Option Investor
Newsletter

Daily Newsletter, Monday, 10/25/2010

Table of Contents

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

Market Wrap

Fed Easing Hopes Boost Stocks Again

by Todd Shriber

Click here to email Todd Shriber
With economic growth coming in fits and starts, the Federal Reserve will not be shy about doing what it can to prop up the economy. The printing presses are working overtime so the Fed can inject more money into the economy and purchase even more Treasuries. All of this is good news for stocks, at least in the near-term, as speculation that the Fed wants to add to its Treasury holdings helped stocks manage some small gains on Monday. The S&P 500 extended three consecutive weekly gains by adding 0.2% today.

Stats Table

The big economic data point that was out today was September existing home sales, which showed a surprise 10% increase, according to the National Association of Realtors. Since the July low at 3.84 million units, existing home sales have jumped 18% since then and inventory has been whittled down to just under 11 months.

Sounds good, right? Well, even with the 10% gain, single-family home sales are still almost 20% below where they were a year ago. Prices are down more than 3% since and as the charts below illustrate, the real estate market in the U.S. has been in a tailspin for several years with only artificial help in the form of help from Uncle Sam keeping the situation from being much worse.

Home Sales Chart

Home Inventory Chart

The G-20 wrapped up its meeting and in what cannot be described as a surprise, the U.S. Dollar Index was up to its old tricks and that is moving lower. The index is down more than 7% since August, which has helped the S&P 500 gain 13% in the same time frame. Adding to the anecdotes that illustrate just how weak the greenback is, it fell to a 15-year low against the yen today, according to Bloomberg News.

What is happening is that the rest of the world is expecting the Fed, the Bank of England and the Bank of Japan to engage in some more quantitative easing, you know, because the first go round was successful. For now that means it is safer to be long stocks and commodities and short the dollar.

Here is another shocker and I hope you can sense the sarcasm. Financials were again the worst performers in the S&P 500 today. Save for a 2.4% jump in Citigroup (C), the third-largest U.S. bank, which came at the hands of Goldman Sachs adding to Citi to the widely followed conviction buy list, the rest of the group was pretty ugly.

Bank of America (BAC) shed 2.45% and touched a new 52-week low today. The stock now trades at 0.53x book value. JPMorgan Chase gave up 1.7% and is within earshot of a new 52-week low. The shares trade at less than 1x book value. Wells Fargo (WFC) dropped 1.5%. At least that name trades for 1.22x book value. Believe it or not, Citi may be one of the more compelling options in the sector. The bank has yet to be tied to the foreclosure mess and its international exposure is another point in the stock's favor.

Citigroup Chart

It was a quiet day on the mergers and acquisitions front, especially for a Monday. The big deal of the day was news that private equity giant Carlyle Group is in talks to acquire CommScope (CTV), a telecom equipment maker, for $3 billion. That news sent shares of North Carolina-based CommScope up by more than 30%. Carlyle's $31.50 per share offer values CommScope at a 36% premium to where the stock closed on Friday.

What is important here is not so much that CommScope is being acquired, which is only important to those that are long the stock, but the fact that private equity is back and back in a big way. The financial crisis spelled doom for leveraged buyouts and while that style of M&A is not back to its 2005-2006 levels, private equity firms have committed $133 billion to new deals thus far in 2010, more than double the sum at this time last year, according to Bloomberg data.

While there have been 14 deals of over $1 billion in the telecom space over the past five years, according to Bloomberg data, CommScope cautioned that no official deal has been reached and there can be no assurances that the talks with Carlyle will result in an official takeover.

CommScope Chart

Staying in the tech sector, Texas Instruments (TXN) delivered third-quarter results after the market closed, saying that net income jumped 60% as post-recession demand picked up. The company said it earned $859 million, or 71 cents a share, compared with $538 million, or 42 cents a share, a year earlier. Revenue surged 30% $3.74 billion. Analysts were expecting a profit of 69 cents a share on revenue of $3.69 billion.

Analog chips, which are used in mobile phones and other electronic devices, as usual were the big driver for TI in the third quarter, accounting for $1.581 billion in sales, up 35% from a year earlier. Sales of chips used in cars and communications surged 47% to $579 million.

All would seem well with those results, but TI warned that fourth-quarter results would not be as rosy. The fourth quarter is usually the weakest time of the year for tech companies and TI does not expect this year will be any different, citing weak consumer demand.

For the current quarter, TI expects to earn 59 cents to 67 cents a share on revenue of $3.36 billion to $3.64 billion. Analysts were forecasting a profit of 63 cents a share on sales of $3.51 billion. That news had TI shares down by just over 1% in after-hours trading.

Texas Instruments Chart

Looking at the charts, the S&P 500 got off to a fine start this morning, easily making its way beyond resistance at 1185 to trade as high as 1196, but when all was said and done, the index closed less than a point above its intractably low to finish just barely above 1185. Even when 1185 is taken care of the, S&P 500 will face resistance again at 1195. The 1175 area should be support.

S&P 500 Chart

A similar pattern was seen with the Dow as the blue-chip index easily made its way above resistance at 11,200 early in the trading session only to give up those gains as the day went along. After trading as high as 11,247, the Dow's close at 11,164 can certainly be considered a disappointment.

There are plenty of Dow components reporting earnings this week with DuPont (DD) kicking the week's reports off tomorrow. Procter & Gamble (PG) follows on Wednesday and three Dow components follow on Thursday. In other words, this would be an ideal week for the Dow to close above that resistance at 11,2000.

Dow Chart

The Nasdaq is facing significant resistance at 2520 and was able to trade above 2500 for a little while today, but it may be a source of concern that the index closed barely above its low of the day and actually closed below its opening level. Looking at some of the rapid price appreciation recently seen among the Nasdaq's most important constituents, it would not be surprising to see some profit taking here. If the index fails to make its way to 2520, a decline to 2450 would not be unreasonable.

Nasdaq Chart

It was a ho-hum day for small caps as the Russell 2000 did what the other indexes and that is to tantalize us with a move an important resistance level only to close below that area. In this case, the Russell 2000 traded as high as 714, above resistance at 710, but could only muster a close just below 708. The Russell 2000 has bumped into 710 a couple of times and if it can clear that level, that would be a fresh buy signal because next resistance looms a long way off at 740.

Russell 2000 Chart

It would not be surprising to see stocks take a knee this week and just trade in a tight range heading into Election Day and the Fed meeing on November 3. The best case scenario for the election's outcome is probably priced in as highlighted by the fact that if you want to head over to Intrade and bet on the Republicans taking the House, you will not make much money as those contracts are showing the chances of the Republicans controlling the House are 90%.

Once we get into next week, it becomes a matter of QE2. If the Fed goes back for more of this dubious policy, then stocks will continue to rally. If not, the result could be painful.


New Option Plays

Agriculture Commodities

by Scott Hawes

Click here to email Scott Hawes


NEW DIRECTIONAL CALL PLAYS

Archer Daniels Midland Co. - ADM - close 33.71 change +0.17 stop 30.70

Target(s): 36.50, 37.95, and possibly higher
Key Support/Resistance Areas: 38.00, 34.15, 33.00, 32.00
Current Gain/Loss: Unopened
Time Frame: 2 to 4 weeks
New Positions: Yes, see entry point below

Company Description:
Archer Daniels Midland Company is principally engaged in procuring, transporting, storing, processing, and merchandising agricultural commodities and products. It is a processor of oilseeds, corn, wheat, cocoa, and other agricultural commodities and is a manufacturer of vegetable oil and protein meal, corn sweeteners, flour, biodiesel, ethanol, and other food and feed ingredients. The Company also has a grain elevator and transportation network to procure, store, clean, and transport agricultural commodities, such as oilseeds, corn, wheat, milo, oats, and barley, as well as processed agricultural commodities. The Company's operations are classified into three business segments: Oilseeds Processing, Corn Processing, and Agricultural Services. (source: company press release or website)

Why We Like It:
ADM has been consolidating around a key long term pivot area between $32 and $33 for the past 6 weeks. The stock has lots of support below and limited overhead resistance until $36.50. I suggest readers initiate long positions on a dip or a breakout. We'll use a trigger of $33.05 on a dip and $34.15 on a breakout. Our initial stop will be $30.70 and it will be adjusted once the position is opened.

Note: ADM reports earnings before the market opens on 11/2. The company has beaten earnings estimates in 3 of the past 4 quarters and I am expecting another surprise beat. Holding positions is a higher risk play so please consider using small position size.

Trigger: $33.05 or $34.15 Suggested Position: Buy December $34.00 CALL, current ask $1.16

Annotated 5-year weekly chart:

Entry on October xx
Earnings Date 11/2/2010 before market (unconfirmed)
Average Daily Volume: 5 million
Listed on October 25, 2010


In Play Updates and Reviews

Little Movement

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:


CALL Play Updates

ATP Oil & Gas Corp - ATP - close 15.05 change +0.32 stop 13.75

Target(s): 16.20, 17.00, 17.90, and possibly higher
Key Support/Resistance Areas: 18.00, 17.00, 16.25, 14.75, 14.10
Current Gain/Loss: -5%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
10/25: ATPG hit our higher trigger of $15.11 to launch bullish positions. The stock has support at $14.75 and $14.15. If we get a broader market correction I would look to these areas to consider opening new positions. My comments below remain the same.

10/23: ATPG broke out of resistance from August on heavy volume on 10/11 & 10/12. Over the past week and a half the stock has drifted lower on light volume (a bullish sign) right into the prior resistance from August, which should now act as support. At the same time the stock has formed a bullish descending wedge pattern that could produce a powerful move higher if it breaks out. Also notice the converging 20-day and 200-day SMA's providing further support, along with an upward trend line from its August lows. Finally, there is a gap to fill down near $14.30 which also sets up a good bullish entry point. I suggest we launch bullish positions using a breakout (at $15.11) or gap fill (at $14.30). We'll keep a tight initial stop at $13.75 and it will be adjusted after our entry is triggered.

Suggested Position: Long December $16.00 CALL, entry was at $1.00

Entry on October 25, 2010
Earnings Date 11/4/2010 (unconfirmed)
Average Daily Volume: 2.7 million
Listed on October 23, 2010


First Solar Inc. - FSLR - close 147.15 change +1.60 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:
10/23 & 10/25: Not much has changed with FSLR. I expect FSLR to pullback to trend line support, its 50-day SMA, and prior resistance from July and April. (see grey oval). This is where I suggest launching bullish positions and then target a move back towards its recent highs. I've pushed out the suggested call position to the December $155's. FSLR reports earnings on Thursday after the bell. Holding positions over earnings is a higher risk play. Readers may want to consider selling a further out of the call to help better define risk. For example, buy the December $155 call and sell the December $160 or $165 call.

10/16: (James) 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 @ $140.50.

BUY the December $155 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 - GNK - close 16.44 change +0.17 stop 15.50

Target(s): 16.10 (hit), 16.80, 17.35, 17.95
Key Support/Resistance Areas: 18.25, 17.75, 16.90, 16.25, 15.75
Current Option Gain/Loss: -37.5%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
10/25: GNK broke out higher today and appears to be trying to put in a higher low. I've adjusted the targets slightly and suggest readers use any further strength as an opportunity to close positions or tighten stops to protect capital.

10/23: GNK is stuck between its 50-day SMA (below) and 20-day SMA (above). There is resistance at current levels but if GNK can break above today's highs we will have a good chance of reaching our next target. However, I am concerned about the overbought broader market conditions so I suggest readers use strength to consider exiting positions, or tightening stops. 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: 57.46 change: +0.49 stop: 49.75

Target(s): 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:
10/23 & 10/25: HUM looks extremely bullish here and it is probably because money is rotating into this defensive sector. If HUM pulls back to $53.80 I suggest launching new positions. However, HUM reports earnings next Monday (11/1) so holding positions over the report is a higher risk situation. Readers may want to consider selling a further out of the call to help better define risk, similar to the suggestion in the FSLR play above. The play release from last weekend is below.

10/16: (James) 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 $53.80

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


Jeffries Group, Inc - JEF - close 24.03 change +0.20 stop 22.75

Target(s): 25.10, 25.75
Key Support/Resistance Areas: 25.85, 25.25, 24.25, 23.50, 23.00
Current Gain/Loss: +13%
Time Frame: 3 to 4 weeks
New Positions: Yes

Comments:
10/25: JEF bounced back today but is struggling at its 200-day SMA. $23.50 offers solid support. My comments from the weekend remain valid.

10/23: JEF printed a bearish engulfing candlestick on Friday and I doubt the stock will be able to swim against the current of a broader market correction, should a correction happen. The stock gapped higher on Thursday and then Friday it retraced the gain and closed the gap. The 50-day SMA and prior resistance is just below near $23.50. The stock and price action look good to me but we are likely going to need the market to continue its march higher. For now, I continue to view dips as buying opportunities.

10/21: JEF gapped higher at the open near our trigger to launch bullish positions so we are long December $24 calls. The stock surged higher but closed well off of its highs. I like the price action in JEF and expect further upside if the broader market cooperates. I would view dips as buying opportunities.

Suggested Position: Long December $24.00 CALL, entry was at $1.10

Entry on October xx
Earnings Date 1/20/11 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on October 19, 2010


Sears Holdings Corp - SHLD - close 75.72 change -0.60 stop 72.48 *NEW*

Target(s): 78.85, 81.50, 85.00, 88.00
Key Support/Resistance Areas: 90.00, 85.00, 82.00, 75.30, 73.00
Current Gain/Loss: -25%
Time Frame: 3 to 4 weeks
New Positions: Yes

Comments:
10/25: SHLD reversed course today, but the stock did not take out Friday's lows. I've raised the stop to $72.48 and added $78.85 as a target and suggest readers begin to tighten stops if we head that direction. $75.30 is s solid support area.

10/23: Not much has changed from my comments below. Readers may want to keep an eye on $78.90 as a potential exit target. This is near highs from Thursday and should produce a +15% gain. Consider tightening stops if we get up there. Friday was the highest closing price the stock has seen since 6/17 so momentum is on our side, but we are going to need help from the broader market and retail sector, which has been performing extremely well lately.

10/21: SHLD hit our trigger to enter long positions and surged $1.80 higher. Unfortunately, the breakout did not last and the stock plummeted to its lows of the day. Our options expire in December so time is on our side for now, however, I am concerned with the price action not only in SHLD, but also the broader market. There is a lot of indecision and it is being confirmed by the intraday volatility (up and down). There is high short interest in the stock so this may spark further gains if the broader market continues higher. I suggest being ready to take profits or tighten stops to protect them if SHLD moves higher. I've moved the stop up slightly.

Suggested Position: Long December $80.00 CALL, entry was at $3.40

Entry on October 21, 2010
Earnings Date 11/18/10 (unconfirmed)
Average Daily Volume = 831,000
Listed on October 16th, 2010


PUT Play Updates

Fastenal Co. - FAST - close: 52.62 change: -0.28 stop: 54.25

Target(s): 51.20, 50.10, 48.25, maybe lower
Key Support/Resistance Areas: 55.00, 52.00, 50.00, 48,00,
Current Gain/Loss: -50%
Time Frame: 3 to 4 weeks
New Positions: Yes

Comments:
10/25: FAST gapped higher again today and it was met with immediate selling as the stock sold off the entire day. My comments below remain the same.

10/23: FAST gapped higher on Friday and it was immediately sold into. The stock has yet to trade above its highs from the past two weeks and closed below its 20-day SMA which is starting roll over. If we get a more meaningful broader market correction FAST should quickly head towards our targets which is when we want to be exiting positions or tightening stops.

10/21: Fast has bounced up to its 20-day SMA from below and has yet to take out highs from the past two weeks. We are most likely going to need a more meaningful healthy broader market correction for the position to get back into positive territory.

10/20: FAST rolled over after their earnings report and has made a series of lower lows and lower highs over the past 8 trading sessions. What has me concerned is this may be forming a bullish descending wedge pattern. The bottom line is we are most likely going to need a more severe broader market correction for this trade to turn into a profitable one. A move the 50-day SMA should give us +35% gain. All of my comments below remain the same.

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 54.00 change -0.72 stop NONE

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: -80%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
10/25: I do not see many changes from my comments below. PNC lost -1.3% today and printed a bearish dark cloud cover candle pattern which indicates a decline is imminent. Let's see if we get a healthy broader market correction see how far we can ride this lower.

10/23: PNC just keeps going like the energizer bunny. We have gotten destroyed on this play and our option premium has almost evaporated. Keeping a stop in place now doesn't make a lot of sense to me. I would rather hold the position and ride it lower if the market corrects between now and expiration, which is three full trading weeks. Our opportunity to close positions was late last week when PNC was at the $51.00 level. Let's see what happens in the coming days and we'll continue to monitor the developments.

10/21: PNC's "adjusted" earnings beat estimates but their revenues missed. The CEO made cautious comments but it didn't matter, investors gobbled up the stock and PNC closed +1.5% on the day. It is a tough call with earnings and considering the reaction to many reports I thought holding the position was the right call. Obviously it was the wrong call. If the broader market continues its path higher we will likely get stopped out, possibly tomorrow. We're not out of the position yet though and PNC could easily turn lower here. Our stop is in place.

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


CLOSED BEARISH PLAYS

Alliant Techsystems - ATK - close 76.00 change -0.09 stop 76.33

Target(s): 74.90, 72.80
Key Support/Resistance Areas: 76.00, 74.00, 72.00, 71.25, 70.00
Final Gain/Loss: -68.9%
Time Frame: 1 to 2 weeks
New Positions: Yes, with tight stops

Comments:
10/25: We were stopped out of ATK this morning for a disappointing loss. The stock managed to break above a long term downtrend line and its 200-day SMA last week. There is a possible bearish double top in play at current levels. ATK should find support near $75.00 and then $72.80.

10/23: There is really nothing more to report on ATK as the stock traded in a tight range near its highs from Thursday. We need an immediate turn lower this week. I've adjusted the targets and suggest readers use weakness as an opportunity to close positions or tighten stops to protect capital. Our stop is just overhead.

10/21: ATK has broken out and our set-up has failed. The stock surged +2.7% today which may have been due to a favorable earnings report from one of its peers. ATK came within 1 penny of hitting our stop today so we are on the verge of being taken out. Let's raise the stop by 8 cents to $76.33 just in case ATK flashes a higher price tomorrow. Otherwise we will step aside and take the loss. ATK will eventually trade to its 50-day SMA but it just may not do it now as we have been anticipating.

Closed Position: Long November $70.00 PUT $0.45, entry was at $1.45

Annotated Chart:

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


Hartford Fin. Serv. Group - HIG - close 24.57 change +0.62 stop DROPPED

Target(s): 22.45, 22.05
Key Support/Resistance Areas: 24.60, 23.70, 22.85, 22.25, 21.85
Time Frame: 1 to 2 weeks

Comments:
10/25: I'm getting too many mixed signals in HIG and do not feel confident in the play any longer. As such I am dropping the play. Goldman Sachs removed HIG from its Americas sell list today and raised the stock to Neutral from Sell, slapping a $25 price target on the stock.

10/23: HIG printed a bearish engulfing candlestick on Friday as the stock failed at its 200-day SMA again. Our trigger remains at $23.32 which is a break down below last week's and also a break of trend line support.

10/21: This morning UBS reiterated their buy rating for HIG and the stock gapped higher at the open and surged up to its 200-day SMA. And that is when the selling began which pressured prices back to their lows of the day. We are waiting to be triggered on a break down below the prior two days lows which will also be a break of trend line support. However, more nimble traders may want to try a short position at current levels with a tighter stop overhead.

Suggested Position: *DROPPED* Buy December $22.50 PUT if HIG trades to $23.32

Entry on October xx (DROPPED)
Earnings: 11/2/2010 (unconfirmed)
Average Daily Volume: 7 million
Listed on October 20, 2010