiment toward the greenback lifted gold futures to a record high for the third straight session. While plenty of pundits have been chirping lately that gold is the next asset class headed for a bubble, it has to be acknowledged that the yellow metal has continued a torrid pace while equities have moved higher. Gold's momentum is so strong at this point that futures traded as high as $1285.20 per ounce today.

Plenty of analysts and traders have forecasts that call for gold to trade to $1300 an ounce next year. Clearly, some of those estimates are going to have to be adjusted higher because $1300 an ounce could happen this week. While it can be argued that gold is overbought at this point and some analysts are making that argument, keeping interest rates low only pressures the dollar further, making gold all the more attractive. Gold futures are up 17% year-to-date and are poised to run to their tenth consecutive annual gain, according to Bloomberg News. That is the best run of consecutive annual gains for gold since the 1920s.

Gold Chart

Staying in the metals space, Goldman Sachs was out with some bullish comments on copper today and Freeport McMoRan Copper & Gold (FCX) was on the receiving end of much of that praise. While Freeport is the world's largest publicly traded copper producer, the company did get 17% of its 2009 revenue from gold, so gold prices are providing lift to the shares as well.

Goldman lifted its rating on Freeport to ''buy'' from ''neutral'' and boosted its price target on the stock to $94 from $79. Freeport shares were already up almost 15% this month at last Friday's close, but tacked on another 2% today to close above $80 for the first time since March. The stock has a had tough time breaking through to $90 the last couple of times it has traded into the high 80s, so it will be interesting to see how long it takes for the Goldman price target to prove accurate.

Freeport Chart

In other stock-specific news, Lennar (LEN), the third-largest U.S. homebuilder by sales, delivered a profitable third quarter as the real estate market was a little less bad than it has been. Actually, Lennar CEO Stuart Miller said June was the worst the month of the quarter, but called July and August ''a little less horrible.''

Perhaps a little less horrible is all it takes to get investors excited about homebuilders these days as Lennar shares jumped more than 8% on more than double the average daily volume. Florida-based Lennar said it earned $30 million, or 16 cents a share, during the quarter compared with a loss of $171.6 million, or 97 cents a share, a year earlier. Revenue jumped 14% to $825 million from $720.7 million. Analysts were expecting a profit of five cents a share on revenue of $777.5 million.

Good news for Lennar, but one real estate factoid that cannot be glossed over is that the National Association of Home Builders said today that its homebuilders confidence index is still at the the lowest level in 18 years and that is two straight months of that dour reading.

Lennar Chart

What would a Monday be these days with some mergers and acquisitions news out of the tech sector? An exception, but investors did not have to worry about that thanks to Dow component International Business Machines (IBM) announcing that it will acquire data-sorting firm Netezza (NZ) for $1.7 billion. IBM is using the deal to expand its footprint in the analytics business, which accounted for $9 billion in sales for IBM last year. The company is looking to boost that total to $16 billion by 2015.

IBM is quite serious about the analytics business as the Netezza acquisition represents IBM's 24th purchase in this arena in the last four years, according to the Associated Press. The Netezza buy is IBM's biggest analytics purchase since the $1.2 billion buy of SPSS in 2009. IBM will pay $27 a share for Massachusetts-based Netezza, a 10% premium to where the stock closed last Friday.

Another reason why IBM may have been keen to acquire Netezza: There were rumors that, surprise, surprise Hewlett-Packard (HPQ) was also interested in the company.

Netezza Chart

Looking at the charts, at Friday's close, the S&P 500 was honoring an extremely tight range of 1120-1130. If you are in the bullish camp, the good news is that range was broken in decisive fashion today as the S&P 500 closed just below 1143. There might be some token psychological resistance at 1150 and againbat 1200, but the if the bulls can continue to control the market, there is plenty of real estate for the index to run to its next significant hurdle at 1240. Another bullish sign would be for old resistance at 1130 to turn into new support.

S&P 500 Chart

The Dow had been slow to work its way back to August resistance at 10,700, but that issue was taken care of with authority today as the blue-chip index jumped all the way to 10,753. The index huffed and puffed its way to gain of just 37 points last week and then proceeded to almost quadruple that gain today. Next resistance lies at 11,000, but the catalysts probably are not there for the Dow to traverse that lofty level this week. If 10,700 turns into support, that would be another point in the bulls' favor.

Dow Chart

Tech stocks had disappointed for a good part of the summer, but the news flow out of the sector has turned positive in recent weeks and that has been a boon for the Nasdaq. Dividend news out of Cisco (CSCO) and Microsoft (MSFT) helped as did Oracle's (ORCL) earnings report last week. Those headlines are old news and they had already helped the Nasdaq conquer resistance at 2300. Monday's close just below 2356 brings resistance in the 2385-2400 area into view. Support is 2290.

Nasdaq Chart

Small caps are not being left behind by this rally and the Russell 2000 is flirting with the area that would prompt me to become even more bullish on the group. I have previously said that 675 is the area to watch on the upside with Russell 2000 and the index traded as high as 670 today. The index easily dealt with 650 today, but must traverse 675 to encourage buyers to come off the small-cap sidelines.

Russell 2000 Chart

The FOMC meeting will be big news on Tuesday and there are three more housing reports this week that could throw a curve ball at the bulls, so this week could represent a test of the September rally's strength. At the stock level, more buybacks, dividend increases and upgrades are the catalysts needed to fan the flames of the rally heading into October.

I admit there is no science involved in this little anecdote, but the ''Wall Street'' sequel debuts this week. When the original debuted in December 1987, the Dow added about 7% over the next two months. Consider that my fun fact for the day, not an invitation to buy stocks simply because of a movie debut.


New Option Plays

Short Semi Candidate

by Scott Hawes

Click here to email Scott Hawes


NEW DIRECTIONAL PUT PLAYS

Xilinx, Inc - XLNX - close 26.17 change -0.27 stop 27.20

Company Description:
Xilinx, Inc. designs, develops and markets programmable platforms. These programmable platforms have components that include integrated circuits (ICs) in the form of programmable logic devices (PLDs); software design tools to program the PLDs; targeted reference designs; printed circuit boards, and intellectual property (IP) cores. In addition to its programmable platforms, Xilinx provides design services, customer training, field engineering and technical support.

Target(s): 25.40, 25.00
Key Support/Resistance Areas: 26.75, 25.60, 25.20, 24.00
Time Frame: 1 to 2 weeks

Why We Like It:
Semiconductor stocks have experienced a slew of recent downgrades and they keep coming as RBC cut its rating on XLNX to Sector Perform from Outperform. The semi's have been the worst performing sector over the past month and a broader market pullback should send the stocks in the sector back to retest their recent lows. If it weren't for the strong market today XLNX would probably have closed near our targets, but the intraday recovery is providing a second chance to enter short positions. I suggest readers initiate short positions at current levels and play for quick pullback of $0.80 to $1.20. If our targets are reached the estimated gain on the position is +50% to +75%.

Suggested Position: Buy October $26.00 PUT, current ask $0.68

Annotated chart:

Entry on September xx
Earnings: 10/20/2010 (unconfirmed)
Average Daily Volume: 7 million
Listed on September 20, 2010


In Play Updates and Reviews

Winner Closed

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:


CALL Play Updates

NVIDIA Corp. - NVDA - close 10.70 change +0.15 stop 9.55

Target(s): 10.75 (hit), 11.10, 11.80
Key Support/Resistance Areas: 11.85, 11.45, 11.00, 10.25, 10.00 9.45
Current Gain/Loss: +27%
Time Frame: 1 to 2 weeks
New Positions: Yes, on a pullback

Comments:
9/20: I am looking for NVDA to break out above the $10.80 level which should catapult the stock up towards it 100-day SMA (currently at $11.19 but declining). I want to lower the next target to $11.05 to account for the declining 100-day SMA and suggest readers take profits at this level or tighten stops to protect them.

9/18: We are either going to breakout higher or get a pullback this week. If we breakout first I suggest taking profits or tightening stops to protect them as it could be short lived. Nothing has changed from my comments below. All of the above targets remain valid.

Current Position: Long October $10.00 CALL, entry was at $0.72

Entry on September 8, 2010
Earnings 11/4/2010 (unconfirmed)
Average Daily Volume: 23.5 million
Listed on August 28, 2010


Stillwater Mining - SWC - close 15.59 change +0.32 stop 14.20

Target(s): 15.45 (hit), 15.90 (hit), 16.30, 16.95
Key Support/Resistance Areas: 14.40 to 14.70, 15.00
Current Gain/Loss: +0%
Time Frame: 1 to 3 weeks
New Positions: Yes, only on pullbacks

Comments:
9/20: SWC recouped some of its losses from Friday, closing +2.10% on the day. The stock's rally seems to be getting a little long in the tooth and is probably going to experience a correction. Readers may want to consider closing positions or using a tighter stop in the $14.85 area. If SWC heads back up towards our targets prior to correcting be prepared to take profits or tighten stops to protect them.

9/18: Our $15.90 target has been hit in each of the past two sessions and SWC lost it today, closing down -3%. Taking profits was the right thing to do. However, the bullish case remains in tact as these pullbacks have continued to get bought. There is support near current levels and the stock is maintaining an upward trend line. Conservative traders may want to consider exiting if mining stocks are weak early this week. Our stop is below the rising 20-day SMA which SWC has not touched since it began to turn higher.

9/16: SWC looks great but I suggest readers begin to look for an exit to protect profits, especially on further strength before a pullback. Our second target was hit today and $16.30 looks like the next stop. I've raised the stop to $14.20 but tighter stops could be considered between $14.90 and $15.25.

Current Position: Long October $15.00 CALL, entry was at $1.20

Entry on September 3, 2010
Earnings 11/4/2010 (unconfirmed)
Average Daily Volume: 1.62 million
Listed on September 2, 2010


Transocean Ltd - RIG - close 60.22 change +0.06 stop 53.40

Target(s): 62.95, 64.50, 66.50
Key Support/Resistance Areas: 55.50, 58.35, 63.90, 64.90
Current Gain/Loss: -20%
Time Frame: 2 to 4 weeks
New Positions: Yes

Comments:
9/18 & 9/20: RIG is very close to breaking higher and is forming multiple ascending triangle patterns on different time frames. Our options expire in November and I suggest we give this some time to work.

9/15: RIG is forming an ascending triangle on multiple different time frames and looks poised to breakout. We have some time with November options and expect RIG to shoot higher in the coming days/weeks. My comments from below have not changed.

9/14: We may need to exhibit some patience here as RIG is consolidating gains. The volume pattern looks great as the pullbacks are on lighter volume than the breakout. Broader market weakness will most likely pull RIG down but I believe the dips will be bought. Our options expire in November so I'm not worried about time decay yet. I like new positions on any further weakness.

Current Position: Long November $65.00 CALL, entry was at $2.25

Entry on September 13, 2010
Earnings 11/3/10 (unconfirmed)
Average Daily Volume: 8 million
Listed on September 11, 2010


Vale SA - VALE - close 28.07 change +0.22 stop 25.80

Target(s): 28.38 (hit), 28.65, 28.90, 29.30
Key Support/Resistance Areas: 29.30, 28.45, 28.00, 27.25
Current Gain/Loss: +0%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
9/20: My comments from the weekend remain the same. Look for a breakout as an opportunity to take profits.

9/18: There have been several opportunities to take profits in VALE but our targets were just missed (they were adjusted on 9/14). The stock is maintaining an upward trend line and is consolidating above its moving averages. Any breakouts prior to weakness should be used as an opportunity to take profits.

9/16: I like the support VALE has at current levels and just below and with broader market strength the stock should hit our more aggressive targets. My comments from below remain the same.

9/14: VALE came within 4 cents of our primary second target before backing off and closing near its lows of the day. Options could have been closed for about 85 to 90 cents on the surge higher this morning which would have been a +70% to +80% gain. Nonetheless, our current gain is +44%. It looks like VALE is due for more pullback so readers should consider protecting profits. I do believe the dips will get bought and VALE should head back higher once the selling subsides. I've adjusted the targets and suggest we close positions as targets approach again.

NOTE: I have chosen a further out of the money call than normal to reduce risk on the trade should the stock break lower.

Current Position: Long October $29.00 CALL at, entry was at $0.50

Entry on September 10, 2010
Earnings 10/28/10 (unconfirmed)
Average Daily Volume: 17 million
Listed on September 8, 2010


PUT Play Updates

Archer Daniels Midland - ADM - close 32.95 change +0.57 stop 33.76

Target(s): 31.25, 30.85, 30.20
Key Support/Resistance Areas: 33.50, 31.00, 29.80
Current Gain/Loss: -20%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
9/20: We are short ADM and playing for a pullback. New positions can be considered at current levels. The play release is below and my comments remain valid.

9/18: Cautious comments from analysts about rising agricultural commodity prices is likely to affect ADM's business. The stock is overbought and is due for correction after an incredible run higher off of the July lows. ADM has also formed a bearish dark cloud cover technical pattern that suggests the decline is imminent. I suggest we open positions at current levels and play for a $1 to $2 move lower. The primary targets are $31.25 and $30.85 and if reached they should produce a +40% to +60% winner. Our stop is above the 52-week high set on Friday.

Current Position: Long October $32.00 PUT, entry was at $0.82

Entry on September 20, 2010
Earnings: 11/2/2010 (unconfirmed)
Average Daily Volume: 6 million
Listed on September 18, 2010


Freeport-McMoRan - FCX - close 83.35 change +1.63 stop 84.55

Target(s): 80.20, 79.40, 78.00
Key Support/Resistance Areas: 84.25, 76.50, 75.00
Current Gain/Loss: -50%
Time Frame: 1 week
New Positions: Yes, if playing for quick pullback

Comments:
9/20: A Goldman Sachs upgrade on FCX to buy from neutral sent the stock +2% higher today. As a result, our position suffered greatly and now we need to look for an exit. This move higher in FCX can not continue but it appears any dips will most likely get bought. I've added an immediate target of $80.20, while $79.40 will fill a gap higher. FCX should make it down to these levels on a pullback and is where I suggest readers close positions or tighten stops to protect capital. This could all come at once on one big down day.

9/18: FCX looks toppy and ready for pullback, but then again most things do right now. We are looking for a retracement of some of the recent gains which could come quick and hit our targets. Be ready to close positions if it occurs.

Current Position: Long October $75.00 PUT, entry was at $1.75

Entry on September 15, 2010
Earnings: 10/20/2010 (unconfirmed)
Average Daily Volume: 10 million
Listed on September 14, 2010


McDonald's Corp. - MCD - close 75.11 change +0.79 stop 75.75

Target(s): 73.85, 73.25, 72.60
Key Support/Resistance Areas: 75.35, 73.60, 71.50, 70.50
Current Gain/Loss: -45%
Time Frame: 1 week
New Positions: Yes, if playing for a quick pullback

Comments:
9/20: We've got a double top in play on MCD's hourly chart but price needs to turn lower tomorrow. I've added a target of 73.85, while 73.25 would be a gap fill. I suggest readers begin to look for an exit or tighten stops if MCD trades down to these levels.

9/18: I'm looking for MCD to head lower this week and give us a chance to close this position for a profit. The stock needs break through the 20-day SMA which should occur with broader market weakness. I've adjusted the targets and the pullback could be quick so be ready to take profits or tighten stops to protect them.

9/16: After looking terrible on Tuesday and Wednesday morning MCD has recovered all of its losses and is now drifting higher. I believe our stop is in the right place but caution is advised.

Current Position: Long October $72.50 PUT, entry was at $0.84

Entry on September 10, 2010
Earnings: 10/21/10 (unconfirmed)
Average Daily Volume: 6 million
Listed on September 9, 2010


SPDR S&P 500 ETF - SPY - close 114.21 change +1.72 stop 116.25

Target(s): 112.10, 111.10, 110.65
Key Support/Resistance Areas: 115.00, 113.00, 110.60, 50-day, 20-day
Current Gain/Loss: -46%
Time Frame: 1 week
New Positions: Yes, if playing for a quick pullback

Comments:
9/20: My comments from below have not changed. SPY broke out today but I do believe it will get sold into which sets things up for a much need healthy pullback in the broader market. I suggest using this pullback as an opportunity to close positions or tighten stops, even if we have to take a loss. I've adjusted our targets. The first target is just above the 200-day SMA while the final target is a gap fill which is just above the rising 20 and 50-day SMA's.

9/18: I believe any breakouts in the broader market will be sold into and dips will be bought. I'm looking for a retracement in SPY over the next week or so to fill some gaps and retest its converging 100-day, 50-day, and 20-day SMA's from above. This is when we will close the position and consider a new long entry. $110.65 is the primary target at this point which give us a +35% to +40% gain.

9/16: The S&P 500 looks like it may breakout higher tomorrow on the heels of favorable earnings reports from RIMM and Oracle. This position is meant to be a hedge against our longs but we could experience another short squeeze. Readers may want to consider exiting SPY early and trying to re-enter a short position at a higher price. Regardless, I believe breakouts will be sold into and dips will be bought. I'm looking for a retracement in SPY over the next week or so to fill some gaps and retest its converging 100-day, 50-day, and 20-day SMA's from above. This is when we will close the position and consider a new long entry.

Current Position: Long October $109.00 PUT, entry was at $1.56

Entry on September 14, 2010
Earnings: N/A (unconfirmed)
Average Daily Volume: 198 million
Listed on September 13, 2010


CLOSED BULLISH PLAYS

ConocoPhillips - COP - close 56.83 change +1.56 stop 52.30

Target(s): 55.85 (hit), 56.90 (hit), 57.75
Key Support/Resistance Areas: 58.50, 57.00, 54.00, 53.00 to 53.50
Final Gain/Loss: +57.1%
Time Frame: 1 to 3 weeks
New Positions: Closed

Comments:
9/20: I have been waiting for a breakout in COP to take profits and that's what happened today. In light of the broader market's overbought conditions selling into strength and locking in profits is the smart thing to do. As such, we are flat the position for a +57% gain. There is a prior resistance level (now support) in the $54.70 to $55.50 area but a move back down there will virtually erase the position's gains. It's time to take profits or at least protect them.

9/18: Not much has changed in COP this week. We are looking to take profits on a breakout, otherwise we may need to exhibit some patience on a pullback with options that expire in November. My comments below remain valid.

9/16: COP hit our first target of $55.85 and backed off. Positions could have been closed for a +25% gain. COP and the broader market certainly look due for a pullback, however, they could just as easily breakout. Regardless, at this point pullbacks appear they will be bought so we are leaving this position open with options that expire in November. I've added another near term target and will be looking to take profits on breakouts, especially if there is not a pullback first.

Closed Position: Long November $57.50 CALL at $1.65, entry was at $1.05

Annotated chart:

Entry on September 7, 2010
Earnings 10/28/2010 (unconfirmed)
Average Daily Volume: 8.9 million
Listed on September 4, 2010


iShares Russell 2000 - IWM - close 67.02 change +1.81 stop 59.80 *DROPPED*

Target(s): 66.50, 67.75
Key Support/Resistance Areas: 68.00, 67.00, 64.50, 62.00
Time Frame: 2 to 4 weeks

Comments:
9/20: We have been shut out of entering IWM long. The small caps have surged higher and I can not chase them at these levels. As such, we are dropping the play and may reconsider it after the market gets a much needed healthy pullback.

9/18: I continue to like IWM on a pullback but I won't chase it higher as it is a higher risk situation. My comments from below remain the same.

9/16: Let's raise the trigger to $63.55 which is just above the 50-day SMA. I view weakness in IWM as a buying opportunity and the rising 50-day is a good entry as IWM will test it for the first time since it began turning up. Patience will pay off for us. I'll adjust the stop once we are in the positions.

9/14: We are going to get a pullback and our trigger to enter is just above IWM's 50-day SMA, which should act as a launching point for a move back towards recent highs. I suggest readers be prepared to buy the dip which could easily happen in the next day or two.

Dropped Position: Buy November $65.00 CALL, current ask $3.09, estimated ask at entry $2.20

Entry on September xx
Earnings N/A (unconfirmed)
Average Daily Volume: 60 million
Listed on September 7, 2010