Option Investor
Newsletter

Daily Newsletter, Monday, 10/18/2010

Table of Contents

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

Market Wrap

Fed Plans Continue To Help Stocks

by Todd Shriber

Click here to email Todd Shriber
Stocks started off the day in sluggish fashion, but finished strong as financials showed up to the party and led the gain for the 10 industry groups tracked by the S&P 500, gaining 2.3% on the day. That erased almost all of last week's 2.4% decline for the group and that helped both the Dow Jones Industrial Average and S&P 500 to gains of over 0.7% each. The Nasdaq added almost half a percent as tech investors awaited a fairly significant after-the-bell earnings report.

Stats Table

It looks like the market is maintaining the expectation that the Federal Reserve will be adding to its balance sheet by purchasing Treasuries to prop up the economy, particularly after a surprise 0.2% decline in factory output and utilization rates. Industrial production has been seeing some gradual improvement and even after the September decline, U.S. industrial production has moved higher at an annualized clip of 5% over the last six months.

Industrial Production Chart

As for the impact that news of more quatitative easing is having on the U.S. dollar, let's just say things were a little less bad for the dollar against the euro today, but there was hardly a reason to cheer the performance of the U.S. Dollar Index. The greenback was stronger against the euro overnight due to some profit-taking that started last week, but enthusiasm for the dollar waned early in the U.S. trading session.

Perhaps the best near-term outlook for the dollar is not fundamental, but rather technical as analysts are saying the euro faces some stout resistance in the $1.40 area. Oil was higher today and gold took only a small breather, so the dollar is getting little in the way of reprieve. Dennis Lockhart, president of the Atlanta branch of the Federal Reserve, said today that the U.S. economy is weak enough to command extension of the Fed's easy monetary policy.

While it is worth noting that traders have pared their bearish bets against the dollar on speculation the market has already priced in the impact of QE2, there are still a lot more short bets against the dollar than there are bullish positions out there. The dollar index is down 8% since President Obama took office.

Dollar Index Chart

It was busy day in terms of earnings, both before and after the bell with the pre-market reports presenting investors with a mixed bag. This is a busy week for profit updates from oil services and energy names and the results were not pretty on that front this morning.

McMoRan Exploration (MMR), the independent oil and gas exploration firm, was slammed to the tune of 13.1% today after the company cut its production outlook for the third time this year. The company now expects to produce about 140 million cubic feet of natural gas per day in the fourth quarter and 160 million cubic feet on average for 2010, well below last year's production level of 202 million cubic feet.

While McMoRan was able to cut its year-earlier loss in half to 26 cents a share, revenue plunged 13% to $94.8 million. Analysts were expecting a loss of 25 cents a share on revenue of $98.7 million. McMoRan attributed the slack third-quarter production to maintenance work and downtime that was forced upon the company by the moratorium on deepwater drilling in the Gulf of Mexico.

Halliburton (HAL), the world's second-largest oil services company, said its third-quarter profit doubled to $544 million, or 60 cents a share, from $262 million, or 29 cents a share, a year earlier. While revenue jumped 30% to $4.67 billion, analysts were forecasting a top-line number of $4.78 billion. The revenue miss sent Halliburton shares down $1.73, or 4.83%, to $34.09 on volume that was more than double the daily average.

Halliburton said increased demand for its services in products in shale gas plays in the Northeast and Southwest helped offset weakness in other regions, inlcuding the Gulf of Mexico. The company is benefitting as energy producers rush to exploit onshore resources in the wake of the Gulf oil spill. Halliburton's global operation declined everywhere but North America during the quarter.

While natural gas prices are plunging, analysts say energy producers are heavily attracted to shale plays and will simply shift their drilling efforts to oilier shale areas if oil prices remain high and gas prices continue to falter, enabling Halliburton to maintain its North American margins and revenue at least through 2011.

Halliburton Chart

Leading the charge in the financial services sector was Citigroup (C), the third-largest U.S. bank by assets. Citi jumped 22 cents, or almost 5.6%, to $4.17 on volume that was almost double the daily average after saying its third-quarter profit rose to $2.15 billion, or 7 cents a share, compared with a loss of $3.24 billion, or 27 cents a share, a year earlier. Analysts were expecting a profit of 6 cents a share.

Like rival JPMorgan Chase (JPM) said when it reported results last week, Citi was able to deliver the quarterly profit by taking back $1.97 billion it had set aside to cover bad loans. Citi's losses from bad loans plunged 30% in the third quarter to $7.66 billion as defaults on credit cards and real estate loans declined. Citi is benefitting from its global business, which delivered about half the bank's revenue in the quarter, and thus far, Citi has been immune from the foreclosure mess that has hampered rivals such JPMorgan and Bank of America (BAC).

Citi Chart

After the bell, the tech sector was at the forefront of earnings report. Dow component International Business Machines (IBM), the world's biggest computer services provider, said its third-quarter profit rose 12% to $3.59 billion, or $2.82 a share, from $3.21 billion, or $2.40 a share, a year earlier. Sales rose to $24.3 billion. Those numbers beat the average analyst estimate of a profit of $2.75 a share on revenue of $24.1 billion, but investors were not impressed.

Corporate customers did boost spending on IBM hardware and software, but services contracts, the company's most important business line, slumped 7% to $11 billion. The services unit accounts for 60% of IBM annual revenue and 40% of its annual profit, according to Bloomberg News. News of the disappointing services number has IBM shares trading lower by $5 in the after-hours session as of this writing.

IBM Chart

Yes, IBM is an important stock, but it was by no means the marquee tech name to deliver results after the market closed today. That distinction belongs to Apple (AAPL). After touching a new all-time of $319 today, Apple closed at $318. Apple does what it does best when it comes to quarterly earnings updates and that is blow-out estimates.

For its fiscal fourth quarter, Apple posted a profit of $4.31 billion, or $4.65 a share, compared with $2.53 billion, or $2.77 a share, a year earlier. Revenue surged 67% to $20.34 billion. Analysts were expecting a profit of $4.10 a share on sale of $18.9 billion. The now ubiquitous iPhone led the charge for Apple as the company moved 14.1 million units compared to the Street estimate of 11.5 million units.

Consumers also continue to love their Macs. Apple sold 3.89 Mac computers during the quarter, beating the estimate of 3.8 million, but the good news may have ended there. Kind of. Apple sold ''just'' 4.2 million iPads during the quarter, but the Street was looking for a number around 4.8 million units. The problem was not a lack of demand because stores cannot keep the iPad on their shelves. The problem was Apple suppliers ran out of parts and components to build more iPads with.

Obviously, demand for the iPad is robust, but if Apple cannot build the device then they cannot sell it and investors realize that. Apple shares are down almost 6% in the after-hours session. Six percent is a lot in percentage in terms, but when talking about a stock that closed at $318, that works out to a decline of $18.39.

The Apple conference call was pretty entertaining. Founder and CEO Steve Jobs made a rare cameo on the call, delcaring that his company will crush iPad competitors and rival products from the likes of Dell (DELL) and Research In Motion (RIMM) will be ''dead on arrival.'' Remember, Goldman Sachs has a $500 price target on Apple.

Apple Chart

If Monday's after-hours action is any indication, the Nasdaq will open lower on Tuesday. Apple accounts for 20% of the Nasdaq 100 so it may take longer than previously hoped for the Nasdaq Composite to make a run at resistance at 2519. With Monday's close at 2480, it would take a mighty tumble to bring Nasdaq support at 2450 into play over the next couple of days.

Nasdaq Chart

While the S&P 500 did not post an eye-popping gain today, it was able to move away from resistance at 1175, albeit slightly. That is good for three closes in four days above 1175, but with Apple and IBM looking so weak this evening, we could see the S&P 500 back below 1175 tomorrow. More significant support is 1150.

S&P 500 Chart

The Dow may have some problems making a run at resistance at 11,200 tomorrow, assuming that IBM is a real drag on the index. Then again, three Dow components, Bank of America, Coca-Cola (KO) and Johnson & Johnson (JNJ) report before the bell. I would not expect much out of Bank of America, certainly not enough to outweight IBM's decline. Support for the Dow is 10,975.

Dow Chart

With so much being made of the results of the mid-term elections, and Election Day is just two weeks from tomorrow, I thought it would be interesting to research the performance of stocks following the mid-terms. There have been 17 200-day trading periods following mid-term elections since 1942. How many times has the S&P 500 moved higher in those 200 days proceeding the mid-term election? Seventeen. Perhaps its best to be bullish until the market proves otherwise.


New Option Plays

Short Squeeze?

by Scott Hawes

Click here to email Scott Hawes


NEW DIRECTIONAL CALL PLAYS

Sears Holdings Corp - SHLD - close 75.12 change +0.22 stop 70.75

Target(s): 81.50, 85.00, 88.00
Key Support/Resistance Areas: 90.00, 85.00, 82.00, 76.00
Current Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see entry point below

Company Description:
Sears Holdings Corporation (Holdings) is the parent company of Kmart Holding Corporation (Kmart) and Sears, Roebuck and Co. (Sears). The Company is broadline retailer with 2,235 full-line and 1,284 specialty retail stores in the United States operating through Kmart and Sears, and 402 full-line and specialty retail stores in Canada operating through Sears Canada Inc.(source: company press release or website)

Why We Like It:
Shares of SHLD have been trending higher since their lows near $60.00 back in August. The stock broke out of a multi-week consolidation area that began on 9/27 and looks poised for a continued move higher. Add in the fact that SHLD has a high short interest ratio and it could mean a short squeeze is on the horizon. There is also a lot of open air above $77.00 which means breakout higher could quickly gain momentum. I suggest readers initiate long positions with a trigger $77.10 which is well above the past few day's highs. This allows SHLD to prove that it can make a run higher and should be the catalyst for a move towards $82.00, or higher. Our initial stop will be $70.75 and it will be adjusted once we are in the position.

Trigger to enter long positions: $77.10 Suggested Position: Buy December $80.00 CALL, current ask $2.00

Annotated Chart:

Entry on October xxth
Earnings Date 11/18/10 (unconfirmed)
Average Daily Volume = 831,000
Listed on October 16th, 2010


In Play Updates and Reviews

Stay Nimble

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:

Good evening. The reaction to earnings reports from Apple and IBM in the after market has me very cautious with long positions as there is likely to be a broader market correction in the coming days. At the same time, I would use any dips as opportunities to take/protect profits on short positions and consider initiating new long positions. How far a correction goes is the magic question but I would target SPX 1,150 as the first stop. Staying nimble here is key and working both sides of the market could be lucrative.

Current Portfolio:


CALL Play Updates

Dresser-Rand Group - DRC - close 38.73 change +0.37 stop 36.15

Target(s): 39.00, 39.95, 41.40
Key Support/Resistance Areas: 42.00, 40.00, 39.15, 37.50, 36.30
Current Option Gain/Loss: +28%
Time Frame: 2 to 3 weeks
New Positions: No

Comments:
10/18: DRC is consolidating just under our first target of $39.00 (we have come within 2 to 15 cents in 3 of the past 4 sessions). We have a +28% gain and I suggest using any strength in the stock as an opportunity to take profits or tighten stops to protect them. As such, I am not recommending new positions at this time due to the broader market overbought conditions. James' comments below is a valid strategy, however, a breakout may not happen prior to a market correction. Readers may want to consider tighter stops at $37.40 or $36.90.

10/16 (James): There is really no change from my comments on Thursday. DRC is bouncing around the $38.00-39.00 level with short-term support at $38.00. The pattern is bullish with a trend of higher lows as the stock tries to breakout over $39.00. If DRC can breakout from this pattern I would expect shares to challenge their all-time highs in the $42-44 zone so readers may want to adjust their targets higher. However, cautious traders do not want to hold over the earnings report. I can't find a specific date but DRC is expected to report on the Oct. 27-30th time frame.

Current Position: Long November $40.00 CALL, entry was at $0.70

Entry on October 6, 2010
Earnings 10/28/2010 (unconfirmed)
Average Daily Volume: 570,000
Listed on October 5, 2010


First Solar Inc. - FSLR - close: 147.07 change: +2.51 stop: 135.95

Target(s): 145.00, 147.50, 149.75
Key Support/Resistance Areas: 137.50, 140.00, 145.00, 147.50, 150.00
Current Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see entry point below

Comments:
10/18: FSLR went in the opposite direction of our trigger to enter long positions. Let's remain patient and keep our trigger at $142.50.

10/16: Shares of FSLR have been marching higher after producing a huge (bullish) double bottom pattern with the lows in February and June. Now the stock has created a more bullish pattern of rally, consolidate, rally, consolidate. After two weeks of correcting traders are now buying the dip in FLSR near support in the $137-140 zone.

Aggressive traders could launch positions right now following Friday's bounce from $140. However, I suspect we'll see a better entry point on a minor dip this week. I'm suggesting we use a trigger at $142.50 to buy calls. If triggered we'll use a wide stop loss at $135.95 since FSLR can be so volatile (as an alternative more conservative traders could put their stop closer to $140). If triggered our first target is $145.00. Our second target is $147.50. Our final target is $149.75. More aggressive traders could aim for the $160 area. FYI: Investors should note that FSLR is due to report earnings on October 28th. Earnings reports can significantly raise our risk.

Suggested Position:

Trigger to buy calls @ $142.50.

BUY the November $150 calls.

Entry on October xxth at $ xx.xx
Earnings Date 10/28/10 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on October 16th, 2010


Genco Shipping & Trading, LTD - GNK - close 16.48 change +0.03 stop 15.50

Target(s): 17.70, 18.05, 18.50
Key Support/Resistance Areas: 18.25, 17.75, 16.90, 15.75
Current Option Gain/Loss: -25.0%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
10/18: GNK gained 3 cents today and is consolidating in a fairly tight range near $16.50. Our comments below remain the same.

10/16 (James): There is no change from my Thursday comments on GNK. Traders bought the dip again for the second day in a row near GNK's 100-dma and short-term support near $16.20. If this stock can rally past the October highs it could see a significant short squeeze. I wouldn't be surprised to see a rally toward $20.00. The Baltic Dry Goods shipping index, a measure of shipping rates, has been improving recently, which should bolster GNK shares.

10/14: Hmm... I am definitely seeing some mixed signals on GNK. The trend from late September is up with traders buying the dips, like they did today. However, on a very short-term basis, GNK has produced a bearish double top at $17.10. At the same time short-term support near $16.20 held up today. I do think GNK offers a lot of potential. The most recent data lists short interest in this stock at more than 18% of the very small float (27.7 million shares). That is a recipe for a short squeeze if GNK can show any strength. If the market pulls back again I would look for a potential entry point on a bounce from what should be support near $16.00 and its 50-dma.

Current Position: Long November $17.00 CALL, entry was at $0.80

Note: Readers who want to give this more time to work may want to consider buying the JAN 2011 $17.50 CALLS

Entry on October 12, 2010
Earnings 11/1/2010 (unconfirmed)
Average Daily Volume: 1.2 million
Listed on October 11, 2010


Humana Inc. - HUM - close: 55.43 change: +0.59 stop: 49.75

Target(s): 54.95, 57.50, 60.00
Key Support/Resistance Areas: 50.00, 51.00, 53.50, 55.00
Current Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see entry point below

Comments:
10/18: Nothing has changed from the released play over the weekend. We will use a dip as a buying opportunity and keep the trigger at $52.50.

10/16: Check out the HMO healthcare index. Investor sentiment for the healthcare sector has changed. Fears about the healthcare reform seem to have faded and now the sector is breaking out to new three-year highs. HUM is helping lead the way. Shares have been very strong this past week with a rally toward the top of its bullish channel. We want to hop on board but wait for a better entry point.

I am suggesting readers use a trigger to buy calls at $52.50. More cautious traders could look for a dip closer $51.00 but I don't think we'll see HUM pullback that low. If we are triggered at $52.50 I'm suggesting a stop loss at $49.75. Our first target is $54.90. Our second target is $57.25. Our third, longer-term target is $59.00. Time frame is six to eight weeks. Technical traders will note that the P&F chart is bullish with a $66 target. FYI: HUM is due to report earnings on November 1st. We normally want to avoid holding over earnings but I would make an exception for HUM.

Suggested Position:

Trigger to buy calls at $52.50

BUY the November $55 calls - or - BUY the 2011 January $55 calls.

Entry on October xxth at $ xx.xx
Earnings Date 11/01/10 (confirmed)
Average Daily Volume = 2.1 million
Listed on October 16th, 2010


Thompson Creek Metals - TC - close 11.58 change -0.03 stop 10.45

Target(s): 11.75, 12.40
Key Support/Resistance Areas: 12.60, 11.80, 11.00, 10.55
Current Gain/Loss: +11%
Time Frame: 1 to 3 weeks
New Positions: Yes, on pullbacks

Comments:
10/18: TC dritfed sideways in a fairly tight range on Monday. The stock closed near its highs and continues to look bullish, however, be aware of some possible profit taking in the comng days which I would use an opportunity to launch new positions. If TC breaks above last week's highs there is little resistance until the $12.50 area which is just above our final target. Tighter stops could be considered in the $10.80 area to limit downside risk.

10/16 (James): TC experienced some volatility on Friday morning but shares settled into a sideways churn heading into the weekend. A little pullback toward the $11.15-11.00 zone could offer a new bullish entry point to buy the dip. I'm optimistic that this stock could trade toward $12.75 before hitting any significant resistance. FYI: I can't find any data on an earnings date for this company. Cautious traders will want to avoid holding over earnings, which makes this somewhat more risky.

Current Position: Long November $11.00 CALL, entry was at $0.90

Entry on October 12
Earnings 10/4/2010 (unconfirmed)
Average Daily Volume: 1.7 million
Listed on October 9, 2010


PUT Play Updates

Alliant Techsystems - ATK - close 74.23 change +0.41 stop 76.25

Target(s): 72.25, 71.70, 70.50
Key Support/Resistance Areas: 76.00, 74.00, 72.00, 71.25, 70.00
Current Gain/Loss: -35%
Time Frame: 1 to 2 weeks
New Positions: Yes, with tight stops

Comments:
10/18: The bearish set-up in ATK remains in tact but the stock has stubbornly refused to break lower. I've raised the the second target to $71.70 which is my primary target and just above the 50-day SMA. I think we'll see some selling in this stock in the coming days which readers should use as an opportunity to exit positions or tighten stops. All of James comments below remain valid.

10/16 (James): Shares of ATK continue to churn sideways under resistance near $75.00 and its descending 200-dma. I don't see any changes from my Thursday comments. Readers may want to wait for a move under $73.25 before launching new positions. FYI: ATK is due to report earnings on November 4th, before the opening bell. Wall Street expects a profit of $2.81 a share.

10/14 (James): The rally has stalled at significant resistance near $75.00, which just happens to include resistance at the 68.2% Fib retracement of the summer sell-off. This same level is now seeing additional resistance with the simple 200-dma overhead. ATK produced a failed rally on Oct. 1st and it appears the stock just did it again today with a miniature bearish engulfing candlestick pattern. Now usually these patterns need to see confirmation. Readers may want to wait for a move under $73.25 before launching new positions. I wouldn't be surprised to see ATK retest $70 over the next few weeks.

Current Position: Long November $70.00 PUT, entry was at $1.45

Entry on October 4, 2010
Earnings: 11/4/2010 (unconfirmed)
Average Daily Volume: 310,000
Listed on October 2, 2010


Fastenal Co. - FAST - close: 51.89 change: -0.21 stop: 54.25

Target(s): 50.75, 48.25, maybe lower
Key Support/Resistance Areas: 55.00, 52.00, 50.00, 48,00,
Current Gain/Loss: +0%
Time Frame: 3 to 4 weeks
New Positions: Yes

Comments:
10/18: We are now long puts in FAST per the weekend play release. If the broader market corrects our targets should be reached quickly. Be prepared to take profits or tighten stops to protect them. I like new positions at current levels.

10/16: Traders were disappointed with FAST's recent earnings report and guidance. Shares had soared from $45 to $55 in just a few weeks and the stock plunged on the earnings news (Oct. 12th). The bounce attempts this week were also sold sharply and FAST looks poised for a much deeper correction.

I am suggesting new bearish positions now at current levels. We'll use a stop loss at $54.25. Our first target is 50.75 near the simple 50-dma. Our second target is $48.25, but watch for potential support at the rising 200-dma. It is possible that FAST actually sinks lower since the larger pattern on the weekly chart is one of lower highs and lower lows.

Current Position: Long November $50.00 PUT, entry was at $1.00

Entry on October 18, 2010
Earnings Date 10/12/10
Average Daily Volume = 1.0 million
Listed on October 16, 2010


PNC Financial - PNC - close 51.32 change -0.43 stop 54.92

Target(s): 51.05 (hit), 50.35, 49.50, 48.75
Key Support/Resistance Areas: 54.50, 53.50, 50.50, 49.50, 48.75, 47.00
Current Gain/Loss: -50%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
10/18: After reaching our first target on Thursday and coming close to our second target on Friday, PNC had a snap back rally today and gained more than +3% as banks were the strongest perfroming sector. PNC remains below its 50-day SMA and primary downtrend line so the bearish case remians in tact. Launching new positions at these levels makes a lot of sense for a quick trade lower, but the broader market needs to correct along side PNC for it to be successful. Readers with current positions should use weakness to close positions. $50.35 and $49.50 are my primary targets.

10/16 (James): Financial stocks continue to under perform the rest of the market with the BKX and BIX banking indices both down more than -2.3%. Shares of PNC only lost -0.8% on Friday as the stock found some support at its late September low. Readers could look for a bounce back toward the $52.50 area as a new entry point to buy puts. The simple 50-dma is very clear overhead resistance. Keep in mind that PNC is due to report earnings on October 21st, before the market's opening bell. Analysts are looking for a profit of $1.36 a share. Normally, we prefer to avoid holding over an earnings report. FYI: The Point & Figure chart is bearish with a $48 target.

10/14 (James): Bingo! PNC has started to breakdown again. Financials were the market laggards today as investors worried about the state of foreclosures in this country. Shares of PNC lost -2.2% and broke down under a short-term bullish trend of higher lows. It looks like our first target was hit $51.05 this afternoon (the option was trading near $1.10 at the time). Personally I would aim for the August lows and beyond.

Current Position: Long November $48.00 PUT, entry was at $1.26

Entry on September 30, 2010
Earnings: 10/21/2010 (unconfirmed)
Average Daily Volume: 5 million
Listed on September 29, 2010