Option Investor
Newsletter

Daily Newsletter, Monday, 11/1/2010

Table of Contents

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

Market Wrap

Pre-Election Nothing

by Todd Shriber

Click here to email Todd Shriber
Bets on a pre-election rally looked safe early in Monday's trading session, but the major U.S. indexes could not hold the morning's gains eventually finding their way into the red. That is where the Nasdaq would finish with a small loss while the Dow Jones Industrial Average and the S&P 500 were able to manage only meager gains on the day. A close below 700 for the Russell 2000 could prove to be cause for concern.

Stats Table

It was another day of a mixed bag of economic data as personal incomes dropped for the first time in a year, leading to a smaller-than-expected rise in consumer spending during September. The Commerce Department said personal incomes fell 0.1% last month, the first decline since July 2009, and consumer spending rose by just 0.2%. The median estimate of 67 economists surveyed called for a 0.4% rise in consumer spending. On the bright side, the Commerce Department revised the August consumer spending number to an increase 0.5% from 0.4%.

Personal Incomes & Spending Chart

The Institute For Supply Management October manufacturing data was a bit more impressive, coming in at 56.9 compared to an estimate of 54.5. That is good for 15 consecutive months of expansion. ISM's Robert Nore detailed the following: ''Survey respondents note the recovery in autos, computers and exports as key drivers of this growth. Concerns about inventory growth are lessened by the improvement in new orders during October. With 14 of 18 industries reporting growth in October, manufacturing continues to outperform the other sectors of the economy.''

As I always, the devil is in the details as comments like these highlight: ''The dollar is weakening again, which is resulting in higher costs for our materials we purchase overseas. It is hurting our profit margins.'' And ''Currency continues to wreak havoc with commodity pricing.'' The first is from survey respondents in the transportation equipment group, the second is from those in the food, beverage and tobacco groups.

ISM Chart

One group that did shine on Monday was oil stocks. There was a some mergers and acquisitions news involving Exco Resources (XCO), an independent oil and gas producer. The company received a $4.36 billion management-led buyout offer and that helped the shares jump more than 30%, good for the biggest rally in the stock since its 2006 initial public offering.

Exco CEO Doug Miller is offering $20.50 a share in cash, an offer that values Exco at a 38% premium to where the stock closed on Friday. This is clearly a bet that natural gas prices will rebound from their recent lows as that fuel accounts for 93% of Exco's output, according to Bloomberg News. That may prove to be a tough bet to turn into a winner because energy producers seem intent on continuing to tap shale resources throughout North America, bringing more supply to market at a time when prices clearly show that is not the best of strategies.

Exco has over 1 trillion cubic feet of reserves and for those of you that are not familiar with the company, one of its largest shareholders is legendary energy investor T. Boone Pickens.

Exco Resources Chart

Staying in the oil patch, oil services firm Baker Hughes (BHI) caught a bid not only because oil services are extremely sensitive to price action in crude futures, but also on its own merits. By that I mean an excellent third-quarter earnings report that saw the company post a profit of $255 million, or 59 cents a share, compared with $55 million, or 18 cents a share, a year earlier. Revenue soared 83% to $4.08 billion $2.23 billion.

Analysts were expecting a profit of 47 cents a share on revenue of $3.8 billion. Texas-based Baker Hughes said the results were helped by its $5.5 billion acquisition of BJ Services, which closed in April. Going beyond that catalyst, the company's comments were inline with what other oil services and integrated names have been saying following their third-quarter results and that is the rush to onshore drilling (shale plays) was a positive catalyst in the quarter while the moratorium on deepwater drilling in the Gulf of Mexico restrained earnings to some degree.

Baker Hughes Chart

All was not well on the earnings front for energy names, though. After the bell, Anadarko Petroleum (APC), the independent oil and gas producer that owned a 25% non-operating interest in the now infamous Macondo well project, reported a third-quarter loss of $26 million, or 5 cents a share, compared with a profit of $200 million, or 40 cents a share, a year earlier. Excluding one-time charges, Anadarko earned 21 cents a share and that missed the consensus estimate of 28 cents a share.

In an environment where a profit miss is one thing, but a revenue miss is far worse, Anadarko went down that unfortunate road by saying revenue declined 11%. Anadarko has previously said it is refusing to pay BP (BP) for costs related to the Gulf spill, citing the British company's negligence in drilling the Macondo well.

BP reports earnings on Tuesday morning London time and in what cannot be considered a surprise, Bloomberg ran a headline today saying that the company's profit will probably be lower in the third quarter than it was in the same period in 2009. Not exactly a shocking revelation. Back to Anadarko. The shares are down almost 1.3% in the after-hours session.

Anadarko Chart

Obviously, this is week is chocked full of marquee events. Tuesday is Election Day. Wednesday brings the conclusion of the Federal Reserve's two-day meeting and the expecation of more quantitative easing. As if that is not enough, October non-farm payroll news will hit the wires on Friday morning. So unless you have been keeping a close eye on the soap opera that is BHP Billiton's (BHP) $38.6 billion hostile takover bid for Potash Corp. (POT), it would be easy to forget that Canada's government will make its ruling on BHP's offer on Wednesday.

Whether you are a fan of the materials space or not, this is a pretty interesting story that seems to change by the hour. Late Sunday night, press reports were saying BHP, the world's largest mining company, was considering raising its offer for Potash, the world's largest fertilizer maker, by 10%. That would value Potash at $143 a share, up from the current offer of $130.

Then some stories crossed the wires that said BHP would not rush to increase its offer. This morning, UBS was out with a note that saying that BHP could take its offer as high as $165 a share. What is important to remember is that while BHP has never officially ruled out raising its bid, it has not really embraced the idea either. At the end of the day, if Potash is looking to create shareholder value through a sale it has BHP's offer and... (insert crickets chirping here).

Potash Chart

Looking at the charts, it is the same old song with the S&P 500 and the 1185 area. It looked like the index was going to break resistance at 1190, and it did intraday, but those gains did not hold. Then it looked like the index would flirt with support at 1175, which it did, only to find its way back to 1184. With the election outcome effectively priced in, I would not expect an exciting day on Tuesday.

S&P 500 Chart

Looking at the Dow's six-point gain for the day might leave you thinking it was a boring day for the blue-chip index. In fact, the Dow was quite volatile, trading in a 180-point range. The Dow looked like it was going to conquer resistance at 11,200, but those gains could not be held either. That is still resistance and support can still be found at 10,975.

Dow Chart

The Nasdaq snapped its eight-day winning streak after starting the day off in fine form. The index opened at 2520, a significant resistance area and quickly made its way above that area only to give up those gains and trade below 2500. About the best thing that can be said about the Nasdaq is that it was able to muster a close above 2500. Support can still be found at 2490 and 2480.

Nasdaq Chart

The Russell 2000 closed below the psychologically important 700 level. This could be a case of some pre-election profi-taking or sign of bad things to come, but as I noted a couple of weeks ago, stocks have moved higher following the last 17 mid-term elections and the fourth quarter is favorable to stocks anyway, so it would be a surprise to see fund managers take a pass on small caps once we get out of this week.

Russell 2000 Chart

Nearly everyone has a rooting interest in tomorrow's election and no one seems to be lacking an opinion on QE2. Maybe it is time to relax a bit and just root for the Giants to win the World Series. Sorry Yankees and Red Sox fans, but on a historical basis, stocks perform better following a World Series victory by a National League team.


New Option Plays

Materials

by Scott Hawes

Click here to email Scott Hawes


NEW DIRECTIONAL CALL PLAYS

Cliffs Natural Resources - CLF - close: 66.36 change: +1.16 stop: 61.85

Target(s): 68.75, 70.75
Key Support/Resistance Areas: 71.25, 69.00, 65.00 62.00
Current Option Gain/Loss: Unopened
Time Frame: 1 to 2 weeks
New Positions: Yes

Company Description:
Cliffs Natural Resources Inc. (Cliffs), formerly Cleveland-Cliffs Inc, is an international mining and natural resources company. The Company is a producer of iron ore pellets in North America, a supplier of direct-shipping lump and fines iron ore out of Australia, and a producer of metallurgical coal. The Company's operations are organized according to product category and geographic location: North American Iron Ore, North American Coal, Asia Pacific Iron Ore, Asia Pacific Coal and Latin American Iron Ore. In North America, it operates six iron ore mines in Michigan, Minnesota and Eastern Canada, and two coking coal mining complexes located in West Virginia and Alabama. Its Asia Pacific operations are comprised of two iron ore mining complexes in Western Australia, serving the Asian iron ore markets with direct-shipping fines and lump ore, and a 45 % economic interest in a coking and thermal coal mine located in Queensland, Australia.

Why We Like It:

Manufacturing data from around the world was better than expected today, including here in the US. Companies like CLF should benefit from an uptick in manufacturing because the manaufacturers need materials such as coal and iron ore to make their products. Technically, CLF has been trending higher since its lows in July and looks poised to move back towards its highs from early October if the broader market cooperates. The stock also broke and closed above a short term downtrend line today. Considering the overbought market conditions I consider this is an aggressive play, however, the trend in CLF is up and until proven otherswise the trend should continue. I suggest we use a trigger of $65.40 (near today's lows) to launch bullish positions. Our targets are +5% and +8% higher than our trigger.

NOTE: This is a good hedge against our short MTL position. I also consider this an aggressive trade so small position size is suggested to control risk if the stock reverses lower.

Trigger = $65.40

Suggested Position: Buy 2010 November $70.00 CALL, current ask $2.89

Annotated Chart:

Entry on November XX
Earnings Date More than two months
Average Daily Volume = 4.3 million
Listed on November 1, 2010


In Play Updates and Reviews

Three Plays Opened, One Play Closed

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:


CALL Play Updates

Archer Daniels Midland Co. - ADM - close 33.39 change +0.07 stop 31.90

Target(s): 33.75, 34.15, 35.15, 35.95, and possibly higher
Key Support/Resistance Areas: 38.00, 34.15, 33.00, 32.00
Current Option Gain/Loss: +32%
Time Frame: 2 to 4 weeks
New Positions: No

Comments:
11/1: ADM started off strong this morning but got knocked down just under its 52-week high of $34.03. On the initial strength positions could have been closed for more than a +50% gain. The company reports earnings tomorrow so I would expect some volatilty. If the stock shoots higher I suggest readers use the strength to closed positions and book a gain, or at least tighten your stops to protect capital. The stock has struggled at near $33.80 in recent weeks so I have added a lower target.

10/30 (James): Shares of ADM continue to consolidate sideways. The stock saw some volatility on Friday after Credit Suisse downgraded the stock on valuation concerns and yet the analyst kept their $37 price target. I agree with Scott that traders will want to consider an early exit on any strength next week. ADM is due to report earnings on Tuesday morning (Nov. 2nd) before the opening bell. Wall Street is looking for a profit of 75 cents a share. Holding over earnings is a higher-risk strategy so I am raising our stop loss to $31.90, just under the 50-dma (currently 32.32). FYI: The Point & Figure chart is very bullish with a long-term $53 target.

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.

Current Position: Long December $34.00 CALL, entry was at $0.77

Entry on October 27, 2010
Earnings Date 11/2/2010 before market (confirmed)
Average Daily Volume: 5 million
Listed on October 25, 2010


ATP Oil & Gas Corp - ATPG - close 14.09 change -0.26 stop 13.75

Target(s): 14.70, 15.10, 15.40, 16.10
Key Support/Resistance Areas: 18.00, 17.00, 16.25, 14.75, 14.10
Current Gain/Loss: -40%
Time Frame: 1 to 3 weeks
New Positions: No

Comments:
11/1: Nothing has changed from our comments below. Readers should use caution and consider exiting positions to protect capital, especially on bounces. Our stop is just below and I have adjusted the targets.

10/30 (James): We remain very cautious on ATPG. The stock appeared to breakdown under support at the $14.00 level on Thursday. Fortunately, shares saw a strong bounce (+2.8%) on Friday but I would not buy it. The stock has been underperforming its peers in the oil sector. If the OIX oil index rolls over it will make it even tougher on ATPG to maintain its current share price. The situation could change soon with ATPG reporting earnings on Thursday, Nov. 4th before the opening bell. Wall Street expects a loss of 58 cents a share. Although I have to say ATPG's earnings report could be completely ignored if the market is moving on the FOMC announcement from Wednesday afternoon. I am not suggesting new positions and more conservative traders will want to strongly consider exiting ahead of the earnings report (or even the FOMC meeting).

10/28: The slide in ATPG continues and we are on the verge of getting stopped out. The stock has lost its 20-day and 200-day SMA's as well as a couple of support levels. It is do or die time or we will have to step aside and close the position. The bullish case of a descending wedge remains but the stock may be headed for its 50-day SMA prior to breaking higher, which is below our stop.

Current 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


Genco Shipping - GNK - close 16.20 change -0.35 stop 15.50

Target(s): 16.10 (hit), 16.70, 17.35, 17.95
Key Support/Resistance Areas: 18.25, 17.75, 16.90, 16.25, 15.75
Current Option Gain/Loss: -56%
Time Frame: 1 to 3 weeks
New Positions: No

Comments:
11/1: Friday's price action in GNK was promising, however, the gains were erased as the stock printed a bearish engulfing candlestick on Monday. In early trading the stock came with 5 cents of our $16.80 target before falling apart. GNK is finding support at its 50-day SMA. If the stock bounces I would use the strength as an opportunity to close positions or tighten stops. The 2nd target has been lowered slithly.

10/30 (James): GNK does have a steady, bullish trend of higher lows. However, shares don't move very fast and I would not open new positions ahead of the company's earnings report. GNK is due to report on November 3rd, after the closing bell. Wall Street is looking for a profit of 98 cents a share. Unfortunately, this report will be completely lost in the shuffle as the market tries to digest the FOMC decision earlier that afternoon. There is a chance that GNK's earnings could surprise given the sharp improvement in shipping rates back in August but in September and October prices leveled off.

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: 58.68 change: +0.39 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:
11/1: HUM crushed earnings today on the bottom line but fell just short on revenue. The stock gapped higher but immediately began to trade lower. We are keeping our trigger at $53.00 and will use dips as buying opportunities. $53.80 could also be considered an entry point.

10/30 (James): Wow! The rally in HUM has been very impressive. Unfortunately, we're still sitting on the sidelines as spectators since the stock never pulled back. I think that's about to change. HUM is due to report earnings on November 1st (Monday) before the opening bell. Analysts expect a profit of $1.66 a share. Odds are very good HUM should see some profit taking on Monday. Plus, we're expecting a market-wide pull back on Wednesday and Thursday this week. While I'm tempted to raise the trigger to buy calls I am actually going to lower the trigger down to $53.00 (from 53.80).

Suggested Position:

Trigger to buy calls at $53.00 <-- new trigger!

BUY the 2011 January $55 calls.

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


Volatility Index - VIX - close: 21.83 change: +0.63 stop: 17.45

Target(s): 24.90, 29.00
Key Support/Resistance Areas: 18.00, 21.00, 25.00, 30.00
Current Option Gain/Loss: +4.5%
Time Frame: Two or Three weeks
New Positions: Yes

Comments:

11/1: Volatility started to climb after the initial gap higher and early strength in the S&P 500. The early strength failed after the first 45 minutes of trading. We are long December $25.00 calls at $2.25 per the play release below.

10/30: Stocks have been climbing for weeks on expectations the Federal Reserve will launch a new round of quantitative easing. Expectations are too high and odds are very strong that no matter what Ben Bernanke says on Wednesday that the market will see a sell-the-news reaction. Obviously a market sell-off will help push the VIX higher.

I am suggesting new bullish positions now but nimble traders could try and launch positions anywhere in the $19-23 zone. The key here is to make sure you have your bullish position open before the FOMC announcement on Wednesday afternoon. Personally I would want to do it on Monday morning but you could wait until Tuesday afternoon before the election results are out.

The VIX moves fast. I am suggesting our first target to take profits at 24.90. Our second target is 29.00. We'll use a relatively wide stop loss at 17.45. Keep in mind that VIX options do not expire on the normal expiration schedule.

Current Position: Long December 2010 25.00 calls (VIX1022L25), entry was at $2.25

Entry on November 1, 2010
Earnings Date --/--/--
Average Daily Volume = xxx million
Listed on October 30th, 2010


PUT Play Updates

Fastenal Co. - FAST - close: 51.76 change: +0.28 stop: 53.40

Target(s): 51.20 (hit), 50.25, 49.65, 48.25, maybe lower
Key Support/Resistance Areas: 55.00, 52.00, 50.00, 48,00,
Current Option Gain/Loss: -35%
Time Frame: 3 to 4 weeks
New Positions: Maybe

Comments:
11/1: FAST gapped higher this morning and experienced a surge up towards its 20-day SMA where the rally failed. The stock immediately turned lower and closed neat its lows of the day. The stock keeps getting saved near its 50-day and 100-day SMA's, but a deeper correction in the broader market may provide the momentum to break lower towards its 200-day SMA. Time decay is beginning to accelerate so I would use weakness as an opportunity to close positions or tighten stops.

10/30 (James): Scott is right. We have three weeks left before November options expire and the time decay is going accelerate. If you are looking for a new entry point I'd wait for another failed rally under $53.00 and then use December options. On a very short-term basis FAST has found support near its 100-dma three days in a row. A breakdown under this level would be great news for us but I wouldn't be surprised to see a bounce soon.

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


Illinois Tool Works - ITW - close 46.23 change +0.55 stop 47.83

Target(s): 44.95, 44.15, 43.50
Key Support/Resistance Areas: 47.75, 46.10, 45.50, 44.60, 44.00, 43.00
Current Gain/Loss: -8%
Time Frame: 2 to 3 weeks
New Positions: Yes

Comments:
11/1: The bounces in ITW keep getting sold. We need a break below $45.50 to get things moving towards our targets. I've raised the first target to $44.95 to account for the 100-day SMA. A move to this level should produce a +33% gain.

10/30 (James): The post-earnings, oversold bounce has failed. The new trend for ITW seems to be down. Shares are hovering near short-term support at $45.50 and a drop under this level could be used as a new entry point to buy puts. If the market corrects I wouldn't be surprised to see ITW hit the $42-41 zone.

Current Position: Long December $45.00 PUT, entry was at $1.20

Entry on October 27, 2010
Earnings: More than two months (unconfirmed)
Average Daily Volume: 4.5 million
Listed on October 26, 2010


Mechel OAO - MTL - close 23.68 change +0.13 stop 24.60

Target(s): 22.30, 21.25, 20.25
Key Support/Resistance Areas: 24.25, 24.00, 23.60
Current Gain/Loss: -8%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
11/1: Friday's bounce in MTL continued on Monday and the stock closed above its 200-day SMA. The stock rallied up to touch its 50-day SMA from below for the first time since it broke below on 10/21, which is where today's selling began. There is resistance at current levels but we are going to need to see the broader market correct to see MTL make new lows and reach our targets.

10/30 (James): Our new play on MTL is now open! The stock rallied from the bottom of its current range and tagged the 200-dma on Friday. MTL hit our trigger to buy puts (December $23 strike). If you missed the entry point I would still consider new positions now. Or you could wait for a bounce closer to what should be resistance near $24.00 and MTL's 50-dma. I am suggesting we move our stop loss to $24.60.

Current Position: Long December $23.00 PUT, entry was at $1.30

Entry on October 30, 2010
Earnings Date: More than two months (unconfirmed)
Average Daily Volume: 2.1 million
Listed on October 27, 2010


Millicom Intl. - MICC - close: 95.00 change: +0.40 stop: 98.25

Target(s): 90.25, and the 200-dma
Key Support/Resistance Areas: 98.00, 96.00, 92.00, 90.00
Current Gain/Loss: +0.00%
Time Frame: Three weeks
New Positions: Yes

Comments:
11/1: MICC is consolidating under its 50-day SMA and declining 20-day SMA (both at $96.50). There is also resitance at $96.00 so this is a logical spot for the stock to turn lower and make a lower low. The 100-day SMA is just under $93.00 which may provide support on weakness. I like new positions to play for a pullback but we are most likely going to need help from the broader market.

10/30: The long-term trend for MICC is bullish but short-term the bulls have lost their focus. MICC has a bearish double top formed in the last six weeks and now shares are failing at the 50-dma in what almost looks like a bear flag pattern. I am suggesting we buy puts now to capture a move toward its long-term trendline. Then we can think about switching directions and buying calls.

I would open positions now. However, you could wait and try and time your entry point on a bounce near $96.00. There is some support near $92.00 but our first target is $90.25.

Suggested Position: Long December 2010 $90 puts (MICC1018X90), entry was at $2.45

Entry on November 1, 2010
Earnings Date 02/01/11
Average Daily Volume = 490 thousand
Listed on October 30th, 2010


PNC Financial - PNC - close 53.17 change -0.73 stop NONE

Target(s): 53.00(hit), 52.10, 51.05 (hit), 50.35
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: Neutral

Comments:
11/1: PNC lost -1.35% today and printed a bearish engulfing candlestick. However, the stock is finding support at its 20 and 50-day SMA's. We have three weeks for PNC to break down and are playing for a move back towards the recent lows. We are most likely going to take a loss on this trade but if we can gain another 20 to 30 cents in premium I suggest exiting the position.

10/30 (James): The larger trend for PNC is certainly down but the breakout over its 50-dma several days ago concerns me. I would hesitate to launch new positions with PNC trading above $52.50 (or even $52.00). We're expecting a market-wide correction soon and believe PNC will be testing new lows for the year before November is done. Keep in mind we only have three weeks left before November options expire. If we see a new entry point I suggest the December or January puts.

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


VMWare Inc - VMW - close: 76.63 change: +0.17 stop: 80.25

Target(s): 72.25, 68.50
Key Support/Resistance Areas: 80.00, 78.65, 75.00, 72.00, 200-dma
Current Gain/Loss: +10%
Time Frame: 3 to 4 weeks
New Positions: Yes

Comments:
11/1: VMW reached Friday's high in early trading and immediately turned lowere. The stock is consolidating just below its 100-day SMA and declining 20-day SMA. The first level of support is near $75.00. If the stock breaks this level it may find support at $73.00 but I would be surprised if $72.25 is not reached.

10/30: VMW has seen an incredible two-year fun but it appears that the upward momentum has reversed. The stock started selling off days ahead of its earnings report. When VMW reported on Oct. 18th shares gapped down again. Now traders are selling into strength and VMW has a bearish trend of lower highs and lower lows. I do think VMW could be a bullish candidate again but it might take a correction toward $70 or its 200-dma before shares find any real support. In the meantime the short-term trend is down.

I am suggesting bearish positions now. We'll use a stop at $80.25 but more conservative traders might be able to get away with a stop close to $79.00. Our first target is $72.25. Our secondary target is $68.50 (or the 200-dma, whichever VMW its first).

Suggested Position: Long December 2010 $70.00 put (VMW1018X70), entry was at $1.85

Entry on November 1, 2010
Earnings Date 01/25/11
Average Daily Volume = 4.5 million
Listed on October 30th, 2010


CLOSED BULLISH PLAYS

First Solar Inc. - FSLR - close 134.44 change -3.24 stop 134.75

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: -35.48%
Time Frame: 3 to 4 weeks
New Positions: Yes, but look for a bounce

Comments:
11/1: We were taken out of FSLR today as the post-earnings sell-off failed to reverse course as we expected. The next levels of support are $130, $126, and $123. I would keep an eye on these levels as possible bullish entry points.

10/30 (James): Bingo! Scott was right on the money expecting a post-earnings dip in FSLR. Shares gapped open at $139.15 (our new entry point). There was a brief bounce toward $142 but FSLR eventually settled under potential support near $140, under its 50-dma, and under the bottom of its bullish channel. All of those "unders" in the previous sentence make me a little nervous but there is a decent chance FSLR could fill the gap. Since we got a better than expected entry point (139.15 instead of 141.00) I'm adjusting our stop loss down to $134.75. More conservative traders may want to keep their stops tight and closer to the $136 level.

10/28: FSLR reported earnings today after the bell and the stock is down -$10 in afterhours trading as of the time of this writing. The report looked good to me as FSLR beat earnings by 9 cents, revenues were better than expected, and guidance was slightly above analysts' estimates. However, the company said they see some uncertainties in Europe which explains the weakness. The stock closed the extended session right at $141.00 to the penny which was my anticipated support level for the stock. I suggest we use the weakness to our advantage and open small positions tomorrow. This is a higher risk play so I suggest using smaller position size. We are targeting a bounce and have close targets. If buyers step in these targets could be reached quickly so be ready to take profits.

Closed Position: Long December $155 CALL at $1.60, entry was at $2.48

Annotated Chart:

Entry on October 30th at $139.15
Earnings Date 10/28/10 (confirmed)
Average Daily Volume = 1.5 million
Listed on October 16th, 2010